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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-24081
EVOLVING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1010843
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9777 MT. PYRAMID CT., ENGLEWOOD, COLORADO 80112
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(303) 802-1000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark 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. / /
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the last sale price of the Common
Stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $2.56 as of March 1, 2001.
The number of shares of Common Stock outstanding was 12,953,442 as of
March 1, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to portions of the registrant's definitive proxy
statement for the 2000 Annual Meeting of Stockholders, which will be filed, with
the Securities and Exchange Commission within 120 days after the close of the
2000 year.
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EVOLVING SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 14
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5 Market for Registrant's Common Equity and Related 15
Stockholder Matters.......................................
Item 6 Selected Financial Data..................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition 16
and Results of Operations.................................
Item 8 Consolidated Financial Statements and Supplementary Data.... 21
Item 9 Changes in and Disagreements with Accountants on Accounting 21
And Financial Disclosure..................................
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 22
Item 11 Executive Compensation...................................... 22
Item 12 Security Ownership of Certain Beneficial Owners and 22
Management................................................
Item 13 Certain Relationships and Related Transactions.............. 22
PART IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 23
8-K.......................................................
2
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS DOCUMENT, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO; THOSE DISCUSSED IN THIS SECTION, IN THE SECTIONS ENTITLED
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "RISK FACTORS."
PART I
ITEM 1. BUSINESS
INTRODUCTION
Evolving Systems is a leading provider of telecommunications software
solutions for complex wireline and wireless data applications. Customers include
Regional Bell Operating Companies, InterExchange Carriers, and several of the
nation's largest wireless carriers. We are the nation's leading provider of
Local Number Portability (LNP) solutions and are expanding our presence in the
high-growth wireless data communications market. We possess special expertise in
operations system support software (OSS) that encompasses order management,
complex provisioning, service activation and customer care systems. We deliver
solutions to our customers that include combinations of our LNP and OSS software
products, consulting, system integration, custom software development, training
and customer support.
From our inception in 1985 through 1996, Evolving Systems focused on
providing custom software development services to a limited number of
telecommunications companies. Beginning in 1996, we made a strategic decision to
expand our focus to include development of Local Number Portability (LNP)
software products. Our LNP software solutions enable carriers to meet the FCC
requirement that customers retain their local phone numbers when changing
service providers, and is in use by all but one of the Regional Bell Operating
Companies (RBOC's), a major long distance carrier, and a local broadband
services provider. Over time we have expanded our LNP product features and
developed other LNP related OSS software products.
We developed and continue to maintain the software currently in use by
all Number Portability Administration Centers (NPAC's) in the United States and
Canada. The software receives ported telephone number information as changes
occur and distributes the data to all subscribing carriers in the region. This
software is provided under contract to NeuStar, Inc., formerly a division of
Lockheed Martin IMS.
We also provide several custom solutions to incumbent local exchange
carriers (ILEC's) for the provisioning and fulfillment of customer orders. These
solutions focus on the flow-through provisioning of Advanced Intelligent Network
(AIN) services within a carrier's network environment.
We developed and continue to maintain and enhance software for wireless
data network elements, which are owned and marketed by Lucent Technologies
(Lucent). In the year 2000 we added new wireless customers and have expanded our
R&D for new wireless products that are expected to be released in 2001.
At the end of 2000 we began development of a Presence and Availability
Management (PAM) server software product. It will be offered initially to the
wireless instant messaging market. We continue to use our technical strengths to
position us as a leading provider of OSS and wireless data solutions.
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INDUSTRY BACKGROUND
THE TELECOMMUNICATIONS INDUSTRY
Historically, telecommunications carriers have operated in a highly
regulated environment, with local and long distance telephone service providers
operating as near monopolies with little competition. Deregulation and the
widespread adoption of new telecommunications technologies, such as fiber
optics, packet-data networks, digital wireless telephony and Internet-based
services, have significantly increased the number of telecommunications carriers
and created an increasingly competitive market. New entrants to the
telecommunications service market include CLEC's, alternate access providers,
internet service providers (ISPs) and wireless service providers.
