SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-17920
METASOLV, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2912166
(State of Incorporation) (I.R.S. Employer
Identification No.)
5560 Tennyson Parkway
Plano, Texas 75024
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 403-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, Par Value $.005 The Nasdaq Stock Market
Rights to Purchase Series A Junior Participating
Preferred Stock, Par Value $0.01 per share The Nasdaq Stock Market
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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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of February 28, 2002, was approximately $227,800,000, based
upon the last reported sales price on such date.
On February 28, 2002, there were 37,524,289 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 21, 2002, are incorporated by reference
into Part III of this report. The Proxy Statement is expected to be filed with
the Commission not later than April 29, 2002.
MetaSolv, Inc.
2001 FORM 10-K
TABLE OF CONTENTS
Item Description Page
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PART I
1 Business ................................................................ 1
2 Properties .............................................................. 20
3 Legal Proceedings ....................................................... 20
4 Submission of Matters to a Vote of Security Holders ..................... 20
PART II
5 Market for the Registrant's Common Equity and Related Stockholder Matters 21
6 Selected Financial Data ................................................. 22
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 23
7a Quantitative and Qualitative Disclosures about Market Risk .............. 31
8 Financial Statements and Supplementary Data ............................. 32
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................... 48
PART III
10 Directors and Executive Officers of the Registrant ...................... 49
11 Executive Compensation .................................................. 49
12 Security Ownership of Certain Beneficial Owners and Management .......... 49
13 Certain Relationships and Related Transactions .......................... 49
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 50
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PART I
This report includes certain statements that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Any statement in this report that is not a statement of historical fact
may be deemed to be a forward-looking statement. We often use these types of
statements when discussing our plans and strategies, our anticipation of
revenues from designated markets, the development of our businesses, the markets
for our products and services, our anticipated capital expenditures, operations,
support systems, changes in regulatory requirements and other statements
regarding matters that are not historical facts. Words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," and other similar
expressions are intended to identify such forward-looking statements. Although
we believe that that these forward looking statements reasonably reflect our
plans, intentions, and expectations, we can give no assurance that we will
achieve these plans, intentions, or expectations. Certain important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this report include, without limitation, the following:
. Our quarterly operating results are difficult to predict and can vary
significantly;
. We could be materially harmed if we fail to anticipate and react to
rapid changes in the communications market;
. We could be materially harmed if consolidation in the communications
industry reduces customer demand for the products and services we
provide;
. We could be materially harmed if our customers are unable to obtain
financing to continue their operations or for continued expansion of
their businesses;
. Expected increased competition could result in price reductions,
reduced gross margins, and loss of market share; and
. Other factors identified in our Securities and Exchange Commission
filings, including, but not limited to those discussed elsewhere in
this report under the heading "Certain Factors That May Affect Future
Results" located at the end of Item 1, Business, of this report.
Many of these risks and uncertainties are beyond our control, and in many
cases we cannot predict the risks and uncertainties that could cause our actual
results to differ materially from those indicated by the forward-looking
statements. All forward looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements and risk factors contained throughout this report. In light of these
risks, uncertainties, and assumptions, the forward-looking events we discuss in
this report might not occur.
Our forward-looking statements speak only as of the date made, and
other than as required by law, we undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
ITEM 1. BUSINESS
General
We are a leading global provider of operational support system (OSS)
software solutions that help communications providers and businesses manage
their next-generation communication networks and services. Our products
integrate and automate key communications management processes, from network
planning and engineering to operations and customer care. Our products enable
communications providers to simplify the costly and complex process of
delivering value-added communications services over new packet-based
technologies, as well as traditional circuit-switched networks.
Communications service providers using our software are able to efficiently
enter, manage, and fulfill orders for service from their customers. These
communications service providers offer a full array of communications services,
including local and long-distance voice services, high-speed data services and
Internet services, often as a bundled offering. We derive substantially all of
our revenue from the sale of licenses, related professional services,
maintenance, and support of our packaged software to these communications
service providers. In 2001, we began offering our software solution and services
to large enterprises that need to manage their significant internal networks and
interfaces to their external service providers.
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We are focused on creating open and flexible software to help
communications service providers and enterprises automatically manage the
complexity associated with today's communications environment. The regulated
break-up of the communications network beginning with the divestiture of AT&T
and continuing with the Telecommunications Act of 1996 enabled competition for
access to long-distance and local phone service. The rapid introduction of
communications technologies designed to bring faster, cheaper communications
services to homes and businesses has created additional complexities in service
management. Demand for faster, cheaper services is driven primarily by the
unprecedented growth in the Internet as a communications medium. Our software,
which was developed from the outset as a standardized package rather than a
custom solution, is designed to automate and simplify the fulfillment of all
types of communication services for use by a variety of communications providers
across diverse, interconnected networks.
Deregulation and privatization, both domestically and abroad, and advances
in technology have necessitated extensive coordination in the service management
process--both coordination between communications service providers whose
networks must interconnect in order to establish service to the customer, and
between different communications technologies that must work together to carry
the communications service. Traditional software systems were not designed to
manage the complexities of a variety of communications services delivered over a
diverse network spanning multiple communications service providers.
Consequently, our customers need innovative, flexible software systems to
efficiently handle rapidly changing market and technology demands. Our product
portfolio includes the MetaSolv Solution(TM), a suite of integrated subsystems
that addresses the majority of a service providers service fulfillment problems,
and several stand alone point solutions added from recent acquisitions. We have
become a leading provider of service management software by continually
enhancing our product to manage the complexities of providing multiple
communications services over a diverse, interconnected network. Our customers
represent all facets of the new, unregulated telecommunications industry.
On July 20, 2001, we acquired all of the outstanding shares of capital
stock of Montreal-based Lat45 Information Systems Inc., a developer of
geospatial software for planning, design and management of communications
networks. Our acquisition of Lat45 Information Systems Inc. allows us to use
graphical geospatial (geographic) technology to expand a service provider's
capabilities in network planning and engineering functions and extends the
MetaSolv Solution functionality to include support for market demand
forecasting, network planning and design, service fulfillment, and executive
decision support. We offer this product under the brand, MetaSolv Network and
Service Planning(TM), both as a separate product and integrated with the
MetaSolv Solution.
On February 1, 2002, we acquired certain OSS assets from Nortel Networks.
With this acquisition, we extended our product portfolio with a leading
carrier-class (highly scalable and reliable) service activation product, and
several point solutions that allow communications service providers to
efficiently manage and deliver differentiated services for Internet Protocol
(IP), data, and wireless communications. As a result of this acquisition, we now
offer a comprehensive suite of OSS solutions available for wireless, IP, data,
and traditional networks and services. The acquisition also strengthens the
worldwide scope of our product sales and services through an established
presence in Europe.
MetaSolv, Inc. became the holding company of MetaSolv Software, Inc. on
January 1, 2001. Our principal executive offices are located at 5560 Tennyson
Parkway, Plano, Texas 75024, and our telephone number is (972) 403-8300. Our web
site is www.metasolv.com. The information on our web site is not incorporated by
reference into this Form 10-K.
Our Products
Our product portfolio consists of a comprehensive suite of OSS solutions
for wireless, IP, data, and traditional networks and services. The MetaSolv
Solution is an integrated service fulfillment solution that automates order,
inventory, trouble, and workflow management processes. As a result of our
February 2002 acquisition, our product portfolio now includes modular service
fulfillment solutions that enable flow-through provisioning, as well as network
mediation and contract management.
The MetaSolv Solution is built upon a flexible, scalable, and integrated
software architecture. We support any service on any technology with predefined
ordering and provisioning capabilities. These technologies include Optical,
Virtual Private Network (VPN), Digital Subscriber Line (DSL), IP, Ethernet and
others. The MetaSolv Solution
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provides the tools needed to enable and support future growth and changes in the
communications market. Major subsystems of the MetaSolv Solution include:
. Work Management: Tracks all the tasks in the service provisioning
process, enabling work to flow electronically across an organization
and providing visibility to the customer's business processes and
resource utilization. Work Management includes the capability to
design customized fulfillment plans, which organize and manage the
flow of tasks, both electronic and manual, according to specific
business processes. In addition, through the Field Operations Portal,
the workflow management functionality allows the customer to access
critical service delivery information from the MetaSolv Solution
through any web enabled device in the field.
. Data Management: Provides the basis for the common data repository
that enables our customer to manage information.
. Order Management: Provides functions that manage customers and
prospects, capture customer requests, and manage simple and complex
processes to achieve end-to-end delivery of requested services. This
end-to-end service delivery process often involves more than one type
of request both within the service provider's internal organization
and with other external service providers.
. Network and Service Planning: Applies geospatial information to key
business and network planning functions, including strategic market
demand forecasting, network planning and design, service fulfillment,
and executive decision support. This subsystem helps correlate the
service provider's actual and planned networks and market demand.
Network and Service Planning is available as an integrated component
of the MetaSolv Solution or as a separate, stand alone product.
. Network Inventory and Design: Gives the carrier or enterprise the
ability to provision large or small networks and the flexibility to
manage traditional as well as new technologies. This subsystem brings
the physical, virtual, electrical, and logical dimensions of a network
into a single view supported by inventory management and network
system design modules.
. Service Provisioning: Enables the translation of customer requests and
requirements into specific service designs that will deliver a broad
spectrum of services from traditional voice and data to broadband
technologies such as Frame Relay and ATM (asynchronous transfer mode),
as well as SONET (synchronous optical network), xDSL, DWDM (dense
wavelength division multiplexing), wireless, and IP technologies.
. Trouble Management: Enables a quick response when problems arise by
accessing information about customers, equipment, and service
locations. Trouble Management information is fully integrated with the
network and service inventory, providing complete network information
for faster problem resolution.
. Customer Care: Integrates order management, service fulfillment, and
customer care to provide a complete customer care solution for the
communications industry. A comprehensive profile provides access to
current and historical aspects of the customer account information,
including order status, services, and trouble.
The MetaSolv Solution can manage each service using all of the different
technologies through one integrated system. We offer Technology Modules to help
adapt our system to new technologies. Our customers and system integration
partners can develop and implement these modules more quickly than traditional
software upgrades.
We also offer a library of Application Programming Interfaces (APIs),
enabling interfaces with third party systems electronically to automate order
processing, fault recovery, testing, service activation, convergent billing, and
credit processing.
Our February 2002 acquisition expanded our product portfolio to include the
following software solutions that can be offered on a stand alone or integrated
basis:
MetaSolv ASAP is a service activation solution that enables service
providers to instantly activate customer-requested services across multiple
domains. Our product is an activation platform that works with all major
hardware vendors and activates services to any type of network or technology,
including wireless and IP.
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MetaSolv Objectel is an inventory management solution that provides a
centralized system for network engineering and management of network inventory.
MetaSolv Objectel enables the tracking of physical network objects including
equipment, facilities, and logical network objects. MetaSolv Objectel allows
providers to determine service inventory levels, ensure rapid service delivery,
and manage network capacity.
MetaSolv Order Management System (OMS) is an order provisioning system that
helps coordinate and manage information moving to and from multiple internal
business support systems and OSSs to complete service and network orders.
MetaSolv OMS enables service providers to coordinate and manage internal
information as well as order information being exchanged between external
service provider partners.
MetaSolv Policy Services offers directory-based service management for
next-generation service delivery. MetaSolv Policy Services also offers
centralized IP services management including Domain Name Service (DNS), Dynamic
Host Configuration Protocol (DHCP), RADIUS (remote authentication dial-in user
service), and IP Quality of Service (QoS). MetaSolv Policy Services helps create
a subscriber-aware network with a directory-based service management strategy,
enabling our customers to offer QoS differentiated services.
MetaSolv Network Mediation provides a carrier-class mediation solution
designed for multi-service, multi-vendor, IP, and 3G wireless network
environments. MetaSolv Network Mediation includes a network-facing ability to
collect call data records and IP data records. By transforming raw network data
into useful information representing a service-level view of customer activity,
service providers can price, bundle, and discount in a way that significantly
differentiates their service offerings.
MetaSolv Service Analytics provides a service level agreement contract
management application that is designed for multi-service, multi-vendor network
environments. Our product is designed to manage the entire service contract
management process through definition, negotiation, assessment, analysis and
reporting of customer compliance and business effectiveness. A service contract
is a formal agreement between either a service provider and its customers, or a
service provider and its suppliers, to define and manage service expectations,
clarify responsibilities and facilitate communication. Service contracts cover
many aspects of the relationship and quality of service delivery, including
service performance, service provisioning, customer-care, and billing.
Technology
Our continuing development of the MetaSolv Solution and our acquired
products incorporate a multi-tier architecture:
. User Interface Tier: Any type of user-interface client is possible,
including both thin client types, such as browsers and pagers, and
rich client types, such as java applications. The user interface tier
follows the Model-View-Controller (a software architecture design for
segregating the user-interfaces and data, and controlling the
interaction between the two) architectural pattern and all
user-interface clients access the same server-side business logic
tier.
. Application Server Tier: The application server tier includes the
business logic in components running on J2EE-based application servers
(a java platform designed for large scale computing). These business
logic and database access objects enable us to build different
graphical user interfaces with the same business logic code. In
addition, application-programming interfaces provide our customers and
partners access to these components. Our interfaces make it possible
to extend and integrate the MetaSolv Solution with existing customer,
partner, and third party software applications.
. Data Tier: The data tier provides the persistence layer that separates
the business logic from the database technology. Oracle is fully
supported and the recommended DBMS (database management system).
Oracle database features are used, including delivering database
solutions on any hardware platform supported by Oracle. For all
graphics and graphic information systems (GIS)-related data, different
types of persistence techniques are utilized (raster and vector types
of databases and files).
This multi-tier technology design provides the following benefits to
our customers:
. Flexibility: Multiple graphical user interfaces enable our customers
to select the presentation platform of their choice, as well as to
manage the upgrade and internal distribution of the software.
. Scalability: The software is suitable for large and small networks
while simultaneously maintaining high performance levels. Customers
can add multiple servers as needed to any level of the system,
generally without service interruption.
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. Data Integrity: The database design preserves data integrity while
ensuring fast, efficient transaction-oriented data retrieval methods.
As a demonstration of resilience, our database design has remained
constant during the life and evolution of other components of our
software. This stability provides reusability of the business
functionality as new, updated graphical user interfaces are developed.
. Open Design: Our open, fully documented application programming
interfaces allow customers and alliance partners to integrate the
MetaSolv Solution software with existing internal and external
software systems. We are moving towards OSS through Java (OSS/J)
compliance. The OSS/J API guidelines are publicly available and
maintained and promoted by the telecom industry. These APIs enable
both tightly coupled interfaces (using Java) or loosely coupled
interfaces (using XML) between our software modules and third party
modules and applications.
. Extensibility: Using our technology our object model is able to
support additional information, including attributes, classes, class
instances, interfaces, and operations.
We are active in various government and industry standards bodies,
including the TeleManagement Forum's e-Business Telecom Operations Model (eTOM),
the Common Information Model (CIM), Directory Enabled Networks (DEN), Shared
Information/Data (SID) model and OSS/J.
J2EE and Java are trademarks of Sun Microsystems, Inc.
Professional Services and Support
We believe that our ability to provide high-quality customer service and
support is critical to ensuring long-term customer satisfaction. We have
developed a broad array of service offerings to assist our diverse customer
base.
PROFESSIONAL SERVICES
Our professional services organization provides the expertise necessary to
implement our software in a production environment, educate users on best
practices for utilizing the software, assist with data migration, and provide
maintenance and technical support after implementation. As of December 31, 2001,
our professional services organization consisted of over 100 people operating in
the United States, Canada, Europe, and Latin America. Our February 2002
acquisition added 56 people to our professional services team experienced in the
implementation of carrier grade service activation, modular inventory management
and order management, IP mediation, and service level agreement (SLA) management
solutions.
We work closely with systems integration (SI) partners who provide
experience on large projects typically involving multiple systems, extensive
program management, and the development of custom interfaces.
In addition, we offer the following services through our professional
services organization:
Framework for Success(TM) is a set of tools and processes that enable a
successful implementation of the MetaSolv Solution and can be targeted to a
specific customer's needs. These tools and processes incorporate industry best
practices and techniques specific to our expertise and experience and can be
tailored on an ongoing basis as a customer's requirements change. By shortening
a customer's learning curve and streamlining the software implementation cycle,
our Framework for Success implementation methodology saves the customer time and
money.
QuickStart(TM) is a program designed to simplify and accelerate the
implementation of the MetaSolv Solution. This program consists of a software
database pre-loaded with data such as service fulfillment plans, equipment
specifications and products, along with a defined training curriculum for the
end user. As a result of this program, our solutions can typically be
implemented into a production environment in less than 90 days. Built from
knowledge acquired in previous implementations, the QuickStart program makes
maximum use of a customer's resources and shortens service delivery intervals.
Rapid Results(TM) is a workshop designed to improve the skills of the
individuals on the customer's implementation team and to streamline the
implementation of our software, primarily by improving business methods and
processes. The workshop provides in-depth exposure to concepts and
implementation requirements.
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Team members learn how and where information is loaded in a MetaSolv software
database, and they see demonstrations of best practices for setting up and
maintaining the software.
Operational Assessment analyzes the strengths and weaknesses of a
customer's existing processes. We study processes within a customer's
organization to compare internal practices to the current best practices of
companies with similar characteristics (including size and maturity) in such
areas as application performance and tuning, data integrity, and change
management. By analyzing these key areas of operations, we can recommend the
organizational improvements needed to increase the benefit received from the
MetaSolv Solution.
IP Service Management is a new service offering resulting from our recent
acquisition that meets service providers' IP-based OSS requirements by providing
integrated, directory-based service/subscriber management, service provisioning,
service level management and accounting mediation for multi-vendor network
solutions. This pre-configured solution helps service providers more quickly
deliver differentiated, reliable IP services.
Wireless Service Management is also a new addition resulting from our
recent acquisition that offers a pre-integrated solution, including order
management, network inventory, service management, and service activation. This
solution gives wireless service providers an opportunity to differentiate
themselves from their competition based on the ability to more quickly create
and deliver profitable next-generation wireless services while maximizing the
efficiency of their networks.
EDUCATIONAL OFFERINGS
We provide a comprehensive series of educational courses to our customers,
alliance partners, and employees to provide the knowledge and skills necessary
to deploy, use and maintain our software solutions. These classes focus on the
technical aspects of our products and on real-world business issues and
processes. Classes include lectures, demonstrations, discussions and hands-on
use of our software. Classes are held regularly at our training centers in our
Plano, Texas, headquarters. In addition, training sessions can be held in our
Englewood, Colorado, and McLean, Virginia, facilities, as well as at our
customer sites. We also offer `Train-the-Trainer' programs that enable our
customers to conduct their own internal end-user training.