COMPETITION AND DEREGULATION
The U.S. long distance market was opened to competition beginning in the
early 1970s. More recently, the Telecommunications Act of 1996 (the Act)
provides for the introduction of competition in local telephone service,
allowing long distance, wireless and other carriers to enter local telephone
markets. The Act, among other things, requires RBOCs and other ILEC's to offer
LNP, which allows customers to retain their local phone numbers regardless of
the carrier providing local telephone service.
OPERATIONS SUPPORT SYSTEMS
OSS encompasses a broad array of software and systems that perform
critical functions for telecommunications carriers, including ordering,
provisioning, service assurance and billing. Ordering systems allow carriers to
collect customer information, retrieve current service information, capture and
validate new service requests, verify the availability of selected services and
transmit completed orders to one or more provisioning OSS. Carriers use
provisioning systems to install services for new customers and to change or add
services for existing customers. Service assurance systems allow carriers to
perform the testing, monitoring and reporting necessary to maintain network
availability and feed operational data to other business systems. Carriers use
billing systems to collate, manage and report billing information. Some industry
trade press also include customer care systems in the OSS market segment.
Historically, as existing carriers have added new services, such as
wireless or Internet-based services, they have developed multiple, distinct OSS.
These legacy, proprietary OSS have typically been mainframe-based systems that
in many cases utilize incompatible software and technologies, making
communication among systems difficult. These OSS are further strained by the
many incremental changes that have been made in order to accommodate new
technologies, such as client/server technology and advancements in data
networking, and the proliferation of value-added services, such as call waiting,
call forwarding and voice mail. Despite these difficulties, carriers are unable
to completely replace existing OSS due to the large investments and vast amounts
of historical data contained in these systems. As a result, carriers continue to
make incremental modifications to these OSS, further increasing their complexity
and interoperability difficulties.
LNP CHALLENGES TO CURRENT OSS
The LNP requirements of the Act pose significant technological challenges to
existing carriers' OSS, which are already strained by the changes caused by
increasing competition, new technologies and the introduction of value-added
services. LNP invalidates a fundamental design assumption of many existing OSS,
which is the association between a customer's telephone number and the
geographic location of a carrier's particular physical switch. Provisioning
systems now must be able to receive and distribute on a real-time basis, certain
customer data in order to assure proper call handling, routing and completion.
If the LNP data from ported numbers are not properly distributed to all involved
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carriers, any call to and from that number will not be routed correctly, causing
service problems for customers. With LNP, the phone number can be associated
with a different switch each time the customer changes carriers.
After altering provisioning systems, carriers must then implement
changes throughout many of their other OSS. These OSS are "hard-coded" in that
each telephone number corresponds to a physical switch for the ordering, service
assurance and billing systems. The implementation of LNP also requires new
systems to pool, allocate and assign telephone numbers. Changes will be required
to existing billing systems, which currently associate a telephone number with a
fixed geographic location. As a result of these challenges, we believe a
significant market opportunity exists for providing solutions to carriers that
must address these OSS problems. LNP is in operation now in the wireline service
provider networks. The FCC has mandated that LNP must be in operation for
wireless networks by November 24, 2002. The wireless service providers have
plans to begin testing their LNP solutions during 2001.
NEW TECHNOLOGIES AND EXPERIENCE
The telecommunications industry is continually developing new technology
in all aspects of telephony. One of the newer technologies is instant messaging
(IM). IM is a service in which a consumer can send a text message to other
individuals if they are logged into the network. In order for IM to work, it is
necessary for a database to have the current presence state (i.e., logged on or
logged off) of all individuals that wish to communicate with IM. This is a
specific instance of a class of data called presence data. Other examples would
be data indicating if a cell phone were on or off.
Members of the communication industry recognize that there is value
associated with establishing standards for storing, updating, and accessing data
about presence and availability data. As a result, the Presence and Availability
Forum (PAM) was created as a non-profit organization dedicated to creating and
promoting PAM standards. The PAM Forum specification is designed to allow
communications systems to share authorized information about subscribers'
identity, presence and availability across telephony and IP technologies while
providing the capability to protect privacy. George Hallenbeck, our CEO, is the
current Chairman of the PAM Forum Board.