MAINTENANCE AND TECHNICAL SUPPORT
Our standard maintenance and technical support services include help desk
support, problem resolution, software maintenance and scheduled software
upgrades. We provide technical support for our products, utilizing the Internet,
telephone, and electronic mail to respond to and resolve customers' technical
problems. Our automated customer service system tracks each customer's inquiry
through to problem resolution. Support personnel schedule fixes into appropriate
service packs or product releases. In addition to our standard support, we offer
these optional services:
. Extended Support: This option extends support to 24 hours a day, seven
days a week for critical issues.
. Premier Support: This option includes both the standard and Extended
Support features and provides for a dedicated Technical Support
Engineer. This technical resource is dedicated to understanding how
our software is used to support the customer's business and works all
incidents through to resolution. Quarterly site visits are part of
this offering as well as assistance with upgrades, determining how to
best use new product offerings, and customized problem tracking
reports.
Product upgrades are included in our maintenance agreements, allowing our
customers to benefit from technological advances, stay current with regulatory
change, and achieve efficiencies from product enhancements. We also provide
complete documentation with our software, including system administration
guides, programming interface-integration guides, and extensive online help. Our
typical software maintenance agreement has a 12-month renewable term.
Sales and Marketing
SALES
We market and sell our software through our direct worldwide sales force.
During 2001, we focused our sales efforts on established service providers and
enterprises who manage, offer, or deliver communication services.
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Our worldwide sales force is aligned by region, each focusing on a specific
type of customer or prospect, whether it is a new account, a growth account, or
a strategic account. Due to the technological complexity of our market, our
sales teams consist of an account executive that is responsible for the business
aspect of the sale and a sales analyst who is responsible for the technology
aspect of the sale. Once a sale has been made, the ongoing account relationship
is transitioned to our growth account team to ensure the attention and nurturing
required to successfully service the client. Our dedicated lead generation team
identifies qualified territory sales opportunities through telemarketing,
campaign management and participation in trade shows, seminars, conferences,
market research and our public relations programs. Once a qualified opportunity
is identified, it is assigned to the appropriate end-user sales team to initiate
direct sales engagement. Upon gathering the prospect's requirements, the sales
team conducts multiple presentations and demonstrations to the organization's
stakeholder and user communities. Customer visits to our Executive Briefing
Center located within our corporate headquarters are used to establish a
strategic relationship with the prospect and our executive management, product
managers, and software architects. During 2001, we expanded our sales footprint
into South America, Europe, and Asia. Although we have dedicated teams in these
regions, their sales efforts leverage local system integrator companies. We
maintain strategic channel partnerships with Accenture, Cap Gemini Ernst &
Young, Hewlett-Packard, and others.
Our average sales cycle ranges from four to nine months, from initial
prospect contact to the execution of a license agreement. The majority of our
selling activities are the result of sales participation in a customer-issued
request for proposal, a lengthy bidding process.
MARKETING
We continue to focus our marketing efforts on developing market strategies
and product plans, creating awareness of our products and generating new sales
opportunities. Our product management organization provides direction on target
markets and their business requirements. We base our product strategy on an
analysis of market requirements, competitive offerings and projected return on
investment. Our product enhancement plans are developed by our product
management organization in partnership with our customers, utilizing their
communications experience with our market and competitive knowledge. Our
customer user group maintains an active enhancement-ranking process, by which
members continually establish priorities for software improvements and evaluate
the enhancements we deliver. In addition, our product managers are active in
numerous technology and industry forums. Through these domestic and
international forums, we participate in various projects that demonstrate our
capability to support world-class communications service fulfillment solutions.
We rely on several marketing communications activities and programs to
create awareness of our products and to generate sales opportunities. Through
our product marketing and marketing communications functions, we manage and
maintain our web site, publish product-related communications and educational
white papers, and conduct seminars and user group conferences. We also have a
public relations program and maintain relationships with recognized industry
analysts in an ongoing effort to create awareness of our products. We are an
active sponsor of technology-related conferences and demonstrate our products at
trade shows targeted at providers of communications services. We also focus on a
range of joint marketing strategies and programs with our partners to capitalize
on their respective market relationships and resources.
Alliances and Partnerships
To ensure the availability of a comprehensive end-to-end solution and to
optimize its delivery, we continue to develop our partner programs and grow
strategic relationships with systems integrators and complementary software
application vendors.
Systems Integrators. Our systems integration partners provide, jointly or
separately, a range of services to our customers. Among our partners are
Accenture, American Management Systems, BusinessEdge Solutions, Cap Gemini Ernst
& Young, DMR Consulting Group, Encore Software, Hewlett-Packard, Velankani
Information Systems, and Wipro Technologies. These partners assist in
implementing our software at the customer location and often assist us in
generating sales leads. Using our Framework for Success tools and processes
mentioned above, we have trained numerous consultants in these organizations in
the implementation and operation of our software.
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Complementary Software Application Vendors. During 2001 we expanded our
program for joint marketing relationships with software vendors, offering
products and services that are complementary to the MetaSolv Solution.
Throughout 2001 new partners were added to the program and other relationships
were discontinued, as we continued our efforts to offer our customers software
solutions with the efficiency and cost-effectiveness of commercial,
off-the-shelf interfaces. These software partners provide solutions for the
operations support functions that our software does not address such as billing,
fault management, network management and electronic exchange of information
between service providers. In addition, we have alliances with other application
integration vendors that provide commercial interfaces between our software and
other third party software systems. Some of our partners in these areas include
3Com Corporation, Harris Corporation, Micromuse, Siebel Systems, and Vitria
Technology.
Segment Information and Foreign and Domestic Operations
The information set forth in Note 10 to the accompanying consolidated
financial statements is incorporated herein by reference.
Research and Development
Teams of development engineers, software architects and product managers
are responsible for our research and development efforts. We use a software
development process that includes planning and documenting deliverables in
advance, rigorously adhering to coding standards, and performing significant
performance and function tests. By involving all functional groups at various
levels within our organization, this process provides a framework for turning
concepts into products which enables us to market these products cost
effectively. In addition, we have recruited and hired development engineers,
architects and product managers with experience in order processing, management,
and fulfillment solutions and other facets of software, along with senior
managers experienced in software used by communications service providers.
Our research and development expenditures totaled approximately $31.3
million for 2001, $31.3 million for 2000, and $17.0 million for 1999.
Competition
Competition in our markets is intense and involves rapidly changing
technologies and customer requirements, as well as evolving industry standards
and frequent product introductions. We believe several factors make us a strong
competitor, including:
. The breadth, depth and flexibility of our software;
. The quality and performance of our product;
. Our high-quality customer service;
. Our proven ability to implement and integrate solutions;
. The overall value of our software; and
. The references of our customers.
Competitors vary in size and scope of products and services offered. We
encounter direct competition from several vendors, including Astracon, Cramer
Systems, Eftia OSS Solutions, GE Smallworld, Granite Systems, Syndesis,
Telcordia Technology and Wisor Telecom. Additionally, we compete with OSS
solutions sold by large equipment vendors such as ADC Telecommunications. We
also compete with systems integrators and with the information technology
departments of large communications service providers. Finally, we are aware of
communications service providers, software developers, and smaller
entrepreneurial companies that are focusing significant resources on developing
and marketing products and services that will compete with us. We anticipate
continued long-term growth in the communications industry and the entrance of
new competitors in the order processing, management and fulfillment software
markets, and we expect that the market for our products and services will remain
intensely competitive.
-8-
Software Protection and Other Proprietary Rights
To establish and protect our intellectual property, we rely on a
combination of patent, copyright, trade secret, and trademark laws, as well as
confidentiality procedures and contractual restrictions. MetaSolv Software, the
MetaSolv logo, Telecom Business Solution, MetaSolv Solution, MetaSolv
QuickStart, MetaSolv Framework for Success, eService, PowerFrame, MetaSolv Field
Operations Portal, MetaSolv Network and Service Planning, and Rapid Results are
trademarks, and MetaSolv(R) is a federally registered trademark of MetaSolv
Software, Inc. To maximize protection of our technology, we have set up a
patent-protection program. We have filed for patent protection on certain
aspects of our software, and we will continue to file patent applications to
establish exclusive rights to certain technology we have developed. While we
rely on patent, copyright, trade secret and trademark laws to protect our
intellectual property, we believe that the technical and creative skills of our
employees, frequent product enhancements and improved product quality are
greater factors in maintaining a technology leadership position. In addition to
intellectual property that we own, we also license certain intellectual property
from third parties that is integrated with our software and used to perform key
functions. There can be no assurance that in the future these third party
licenses will continue to be available to us on commercially reasonable terms or
at all.
We generally enter into confidentiality and/or license agreements with our
employees, partners, and customers, and generally control access to and
distribution of our software, documentation and other proprietary information.
We license, rather than sell, our software and require our customers to enter
into license agreements that restrict the use of our software.
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property,
and we may not be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. If third parties infringe or
misappropriate our copyrights, trademarks, trade secrets or other proprietary
information, our business could be seriously harmed. In addition, although we
believe that our proprietary rights (including those we license from third
parties) do not infringe on the intellectual property rights of others, other
parties may assert infringement claims against us or claim that we have violated
their intellectual property rights. Claims against us, either successful or
unsuccessful, could result in significant legal and other costs and may be a
distraction to management. While we have primarily focused on intellectual
property protection within the United States, we have expanded that scope to
selected international markets. Protection of intellectual property outside of
the United States will sometimes require additional filings with local patent,
trademark, or copyright offices, as well as the implementation of contractual or
license terms different from those used in the United States. Protection of
intellectual property in many foreign countries is weaker and less reliable than
in the United States. If our business expands into foreign countries, costs and
risks associated with protecting our intellectual property abroad will increase.
-9-
Executive Officers
Our executive officers and their ages as of December 31, 2001, are as
follows:
Name Age Position
---- --- --------
James P. Janicki 46 Chief Executive Officer
T. Curtis Holmes, Jr. 39 President and Chief Operating
Officer
Glenn A. Etherington 47 Chief Financial Officer
Jonathan K. Hustis 46 Vice President--Business
Services, General Counsel and
Corporate Secretary
Michael J. Cullen 42 Vice President--Engineering
Sam L. Kelley 42 Vice President--Services
Joseph W. Pollard 45 Vice President--Sales
James P. Janicki co-founded MetaSolv in July 1992 and since such time has
served in various capacities. Mr. Janicki was appointed Chief Executive Officer
in May 1999. He has served as a director since April 1994 and served as
President from April 1994 to January 2001. From June 1982 to July 1992, Mr.
Janicki was at Texas Instruments where he served in many capacities, including
as manager of the Texas Instruments' CASE consulting practice from July 1987 to
August 1990 and as manager of the Template software business from August 1990
until July 1992. Texas Instruments develops and manufactures semiconductors and
other products in the electrical and electronics industry.
T. Curtis Holmes, Jr. has served as our President and Chief Operating
Officer since January 2001 and as a director since May 2001. From December 1996
to December 2000, Mr. Holmes served as Vice President and General Manager of the
Intelligent Network Unit of Lucent Technologies, Inc., where his
responsibilities included strategic planning, product marketing, product
management, development and deployment of enhanced services applications. From
July 1994 to December 1996, Mr. Holmes served as Applications Group Director for
Operations Support Systems for Lucent Technologies/AT&T Network Systems.
Glenn A. Etherington has served as our Chief Financial Officer since May
1999. Mr. Etherington held various senior management positions at Brite Voice
Systems, a leading provider of enhanced communications products and interactive
information systems, from August 1988 to May 1999. He was Chief Financial
Officer from August 1988 to May 1999, Treasurer from August 1988 to May 1993 and
Secretary from May 1993 to May 1999.
Jonathan K. Hustis has served as our General Counsel and Corporate
Secretary since April 1997. He was appointed our Vice President--Business
Services in August 1998. Mr. Hustis was at Texas Instruments where he worked in
its Corporate Finance Group from November 1995 until April 1997 and as
Manager--Business Services in its Information Technology Group (Advanced
Information Management and Enterprise Solutions divisions) from September 1989
to November 1995.
Michael J. Cullen has served as our Vice President--Engineering since May
2001. From October 1997 to May 2001, Mr. Cullen served as Director of
Engineering within the Intelligent Network Unit of Lucent Technologies, Inc.,
where his responsibilities included planning, development and support of the
provisioning and service creation product lines within the Intelligent Network
Unit. From February 1991 to October 1997, Mr. Cullen served as technical manager
within Lucent Technologies/AT&T Network Systems Operations Support Systems.
Sam L. Kelley has served as our Vice President--Services since July 2001.
From June 2000 to April 2001, Mr. Kelley was the Chief Operating Officer of
Akili Systems Group, a developer of industry-based solutions for the
telecommunications, utilities, financial services and energy industries. Mr.
Kelley was at IBM Global Services where he worked as Director, Managing
Principal--Business Innovation Services from January 2000 to June 2000 and as
Director, Managing Principal--Integration Services from January 1997 through
December 1999.
Joseph W. Pollard has served as our Vice President--Sales since February
1997. From July 1992 to February 1997, Mr. Pollard was the Director of Sales,
South-Central Region and Director of Sales, International for Tivoli Systems, a
provider of systems management software. From September 1989 to July 1992, Mr.
Pollard was Manager, International Sales and National Accounts, for Visual
Information Technologies, a provider of commercial image processing systems.
-10-
In February 2002, Philip C. Thrasher became our Executive Vice
President--America's Sales and Mr. Pollard became our Executive Vice
President--Enterprise. Mr. Thrasher has more than nineteen years experience in
the communications technology industry, and most recently served as Senior Vice
President--Sales, Global Marketing, Channels, PSO and Support, of Nortel
Networks' OSS business, which we acquired in February 2002. As Executive Vice
President--America's Sales, Mr. Thrasher leads and manages our sales force in
North, South, and Central America, as well as the Asia Pacific region.
Employees
We believe that our growth and success is attributable in large part to our
employees and an experienced management team, many members of which have years
of industry experience in building, implementing, marketing and selling software
applications critical to business operations. We maintain a strong corporate
culture and reinforce it by providing our employees an extensive 80-hour
orientation program to learn our technology, the industry we serve, and our
corporate values. We intend to continue teaching and promoting our culture and
believe such efforts provide us with a sustainable competitive advantage. We
offer a work environment that enables employees to make meaningful
contributions, as well as incentive programs designed to motivate and reward our
employees. None of our employees is represented by an organized labor union nor
have we experienced any work stoppages.
As of December 31, 2001, we had 558 full-time employees of whom:
. 167 were in professional services and customer support;
. 96 were in sales and marketing;
. 222 were in research and development; and
. 73 were in finance, administration and operations.
Our February 2002 acquisition added approximately 335 additional employees.
Certain Factors That May Affect Future Results
We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of these risks and uncertainties that we believe may adversely affect our
business, financial conditions or results of operations. There are additional
risks and uncertainties that we do not presently know, or that we currently view
as immaterial that may also impair our business operations. This report is
qualified in its entirety by these risks. You should carefully consider the
risks described below before making an investment decision. If any of the
following risks actually occur, they could materially harm our business,
financial condition, or results of operations. In that case, the trading price
of our common stock could decline.
OUR QUARTERLY OPERATING RESULTS CAN VARY SIGNIFICANTLY AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our quarterly operating results can vary significantly and are difficult to
predict. As a result, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It is
likely that in some future quarter or quarters our operating results will be
below the expectations of public market analysts or investors. In such an event,
the market price of our common stock may decline significantly. A number of
factors are likely to cause our quarterly results to vary, including:
. The overall level of demand for communications services by consumers
and businesses and its effect on demand for our products and services
by our customers;
. Our customers' willingness to buy, rather than build, order
processing, management and fulfillment software;
. The timing of individual software orders, particularly those of our
major customers involving large license fees that would materially
affect our revenue in a given quarter;
. The introduction of new communications services and our ability to
react quickly compared to our competitors;
-11-
. Our ability to manage costs, including costs related to professional
services and support services;
. The utilization rate of our professional services employees and the
extent to which we use third party subcontractors to provide
consulting services;
. Costs related to possible acquisitions of other businesses;
. Our ability to collect outstanding accounts receivable from very large
product licenses;
. Innovation and introduction of new technologies, products and services
in the communications and information technology industries;
. Costs related to the expansion of our operations;
. We may be required to defer recognition of revenue for a significant
period of time after entering into a contract due to undelivered
products, extended payment terms, or product acceptance; and
. Changes in services and license revenue as a percentage of total
revenue, as license revenue typically has a higher gross margin than
services revenue.
We forecast the volume and timing of orders for our operational planning,
but these forecasts are based on many factors and subjective judgments, and we
cannot assure their accuracy. We have hired and trained a large number of
personnel in core areas, including product development and professional
services, based on our forecast of future revenues. As a result, significant
portions of our operating expenses are fixed in the short term. Therefore,
failure to generate revenue according to our expectations in a particular
quarter could have an immediate negative effect on results for that quarter.
Our quarterly revenue is dependent, in part, upon orders booked and
delivered during that quarter. We expect that our sales will continue to involve
large financial commitments from a relatively small number of customers. As a
result, the cancellation, deferral, or failure to complete the sale of even a
small number of licenses for our products and related services may cause our
revenues to fall below expectations. Accordingly, delays in the completion of
sales near the end of a quarter could cause quarterly revenue to fall
substantially short of anticipated levels. Significant sales may also occur
earlier than expected, which could cause operating results for later quarters to
compare unfavorably with operating results from earlier quarters.
Some contracts for software licenses may not qualify for revenue
recognition upon product delivery. Revenue may be deferred when there are
significant elements required under the contract that have not been completed,
there are express conditions relating to product acceptance, there are deferred
payment terms, or when collection is not considered probable. A higher
concentration of large telecom service providers, and larger more complex
agreements may increase the frequency and amount of these deferrals. With these
uncertainties we may not be able to predict accurately when revenue from these
contracts will be recognized.
THE COMMUNICATIONS MARKET IS CHANGING RAPIDLY, AND FAILURE TO ANTICIPATE AND
REACT TO THE RAPID CHANGE COULD RESULT IN LOSS OF CUSTOMERS OR WASTEFUL
SPENDING.