EVOLVING SYSTEMS' STRATEGY
Recognizing the opportunity created by the ongoing deregulation of local
telephone service, we have capitalized on our historic strength as a leading
architect and developer of solutions for technically challenging OSS
requirements. We position ourselves as a leading provider of LNP solutions
across the entire telecommunications industry. As LNP expands to include
wireless carriers, we are positioned to enable them with LNP capabilities. Our
knowledge of OSS applications, wireless technology and LNP provides a base of
domain expertise necessary to continue our leadership position in the industry.
We have greatly expanded our sales force over the last two years and
have added considerable analytical talent to our marketing department. The
combination of more market research data and well-focused sales staff has
resulted in an increase of 33% in our customer base in 2000. Our strategy is to
better understand our customers' overall OSS requirements and propose solutions
beyond our dominant LNP product line. With our expanded group of technical
analysts and improved knowledge of our customers' competitive challenges, we
have expanded our presence into other OSS solutions for our customers.
EVOLVING SYSTEMS' BUSINESS STRUCTURE
We are organized into two main business groups that build on our core
competencies and domain expertise to form an end-to-end solution for each
customer's specific requirements. The
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business groups combine domain expertise with product components and
professional services to create next generation OSS solutions for the carrier.
OSS PRODUCTS GROUP
Our LNP products enable carriers to accommodate customer requests to
change service providers while retaining the same phone number, and to exchange
call routing data to carriers' networks via the NPAC. Evolving Systems' LNP
products Order Path-Registered Trademark- (a Local Service Order Administration
component) and Number Manager-Registered Trademark- (a Local Service Management
System component) were introduced in 1997. Since then, we have introduced
numerous additional products, adapters and interfaces. We generally license our
LNP products, separately or bundled, as a complete solution. Our group is also
responsible for ongoing maintenance of these products and is responsible for the
development and support of integration software needed to integrate the products
with customers' legacy systems.
We are expanding the ways we offer our LNP solutions and we have entered
into agreements with application service providers (ASP) who will offer our
solutions on a recurring revenue basis. We will share in the monthly recurring
revenue stream that is produced. Customers typically engage Evolving Systems to
provide installation, integration and testing of the LNP products in connection
with these licenses. Customers also rely on us for ongoing support and
enhancement of these solutions. General software upgrades and enhancements for
all products are under development as well as new features being continually
planned.
NPAC BUSINESS UNIT. We developed and continue to maintain the software
currently in use by all NPAC's in the United States and Canada. The software
receives ported telephone number information as changes occur and distributes
the data to all subscribing carriers in the region. The software is provided
under contract to Neustar, Inc.
SERVICE ACTIVATION AND FULFILLMENT UNIT. The Service Activation unit
provides a wide range of custom solutions to ILEC's and CLEC's for the
provisioning and fulfillment of customer orders. The solutions focus on the
flow-through provisioning of Advanced Intelligent Network (AIN) services within
a carrier's network environment. We are developing new components of the
solutions developed in the Service Activation business group for sale as
products to the general marketplace. The products will provide interfaces to
available order management OSS and network elements for seamless integration.
WIRELESS DATA GROUP
This business group provides custom software infrastructure products for
Lucent, a leading equipment supplier. The infrastructure products enable
Cellular Digital Packet Data (CDPD), CDMA, and Over-the-Air-Service Provisioning
(OTASP) in wireless network environments. Evolving Systems provides full
lifecycle support for these products including the development and ongoing
maintenance releases. The Wireless Data Group also maintains a service bureau
offering for the billing of wireless data. We are developing a family of
wireless telecom products based on a new technology, called Presence and
Availability Management (PAM). PAM is a response to the tremendous proliferation
of both the volume of communications and modes of communication in today's
world. As a telecommunications management technology, PAM is designed to provide
individuals with control over the flow of communications to them. It will enable
people to manage when, where and how others may communicate with them.
MARKETING AND SALES
The primary objectives of our marketing efforts are to build Evolving
Systems' expanded capabilities image, generate market awareness and produce
qualified leads. Our marketing efforts include direct sales to targeted
accounts, participation in selected trade shows, a strong website
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presence, print and electronic advertising, story placement in telecom industry
trade media, presentations at industry conferences and forums, press releases to
the industry, and certain other marketing initiatives.
Evolving Systems' sales activities are conducted through a direct sales
force, complemented by other sales channels. We rely on resellers and alternate
channels to further penetrate the LNP market with the smaller carriers while
focusing our direct sales efforts on Tier 1 customers and prospects. We assign a
dedicated account manager to each major customer to ensure that both the sales
relationship and the business relationship are managed well. The sales closing
cycle can be quite long in the telecommunications business due to both the
complexity of products and integration issues that make major systems decisions
difficult. Typically, the sales cycle takes three to twelve months.
The alternate channels, such as strategic distribution partners, help to
identify and qualify leads. We increased the focus on resellers and alternate
sales channels in 2000 to further penetrate the LNP market. As a result of this
expanded focus and our strategic goal to increase recurring revenue, we have
added strategic partners to offer our software through ASP's. Our marketing and
sales efforts have been focused primarily on facility-based local exchange,
interexchange and wireless service providers in the United States, and this
group has comprised the majority of our customers.
RESEARCH AND DEVELOPMENT
Evolving Systems' research and development efforts are focused on
identifying market requirements and performing design and development functions.
These activities follow our product development process that governs the focus
of providing new feature sets into existing product lines in order to meet
near-term customer needs. This process provides our senior management with a
series of decision milestones that allows the evaluation of ongoing projects on
a regular basis. Normally, we do not fund significant development efforts
without first having a customer to buy the resulting product. With our expansion
into new wireless technologies, we have increased our R&D efforts, which should
result in an increased stream of new product releases. We believe our R&D
expenditures will continue to show a significant increase, that we believe will
drive revenue growth.
COMPETITION
The market for telecommunications software is intensely competitive and
is subject to rapid technological change, changing industry standards and
regulatory developments. Evolving Systems faces continuous demand for improved
product performance, new product features and reduced prices, as well as intense
pressure to accelerate the release of new products and product enhancements. Our
existing and potential competitors include many large domestic and international
companies, including certain of our customers, that have substantially greater
financial, manufacturing, technological, marketing, distribution and other
resources, larger installed customer bases and longer-standing relationships
with telecommunications customers than we do. Although we concentrate on
providing software and services for the telecommunications industry, the market
for telecommunications software is extremely large and we currently hold only a
very small portion of the market share outside of the LNP segment. We
differentiate ourselves from competitors through our combination of products,
services and strategic alliances. Evolving Systems consults, develops software,
integrates third party software and interconnects customers existing operating
systems. Very few competitors can offer all of these capabilities and depth of
knowledge.
The principal competitors in the LNP space include Telcordia (formerly
known as Bellcore) and Tekelec, Inc. (Tekelec). We expect competition to
increase in the future from existing suppliers and from other companies that may
enter our existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier than
our solutions.
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Many telecommunications companies have large internal development
organizations, which develop software solutions and provide services similar to
our products and services. ILEC's that have implemented LNP solutions are well
suited to provide LNP services for smaller CLEC's within their regions. Recent
independent market research data indicate that more telecommunications companies
are outsourcing their software solutions due to time to market considerations.
We have addressed this market segment by partnering to provide our software
through the ASP model.
We believe that our ability to compete successfully depends on a wide
range of internal and externally controlled factors. Evolving Systems plans to
compete by providing quality solutions that are tailored specifically to the
customer. We are organized to provide core products and complimentary services
that provide a total solution for the application area. We create a long-term
relationship with the customer by providing ongoing support, extensions of the
original solution, and new related solutions.