Over the last decade, the market for communications products and services
has been characterized by rapid technological developments, evolving industry
standards, dramatic changes in the regulatory environment, emerging companies
and frequent new product and service introductions. Our future success depends
largely on our ability to enhance our existing products and services and to
introduce new products and services that are capable of adapting to changing
technologies, industry standards, regulatory changes and customer preferences.
If we are unable to successfully respond to these changes or do not respond in a
timely or cost-effective way, our sales could decline and our costs for
developing competitive products could increase.
New technologies, services or standards could require significant changes
in our business model, development of new products or provision of additional
services. New products and services may be expensive to develop and may result
in our encountering new competitors in the marketplace. Furthermore, if the
overall market for order processing, management and fulfillment software grows
more slowly than we anticipate, or if our products and services fail in any
respect to achieve market acceptance, our revenues would be lower than we
anticipate and operating results and financial condition could be materially
adversely affected.
-12-
THE COMMUNICATIONS INDUSTRY IS EXPERIENCING CONSOLIDATION, WHICH MAY REDUCE
THE NUMBER OF POTENTIAL CUSTOMERS FOR OUR SOFTWARE.
The communications industry and in particular our customers have
experienced significant consolidation. In the future, there may be fewer
potential customers requiring operations support systems and related services,
increasing the level of competition in the industry. In addition, larger,
consolidated communications companies have strengthened their purchasing power,
which could create pressure on the prices we charge and the margins we realize.
These companies are also striving to streamline their operations by combining
different communications systems and the related operations support systems into
one system, reducing the number of vendors needed. Although we have sought to
address this situation by continuing to market our products and services to new
customers and by working with existing customers to provide products and
services that they need to remain competitive, we cannot be certain that we will
not lose additional customers as a result of industry consolidation.
CONSOLIDATIONS IN THE TELECOMMUNICATIONS INDUSTRY OR SLOWDOWN IN
TELECOMMUNICATIONS SPENDING COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATION.
We have derived substantially all of our revenues from sales of products
and related services to the telecommunications industry. The global
telecommunications industry experienced a very challenging period in calendar
2001, during which business activity contracted. Since early 2001, we and a
number of other companies have been impacted by reduced spending by
telecommunications carriers and equipment manufacturers. Slowdowns in spending
often cause delays in sales and installations and could cause cancellations of
current or planned projects, any of which could harm our financial results in a
particular period.
OUR CUSTOMERS' FINANCIAL STRENGTH, THEIR ABILITY TO OBTAIN FINANCING, AND THE
RECENT DOWNTURN IN THE COMMUNICATIONS INDUSTRY MAY LEAD TO LOWER SALES AND
DECREASED PROFITABILITY.
Many of our customers are small to medium sized competitive communications
service providers with limited operating histories. Many of these customers are
not profitable and highly dependent on private sources of venture capital to
fund their operations. During 2001 many competitive communications service
providers were unable to obtain sufficient funds to continue expansion of their
businesses. During the same period, many communications companies encountered
significant difficulties in achieving their business plans and financial
projections. In 2001 several of our customers ceased their business operations
and a significant number of our customers initiated bankruptcy proceedings. It
is possible that this downturn in the communications industry could continue for
an indefinite period of time. The downturn in the communications industry and
the inability of many communications companies to raise capital have resulted in
a decrease in the number of potential customers that are capable of purchasing
our software, a delay by some of our existing customers in purchasing additional
products, delays in payments by existing customers, or failure to pay for our
products. We cannot be certain that market conditions will not continue to
affect the ability of these customers to obtain adequate financing for capital
expenditures. If our customers are unable to obtain adequate financing, sales of
our software could suffer. If we fail to increase revenue related to our
software, our operating results and financial condition would be adversely
affected. In addition, adverse market conditions and limitations on the ability
of our current customers to obtain adequate financing could adversely affect our
ability to collect outstanding accounts receivable resulting in increased bad
debt losses and a decrease in our overall profitability. Any of our current
customers who cease to be viable business operations would no longer be a source
of maintenance revenue, or revenue from sales of additional software or services
products, and this could adversely affect our financial results.
WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
REVENUE.
A significant portion of revenue each quarter is derived from a relatively
small number of large sales. As consolidation in the telecommunications industry
continues, our reliance on a limited number of customers for a significant
portion of our revenue may increase. The amount of revenue we derive from a
specific customer is likely to vary from period to period, and a major customer
in one period may not produce significant additional revenue in a subsequent
period. During the year 2001, our top ten customers accounted for 36% of our
total revenue, compared to 27% during the year 2000. No single customer
accounted for more than 6% of total revenue in 2001. However, to the extent that
any major customer terminates its relationship with us, our revenue could be
adversely affected. While we believe that the loss of any single customer would
not seriously harm our overall business or financial condition, our inability to
consummate one or more substantial sales in any future period could seriously
harm our operating results for that period.
-13-
COMPETITION FROM LARGER, BETTER CAPITALIZED OR EMERGING COMPETITORS FOR THE
COMMUNICATIONS PRODUCTS AND SERVICES THAT WE OFFER COULD RESULT IN PRICE
REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
Competition in the communications products market is intense. Although we
compete against other companies selling communications software and services,
the in-house development efforts of our customers may also result in our making
fewer sales. We expect competition to persist in the future. We cannot be
certain that we can compete successfully with existing or new competitors, and
increased competition could result in price reductions, reduced gross margins
and loss of market share.
Competitors vary in size and scope of products and services offered. We
encounter direct competition from several vendors, including Astracon, Cramer
Systems, Eftia OSS Solutions, GE Smallworld, Granite Systems, Syndesis,
Telcordia Technology, and Wisor Telecom. Additionally, we compete with OSS
solutions sold by large equipment vendors such as ADC Telecommunications. We
also compete with systems integrators and with the information technology
departments of large communications service providers. Finally, we are aware of
communications service providers, software developers, and smaller
entrepreneurial companies that are focusing significant resources on developing
and marketing products and services that will compete with us. We anticipate
continued long-term growth in the communications industry and the entrance of
new competitors in the order processing, management and fulfillment software
markets. We believe that the market for our products and services will remain
intensely competitive.
Some of our current competitors have longer operating histories, a larger
customer base, greater brand recognition and greater financial, technical,
marketing and other resources than we do. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic alliances and other initiatives. In addition,
many of our competitors have well-established relationships with our current and
potential customers and have extensive knowledge of our industry. As a result,
our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote more resources to the development, promotion and sale of their products
and services than we can. To the extent that our competitors offer customized
products that are competitive with our more standardized product offerings, our
competitors may have a substantial competitive advantage, which may cause us to
lower our prices and realize lower margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with others to increase their
ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
products and services that are superior to, or have greater market acceptance
than, the products and related services that we offer.
IF THE INTERNET OR BROADBAND COMMUNICATION SERVICES GROWTH SLOWS, DEMAND FOR
OUR PRODUCTS MAY FALL.
Our success depends heavily on the continued acceptance of the Internet as
a medium of commerce and communication, and the growth of broadband
communication services. The growth of the Internet has driven changes in the
public communications network and has given rise to the growth of the
next-generation service providers who are our customers. If use of the Internet
or broadband communication services does not continue to grow or grows more
slowly than expected, the market for software that manages communications over
the Internet may not develop and our sales would be adversely affected.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including potentially inadequate network
infrastructure, slow development of technologies or insufficient commercial
support. The Internet infrastructure may not be able to support the demands
placed on it by increased usage and bandwidth requirements. In addition, delays
in the development or adoption of new standards and protocols required handling
increased levels of Internet activity, or increased government regulation, could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols or complementary products,
services or facilities are developed, we may incur substantial expense adapting
our solutions to changing or emerging technologies.
-14-
CHANGES IN COMMUNICATIONS REGULATION COULD ADVERSELY AFFECT OUR CUSTOMERS AND
MAY LEAD TO LOWER SALES.
Our customers are subject to extensive regulation as communications service
providers. Changes in legislation or regulation that adversely affect our
existing and potential customers could lead them to spend less on order
processing, management and fulfillment software, which would reduce our revenues
and could seriously affect our business and financial condition.
IF WE FAIL TO ACCURATELY ESTIMATE THE RESOURCES NECESSARY TO COMPLETE ANY
FIXED-PRICE CONTRACT, IF WE FAIL TO MEET OUR PERFORMANCE OBLIGATIONS, OR IF
WE FAIL TO ANTICIPATE COSTS ASSOCIATED WITH PARTICULAR SALES OR SUPPORT
CONTRACTS, WE MAY BE REQUIRED TO ABSORB COST OVERRUNS AND WE MAY SUFFER
LOSSES ON PROJECTS.
In addition to time and materials contracts, we have periodically entered
into fixed-price contracts for software implementation, and we may do so in the
future. These fixed-price contracts involve risks because they require us to
absorb possible cost overruns. Our failure to accurately estimate the resources
required for a project or our failure to complete our contractual obligations in
a manner consistent with the project plan would likely cause us to have lower
margins or to suffer a loss on such a project, which would negatively impact our
operating results. Also, in some instances our sales and support contracts may
require us to provide software functionality that we have procured from third
party vendors. The cost of this third party functionality may impact our
margins, and we could fail to accurately anticipate or manage these costs. On
occasion we have been asked or required to commit unanticipated additional
resources or funds to complete projects or fulfill sales and support contracts.
Our acquisitions of Lat45 Information Systems Inc. in July 2001, and certain OSS
assets from Nortel Networks in February 2002, and associated customer
obligations, may intensify these risks.
IN ORDER TO GENERATE INCREASED REVENUE, WE NEED TO EXPAND OUR SALES AND
DISTRIBUTION CAPABILITIES.
We must expand our direct and indirect sales operations to increase market
awareness of our products and to generate increased revenue. We cannot be
certain that we will be successful in these efforts. Our products and services
require a sophisticated sales effort targeted at the senior management of our
prospective customers. New hires will require training and take time to achieve
full productivity. We cannot be certain that our recent hires will become as
productive as necessary or that we will be able to hire enough qualified
individuals in the future. We also plan to expand our relationships with systems
integrators and other partners to build an indirect sales channel. Failure to
expand these sales channels could adversely affect our revenues and operating
results. In addition, we will need to manage potential conflicts between our
direct sales force and third party reselling efforts.
WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL COULD
AFFECT OUR ABILITY TO COMPETE.
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining business contacts with our
customers. Our senior management team and key technical personnel would be very
difficult to replace and the loss of any of these key employees could seriously
harm our business.
OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED EMPLOYEES IS CRUCIAL TO
RESULTS OF OPERATIONS AND FUTURE GROWTH; MANAGEMENT TURNOVER COULD AFFECT OUR
ABILITY TO ACHIEVE OPERATING RESULTS.
As a company focused on the development, sale and delivery of software
products and related services, our personnel are our most valued assets. Our
future success depends in large part on our ability to hire, train and retain
software developers, systems architects, project managers, communications
business process experts, systems analysts, trainers, writers, consultants and
sales and marketing professionals of various experience levels. Competition for
skilled personnel is intense. Any inability to hire, train and retain a
sufficient number of qualified employees could hinder the growth of our
business.
We have undergone significant management changes during the last twelve
months and may experience additional management changes in the future. New
managers typically bring new strengths to our business, but their short tenure
with us could affect our ability to execute business plans and achieve our
planned operating results.
-15-
OUR FUTURE SUCCESS DEPENDS ON OUR CONTINUED USE OF STRATEGIC RELATIONSHIPS TO
IMPLEMENT AND SELL OUR PRODUCTS.
We have entered into relationships with third party systems integrators and
hardware platform and software applications developers. We rely on these third
parties to assist our customers and to lend expertise in large scale,
multi-system implementation and integration projects, including overall program
management and development of custom interfaces for our product. Should these
third parties go out of business or choose not to provide these services, we may
be forced to develop those capabilities internally, incurring significant
expense and adversely affecting our operating margins. In addition, we have
derived and anticipate that we will continue to derive a significant portion of
our revenues from customers that have established relationships with our
marketing and platform alliances. We could lose sales opportunities if we fail
to work effectively with these parties or fail to grow our base of marketing and
platform alliances.
THE EXPANSION OF OUR PRODUCTS WITH NEW FUNCTIONALITY AND TO NEW CUSTOMER
MARKETS MAY BE DIFFICULT AND COSTLY.
We plan to invest significant resources and management attention to
expanding our products by adding new functionality and to expanding our customer
base by targeting customers in markets that we have not previously served. We
cannot be sure that expanding the footprint of our products or selling our
products into new markets will generate acceptable financial results due to
uncertainties inherent in entering new markets and in our ability to execute our
plans. Costs associated with our product and market expansions may be more
costly than we anticipate, and demand for our new products and in new customer
markets may be lower than we expect.
FOR SOME OF OUR PRODUCTS WE RELY ON SOFTWARE AND OTHER INTELLECTUAL PROPERTY
THAT WE HAVE LICENSED FROM THIRD PARTY DEVELOPERS TO PERFORM KEY FUNCTIONS.
Some of our products contain software and other intellectual property that
we license from third parties, including software that is integrated with
internally developed software and used in our products to perform key functions.
We could lose the right to use this software and intellectual property or it
could be made available to us only on commercially unreasonable terms. We could
fail to accurately recognize or anticipate the impact of the costs of procuring
this third party intellectual property. Although we believe that alternative
software and intellectual property is available from other third party
suppliers, the loss of or inability to maintain any of these licenses or the
inability of the third parties to enhance in a timely and cost-effective manner
their products in response to changing customer needs, industry standards or
technological developments could result in delays or reductions in product
shipments by us until equivalent software could be developed internally or
identified, licensed and integrated, which would harm our business.
OUR INTERNATIONAL OPERATIONS MAY BE DIFFICULT AND COSTLY.
We intend to continue to devote significant management and financial
resources for our international expansion. In particular, we will have to
continue to attract experienced management, technical, sales, marketing and
support personnel for our international offices. Competition for skilled people
in these areas is intense and we may be unable to attract qualified staff.
International expansion may be more difficult or take longer than we anticipate,
especially due to cultural, language barriers, and currency exchange risks.
Additionally, communications infrastructure in foreign countries may be
different from the communications infrastructure in the United States. Our
ability to successfully penetrate these markets is uncertain. If our
international operations are unsuccessful, our expenses could increase at a
greater rate than our revenues, and our operating results could be adversely
affected.
Moreover, international operations are subject to a variety of additional
risks that could adversely affect our operating results and financial condition.
These risks include the following:
. Longer payment cycles;
. Problems in collecting accounts receivable;
. The impact of recessions in economies outside the United States;
. Unexpected changes in regulatory requirements;
. Variable and changing communications industry regulations;
-16-
. Trade barriers and barriers to foreign investment, in some cases
specifically applicable to the communications industry;
. Barriers to the repatriation of capital or profits;
. Political instability or changes in government policy;
. Restrictions on the import and export of certain technologies;
. Lower protection for intellectual property rights;
. Seasonal reductions in business activity during the summer months,
particularly in Europe;
. Potentially adverse tax consequences;
. Increases in tariffs, duties, price controls or other restrictions on
foreign currencies;
. Requirements of a locally domiciled business entity;
. Regional variations in adoption and growth of new technologies served
by our products; and
. Potential impact on the above factors of the failure, success, or
variability between countries of acceptance of the Euro monetary unit,
and other European Union initiatives.
WE HAVE ACQUIRED OTHER BUSINESSES AND WE MAY MAKE ADDITIONAL ACQUISITIONS OR
ENGAGE IN JOINT BUSINESS VENTURES THAT COULD BE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR
OPERATING RESULTS.
We have acquired other businesses and may make additional acquisitions, or
engage in joint business ventures in the future that may be difficult to
integrate, disrupt our business, dilute stockholder value, complicate our
management tasks and affect our operating results. In July 2001 we completed the
acquisition of Lat45 Information Systems Inc., a developer of geospatial
software for planning, design and management of communications networks, and in
February 2002 we completed the acquisition of certain OSS assets from Nortel
Networks business that added service activation and other products to our
product portfolio. Acquisitions and investments in businesses involve
significant risks, and our failure to successfully manage acquisitions or joint
business ventures could seriously harm our business. Our past acquisitions and
potential future acquisitions or joint business ventures create numerous risks
and uncertainties including:
. Risk that the industry may develop in a different direction than
anticipated and that the technologies we acquire do not prove to be
those needed to be successful in the industry;
. Potential difficulties in completing in-process research and
development projects;
. Difficulty integrating new businesses and operations in an efficient
and effective manner;
. Risk that we have inaccurately evaluated or forecasted the benefits,
opportunities, liabilities, or costs of the acquired businesses;
. Risk of our customers or customers of the acquired businesses
deferring purchase decisions as they evaluate the impact of the
acquisition on our future product strategy;
. Risk that we may not properly determine or account for risks and
benefits under acquired customer contracts;
. Potential loss of key employees of the acquired businesses;
. Risk that we will be unable to integrate the products and corporate
cultures of the acquired business; and
. Risk of diverting the attention of senior management from the
operation of our business;
. Risk of entering new markets in which we have limited experience; and
. Future revenues and profits from acquisitions and investments may fail
to achieve expectations.
Our inability to successfully integrate acquisitions or to otherwise manage
business growth effectively could have a material adverse effect on our results
of operations and financial condition. Also, our existing stockholders may be
diluted if we finance the acquisitions by issuing equity securities.
-17-
THE VALUE OF OUR ASSETS MAY BECOME IMPAIRED.
Should our marketing and sales plan not materialize in the near term, the
realization of our intangible assets could be severely and negatively impacted.
The accompanying consolidated financial statements contained in this report have
been prepared based on management's estimates of realizability, and these
estimates may change in the future due to unforeseen changes in our results or
market conditions.
FUTURE SALES OF OUR COMMON STOCK WOULD BE DILUTIVE TO OUR STOCKHOLDERS AND
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
We cannot predict the effect, if any, that future sales of our common stock
by us, or the availability of shares of our common stock for future sale, will
have on the market price of our common stock prevailing from time to time. Sales
of substantial amounts of our common stock (including shares issued upon the
exercise of stock options), or the perception such sales could occur, may
materially and adversely affect prevailing market prices for common stock.
OUR FAILURE TO MEET CUSTOMER EXPECTATIONS OR DELIVER ERROR-FREE SOFTWARE
COULD RESULT IN LOSSES AND NEGATIVE PUBLICITY.