INTELLECTUAL PROPERTY
Evolving Systems relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. We presently have
U.S. patents on elements of our three LNP products:
NumberManager-Registered Trademark-, OrderPath-Registered Trademark-and
NodeMaster-Registered Trademark-.
EMPLOYEES
As of December 31, 2000, Evolving Systems employed 317 people, of which
70% were involved in service provisioning, consulting practices and product
development. Additionally, 10% of our staff is in marketing and sales, and 20%
in general administration.
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RISK FACTORS
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Evolving Systems' operating results have fluctuated significantly in the
past and are likely to continue to fluctuate significantly in the future.
Fluctuations in operating results may cause volatility in the price of our
Common Stock. These quarterly fluctuations may result from a number of factors,
including the size of new contracts and when they are signed; our rate of
progress under our contracts; the timing of customer and market acceptance of
our products and service offerings; actual or anticipated changes in government
laws and regulations related to the telecommunications market; judicial or
administrative actions about these laws or regulations; the nature and pace of
enforcement of the Act; product lifecycles; the mix of products and services
sold; changes in demand for our products and services; the timing of third-party
contractors' delivery of software and hardware; budgeting cycles of our
customers; changes in the renewal rate of support agreements; how much we spend
and the timing of expenses for research and development and sales, general and
administrative expenses; competition by existing and emerging competitors in the
telecommunications software markets; our success in developing and marketing new
products, controlling cost, attracting and retaining qualified personnel and
expanding our sales and marketing programs; regional office expansion; software
defects and other product quality problems; changes in our strategy; the extent
of industry consolidation and general economic conditions. In the past, we
earned a significant portion of our revenue from a small number of customers. We
expect that will continue. As a result, the loss of any significant customer,
delays in delivery or acceptance of any of our products by a customer or delays
in the performance of services for a customer could be materially harmful to
Evolving Systems' business, financial condition, results of operations, and cash
flows.
Evolving Systems' expense levels are based in significant part on our
expectations regarding future revenue. Our revenue is difficult to forecast
because the market for our products and services is rapidly changing, and our
sales cycle and the size and timing of large contracts vary substantially among
customers. As a result, we may be unable to adjust spending in a timely manner
to compensate for any unexpected shortfall in revenue.
Based on all of the things described above, we believe that future
revenue, expenses and operating results are likely to vary significantly from
quarter to quarter. Because of this, quarter-to-quarter comparisons of operating
results are not necessarily meaningful nor do they indicate what our future
performance will be. Furthermore, we believe it is likely that in some future
quarter our operating results will be below the expectations of public market
analysts or investors. If that occurs, the market price of our Common Stock
would likely go down.
DEPENDENCE UPON TELECOMMUNICATIONS INDUSTRY; REGULATORY UNCERTAINTIES
The market for our OSS products was created and has primarily been
driven by the adoption of regulations under the Act requiring RBOCs to implement
LNP as a condition to being permitted to provide long distance services.
Therefore, any changes to these regulations, or the adoption of new regulations
by federal or state regulatory authorities under the Act, or any legal
challenges to the Act, could hurt the market for our products and services. For
example, when the FCC delayed implementation of the Act with respect to wireless
carriers until November 2002, these delays had an impact on our revenue from our
LNP products and services. Additional delays in the deadlines imposed by the Act
or the FCC, or any invalidation, repeal or modification in the requirements
imposed by the Act or the FCC, could materially harm our business, financial
condition and results of operations. In addition, customers may require, or we
may find it necessary or advisable, to modify our products or services to
address actual or anticipated changes in regulations affecting our customers.
This could also materially harm our business, financial condition, results of
operations, and cash flows.