The complexity of our products and the potential for undetected software
errors increase the risk of claims and claim-related costs. Due to the
mission-critical nature of order processing, management and fulfillment
software, undetected software errors are of particular concern. The
implementation of our products, which we accomplish through our professional
services division and with our partners, typically involves working with
sophisticated software, computing and communications systems. If our software
contains undetected errors or we fail to meet our customers' expectations or
project milestones in a timely manner, we could experience:
. Delayed or lost revenues and market share due to adverse customer
reaction;
. Loss of existing customers;
. Negative publicity regarding us and our products, which could
adversely affect our ability to attract new customers;
. Expenses associated with providing additional products and customer
support, engineering and other resources to a customer at a reduced
charge or at no charge;
. Claims for substantial damages against us, regardless of our
responsibility for any failure;
. Increased insurance costs; and
. Diversion of development and management time and resources.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. In
addition, our license agreements usually cap the amounts recoverable for damages
to the amounts paid by the licensee to us for the product or services giving
rise to the damages. However, we cannot be sure that these contractual
provisions will protect us from additional liability. Furthermore, our general
liability insurance coverage may not continue to be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or the insurer
may disclaim coverage as to any future claim. The successful assertion of any
large claim against us could adversely affect our operating results and
financial condition.
OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY ADVERSELY
AFFECT OUR ABILITY TO COMPETE, AND WE MAY BE FOUND TO INFRINGE ON THE
PROPRIETARY RIGHTS OF OTHERS.
Our success depends in part on our proprietary software technology. We rely
on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our technology. We cannot guarantee that the
steps we have taken to assess and protect our proprietary rights will be
adequate to deter misappropriation of our intellectual property, and we may not
be able to detect unauthorized use and take appropriate steps to enforce our
intellectual property rights. If third parties infringe or misappropriate our
copyrights, trademarks, trade secrets or other proprietary information, our
business could be seriously harmed. In addition, although we believe that our
proprietary rights do not infringe on the intellectual property rights of
others,
-18-
other parties may assert infringement claims against us or claim that we have
violated their intellectual property rights. These risks may be increased by the
addition of intellectual property assets through business or product
acquisitions. Claims against us, either successful or unsuccessful, could result
in significant legal and other costs and may be a distraction to management. We
currently focus on intellectual property protection within the United States.
Protection of intellectual property outside of the United States will sometimes
require additional filings with local patent, trademark, or copyright offices,
as well as the implementation of contractual or license terms different from
those used in the United States. Protection of intellectual property in many
foreign countries is weaker and less reliable than in the United States. As our
business expands into foreign countries, costs and risks associated with
protecting our intellectual property abroad will increase. We also may choose to
forgo the costs and related benefits of certain intellectual property benefits
in some of these jurisdictions.
OUR STOCK PRICE HAS BEEN AND MAY REMAIN VOLATILE, WHICH EXPOSES US TO THE
RISK OF SECURITIES LITIGATION.
The trading price of our common stock has in the past and may in the future
be subject to wide fluctuations in response to factors such as the following:
. Revenue or results of operations in any quarter failing to meet the
expectations, published or otherwise, of the investment community;
. Announcements of technological innovations by us or our competitors;
. Acquisitions of new products or significant customers by us or our
competitors;
. Developments with respect to our patents, copyrights or other
proprietary rights of our competitors;
. Changes in recommendations or financial estimates by securities
analysts;
. Rumors or dissemination of false and/or unofficial information;
. Changes in management;
. Stock transactions by our management or businesses with whom we have a
relationship;
. Conditions and trends in the software and communications industries;
. Announcement of acquisitions or other significant transactions by us
or our competitors;
. Adoption of new accounting standards affecting the software industry;
and
. General market conditions, including geopolitical events.
Fluctuations in the price of our common stock may expose us to the risk of
securities lawsuits. Defending against such lawsuits could result in substantial
costs and divert management's attention and resources. In addition, any
settlement or adverse determination of these lawsuits could subject us to
significant liabilities.
Provisions Of Our Charter Documents, Delaware Law and Our Stockholder Rights
Plan Could Discourage a Takeover You May Consider Favorable Or the Removal Of
Our Current Management.
Some provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that you may consider
favorable or the removal of our current management. These provisions:
. Authorize the issuance of "blank check" preferred stock;
. Provide for a classified board of directors with staggered, three-year
terms;
. Prohibit cumulative voting in the election of directors;
. Prohibit our stockholders from acting by written consent without the
approval of our board of directors;
. Limit the persons who may call special meetings of stockholders; and
. Establish advance notice requirements for nominations for election to
the board of directors or for proposing matters to be approved by
stockholders at stockholder meetings.
-19-
Delaware law may also discourage, delay or prevent someone from acquiring
or merging with us. In addition, purchase rights distributed under our
stockholder rights plan will cause substantial dilution to any person or group
attempting to acquire us without conditioning the offer on our redemption of the
rights. As a result, our stock price may decrease and you might not receive a
change of control premium over the then-current market price of the common
stock.
ITEM 2. PROPERTIES
We lease two buildings in an office park in Plano, Texas, that total
approximately 160,000 square feet, and we own an adjacent, undeveloped lot
available for expansion. These buildings are used as our headquarters under a
lease that expires in 2010. In addition, we lease facilities and offices in
Englewood, Colorado; Chicago, Illinois; McLean, Virginia; Atlanta, Georgia;
Montreal, Canada; Rio de Janero, Brazil; Nice, France and Leige, Belgium. As a
result of our February 2002 acquisition we also now have leased facilities in
Huntsville, Alabama; Covents Garden and Reading, England; Munich, Germany; and
Toronto, Canada. Lease terms for all our locations expire at various times
through February 2010.
ITEM 3. LEGAL PROCEEDINGS
On November 1, 2001, Bernstein Liebhard & Lifshitz, LLP announced that it
had filed a class action suit in the United States District Court for the
Southern District of New York against MetaSolv Software, Inc., Morgan Stanley
Dean Witter, Inc., BancBoston Robertson Stephens, Inc., Jeffries & Company,
Inc., James P. Janicki, and Glenn A. Etherington, alleging violations of
Sections 11 and 15 of the Securities Act of 1933 and alleging violations of
Section 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against
Morgan Stanley Dean Witter, Inc., BancBoston Robertson Stephens, Inc., and
Jeffries & Company, Inc. The named plaintiff is Colbert Birnet, L.P. The
complaint seeks unspecified damages as a result of various alleged securities
law violations arising from activities purportedly engaged in by the
underwriters in connection with our initial public offering. The plaintiffs
allege that the underwriter defendants agreed to allocate stock in our initial
public offering to certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional purchases of
stock in the aftermarket at pre-determined prices. The plaintiffs allege that
the prospectus for our initial public offering was false and misleading in
violation of the securities laws because it did not disclose these arrangements.
We intend to vigorously defend the action, which is being coordinated with
over three hundred nearly identical actions filed against other companies before
one judge in the U.S. District Court for the Southern District of New York. No
date has been set for any response to the complaint. We believe that the suit is
without merit and that we and our officers have fully complied with applicable
laws and regulations. We do not expect this action will impact our operations,
financial results, or public perception in any material way.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No information is required in response to this Item, as no matter was
submitted to a vote of our security holders during the fourth quarter of the
fiscal year covered by this report.
-20-
PART II
ITEM 5. MARKET FOR THE registrant's COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on The Nasdaq Stock Market (Nasdaq) under the
symbol MSLV. Prices per share reflected in the following table represent the
range of high and low sales prices reported by The Nasdaq Stock Market for the
quarters indicated.
Fiscal 2001 Fiscal 2000
----------- -----------
High Low High Low
---- --- ---- ---
March 31................................. $24.63 $7.00 $126.00 $45.88
June 30.................................. 14.81 7.00 60.00 30.25
September 30............................. 8.30 5.00 55.50 29.50
December 31.............................. 9.10 5.71 40.75 6.75
We have not paid cash dividends on our common stock, and do not plan to pay
cash dividends to our stockholders in the near future. We are not bound by any
contractual terms that prohibit or restrict the payment of dividends; however,
we presently intend to retain our earnings to finance the future growth of the
business.
As of February 28, 2002, we had approximately 8,250 beneficial
stockholders, including approximately 103 stockholders of record. On February
28, 2002, the closing price of our common stock on Nasdaq was $6.07 per share.
On July 20, 2001, MetaSolv Canada Holdings Inc., our wholly-owned
subsidiary incorporated under the laws of Nova Scotia, acquired all of the
outstanding shares of capital stock of Lat45 Information Systems Inc. as set
forth in a Share Purchase Aagreement dated July 20, 2001. The consideration paid
to the Lat45 Information Systems Inc. shareholders in connection with the
acquisition consisted of approximately $6.2 million in cash and 366,666
exchangeable shares of MetaSolv Canada Holdings Inc., valued at $2.8 million. In
accordance with their terms, the exchangeable shares of MetaSolv Canada Holdings
Inc. may be exchanged by the holders of the shares for a period of five years.
The holders of the exchangeable shares have the right to acquire shares of
our common stock upon the exchange of the exchangeable shares of MetaSolv Canada
Holdings Inc. Exchange of the exchangeable shares of MetaSolv Canada Holdings
Inc., for our common stock is governed by the terms of the exchangeable shares
and by an Exchange Agreement dated July 20, 2001.
None of the Lat45 Information Systems Inc., shareholders who received
exchangeable shares of MetaSolv Canada Holdings Inc. were "U.S. persons" as that
term is defined in Regulation S promulgated under the Securities Act of 1933.
The issuance of the exchangeable shares by MetaSolv Canada Holdings Inc., was
exempt from the registration requirements of Section 5 of the Securities Act of
1933 pursuant to Regulation S. In addition, the issuance of shares of our common
stock upon exchange of the exchangeable shares of MetaSolv Canada Holdings Inc.
will be exempt from the registration requirements of Section 5 of the Securities
Act of 1933 pursuant to Regulation S.
We did not receive any proceeds from the transactions consummated pursuant
to the Share Purchase Agreement dated July 20, 2001.
-21-
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data that should be
read in conjunction with our consolidated financial statements and notes thereto
and with Management's Discussion and Analysis of Financial Condition and Results
of Operations. The selected consolidated financial data for the years presented
has been derived from our audited financial statements.
Years Ended December 31,
-----------------------------------------------------------------
2001A 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Total revenues.............................. $ 118,846 $ 131,877 $ 73,007 $ 42,576 $ 9,299
Gross profit................................ 87,945 93,140 46,073 26,475 6,717
Income (loss) from operations............... 2,971 18,388 3,718 (508) 65
Net income (loss)........................... 2,717 16,043 2,645 (186) 120
Earnings (loss) per share of common stock:
Basic................................... $ 0.07 $ 0.45 $ 0.17 $ (0.02) $ 0.01
Diluted................................. $ 0.07 $ 0.40 $ 0.08 $ (0.02) $ 0.00
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $ 80,658 $ 93,695 $ 112,341 $ 7,984 $ 3,639
Working capital............................. 132,768 130,650 108,917 9,761 2,393
Total assets................................ 188,017 197,628 147,216 26,527 11,940
Total current liabilities................... 26,456 48,403 28,291 11,935 5,346
Redeemable convertible preferred stock...... -- -- -- 12,610 2,610
Total stockholders' equity.................. $ 161,173 $ 148,950 $ 118,615 $ 1,826 $ 1,939
Quarters Ended
-------------------------------------------------------------
December 31 September 30* June 30 March 31
----------- ------------ ------- --------
(In thousands except per share data)
Unaudited Quarterly Consolidated Financial Data:
2001:
Total revenues.............................. $ 18,712 $ 23,632 $37,696 $38,806
Gross profit................................ 13,478 $ 17,789 28,194 28,484
Income (loss) from operations.............. (2,021) (7,007) 5,692 6,307
Net income (loss) .......................... (521) (6,404) 4,527 5,115
Earnings (loss) per share of common stock:
Basic .................................. $ (.01) $ (.17) $ .12 $ .14
Diluted................................. $ (.01) $ (.17) $ .12 $ .13
2000:
Total revenues.............................. $ 37,804 $ 35,786 $32,297 $25,990
Gross profit................................ 27,333 25,959 21,933 17,915
Income from operations...................... 6,064 5,347 4,298 2,679
Net income.................................. 5,033 4,686 3,745 2,579
Earnings per share of common stock:
Basic .................................. $ .14 $ .13 $ .11 $ .07
Diluted................................. $ .13 $ .12 $ .09 $ .06
* The third quarter of 2001 includes unusual charges of $3.1 million for
restructuring costs and $2.9 million of in-process research and development
expense which are included in the determination of operating income. The net
loss for the third quarter of 2001 includes the $3.1 million of restructuring
charges, $2.9 million of in-process research and development expense, and $3.4
million of write-downs for equity investments, net of a tax benefit of $3.0
million related to those items.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading global provider of operational support system (OSS)
software solutions that help communications providers and businesses manage
their next-generation networks and services. Our products automate key
communications management processes, from network planning and engineering to
operations and customer care. Our products enable communications providers to
increase revenue and reduce costs through more efficient management of network
resources, quick deployment of communication services, and delivery of superior
customer service. We derive substantially all of our revenue from the sale of
software licenses, related professional services, and support of our packaged
software to communications services providers.
The communications provider industry experienced significant financial
weakness during 2001, and corporate consolidations affected a number of our
customers. These consolidations caused revenues from some customers to decline
or cease, while it strengthened and increased revenue from others. It also
reduced the number of potential new sales opportunities for our products. Our
number of active customers decreased from 109 at December 31, 2000, to 90 at
December 31, 2001, primarily due to customers who have suffered financial
problems. Our February 2002 acquisition increased the number of our active
customers to more than 150.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the financial statements and accompanying notes. Note 1 to
the consolidated financial statements in this report describes the significant
accounting policies and methods used in the preparation of the financial
statements. Estimates are used for, but not limited to, the accounting for the
allowance for doubtful accounts, contingencies, restructuring costs and other
special charges. Actual results may differ from these estimates. The critical
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the financial statements.
We generally recognize license revenues when our customer has signed a
license agreement, we have delivered the software product, product acceptance is
not subject to express conditions, the fees are fixed or determinable and we
consider collection to be probable. We allocate the agreed fees for multiple
products and services licensed or sold in a single transaction among the
products and services using the "residual method" as required by SOP 98-9,
deferring the fair value of the undelivered elements and recognizing the
residual amount of the fees as revenue upon delivery of the software license. On
occasion we may enter into a license agreement with a customer requiring
development of additional software functions or services necessary for the
software's performance of specified functions. For those agreements, we
recognize revenue for the entire arrangement on a percentage-of-completion basis
as the development services are provided. We generally recognize service
revenues as the services are performed. We recognize revenues from maintenance
agreements ratably over the maintenance period, usually one year.
Licensing and service terms are typically covered by signed orders that
reference our master agreement with the customer. Our sales for a given period
typically involve large financial commitments from a relatively small number of
customers. Accordingly, delays in the completion of sales near the end of a
quarter could negatively impact revenues in that quarter. Consistent with
industry practice, we sometimes agree to bill our license fees in more than one
installment over extended periods. Generally when less than 50% of the
arrangement fee is billed at the inception of the arrangement, or the
installments extend beyond six months, amounts not due immediately are deferred
and recorded as revenue when payments are due, assuming all revenue recognition
criteria have been met.
Our software products are priced to meet the needs of each of our target
market segments, from start-up resellers and corporate enterprises to large,
facility-based incumbent service providers. We charge a base price for the core
subsystems, coupled with additional license fees for add-on modules. In
addition, we typically charge a per-user license fee, with customary volume
discounts on purchases of large numbers of user licenses. We price annual
maintenance and support contracts as a percentage of the license fee that is
current for the product being maintained. For a new customer, our initial sale
of licenses and associated services, including maintenance and support,
generally ranges from several hundred thousand to several million dollars.
-23-
Service revenues consist principally of software implementation, consulting
and customer training, as well as software maintenance agreements that include
both customer support and the right to product updates. We use our own employees
and subcontract with our system integrator partners to provide
implementation-consulting services to our customers. We primarily offer and
expect to continue to offer the majority of our services on an hourly basis. We
also offer several fixed-price consulting packages, primarily for repeatable
solutions.
Since we implement some of our services on a fixed fee basis, if we incur
more costs than we expect in implementations, our profitability will suffer. Our
process for tracking progress to completion on such arrangements is through
individual detailed project plans and the regular review of labor hours incurred
compared to estimated hours to complete the project. When estimates of costs to
complete the project indicate that a loss will be incurred, these losses are
recognized immediately.
Any estimation process, including that which is used in preparing contract
accounting models, involves inherent risk. To the extent that our estimates of
revenues and expenses on these contracts change periodically in the normal
course of business, due to the modifications of our contractual arrangements or
changes in cost, such changes would be reflected in the results of operations as
a change in accounting estimates in the period the revisions are determined.
We normally ship our software and perform services shortly after we receive
orders. As a result, our quarterly financial results are largely dependent on
orders received during that period.
We do not recognize revenue in cases where a customer's ability to pay is
not probable. Our method for identifying such situations is primarily through
our collections process. When we have indications that a customer is facing
financial difficulty we recognize revenue as cash payments are received. In
addition, for customers not on the cash basis of accounting, we maintain an
allowance for doubtful accounts based upon the expected collectibility of
accounts receivable. We regularly review the adequacy of our allowance for
doubtful accounts through identification of specific receivables where it is
expected that payment will not be received in addition to establishing a general
reserve policy that is applied to all amounts that are not specifically
identified. In determining specific receivables where collection may not be
received, we review past due receivables and give consideration to prior
collection history, changes in the customer's overall business condition and the
potential risk associated with the customer's industry among other factors. The
allowance for doubtful accounts is based on our assessment of the collectibility
of specific customer accounts and the aging of the accounts receivable. If there
is a deterioration of a major customer's credit worthiness or actual defaults
are higher than our historical experience, our estimates of the recoverability
of amounts due us could be adversely affected. The allowance for doubtful
accounts reflects our best estimate as of the reporting dates. Changes may occur
in the future, which may make us reassess the collectibility of amounts and at
which time we may need to provide additional allowances in excess of that
currently provided.