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RELIANCE ON SIGNIFICANT CUSTOMERS
Historically, a substantial portion of Evolving Systems' revenue came
from a limited number of customers. During the years ending December 31, 2000,
1999, and 1998, we recognized approximately 93%, 84%, and 87%, of total revenue
from ten, five, and six, customers, respectively, all in the telecommunications
industry. Although we are striving to sell more of our software solutions on a
recurring revenue basis, where we share in the revenue generated by our
customers when they use our software, the impact of this effort is still not
certain and we cannot predict how successful it will be. We may continue to
depend on large contracts with a small number of significant customers. This can
cause our revenue and earnings to fluctuate between quarters based on the timing
of contracts and when our customers install our products. None of our major
customers have any obligation to purchase additional products or services beyond
annual maintenance contracts that they may or may not renew each year. As a
result, our failure to maintain relationships with our existing customers or to
develop relationships with significant new customers would materially harm our
business, financial condition and results of operations.
LENGTHY IMPLEMENTATION PROCESS; CUSTOMER ACCEPTANCE OF COMPANY SOLUTIONS
Implementing our solutions can be a relatively complex and lengthy
process to adapt and customize these solutions for each customer's unique
environment. Often our customers may also require rapid deployment of our
software solutions, resulting in pressure on us to meet demanding delivery and
implementation schedules. Delays in implementation may result in customer
dissatisfaction and/or damage our reputation. This could materially harm our
business, financial condition, results of operations, and cash flows.
The majority of our existing contracts provide for acceptance testing by
the customer before the contract is considered complete. Although we have not
experienced difficulties in obtaining customer acceptance, unanticipated
difficulties or delays in the customer acceptance process could result in higher
costs and delayed payments. In addition, if we fail to satisfy acceptance
criteria within prescribed times, the customer may be entitled to cancel its
contract and receive a refund of all or a portion of amounts previously paid or
other amounts as liquidated damages, which could exceed related contract revenue
and which could result in a future charge to earnings. Any failure or delay in
achieving final acceptance of our software and services could have a material
harmful effect on our business, financial condition, results of operations and
cash flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LENGTHY SALES CYCLE / CONSOLIDATIONS IN THE INDUSTRY
Large telecommunications service providers for enterprise-wide,
mission-critical purposes, involving significant capital expenditures and
lengthy implementation plans, generally use Evolving Systems' software products
and services. Prospective customers typically commit significant resources to
the technical evaluation of our products and services and require us to spend
substantial time, effort and money providing education regarding our solutions.
This evaluation process often results in an extensive and lengthy sales cycle,
typically ranging between three and 12 months, making it difficult for us to
forecast the timing and magnitude of sales contracts. Delays associated with
customers' internal approval and contracting procedures, procurement practices,
and testing and acceptance process are common. For example, customers' budgetary
constraints and internal acceptance reviews may cause potential customers to
delay or forego a purchase. The delay or failure to complete one or more large
contracts could materially harm our business, financial condition or results of
operations and cause our operating results to vary significantly from quarter to
quarter.
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The telecommunications industry is currently experiencing significant
reorganization and consolidation. Mergers and acquisitions of large
telecommunications companies, as well as the formation of new alliances, have
resulted in a constantly changing marketplace for our products and services.
Delays associated with these changes are common. It is also possible that we
could lose customers as a result of these consolidations. The delay or failure
to complete one or more large contracts, or the loss of a significant customer,
could materially harm our business, financial condition, results of operations,
or cash flows, and cause our operating results to vary significantly from
quarter to quarter.
FIXED-PRICE CONTRACTS
Evolving Systems historically derived a majority of its revenue from
contracts that were billed on a time-and-materials basis. This changed in 1996,
when we began doing more projects on a fixed-price basis. We anticipate that
customers will continue to request that we provide software and implementation
services as a total solution on a fixed-price basis. These contracts specify
certain obligations and deliverables we must meet regardless of the actual costs
we incur. Projects done on a fixed-price basis are subject to budget overruns,
which has occurred on certain fixed-price contracts, resulting in lower than
anticipated margins. We can give no assurance that we will not incur similar
budget overruns in the future. If we incur budget overruns, our gross margins
and results of operations may be materially harmed. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW VERSIONS AND NEW PRODUCTS;
RISKS OF SOFTWARE DEFECTS
The market for Evolving Systems' products and services is subject to
rapid technological changes, evolving industry standards, changes in carrier
requirements and preferences and frequent new product introductions and
enhancements. The introduction of products that incorporate new technologies and
emergence of new industry standards can render existing products obsolete and
unmarketable. To compete successfully, we must continue to design, develop and
sell enhancements to existing products and new products that provide higher
levels of performance and reliability in a timely manner, take advantage of
technological advancements and changes in industry standards and respond to new
customer requirements. There can be no assurance that we will successfully
identify new product opportunities or will achieve market acceptance of new
products brought to market. In addition, products developed by others may cause
our products to become obsolete or noncompetitive. If we fail to anticipate or
respond adequately to changes in technology and customer preferences, or if our
products do not perform satisfactorily or if we have delays in product
development, our business, financial condition and results of operations could
be materially harmed.