We evaluate our long-lived assets, including goodwill and other
intangibles, for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Recoverability
of any assets to be held and used is measured by a comparison of the carrying
amount of any asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
ACQUISITIONS
On July 20, 2001, we acquired all of the outstanding shares of capital
stock of Montreal-based Lat45 Information Systems Inc., a developer of
geospatial software for planning, design and management of communications
networks. Our acquisition of Lat45 Information Systems Inc. allows us to
use graphical geospatial (geographic) technology to expand a service
provider's capabilities in network planning and engineering functions and
extends the MetaSolv Solution functionality to include support for market
demand forecasting, network planning and design, service fulfillment, and
executive decision support. We offer this product under the brand, MetaSolv
Network and Service Planning(TM), both as a separate product and integrated
with the MetaSolv Solution. The aggregate purchase price was approximately
$9.0 million consisting of $6.2 million in cash and 366,666 exchangeable
shares of MetaSolv Canada Holdings Inc., which are exchangeable for our
shares on a one-to-one basis.
-24-
On February 1, 2002, we acquired certain OSS assets from Nortel Networks.
With this acquisition, we extended our product portfolio with a leading
carrier-class (highly scalable and reliable) service activation product, and
several point solutions that allow communications service providers to
efficiently manage and deliver differentiated services for Internet Protocol
(IP), data, and wireless communications. As a result of the acquisition, we now
offer a comprehensive suite of OSS solutions available for wireless, IP, data,
and traditional networks and services. The acquisition also strengthens the
worldwide scope of our product sales and services through an established
presence in Europe. We acquired these assets for $35 million in cash and the
assumption of certain liabilities on closing.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain line items in our statements of
operations.
Year Ended December 31, % Of Dollar Changes
-----------------------
2001 2000 1999 2000-2001 1999-2000
---- ---- ---- --------- ---------
Revenues:
License............................ 58% 54% 53% (4%) 85%
Service............................ 42% 46% 47% (16%) 76%
---- ---- ---
Total revenues................. 100% 100% 100% (10%) 81%
Cost of revenues:
License............................ 5% 4% 2% 20% 198%
Amortization of intangible assets . 1% -- -- n.m. --
Service............................ 20% 25% 35% (31%) 33%
---- ---- ---
Total cost of revenues......... 26% 29% 37% (20%) 44%
---- ---- ---
Gross profit............................ 74% 71% 63% (6%) 102%
Operating expenses:
Research and development........... 26% 24% 23% -- 85%
Sales and marketing................ 23% 19% 20% 9% 71%
General and administrative......... 17% 14% 15% 10% 71%
Restructuring costs ............... 3% -- -- n.m. --
In-process research and development 2% -- -- n.m. --
---- ---- ---
Total operating expenses....... 71% 57% 58% 14% 76%
Income from operations.................. 2% 14% 5% (84%) 395%
Loss on investments .................... 3% -- -- n.m. --
Interest and other income, net ........ 5% 6% 1% (29%) 932%
---- ---- ---
Income before taxes..................... 4% 20% 6% (81%) 484%
Income tax expense...................... 2% 8% 2% (78%) 451%
---- ---- ---
Net income.............................. 2% 12% 4% (83%) 507%
n.m. - not meaningful
Revenues
Total revenues in 2001 were $118.8 million, compared to $131.9 million in
2000 and $73.0 million in 1999, representing a 10% year over year decrease in
2001 and an 81% year over year increase in 2000. The decrease in revenues during
the most recent fiscal year is primarily related to fewer sales to new customers
and, to a lesser extent, fewer follow-on sales to existing customers. We
attribute the lower number of sales to overall lower capital spending in the
communications industry. The sales slowdown adversely affected our license and
implementation consulting revenue in 2001, while the impact was partially offset
by a 33% increase in maintenance revenues. The
-25-
increase in revenues between 1999 and 2000 resulted from an increase in the
number of sales of software and related services to new customers, and also to
higher follow-on sales of software modules, user licenses and related services
to our existing customer base.
License fees. License fee revenues decreased 4% to $68.4 million in 2001
from $71.6 million in 2000, after increasing 85% from $38.8 million in 1999.
License revenue in the second half of 2001 was 60% below the first half. The
decline in license fee revenues during 2001 is primarily due to fewer sales to
new customers, and also to lower sales of modules and additional user seats to
existing customers, where business contraction and their staff reductions have
reduced their need for additional near-term capacity. Our product pricing
remained relatively stable during 2001.
The increase in license revenue from 1999 to 2000 was largely due to a 33%
increase in the number of customers using our products, larger license sales to
new customers, and a 40% increase in follow-on sales of additional software
modules and user licenses to existing customers.
We contracted with 10 new license customers during 2001, compared to 52 in
2000, not including new customers obtained through acquisition of the Lat45
Information Systems Inc. business in July 2001. While we expect weak market
conditions to continue in the near-term, we ultimately expect our order activity
and revenue will increase due to our more extensive product portfolio resulting
from our February 2002 acquisition.
We believe that the lower order activity we have experienced in recent
months, as well as the 4% decline in license revenue in 2001, is related to an
overall slowdown in communications infrastructure spending by our potential
customers.
Services. Revenues from services were $50.4 million in 2001 compared to
$60.2 million in 2000 and $34.2 million in 1999, representing a 16% year over
year decrease in 2001 and a 76% year over year increase during 2000. The decline
in service revenues during the most recent fiscal year was due to a 54% decline
in consulting and education services, partially offset by a 33% increase in
maintenance revenue.
Consulting and education services revenue was $15.5 million in 2001, $34.0
million in 2000, and $23.7 million in 1999. The decline in 2001 from 2000 in
consulting and education services revenue was largely due to fewer new customer
implementations related to fewer new license product sales and, to a lesser
extent, lower spending by our existing customers on upgrades, product
integrations and training of their employees. Our consulting revenue is also
adversely affected by the increasing ability of alliance partners to provide
consulting services directly to our customers, and license product enhancements
and tools that shorten software implementation and upgrade times for our
customers.
Our consulting and education services revenue will continue to be dependent
on sales of new license products requiring implementations, and our customers'
spending for enhancements and integrations that make their business more
efficient.
Post-contract customer support, or maintenance revenues, increased to $34.9
million in 2001 from $26.3 million in 2000, and $10.5 million in 1999,
representing year over year increases in 2001 and 2000 of 33% and 150%,
respectively. The increases in maintenance revenue are due to a higher
cumulative base of license products that we support. The number of customers
from whom we recognize maintenance revenue declined 12% between the fourth
quarter of 2001 and the year-ago period, largely due to consolidation among some
of our customers and financial failure of others. The decline in the number of
customers was most evident during the first half of 2001, and relatively stable
during the second half of the year. The customer losses tended to be our smaller
revenue accounts, while same-customer maintenance revenue from our remaining
customers in 2001 increased over 2000, primarily due to their growth of
operations and their follow-on purchases of our products.
We expect maintenance revenue to continue to increase in 2002 as our
customer base increases with the inclusion of our support for customers using
our newly acquired products, and also from additional maintenance-bearing
license sales to new and existing customers. However, we also expect continued
consolidations and financial weakness in some customers, and this may adversely
impact their ability to pay for maintenance support.
Concentration of Revenues. In 2001, our top ten customers represented 36%
of our total revenue, with no one customer accounting for more than 6% of
revenue. However, in any given quarter, we generally derive a significant
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portion of our revenue from a small number of relatively large sales. While we
believe that the loss of any one of these customers would not seriously harm our
overall business or financial condition, our inability to consummate one or more
substantial sales in any future period could seriously harm our operating
results for that period.
International Revenues. We recognized $26.9 million of revenue during 2001
from sources outside the United States, representing 23% of total revenue, up
from 9% in 2000. We expect our international revenues to increase by a higher
percentage than domestic sales during the next twelve months due to our February
2002 acquisition which brought an established European base of customers and
local sales and support infrastructure, and also due to our product enhancements
that specifically address the needs of European, Latin American and Asian
customers.
Cost of Revenues
License Costs. License costs consist primarily of royalties for third party
software that is used to develop or is embedded in our products, and for product
features that were originally developed for specific customers. These software
components are now included in our software and payments are made to the
original companies that funded the development of those components. Licensing
costs also includes costs of packaging materials and the production of software
media and documentation.
License costs were $6.1 million in 2001, $5.1 million in 2000 and $1.7
million in 1999, representing 9%, 7% and 4% of license revenue in each year,
respectively. The increases in license costs in 2001 and 2000, as a percentage
of license revenue, were primarily due to royalty expenses for use of third
party e-commerce software that we embedded in some of our products. In July 2001
we replaced this royalty-based agreement with a one-time payment for a perpetual
license, thus reducing royalty expense as a percentage of license revenue. We
expect future license costs to be between 6% and 7% of license revenue as we add
and sell our newly acquired OSS products in 2002. We plan to continue the use of
third party software where it provides an advantage for our customers. While
this plan lowers our overall product development cost, it would increase our
cost of license revenues.
Amortization of Intangible Assets. For the year ended December 31, 2001,
cost of revenues includes a $1.4 million charge for amortization of intangible
assets. This amortization consists of $0.9 million of purchased technology
rights and $0.5 million attributable to customer contracts purchased from Lat45
Information Systems Inc. The value assigned to intangible assets, primarily
technology rights, is amortized over the estimated useful life of the assets
using the greater of straight-line or the ratio that current gross revenues
related to those assets bears to the total current and anticipated future gross
revenues related to those assets. The estimated useful life of these assets
range from nine months to thirty-six months.
Service Costs. Service costs consist primarily of costs associated with
providing consulting, training and customer support (maintenance) services.
These costs include compensation and related expenses for employees and fees for
third party consultants who provide services for our customers under subcontract
arrangements.
Service costs were $23.3 million in 2001, $33.6 million in 2000 and $25.2
million in 1999, representing 46%, 56% and 74% of service revenues in each year,
respectively. The decline in service costs in 2001 was primarily due to lower
use of subcontracted consultants related to lower demand for consulting
services, partially offset by increased costs for customer support. The decrease
in service costs as a percentage of service revenues was primarily due to the
relatively higher proportion of higher-margin maintenance revenues, compared to
consulting and training revenues.
We expect future service costs to increase due to growth in staffing to
meet demand for services related to supporting our increasing customer base and
additional products in 2002. Services costs are also expected to increase as we
strengthen product support for overseas customers. Services margins as a percent
of services revenue is expected to decline somewhat during 2002 as consulting
revenues increase relative to maintenance revenues.
Operating Expenses
Research and Development Expenses. Research and development expenses
consist primarily of costs related to our staff of software developers,
contracted development costs, and the associated infrastructure costs required
to support product development. Product research and development expenses during
2001 and 2000 were both $31.3 million, up from $17.0 million in 1999,
representing 26%, 24% and 23% of total revenues in each year, respectively.
While our research and development investment in 2001 was equal to our
investment in 2000, the investment in
-27-
2001 reflects an 18% increase in research and development employees and a 52%
decline in contracted development spending. During 2001, our research and
development investments were focused on new products and enhancements to address
next-generation communications networks, new features to address the needs of
multinational communications providers and user-group defined product
enhancements. The increase in research and development expense between 1999 and
2000 was due to additional engineering personnel and contracted development
expenses required to create enhancements for communications networks utilizing
newer technologies, adapting our software for international differences in data
formats, standards and language, and also for significant architecture
improvements.
We expect that our future investment in product development will continue
to increase as we integrate the newly acquired OSS products to our portfolio,
address emerging communications technologies in our products, and migrate our
products to an integrated, modular suite. The modular structure of our products
allows communications service providers to implement our product functionality
in phases, depending on their needs, to realize near-term value and the
longer-term benefits of an overall integrated system of our products.
Our product development methodology generally establishes technological
feasibility near the end of the development process, when we have a working
model. Costs incurred after the development of a working model and prior to
product release are insignificant. Accordingly, we have not capitalized any
software development costs.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salary, commission, travel, trade show and other related expenses
required to sell our software in our targeted markets. Sales and marketing
expenses were $26.8 million in 2001, $24.5 million in 2000, and $14.3 million in
1999, representing 23%, 19% and 20% of revenues in each year, respectively.
Sales and marketing expenses increased each year primarily due to the expansion
of our sales and marketing staff, increased commission expense, and increased
travel costs, coupled with higher expenses related to our expansion into Europe
and Latin America. The increase in sales and marketing expenses as a percentage
of revenues between 2000 and 2001 was due to the lower revenue in 2001. We
expect that our sales and marketing expenses will continue to increase,
particularly due to the integration of our sales and marketing teams with those
from our recent acquisition, and as we increase our presence in Europe and Latin
America.
General and Administrative Expenses. General and administrative expenses
consist of costs related to information systems infrastructure, facilities,
finance and accounting, legal, human resources and corporate management not
directly allocated to other departments. General and administrative expenses
were $20.7 million in 2001, $18.9 million in 2000 and $11.1 million in 1999,
representing 17%, 14% and 15% of revenues in each year, respectively. The
increase in general and administrative expenses resulted primarily from a higher
provision for doubtful accounts which increased to $8.6 million in 2001 from
$6.8 million in 2000 and $1.8 million in 1999, and also due to staff increases
in information systems and administrative functions to support the increased
scale of our operations. We expect general and administrative expenses to
continue to increase to support business growth, particularly support for the
acquired products and our international operations. We expect general and
administrative expenses to decline as a percentage of revenues as we increase
administrative staffing proportionately less than expected revenue increases,
and from relatively smaller provisions for bad debt.
Restructuring Costs. In July 2001, we announced a corporate restructuring,
and in the quarter ended September 30, 2001, we recorded a pre-tax restructuring
charge of $3.1 million. This charge consisted of $2.0 million for a reduction in
force of approximately 100 people, and approximately $1.1 million for lease
commitments for certain field offices being closed and related fixed asset
write-downs. The restructuring was in response to lower software license
bookings and the expectation of lower revenues in the third and fourth quarters
of 2001. We expect approximately $7.0 million of annualized savings from this
restructuring program. Approximately $1.0 million is included in accrued
liabilities, related primarily to future minimum lease commitments, which expire
in 2004. We will have additional restructuring costs during the first quarter of
2002 to align with market conditions and eliminate redundant operations that
resulted from our February 2002 acquisition.
In-Process Research and Development. In connection with our acquisition of
Lat45 Information Systems Inc., we recorded a pre-tax charge of $2.9 million for
acquired in-process research and development (IPR&D) during the quarter ended
September 30, 2001. At the date of this acquisition, the IPR&D projects had not
yet reached technological feasibility and had no alternative future uses. The
projects generally included enhancements and upgrades to existing technology,
enhanced communication among systems, introduction of new functionality and the
development of new technology primarily for integration purposes. The value of
the IPR&D was calculated using a
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discounted cash flow analysis of the anticipated income stream of the related
product sales. The projected net cash flows were computed using a discount rate
of 35% for the IPR&D project. It is anticipated that remaining costs to complete
the projects will be approximately $1.4 million and project release dates will
range from the fall of 2002 through spring of 2003. If these projects are not
successfully developed, future revenues and profitability may be adversely
affected, and the value of intangible assets acquired may become impaired.
Loss on Investments
During the quarter ended September 30, 2001, we determined that the decline
in fair value of two equity investments below their carrying value was other
than temporary. Accordingly, we recorded a pre-tax charge of $3.4 million to
write down the value of investments, based on an independent appraisal.
Interest and Other Income, Net
Interest and other income, primarily consisting of interest income and
interest expense, was $5.4 million in 2001, $7.7 million in 2000 and $0.7
million in 1999. The decrease in interest and other income from 2000 to 2001 was
primarily due to lower interest rates earned on invested balances, partially
offset by higher cash and marketable security balances during 2001. The increase
in interest and other income in 2000 from 1999 was primarily the result of
interest and dividends earned on higher cash and marketable securities balances
resulting from our initial public offering in November 1999.
Income Tax Expense
Income tax expense was $2.2 million in 2001, $10.0 million in 2000 and $1.8
million in 1999. As a percentage of income before taxes, income tax expense was
45.2% in 2001, 38.4% in 2000, and 40.7% in 1999. The increase in the effective
tax rate during 2001 was due principally to the in-process research and
development write-off that is not deductible for tax purposes. Tax expense as a
percentage of pre-tax income differs from the federal statutory rate primarily
due to these nondeductible costs and state taxes, partially offset by estimated
tax credits in 2001. The 1999 tax expense rate also includes a non-recurring
state tax adjustment.
Net Income
We recorded net income of $2.7 million during 2001, or $0.07 per share of
common stock. This compares to $16.0 million net income in 2000 and $2.6 million
net income in 1999, or $0.40 and $0.08 per diluted share in each year,
respectively. On a pre-tax basis, 2001 net income includes:
. Lat45 Information Systems Inc. acquisition related charges of $4.3
million, including $2.9 million in in-process research and development
costs, and $1.4 million in amortization of intangible assets;
. Restructuring charges during the third quarter of $3.1 million;
. Write-down of equity investments of $3.4 million; and
. Tax benefit of $3.0 million for these items.
Excluding these items, earnings per share on a pro forma basis were $0.27
per diluted share, compared to $0.40 in 2000.
Liquidity and Capital Resources
At December 31, 2001, our primary sources of liquidity were $80.7 million
in cash and cash equivalents, and $56.9 million in marketable securities,
totaling $137.6 million and representing 73% of total assets. We have invested
our cash in excess of current operating requirements in short and intermediate
term investment grade securities that are available for sale as needed to
finance our future growth. Total cash and marketable securities decreased $4.9
million, from $142.5 million at year-end 2000, due to the expenditures incurred
to acquire Lat45 Information Systems Inc. and other operating assets.
Cash provided by operating activities was $5.2 million during 2001,
compared to $36.1 million in 2000 and $10.4 million in 1999. The $5.2 million in
cash from 2001 operating activities resulted from our $2.7 million of net
-29-
income, adjusted for the following non-cash items included in net income:
depreciation and amortization expense of $5.5 million, stock compensation
expense of $0.4 million, income tax related adjustments of $1.2 million,
write-downs of investment assets of $3.4 million, and purchased in-process
research and development expense of $2.9 million, and a reduction in operating
assets and liabilities of $11.0 million, primarily from lower deferred revenue,
accounts payable, and accrued liabilities.
Deferred revenue consists primarily of prepaid maintenance revenue that we
recognize on a pro-rata basis over the term of the agreement, and also includes
customer payments that we have received for license products and services yet to
be performed. Deferred revenues were $9.1 million as of December 31, 2001,
compared to $24.0 million at December 31, 2000, reflecting a decrease in prepaid
license contracts, largely related to release of our MetaSolv Solution 5.0 in
April 2001 that some customers had ordered in 2000. The reduction in deferred
revenue also reflects lower prepaid amounts for maintenance contracts due to
some customers converting to quarterly payments to conserve their cash, and the
inability of some customers to continue their maintenance contracts due to their
financial difficulties.
Accounts receivable, net, decreased from $24.0 million at the end of 2000
to $12.9 million as of December 31, 2001. The $11.1 million decrease in
receivables compares to the $19.1 million decrease in quarterly revenue in the
quarter ended December 31, 2001, from a year ago.
Net cash used for investing activities was $20.9 million in 2001, comprised
of $8.0 million in purchases of marketable securities, $6.8 million for the
Lat45 Information Systems Inc. acquisition, and $6.1 million in capital
expenditures for computing hardware and software, furniture, leasehold
improvements and other operating assets. Net cash used for investing activities
in 2000 and 1999 was $60.2 million and $7.1 million, respectively. We have no
unusual capital commitments at December 31, 2001, and our principal commitments
consist of obligations under operating leases described in Note 8 of the
accompanying consolidated financial statements.
Net cash provided from financing activities was $2.6 million, $5.4 million,
and $101.1 million in 2001, 2000, and 1999, respectively. The decrease in net
cash from financing activities from 2000 to 2001 was due to lower proceeds from
the exercise of stock options and employee stock purchases and the purchase of
treasury stock in the first quarter 2001. Net cash from financing activities in
1999 included $100.4 million in proceeds from the initial public offering of our
common stock.
We acquired certain OSS assets from Nortel Networks in February 2002 for
$35 million in cash and the assumption of certain liabilities on closing.
We believe that our cash flows generated by operations, together with
current cash and marketable securities balances, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. From time to time, we evaluate potential acquisitions of
complementary businesses, products and technologies. Should cash balances be
insufficient to complete one of these acquisitions, we may seek to sell
additional equity or debt securities. The decision to sell additional equity or
debt securities could be made at any time and could result in additional
dilution to our stockholders.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used and
establishes new standards on the recognition of certain identifiable intangible
assets separate from goodwill for all business combinations initiated after June
30, 2001. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead tested for impairment
at least annually. SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values.
We adopted the provisions of SFAS No. 141 effective July 1, 2001 and will
fully adopt SFAS No. 142 effective January 1, 2002. In accordance with the
transitional provisions of SFAS No. 142, goodwill that was acquired in purchase
business combinations completed after June 30, 2001 is not amortized, but is
evaluated for impairment in accordance with the accounting literature in effect
prior to the issuance of SFAS No. 142.
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Under SFAS No. 142, we are required to perform transitional impairment
tests for our goodwill as of the date of adoption. Step one of the transitional
goodwill impairment test, which compares the fair values of our reporting units
to their respective carrying values, will be completed by June 30, 2002.
Transitional impairment losses for goodwill, if any, will be recognized as the
cumulative effect of a change in accounting principle in our consolidated
statement of income. Since we had not completed any acquisitions prior to June
30, 2001, we had no purchased intangible assets or goodwill that were being
amortized prior to January 1, 2002. We completed our acquisition of Lat45
Information Systems Inc. in July of 2001 and recorded $6.4 million of goodwill,
which is not being amortized pursuant to the provisions of this Standard. We are
currently evaluating the impact of the transitional impairment requirements of
this Standard, but the impact of its adoption is not expected to have a material
impact on our results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 establishes one accounting model
to be used for long-lived assets to be disposed of by sale and broadens the
presentation requirements of discontinued operations to include more disposal
transactions. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, relative to discontinued operations. SFAS No.
144 is effective for fiscal years beginning after December 31, 2001. We are
currently evaluating the requirements of this Standard, but the impact of its
adoption, if any, is not expected to be material to our results of operations or
financial position.
In November 2001, the FASB issued a staff announcement regarding the income
statement characterization of reimbursements received for "out-of-pocket"
expenses incurred. This announcement indicated that the FASB believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue in the income statement, where the service provider is the primary
obligor with respect to purchasing goods and services from third parties, has
supplier discretion and assumes credit risk for the transaction. The
announcement is effective for financial reporting periods beginning after
December 15, 2001. Upon application of the statement, comparative financial
statements for prior periods should be reclassified. In the accompanying
financial statements for each of the three years ended December 31, 2001, out of
pocket expenses incurred have been offset against amounts billed to customers
and must be reclassed as service revenue in the financial statements for fiscal
year 2002. The impact of its adoption is not expected to be material to our
results of operations or financial position.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risks principally relates to changes in interest
rates that may affect our fixed income investments. Our excess cash is invested
in debt securities issued by U.S. government agencies and corporate debt
securities. We place our investments with high quality issuers and limit our
credit exposure by restricting the amount of securities that may be placed with
any single issuer. Our general policy is to limit the risk of principal loss and
assure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. At December 31, 2001, the weighted average
pre-tax interest rate on the investment portfolio is approximately 2.4%. Market
risk related to these investments can be estimated by measuring the impact of a
near-term adverse movement of 10% in short-term market interest rates. If these
rates average 10% more in 2001 than in 2000, there would be no material adverse
impact on our results of operations or financial position.
We do not hedge our foreign currency exposure, nor do we use derivative
financial instruments for speculative trading purposes. Market risk related to
foreign currency exchange rates can be estimated by measuring the impact of a
near-term adverse movement of 10% in foreign currency exchange rates against the
U.S. dollar. If these rates average 10% more in 2002 than in 2001, there would
be no material adverse impact on our results of operations or financial
position. During 2001, had these rates averaged 10% more than in 2000, there
would have been no material impact on our results of operations or financial
position.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report............................................ 33
Consolidated Balance Sheets as of December 31, 2001 and 2000............ 34
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 .................................... 35
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 2001, 2000 and 1999.......... 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999..................................... 37
Notes to Consolidated Financial Statements.............................. 38
Supplemental Schedule:
Schedule II-- Valuation and Qualifying Accounts......................... 48
Note: Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable.
-32-
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MetaSolv, Inc.:
We have audited the accompanying consolidated balance sheets of MetaSolv, Inc.
and subsidiaries as of December 31, 2001, and 2000, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2001. In connection with our audits of the consolidated financial statements, we
also have audited the related financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MetaSolv, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, during 2001 the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations, and certain provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, as required for goodwill and intangible
assets resulting from business combinations consummated after June 30, 2001.
KPMG LLP
Dallas, Texas
February 12, 2002
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METASOLV, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except share and per share data)
December 31,
--------------------------------
2001 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents............................................. $ 80,658 $ 93,695
Marketable securities ................................................ 56,919 48,843
Trade accounts receivable, less allowance for doubtful accounts
of $3,171 in 2001 and $5,200 in 2000 ............................. 12,913 23,994
Unbilled receivables.................................................. 617 1,510
Prepaid expenses...................................................... 2,095 6,090
Deferred tax assets and other current assets.......................... 6,022 4,921
---------- ----------
Total current assets.............................................. 159,224 179,053
Property and equipment, net................................................ 16,586 14,491
Equity investments ........................................................ 571 4,000
Goodwill and other intangible assets ...................................... 10,990 --
Other assets .............................................................. 646 84
---------- ----------
Total assets...................................................... $ 188,017 $ 197,628
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................................................... $ 3,663 $ 7,910
Accrued expenses...................................................... 13,679 16,468
Deferred revenue...................................................... 9,114 24,025
---------- ----------
Total current liabilities......................................... 26,456 48,403
Deferred income taxes ..................................................... 388 275
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued or outstanding .................................. -- --
Common stock, $.005 par value, 100,000,000 shares authorized,
shares issued and outstanding: 37,422,649 in 2001, and
35,930,345 in 2000................................................ 187 180
Additional paid-in capital.............................................. 139,750 130,522
Deferred compensation................................................... (154) (300)
Accumulated other comprehensive income ................................. 125 --
Retained earnings ...................................................... 21,265 18,548
---------- ----------
Total stockholders' equity........................................ 161,173 148,950
---------- ----------
Total liabilities and stockholders' equity........................ $ 188,017 $ 197,628
========== ==========
See accompanying notes to consolidated financial statements.
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METASOLV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------
2001 2000 1999
---- ---- ----
Revenues:
License................................................ $ 68,412 $ 71,632 $ 38,788
Service................................................ 50,434 60,245 34,219
--------- --------- --------
Total revenues..................................... 118,846 131,877 73,007
--------- --------- --------
Cost of revenues:
License................................................ 6,141 5,124 1,719
Amortization of intangible assets ..................... 1,417 -- --
Service................................................ 23,343 33,613 25,215
--------- --------- --------
Total cost of revenues............................. 30,901 38,737 26,934
--------- --------- --------
Gross profit................................................ 87,945 93,140 46,073
--------- --------- --------
Operating expenses:
Research and development............................... 31,346 31,304 16,952
Sales and marketing ................................... 26,815 24,545 14,331
General and administrative ............................ 20,731 18,903 11,072
Restructuring costs ................................... 3,142 -- --
In process R&D write-off .............................. 2,940 -- --
--------- --------- --------
Total operating expenses........................... 84,974 74,752 42,355
--------- --------- --------
Income from operations...................................... 2,971 18,388 3,718
Interest and other income, net.............................. 5,419 7,659 742
Loss on investments ........................................ (3,429) -- --
---------- --------- --------
Income before taxes ........................................ 4,961 26,047 4,460
Income tax expense ......................................... 2,244 10,004 1,815
--------- --------- --------
Net income ................................................. $ 2,717 $ 16,043 $ 2,645
========= ========= ========
Earnings per share of common stock:
Basic.................................................. $ 0.07 $ 0.45 $ 0.17
========= ========= ========
Diluted................................................ $ 0.07 $ 0.40 $ 0.08
========= ========= ========
See accompanying notes to consolidated financial statements.
-35-
METASOLV, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years Ended December 31, 2001, 2000 and 1999
(In thousands, except share amounts)
Convertible
Preferred stock Common stock Treasury stock Additional
-------------------- --------------------- -------------------- paid-in
Shares Amount Shares Amount Shares Amount capital
---------- ------ ----------- ------ -------- ------- ---------
Balance, December 31, 1998 ....... 6,650,000 $ 18 11,646,580 $ 58 -- $ -- $ 1,890
Net income .................... -- -- -- -- -- -- --
Exercise of stock options ..... -- -- 862,448 4 -- -- 775
Issuance of common stock ...... -- -- 5,750,000 29 -- -- 100,374
Purchase of treasury stock .... -- -- -- -- 24,000 (14) --
Conversion of redeemable
convertible preferred stock . -- -- 9,595,306 48 -- -- 12,562
Conversion of convertible
preferred stock ............. (6,650,000) (18) 6,650,000 33 -- -- (58)
Tax benefit from disqualifying
dispositions ................ -- -- -- -- -- -- 356
Stock compensation ............ -- -- -- -- -- -- 656
Amortization of deferred
compensation ................ -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ------- ---------
Balance, December 31, 1999 ....... -- -- 34,504,334 172 24,000 (14) 116,555
Net income .................... -- -- -- -- -- -- --
Exercise of stock options ..... -- -- 1,212,662 7 -- -- 1,655
Issuance of common stock for
ESP ......................... -- -- 213,349 1 -- -- 3,348
Purchase of treasury stock .... -- -- -- -- 1,440 (1) --
Reissuance of treasury stock .. -- -- -- -- (25,440) 15 374
Tax benefit from disqualifying
dispositions ................ -- -- -- -- -- -- 8,614
Amortization of deferred
compensation ................ -- -- -- -- -- -- --
Repayment of subscription note -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ------- ---------
Balance, December 31, 2000 ....... -- -- 35,930,345 180 -- -- 130,546
Comprehensive income:
Net income ................... -- -- -- -- -- -- --
Unrealized gain on marketable
securities ................. -- -- -- -- -- -- --
Foreign currency translation . -- -- -- -- -- -- --
Total comprehensive income ... -- -- -- -- -- -- --
Exercise of stock options ..... -- -- 971,626 4 -- -- 2,040
Issuance of common stock for
ESP ......................... -- -- 313,101 2 -- -- 2,162
Issuance of common stock for
acquisition ................. -- -- 366,666 2 -- -- 2,803
Purchase of treasury stock .... -- -- -- -- 163,049 (1,602) --
Reissuance of treasury stock .. -- -- -- -- (3,960) 11 --
Cancellation of treasury stock -- -- (159,089) (1) (159,089) 1,591 (1,590)
Tax benefit from disqualifying
dispositions ................ -- -- -- -- -- -- 3,559
Stock compensation ............ -- -- -- -- -- -- 254
Amortization of deferred
compensation ................. -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ------- ---------
Balance, December 31, 2001 ....... -- $ -- 37,422,649 $ 187 -- $ -- $ 139,774
========== ==== =========== ===== ======== ======= =========
Accumulated
Common other
stock Deferred comprehensive Retained
subscriptions compensation income Earnings Total
------------- ------------ ------ -------- ---------
Balance, December 31, 1998 ....... $ -- $ -- $ -- $ (140) $ 1,826
Net income .................... -- -- -- 2,645 2,645
Exercise of stock options ..... (47) -- -- -- 732
Issuance of common stock ...... -- 100,403
Purchase of treasury stock .... -- -- -- -- (14)
Conversion of redeemable
convertible preferred stock .. -- -- -- -- 12,610
Conversion of convertible
preferred stock ............. -- -- -- -- (43)
Tax benefit from disqualifying
dispositions ................ -- -- -- -- 356
Stock compensation ............ -- (656) -- -- --
Amortization of deferred
compensation ................ -- 100 -- -- 100
---- --------- ---- -------- ---------
Balance, December 31, 1999 ....... (47) (556) -- 2,505 118,615
Net income .................... -- -- -- 16,043 16,043
Exercise of stock options ..... -- -- -- -- 1,662
Issuance of common stock for
ESP ......................... -- -- -- -- 3,349
Purchase of treasury stock .... -- -- -- -- (1)
Reissuance of treasury stock .. -- -- -- -- 389
Tax benefit from disqualifying
dispositions ................ -- -- -- -- 8,614
Amortization of deferred
compensation ................ -- 256 -- -- 256
Repayment of subscription note 23 -- -- -- 23
---- --------- ---- -------- ---------
Balance, December 31, 2000 ....... (24) (300) -- 18,548 148,950
Comprehensive income:
Net income ................... -- -- -- 2,717 2,717
Unrealized gain on marketable
securities ................. -- -- 123 -- 123
Foreign currency translation . -- -- 2 -- 2
---------
Total comprehensive income ... -- -- -- -- 2,842
---------
Exercise of stock options ..... -- -- -- -- 2,044
Issuance of common stock for
ESP ......................... -- -- -- -- 2,164
Issuance of common stock for
acquisition ................. -- -- -- -- 2,805
Purchase of treasury stock .... -- -- -- -- (1,602)
Reissuance of treasury stock .. -- -- -- -- 11
Cancellation of treasury stock -- -- -- -- --
Tax benefit from disqualifying
dispositions ................ -- -- -- -- 3,559
Stock compensation ............ -- (150) -- -- 104
Amortization of deferred
compensation ................. -- 296 -- -- 296
---- --------- ---- -------- ---------
Balance, December 31, 2001 ....... $(24) $ (154) $125 $ 21,265 $ 161,173
==== ========= ==== ======== =========
See accompanying notes to consolidated financial statements.
-36-
METASOLV, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
---------- ---------- ---------
Cash flows from operating activities:
Net income .................................................... $ 2,717 $ 16,043 $ 2,645
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 5,462 2,760 1,741
Stock compensation .......................................... 400 256 100
Loss on asset disposal ...................................... 76 26 180
Deferred tax benefit ........................................ (2,423) (2,577) (583)
Tax benefit for disqualifying dispositions .................. 3,559 8,614 356
Loss on investments ......................................... 3,429 -- --
Purchased in-process research and development ............... 2,940 -- --
Changes in operating assets and liabilities (net of
effect of acquisition):
Trade accounts receivable, net ............................ 11,125 (7,239) (5,677)
Unbilled receivables ...................................... 893 2,554 (3,107)
Other assets .............................................. 3,009 (4,447) (1,642)
Accounts payable and accrued expenses ..................... (11,029) 7,781 7,310
Deferred revenue .......................................... (14,959) 12,331 9,046
----------- --------- ------
Net cash provided by operating activities ............... 5,199 36,102 10,369
---------- --------- ------
Cash flows from investing activities:
Purchases of property and equipment ........................... (6,060) (7,327) (7,133)
Purchase of equity investments ................................ -- (4,000) --
Purchase of marketable securities ............................. (7,953) (48,843) --
Acquisition of Lat45 Information Systems Inc. ................. (6,842) -- --
----------- --------- -------
Net cash used in investing activities ................... (20,855) (60,170) (7,133)
---------- ---------- -------
Cash flows from financing activities:
Borrowings from bank .......................................... -- -- 1,866
Payments on debt .............................................. -- -- (1,866)
Proceeds from initial public offering ......................... -- -- 100,403
Proceeds from issuance of common stock ........................ 4,208 5,034 732
Purchase of treasury stock .................................... (1,602) (1) (14)
Reissuance of treasury stock .................................. 11 389 --
---------- --------- -------
Net cash provided by financing activities ............... 2,617 5,422 101,121
Effect of exchange rate changes on cash .......................... 2 -- --
---------- --------- -------
Increase (decrease) in cash and cash equivalents ................. (13,037) (18,646) 104,357
Cash and cash equivalents, beginning of year ..................... 93,695 112,341 7,984
---------- ------- -------
Cash and cash equivalents, end of year ........................... $ 80,658 $ 93,695 $112,341
========== ========= +=======
Supplemental disclosures of cash flow information --
Cash paid during the year for:
Interest ...................................................... $ 71 $ 48 $ 155
========== ========= =======
Income taxes .................................................. $ 2,253 $ 6,010 $ 868
========== ========= =======
Non-cash investing and financing activities --
Issuance of common stock for acquisition ...................... $ 2,805 $ -- $ --
========== ========= =======
See accompanying notes to consolidated financial statements.
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
1) Organization and Summary of Significant Accounting Policies
MetaSolv, Inc. (the "Company"), a Delaware corporation headquartered in
Plano, Texas, is a provider of software designed to automate the management of
communications networks. Communications service providers using our software are
able to efficiently enter, manage and fulfill orders for service from their
customers. These communications service providers offer a full array of
communications services including local and long distance telephone services,
high-speed data services and Internet services, often as a bundled offering. The
Company derives substantially all of its revenue from the sale of licenses,
related professional services, maintenance and support of packaged software
products to convergent communications service providers and, in 2001, began
offering the products and services to large enterprises that need to manage
their significant internal networks and interfaces to their external service
providers.
a) Principles of Consolidation
The consolidated financial statements include the financial statements of
MetaSolv, Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
b) Revenue Recognition
The Company's software products are licensed to customers primarily through
the direct sales force. The Company's software licensing arrangements typically
include multiple elements, such as software products, post-contract customer
support, consulting, and training. On January 1, 2000, the Company adopted the
residual method of revenue recognition for these arrangements. Under the
residual method, the aggregate arrangement fee is allocated to each of the
undelivered elements in an amount equal to their fair value, with the residual
of the arrangement fee allocated to the delivered elements. Fair values are
based upon vendor specific objective evidence. Fees allocated to each software
element of the arrangement are recognized as revenue when the following criteria
have been met: (a) a written contract for the license of software has been
executed, (b) the product has been delivered to the customer, (c) the license
fee is fixed or determinable, and (d) collectibility of the resulting receivable
is deemed probable. If evidence of fair value of the undelivered elements of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist, or until all elements of the
arrangement are delivered. Fees allocated to post-contract customer support are
recognized as revenue ratably over the support period. Fees allocated to other
services are recognized as revenue as the service is performed. The adoption of
this method of revenue recognition did not have a material impact on the
Company's financial position or results of operation.
The Company is frequently engaged to provide consulting and implementation
services in connection with the licensing of its software. In situations where
such services include significant modification or customization of the software
or are otherwise essential to the functionality of the software, revenues
relating to the software license and services are aggregated and the combined
revenues are recognized using the percentage-of-completion method. Revenue
earned using the percentage-of-completion method is based on management's
estimate of progress towards completion. Changes to estimates of progress
towards completion, if any, are accounted for as a change in estimate in the
period of the change. Of total deferred revenues, $151,000 and $2,801,000 as of
December 31, 2001 and 2000, respectively, represented billings in excess of
costs and related profits on certain contracts accounted for under the
percentage-of-completion method. Of total unbilled receivables, $1,204,000 as of
December 31, 2000, represented costs and related profits in excess of billings
on contracts accounted for under the percentage-of-completion method.
Accounts receivable include only those amounts due from customers for which
revenue has been recognized. Deferred revenue includes amounts received from
customers for which revenue has not been recognized.
-38-
c) Cash and Cash Equivalents
Cash equivalents consist of investments in an interest-bearing money market
account and commercial paper with maturities of three months or less. For
purposes of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less at the date
of purchase to be cash equivalents.
d) Marketable Securities and Equity Investments
Marketable securities at December 31, 2001 consist of $26,200,000 of
commercial paper with remaining contractual maturities of 60 days or less, debt
securities issued by U.S. government agencies of $24,600,000 with remaining
contractual maturities of 12 months or less and $6,100,000 of corporate bonds.
Marketable securities are classified as available-for-sale and recorded at fair
value. Unrealized gains were $123,000 at December 31, 2001.
The Company uses the cost method to account for its investments in equity
securities. A decline in the market value of any investment deemed to be other
than temporary is charged to earnings. During 2001, the Company recorded an
impairment charge of $3,429,000 for other than temporary declines in the value
of its investments.
e) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets or, for
leasehold improvements, the term of the lease, if shorter. The estimated useful
lives are as follows:
Years
-----
Furniture and fixtures 7
Computer equipment 3
Leasehold improvements 3-11
Other equipment 3-7
f) Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to their short
maturities.
g) Research and Development Costs
Research and development costs incurred prior to the establishment of
technological feasibility of the product are expensed as incurred. After
technological feasibility is established, any additional software development
costs are capitalized. The Company believes its process for developing software
is essentially completed concurrently with the establishment of technological
feasibility and, accordingly, no software development costs have been
capitalized to date.
In connection with the acquisition of Lat45 Information Systems Inc., the
Company recorded a charge of $2,940,000 for acquired in-process research and
development. At the date of the acquisition, the in-process research and
development projects had not yet reached technological feasibility and had no
alternative future uses. The projects generally included enhancements and
upgrades to existing technology, enhanced communication among systems,
introduction of new functionality and the development of new technology
primarily for integration purposes. The value of the in-process research and
development was calculated using a discounted cash flow analysis of the
anticipated income stream of the related product sales. The projected net cash
flows were computed using a discount rate of 35% for the in-process research and
development projects. It is anticipated that remaining costs to complete the
projects will be approximately $1,400,000 and project release dates will range
from the fall 2002 through spring 2003. If these projects are not successfully
developed, future revenues and profitability may be adversely affected, and the
value of intangible assets acquired may become impaired.
-39-
h) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairments to be recognized are measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.
i) Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the amounts of existing assets
and liabilities recorded for financial reporting purposes and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is reflected in income tax expense in the period that
includes the enactment date.
j) 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
k) Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense is recorded only if the
fair value of the underlying stock exceeded its exercise price on the date of
grant.
l) Comprehensive Income
The Company reports comprehensive income in its consolidated statement of
stockholders' equity. Comprehensive income represents changes in stockholders'
equity from non-owner sources. For the three years ended December 31, 2001,
unrealized gains on available-for-sale securities and foreign currency
translations were the only items of other comprehensive income for the Company.
The unrealized gains on available-for-sale securities for the year ended
December 31, 2001 were $123,000. The foreign currency translation amount for the
year ended December 31, 2001 was $2,000.
m) Foreign Currency Translations
For all significant non-U.S. operations, the functional currency is the
local currency. Assets and liabilities of those operations are translated into
U.S. dollars using year-end exchange rates; income and expenses are translated
using the average exchange rates for the reporting period. Translation
adjustments are deferred in accumulated other comprehensive income, a separate
component of stockholders' equity.
n) Earnings Per Share of Common Stock
Basic earnings per share are computed by dividing income or loss available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
incremental increase in common shares outstanding assuming the exercise of all
stock options and conversion of all preferred stock that would have had a
dilutive effect on earnings per share.
-40-
o) Stock Split
On October 28, 1999, the Company consummated a 2 for 1 split of all classes
of its common and preferred stock. The financial statements have been adjusted
to give retroactive effect to the stock split.
p) Reclassifications
Certain reclassifications have been made to the 2000 and 1999 consolidated
financial statements to conform to the 2001 presentation.
q) Accounting Change
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used and
establishes new standards for the recognition of certain identifiable intangible
assets, separate from goodwill, for all business combinations initiated after
June 30, 2001. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values.
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001
and will fully adopt SFAS No. 142 effective January 1, 2002. In accordance with
the transition provisions of SFAS No. 142, goodwill acquired in purchase
business combinations completed after June 30, 2001 is not amortized, but is
evaluated for impairment in accordance with the accounting literature in effect
prior to the issuance of SFAS No. 142. The Company's goodwill balance of
approximately $6,375,000 is not being amortized as it all relates to
acquisitions completed subsequent to June 30, 2001 (see Note 11).
2) Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
---------------------------
2001 2000
---- ----
Property and equipment at cost
Land ...................................................... $ 3,671 $ 3,671
Computer equipment and software............................ 11,291 8,129
Furniture and fixtures..................................... 3,722 3,134
Leasehold improvements..................................... 4,475 3,006
Other equipment ........................................... 1,999 1,281
Construction in progress................................... 389 668
------- -------
25,547 19,889
Less accumulated depreciation and amortization ................. (8,961) (5,398)
-------- --------
Property and equipment, net..................................... $16,586 $14,491
======= =======
3) Income Taxes
Income tax expense for the years ended December 31, 2001, 2000 and 1999
consists of the following (in thousands):
-41-
December 31,
---------------------------------
2001 2000 1999
-------- -------- -------
Current income tax expense:
Federal ........................... $ 4,033 $ 10,676 $ 2,055
Foreign ........................... (18) 135 --
State ............................. 652 1,770 343
-------- -------- -------
4,667 12,581 2,398
-------- -------- -------
Deferred income tax expense (benefit):
Federal ........................... (2,231) (2,294) (489)
State ............................. (192) (283) (94)
-------- -------- -------
(2,423) (2,577) (583)
-------- -------- -------
Total expense ........................ $ 2,244 $ 10,004 $ 1,815
======== ======== =======
During 2001, 2000, and 1999 income before income taxes included
approximately $27,000, $451,000, and $23,000, respectively, of non-U.S. income.
Income tax expense (benefit) differed from the amounts computed by applying the
U.S. federal income tax rate of 35 percent to income before taxes in the years
ended December 31, 2001 and 2000, and 34 percent in the year ended December 31,
1999, as follows (in thousands):
December 31,
-------------------------------
2001 2000 1999
---- ---- ----
Computed "expected" tax expense .............................. $1,736 $9,116 $1,516
Expenses not deductible for tax purposes...................... 175 167 73
State and local taxes, net of federal benefit................. 284 932 177
Acquired in process research and development ................. 1,029 -- --
Research and development tax credits.......................... (1,189) (1,211) --
Other......................................................... 209 1,000 49
------ ------- ------
Income tax expense ........................................ $2,244 $10,004 $1,815
====== ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
December 31,
--------------------
2001 2000
------- --------
Deferred tax assets:
Accrued expenses ....................................... $1,274 $1,351
Allowance for doubtful accounts ........................ 1,335 2,006
R&D credit carryforward ................................ 1,645 567
Investment valuation differences ....................... 1,323 --
------- --------
Total deferred tax assets .............................. 5,577 3,924
------- -------
Deferred tax liabilities:
Technology rights ...................................... (1,659) --
Property and equipment, due to differences in basis and
depreciation ......................................... (52) (275)
------- ------
Total deferred tax liabilities ......................... (1,711) (275)
----- ------
Net deferred tax asset .............................. $3,866 $3,649
====== ======
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Based upon the level of historical taxable income
and projections for future taxable income over the periods during which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences.
The Company has aggregate non-U.S. tax loss carryforwards of approximately
$5,200,000 which expire through the year 2008.
-42-
4) Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
---------------------
2001 2000
------- -------
Accrued royalties ......................................... $ 4,191 $ 5,308
Employee compensation ..................................... 2,635 5,682
Income taxes payable....................................... 1,608 190
Sales tax payable ......................................... 286 1,145
Restructuring expenses .................................... 1,006 --
Other expenses ............................................ 3,953 4,143
------- -------
$13,679 $16,468
5) Convertible Preferred Stock and Redeemable Convertible Preferred Stock
In 1996, the Company issued 6,458,480 shares of Class B redeemable
convertible preferred stock for net cash proceeds of $2,475,000. In 1997, the
Company issued 279,680 additional shares of Class B redeemable convertible
preferred stock for cash proceeds of $110,000. In 1998, the Company issued
2,857,146 shares of Class C redeemable convertible preferred stock for cash
proceeds of $10,000,000. In November 1999, effective with the Company's initial
public offering, each share of outstanding convertible preferred stock and
redeemable convertible preferred stock was converted to one share of common
stock. These share amounts have been adjusted for stock splits in June 1998 and
October 1999.
6) Stock Option Plan and Employee Stock Purchase Plan
The Company has adopted the MetaSolv, Inc. Long-Term Incentive Plan
pursuant to which the Board of Directors may grant stock options to officers and
employees. The plan at its adoption authorized grants of options to purchase up
to 9,320,000 shares of authorized but unissued common stock. The number of
shares issuable under the plan increases by 5% of the Company's outstanding
common stock as of January 1 of each of the first five calendar years following
adoption of the plan. Accordingly, as of January 1, 2002, the number of shares
authorized under the plan increased to 14,711,666. At December 31, 2001, there
were 2,153,589 additional shares available for grant under the plan.
Generally, stock options are granted with an exercise price equal to the
stock's fair market value at the date of grant. All options have terms of ten
years or less, and most options vest in four or five equal cumulative
installments beginning on the first anniversary of the grant date. The per share
weighted-average fair value of stock options granted for the years ended
December 31, 2001, 2000 and 1999 was $7.09, $21.13 and $0.99, respectively, as
estimated using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield of 0%, risk-free interest rate of 4.2% for
2001 and 6% for years 2000 and 1999, an expected life of five years, and
volatility of 107% for 2001, 80% for 2000 and 0% for 1999.
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees and non-employee directors under its stock option plans.
The Company recorded deferred compensation of $150,000 in 2001 and $656,000 in
1999 as a result of granting stock options with exercise prices below the
estimated fair value per share of the Company's common stock at the date of
grant. Deferred compensation has been recorded as a component of stockholders'
equity and is being amortized as a charge to operations over the vesting period
of the applicable options. Amortization of deferred compensation was $296,000,
$256,000 and $100,000 in 2001, 2000, and 1999, respectively.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options and activity under the Employee Stock Purchase
Plan under SFAS No. 123, Accounting for Stock Based Compensation, the Company's
net income (loss) would have been changed to the pro forma amounts indicated
below (in thousands, except per share data):
-43-
Year ended December 31,
---------------------------------
2001 2000 1999
---- ---- ----
Net income (loss):
As reported ..................................... $ 2,717 $ 16,043 $ 2,645
Pro forma ....................................... $ (3,875) $ 10,921 $ 2,194
Earnings (loss) per share of common stock:
Basic:
As reported ................................. $ 0.07 $ 0.45 $ 0.17
Pro forma ................................... $ (0.11) $ 0.31 $ 0.14
Diluted:
As reported ................................. $ 0.07 $ 0.40 $ 0.08
Pro forma ................................... $ (0.11) $ 0.27 $ 0.07
Pro forma net income (loss) reflects only stock options granted after
December 31, 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma amounts
presented above because compensation cost is reflected over the options' vesting
periods of five years and compensation expense pertaining to stock options
granted in prior periods is not considered.
Stock option activity during the periods indicated is as follows:
Weighted-
average
Number exercise
of shares price
--------- -----
Balance as of December 31, 1998 ................................................ 4,430,440 $ 0.78
Granted ................................................................... 3,209,200 3.93
Exercised ................................................................. (862,448) 0.86
Forfeited ................................................................. (462,080) 1.97
----------
Balance as of December 31, 1999 ................................................ 6,315,112 2.28
Granted ................................................................... 1,493,665 31.62
Exercised ................................................................. (1,214,262) 1.37
Forfeited ................................................................. (518,170) 8.51
----------
Balance as of December 31, 2000................................................. 6,076,345 9.14
Granted ................................................................... 3,588,950 8.91
Exercised ................................................................. (975,586) 2.11
Forfeited ................................................................. (1,271,240) 8.74
---------
Balance as of December 31, 2001................................................. 7,418,469 $10.02
=========
At December 31, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.24 to $97.75 and 4.95
years, respectively. The following table presents information about outstanding
stock options as of December 31, 2001:
Options vested and
Weighted average exercisable
---------------------------------------------------------
Remaining Weighted
Range of Number of Exercise contractual Number of average
Exercise Prices options price life options exercise price
- ---------------------------------------------- --------------------------- ---------------
$ .24 - 3.50 1,641,424 $ 0.84 5.37 1,225,464 $ 0.66
3.65 - 7.63 2,176,540 5.64 6.09 318,504 3.86
7.88 - 8.80 1,505,650 8.66 4.33 3,300 8.00
9.75 - 21.88 1,484,680 13.47 4.06 123,555 18.64
33.25 - 97.75 610,175 45.37 3.50 161,795 46.39
------- -------
Totals 7,418,469 1,832,618
========= =========
At December 31, 2001, 2000 and 1999, 1,832,618, 1,588,677, and 1,532,362
options were vested and exercisable at a weighted-average exercise price of
$6.48, $1.41, and, $0.56 respectively.
-44-
In August 1999, the Company adopted the MetaSolv, Inc. Employee Stock
Purchase Plan. The plan was authorized to issue 600,000 shares of authorized and
unissued common stock, and shares issuable under the plan increase annually
during the first five years following adoption of the plan by 1% of the
Company's outstanding common stock. Accordingly, as of January 1, 2002, the
number of shares authorized under the plan increased to 1,678,333. The plan
allows employees to purchase common stock at a 15% discount from the lower of
the fair market value of the common stock at the beginning of the enrollment
period or the purchase date. During 2001, there were 313,101 shares of common
stock issued under the plan.
7) 401(k) Plan and Trust Agreement
The Company has a 401(k) Plan and Trust Agreement under which employees are
entitled to contribute up to 15% of their salary, subject to certain regulatory
limitations. In 2001, 2000 and 1999, the Company made profit sharing
contributions of approximately $618,000, $667,000 and $594,000, respectively, to
the plan.
8) Commitments and Contingencies
Leases
The Company leases its offices under operating leases, which expire through
2010. Future minimum annual rent payments for leases having initial or remaining
noncancelable lease terms in excess of one year are as follows (in thousands):
Total minimum
Years ending December 31, lease payments
--------------
2002................................................ $ 3,547
2003................................................ 3,555
2004................................................ 3,388
2005................................................ 2,971
2006................................................ 2,814
Thereafter.......................................... 9,873
--------
$ 26,148
Rent expense for the years ended December 31, 2001, 2000, and 1999 amounted
to $4,651,000, $3,379,000, and $1,675,000, respectively.
Legal Proceedings
On November 1, 2001, Bernstein Liebhard & Lifshitz, LLP announced that it
had filed a class action suit in the United States District Court for the
Southern District of New York against MetaSolv Software, Inc., Morgan Stanley
Dean Witter, Inc., BancBoston Robertson Stephens, Inc., Jeffries & Company,
Inc., James P. Janicki, and Glenn A. Etherington, alleging violations of
Sections 11, and 15 of the Securities Act of 1933 and alleging violations of
Section 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against
Morgan Stanley Dean Witter, Inc., BancBoston Robertson Stephens, Inc., and
Jeffries & Company, Inc. The named plaintiff is Colbert Birnet, L.P. The
complaint seeks unspecified damages as a result of various alleged securities
law violations arising from activities purportedly engaged in by the
underwriters in connection with our initial public offering. The plaintiffs
allege that the underwriter defendants agreed to allocate stock in our initial
public offering to certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional purchases of
stock in the aftermarket at pre-determined prices. The plaintiffs allege that
the prospectus for our initial public offering was false and misleading in
violation of the securities laws because it did not disclose these arrangements.
The Company believes that the suit is without merit and that the Company
and its officers have fully complied with applicable laws and regulations. The
Company does not expect this action will impact its operations or financial
results.
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Letter of Credit
The Company had a standby letter of credit (in lieu of a security deposit)
$1,300,000 as of December 31, 2001 and 2000.
9) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
Numerator:
Net income ................................................ $2,717 $16,043 $2,645
====== ======= ======
Denominator:
Denominator for basic earnings per share
weighted-average common shares outstanding ............ 36,717 35,430 15,582
Effect of dilutive securities:
Preferred stock ....................................... -- -- 13,538
Employee stock options ................................ 2,890 4,759 4,042
------- ------- ------
Denominator for diluted earnings per share
weighted average common and common equivalent
shares outstanding .................................... 39,607 40,189 33,162
====== ====== ======
Earnings per common share:
Basic ................................................. $ 0.07 $ 0.45 $ 0.17
======== ======== ========
Diluted ............................................... $ 0.07 $ 0.40 $ 0.08
======== ======== ========
Securities that were not included in the computation of diluted earnings
per share because their effect was antidilutive consist of options to purchase
1,458,055 shares of common stock in 2001 and 1,479,695 shares of common stock in
2000.
10) Segment Information and Concentration of Credit Risk
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to stockholders. The method for
determining what information to report is based on the way management organizes
the operating segments within the Company for making operating decisions and
assessing financial performance.
The Company's chief operating decision-maker is considered to be the Chief
Operating Officer (COO). The COO reviews financial information presented on a
Company-wide basis accompanied by disaggregated information about revenues by
product and service line for purposes of making operating decisions and
assessing financial performance. The financial information reviewed by the COO
is identical to the information presented in the accompanying statements of
operations. Therefore, the Company operates in a single operating segment:
communications software and related services.
Revenue information regarding operations for different products and
services is as follows (in thousands):
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Year ended December 31,
--------------------------------------
2001 2000 1999
---- ---- ----
Revenues:
Software license fees.................................... $ 68,412 $ 71,632 $ 38,788
Professional services.................................... 15,509 33,995 23,710
Post-contract customer support........................... 34,925 26,250 10,509
--------- --------- ---------
Total revenues................................................ $ 118,846 $ 131,877 $ 73,007
========= ========= =========
The Company has derived most of its revenues from the United States. Total
revenue derived from non-U.S. locations was approximately $26,922,000,
$12,156,000, and $2,522,000 in 2001, 2000, and 1999, respectively. Outside of
the U.S., no individual country accounted for more than 10% of total revenues.
The Company licenses its communications software products to a broad range
of communication service providers. The Company performs ongoing credit
evaluations of its customers' financial condition but does not require
collateral or other security to support its trade accounts receivable. During
1999 one customer represented 13% of total revenues.
11) Acquisitions
On July 20, 2001, the Company, through its wholly owned subsidiary MetaSolv
Canada Holdings Inc., acquired all of the outstanding shares of capital stock of
Montreal based Lat45 Information Systems Inc., a developer of geospatial
software for planning, design and management of communications networks. The
aggregate purchase price consisted of $6,195,000 in cash (excluding acquisition
costs of $600,000) and 366,666 exchangeable shares of MetaSolv Canada Holdings
Inc. valued at $2,805,000. Initially, each of these shares is exchangeable for
one share of MetaSolv, Inc. common stock. In addition, the shareholders of Lat45
Information Systems Inc. were eligible to receive up to an additional $2,000,000
in cash upon the completion of certain revenue milestones prior to December 31,
2001, and the absence of any misrepresentation or breach of warranty within one
year from the closing of the acquisition. These revenue milestones were not
achieved.
The acquisition of Lat45 Information Systems Inc. allows the Company to use
graphical geospatial technology to business and communications network planning
and engineering functions that are key to the customer's network planning and
engineering capabilities. This acquisition extends the MetaSolv Solution(TM)
product under the brand, MetaSolv Network and Service Planning(TM), both as a
separate product and integrated with the MetaSolv Solution.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations of Lat45 Information Systems Inc.
have been included in the Company's consolidated financial statements since July
21, 2001. The purchase price has been allocated to the assets acquired and
liabilities assumed based on an estimate of fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
identifiable assets, totaling $6,375,000 was allocated to goodwill.
Approximately $6,032,000 was allocated to intangible assets, primarily
technology rights, which will be amortized over a three-year period.
Amortization of acquired intangible assets is computed using the greater of
straight-line over the estimated useful life of the asset or the ratio that
current gross revenues for those assets bears to the total current and
anticipated future gross revenues related to those assets. The estimated useful
life of these assets range from nine months to thirty-six months. Approximately
$2,940,000 was allocated to purchased in-process research and development. The
purchased in-process research and development cost was charged to results of
operations in the third quarter. Net obligations assumed upon acquisition were
$5,683,000. Pro forma financial information for this acquisition has not been
presented since the pro forma information would not differ materially from the
historical results of the Company.
12) Restructuring
In the third quarter of 2001, the Company recorded a pre-tax restructuring
charge of $3,142,000. The charge consisted of $1,970,000 for a reduction in
force of approximately 100 people, and approximately $1,172,000 for lease
commitments for certain field offices being closed and related fixed asset
write-downs. The restructuring was in response to lower software license
bookings and the expectation of lower revenues in future periods. The staff
reductions from this program were completed as of December 31, 2001. At December
31, 2001, approximately $1,006,000 is included in accrued liabilities, related
primarily to future minimum lease commitments which expire in 2004. The
following table summarizes the status of the restructuring (in thousands):
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Year ended December 31, 2001
--------------------------------------------------------
Employee
Severance Exit Costs Total
--------- ---------- -----
Restructuring charge $1,970 $1,172 $3,142
Amounts utilized (1,970) (166) (2,136)
------ ------ ------
Balance at December 31, 2001 -- $1,006 $1,006
====== ====== ======
13) Subsequent Events
On February 1, 2002, we acquired certain OSS assets from Nortel Networks.
With this acquisition, we extended our product portfolio with a leading
carrier-class (highly scalable and reliable) service activation product, and
several point solutions that allow communications service providers to
efficiently manage and deliver differentiated services for Internet Protocol
(IP), data, and wireless communications. As a result of the acquisition, we now
offer a comprehensive suite of OSS solutions available for wireless, IP, data,
and traditional networks and services. The acquisition also strengthens the
worldwide scope of our product sales and services through an established
presence in Europe.
This acquisition will be accounted for under the purchase method of
accounting and, accordingly, the results of the business acquired will be
included in the Company's consolidated financial statements beginning February
2, 2002. The purchase price of $35,000,000 cash and the assumption of certain
liabilities which are estimated at $8,500,000 will be allocated to the assets
acquired and liabilities assumed based on an estimate of fair values at the date
of acquisition. The excess of the purchase price over the fair value of the net
identifiable assets, when determined, will be allocated to goodwill. The value
assigned to intangible assets, primarily technology rights, will be amortized
over the estimated useful life of the assets using the greater of straight-line
or the ratio that current gross revenues related to those assets bears to the
total current and anticipated future gross revenues related to those assets. The
value to be allocated to purchased in-process research and development will be
charged to earnings in the first quarter of 2002.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
- ----------- ----------- ----------- ---------- --------
Allowance for doubtful accounts:
Year ended December 31, 2001................. $ 5,200 $ 8,638 $ 10,667 $ 3,171
Year ended December 31, 2000................. $ 1,523 $ 6,847 $ 3,170 $ 5,200
Year ended December 31, 1999................. $ 600 $ 1,750 $ 827 $ 1,523
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information concerning Directors of the Company required by Item 401 of
Regulation S-K will be contained in the Company's 2002 Proxy Statement under the
heading "Election of Directors," and is incorporated herein by reference.
Executive Officers
The information concerning executive officers of the Company required by
this Item is set forth in Item 1 hereof under the heading "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K will be contained in
the Company's 2002 Proxy Statement under the headings "Directors' Compensation,"
"Compensation Committee Interlocks and Insider Participation," "Compensation
Committee Report," "Management Compensation" and "Stock Performance Graph," and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K will be contained in
the Company's 2002 Proxy Statement under the heading "Stock Ownership of Certain
Beneficial Owners and Management," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Certificate of Incorporation limits the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by Delaware law. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our Bylaws provide that we shall indemnify our directors and officers to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. We have
also entered into indemnification agreements with our officers and directors
containing provisions that may require us, among other things, to indemnify our
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
Mr. Royce Holland, one of our directors, is Chairman of the Board, CEO and
a 5% stockholder of Allegiance Telecom, a customer of ours. Purchases by
Allegiance from us in fiscal year 2001 accounted for $897,000 of our revenues.
We paid approximately $65,000 to Seven Continents Travel in 2001 for
business travel expenses. In addition, an undeterminable amount was indirectly
paid to Seven Continents Travel by us through reimbursements to our employees
who utilized Seven Continents' services. Seven Continents Travel was then owned
by Rosemary Janicki, our chief executive officer's mother. Ms. Janicki disposed
of her interest in Seven Continents Travel in December, 2001.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements. The financial statements, notes and
independent auditors' report described in Item 8, to which
reference is hereby made.
(2) Financial Statement Schedule. The financial statement
schedule described in Item 8, to which reference is hereby
made.
(3) Exhibits. The following exhibits:
Exhibit No. Description
2 Agreement and Plan of Reorganization dated as of December 27, 2000
and effective as of January 1, 2001 by and among MetaSolv Software,
Inc., MS Merger, Inc., and the Registrant. Incorporated by reference
to Exhibit 2 to the Registrant's Annual Report on Form 10-K filed on
March 29, 2001.
2.2 Asset Purchase Agreement dated January 21, 2002, by and among Nortel
Networks Limited, as vendor, MetaSolv Software, Inc. as purchaser,
and the Registrant as guarantor. Incorporated by reference to
Exhibit 2.1 to the Registrant's current report on Form 8-K filed on
February 15, 2002.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-3 filed on August 13, 2001,
registration number 333-67428.
3.2 Bylaws of the Registrant.
3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock setting forth the terms of the Series A Junior
Participating Preferred Stock, par value $0.01 per share, filed with
the Delaware Secretary of State on October 25, 2001.
4.1 Investors' Rights Agreement, dated June 2, 1998, among the
Registrant and the shareholders named therein, as amended.
Incorporated by reference to exhibits to the Registrant's
Registration Statement on Form S-1 filed on September 10, 1999,
registration number 333-86937.
4.2 Specimen Certificate of the Registrant's common stock. Incorporated
by reference to exhibits to the Registrant's Registration Statement
on Form S-1 filed on September 10, 1999, registration number
333-86937.
4.3 Rights Agreement, dated as of October 24, 2001, between the
Registrant and Mellon Investor Services LLC, as Rights Agent,
specifying the terms of the Rights, which includes the form of
Certificate of Designation of Series A Junior Participating
Preferred Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights to Purchase
Preferred Shares as Exhibit C. Incorporated by reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-A filed on October
25, 2001, file number 000-28129.
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock (included as Exhibit A to the Rights Agreement filed
as Exhibit 4.1 to the Registrant's Current Report on Form 8-A filed
on October 24, 2001) setting forth the terms of the Series A Junior
Participating Preferred Stock, par value $.01 per share.
4.5 Form of Right Certificate (included as Exhibit B to the Rights
Agreement filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-A filed with the Securities and Exchange Commission on
October 24, 2001). Pursuant to the Rights Agreement, printed Right
Certificates will not be delivered until as soon as practicable
after the Distribution Date.
4.6 Form of Summary of Rights to Purchase Preferred Shares (included as
Exhibit C to the Rights Agreement filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-A filed on October 24, 2001),
which,
-50-
together with certificates representing the outstanding Common
Shares of the Registrant, shall represent the Rights prior to the
Distribution Date.
4.7 Specimen of legend to be placed, pursuant to Section 3(d) of the
Rights Agreement, on all new Common Share certificates issued by the
Registrant after November 5, 2001 and prior to the Distribution Date
upon transfer, exchange or new issuance. Incorporated by reference
to Exhibit 4.5 to the Registrant's Current Report on Form 8-A filed
on October 24, 2001).
4.8 Form of Indemnification Agreement entered into between the
Registrant and its directors and executive officers. Incorporated by
reference to exhibits to the Registrant's Registration Statement on
Form S-1 filed on September 10, 1999, registration number 333-
86937.
10.1 1992 Stock Option Plan. Incorporated by reference to exhibits to the
Registrant's Registration Statement on Form S-1 filed on September
10, 1999, registration number 333-86937.
10.2 Long-Term Incentive Plan. Incorporated by reference to exhibits to
the Registrant's Registration Statement on Form S-1 filed on
September 10, 1999, registration number 333-86937.
10.3 Employee Stock Purchase Plan. Incorporated by reference to exhibits
to the Registrant's Registration Statement on form S-1 filed on
September 10, 1999, registration number 333-86937.
10.4 Mutual Release between the Registrant and Michael J. Watters dated
November 20, 1998. Incorporated by reference to exhibits to the
Registrant's Registration Statement on Form S-1 filed on September
10, 1999, registration number 333-86937.
10.5 Commercial Lease Agreement between the Registrant and Crown Invest
I, L.P., dated April 1, 1997, as amended to date. Incorporated by
reference to exhibits to the Registrant's Registration Statement on
Form S-1 filed on September 10, 1999, registration number 333-86937.
10.6 Commercial Lease Agreement between the Registrant and William R.
Cooper and Craig A. Cooper, dated August 21, 1998, as amended to
date. Incorporated by reference to exhibits to the Registrant's
Registration Statement on Form S-1 filed on September 10, 1999,
registration number 333-86937.
10.7 Master Software License and Service Agreement entered into between
Registrant and Qwest Communications Corporation, dated May 30, 1997.
Incorporated by reference to exhibits to the Registrant's
Registration Statement on Form S-1 filed on September 10, 1999,
registration number 333-86937.
10.8 Master Software License and Services Agreement entered into between
Registrant and Allegiance Telecom, Inc., dated December 19, 1997.
Incorporated by reference to exhibits to the Registrant's
Registration Statement on Form S-1 filed on September 10, 1999,
registration number 333-86937.
10.9 Terms of Exchangeable Shares of MetaSolv Canada Holdings Inc.
adopted as a special resolution by its sole shareholder on July 20,
2001. Incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on form S-3 filed on August 13, 2001,
registration number 333-67428.
10.10 Share Purchase Agreement dated July 20, 2001, by and among the
Registrant, MetaSolv Canada Inc., MetaSolv Canada Holdings Inc.,
Lat45 Information Systems Inc., each of the shareholders of Lat45
Information Systems Inc. and each of Joseph Hatchuel, Toufik
Abdallah, Serge Bouhadana and Jean-Nicolas Guet. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration Statement
on Form S-3 filed on August 13, 2001, registration number 333-67428.
10.11 Exchange Agreement dated July 20, 2001, by and among the Registrant,
MetaSolv Canada Inc., MetaSolv Canada Holdings Inc. and each of the
shareholders of Lat45 Information Systems Inc. Incorporated by
reference to Exhibit 10.3 to the Registrant's Registration Statement
on form S-3 filed on August 13, 2001, registration number 333-67428.
10.12 Registration Rights Agreement dated July 20, 2001, by and among the
Registrant, each of the shareholders of Lat45 Information Systems
Inc. and Joseph Hatchuel, as shareholders' representative.
Incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-3 filed on August 13, 2001,
registration number 333-67428.
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10.13 Amendment No. 1 to the Registration Rights Agreement dated August 3,
2001, by and between Registrant and Joseph Hatchuel, as
shareholders' representative. Incorporated by reference to Exhibit
10.5 to the Registrant's Registration Statement on Form S-3 filed on
August 13, 2001, registration number 333-67428.
10.14 Amendment No. 2 to the Registration Rights Agreement dated August
10, 2001, by and between Registrant and Joseph Hatchuel, as
shareholders' representative. Incorporated by reference to Exhibit
10.6 to the Registrant's Registration Statement on Form S-3 filed on
August 13, 2001, registration number 333-67428.
10.15 Amendment No. 1 to the Share Purchase Agreement dated August 20,
2001, by and between MetaSolv Canada Holdings Inc. and Joseph
Hatchuel, as shareholders' representative. Incorporated by reference
to Exhibit 10.8 to Amendment No. 1 to the Registrant's Registrations
Statement on Form S-3 filed on March 4, 2002, registration number
333-67428.
10.16 Amendment No. 3 to the Registration Rights Agreement dated November
16, 2001, by and between the Registrant and Joseph Hatchuel, as
shareholders' representative. Incorporated by reference to Exhibit
10.7 to Amendment No. 1 to the Registrant's Registrations Statement
on Form S-3 filed on March 4, 2002, registration number 333-67428.
*10.17 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and Michael J. Cullen.
*10.18 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and Glenn A. Etherington.
*10.19 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and T. Curtis Holmes, Jr.
*10.20 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and Jonathan K. Hustis.
*10.21 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and James P. Janicki.
*10.22 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and Sam L. Kelley.
*10.23 Employment Agreement dated as of December 1, 2001, by and between
MetaSolv Software, Inc. and Joseph W. Pollard.
21 Subsidiaries of the Registrant
(a) MetaSolv Software, Inc., a Delaware corporation
(b) MetaSolv Software S.A.S., a French corporation
(c) MetaSolv Software do Brasil, Ltda., a Brazilian limited
liability company
(d) MetaSolv Canada Inc., a Canadian corporation
(e) MetaSolv Belgium SA, a Belgian SA
(f) MetaSolv Software GmbH, a German GmbH
*23.1 Consent of KPMG LLP, independent auditors.
* Filed herewith
(b) (i) Current Report on Form 8-K of the Registrant, dated
October 18, 2001, reporting the filing of a press
release.
(ii) Current Report on Form 8-K of the Registrant, dated
October 25, 2001, reporting the adoption of a rights
plan.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned thereunto duly authorized.
METASOLV, INC.
Dated: March 29, 2002 By: /s/ James P. Janicki
-----------------------------------
James P. Janicki
Chief Executive Officer
/s/ Glenn A. Etherington
-----------------------------------
Glenn A. Etherington
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- ----------------------------------------------- ------------------------------------- --------------------
/s/ John W. White Chairman of the Board March 29, 2002
- ----------------------------------------------- --------------------
John W. White
/s/ James P. Janicki Chief Executive Officer March 29, 2002
- ----------------------------------------------- and Director --------------------
James P. Janicki
/s/ T. Curtis Holmes, Jr. President, Chief Operating Officer March 29, 2002
- ----------------------------------------------- and Director --------------------
T. Curtis Holmes, Jr.
/s/ Laurence J. Bouman Director March 29, 2002
- ----------------------------------------------- --------------------
Laurence J. Bouman
/s/ Royce J. Holland Director March 29, 2002
- ----------------------------------------------- --------------------
Royce J. Holland
/s/ John D. Thornton Director March 29, 2002
- ----------------------------------------------- --------------------
John D. Thornton
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