We intend to periodically issue interim and new releases of our family
of software products. In addition, we intend to develop new products. As a
result of the complexities inherent in software development, major new product
enhancements and new products can require long development and testing periods
before they are commercially released and delays in planned delivery dates may
occur.
COMPETITION; RISKS ASSOCIATED WITH RECRUITING AND RETAINING PERSONNEL
Evolving Systems' primary markets are intensely competitive and are
subject to rapid technological changes, evolving industry standards and
regulatory developments. We face continuous demand for improved product
performance, new product features and reduced prices, as well as intense
pressure to accelerate the release of new products and product enhancements. Our
existing and potential competitors include many large domestic and international
companies, including some competitors that have substantially greater financial,
manufacturing, technological, marketing, distribution and other resources,
larger installed customer bases and longer-standing relationships with
11
customers than we do. Our principal competitors in the LNP market include
Telcordia and Tekelec. In addition, NeuStar has retained rights to the NPAC
software we developed for NeuStar, and NeuStar potentially could compete with us
with respect to LNP products and related services. There also can be no
assurance that other customers will not offer competitive products or services
in the future since customers who have purchased solutions from us are not
precluded from competing with us. Many telecommunications companies have large
internal development organizations, which develop software solutions and provide
services similar to the products and services we provide. We also expect
competition to increase in the future from ASPs, existing competitors and from
other companies that may enter our existing or future markets with solutions
which may be less costly, provide higher performance or additional features or
be introduced earlier than our solutions.
We believe that our ability to compete successfully depends on numerous
factors. For example, how well we respond to our customers' needs; the quality
and reliability of our products and services and our competitors' products and
services; the price for our products and services, as well as the price for our
competitors' products and services; how well we manage our projects; our
technical subject matter expertise; the quality of our customer service and
support; the emergence of new industry standards; the development of technical
innovations; our ability to attract and retain qualified personnel; regulatory
changes and general market and economic conditions are all factors that affect
our ability to compete successfully. Some of these factors are within our
control, and others are not. A variety of potential actions by our competitors,
including a reduction of product prices or increased promotion, announcement or
accelerated introduction of new or enhanced products, or cooperative
relationships among competitors, could harm our business, financial condition
and results of operations. There can be no assurance that we will be able to
compete successfully with existing or new competitors or that we will properly
identify and address the demands of new markets. This is particularly true in
new markets where standards are not yet established, such as in the wireless
data area where we are participating in an industry forum to establish standards
to manage the presence and availability of wireless communications. Our failure
to adapt to emerging market demands, respond to regulatory and technological
changes or compete successfully with existing and new competitors would
materially harm our business, financial condition and results of operations.
Our ability to manage future expansion, if any, effectively will require
us to attract, train, motivate and manage new employees successfully, to
integrate new management and employees into our overall operations and to
continue to improve our operations, financial and management systems. We
anticipate that we will need to hire additional development personnel.
Competition for development and other technical personnel is intense, and there
can be no assurance that we will be able to retain personnel or to hire
additional personnel on a timely basis, if at all. Because of the complexity of
our software solutions, a significant time lag exists between the hiring date of
technical and sales personnel and the time when they become fully productive. We
have at times experienced, and continue to experience, difficulty in recruiting
and retaining such personnel. Our failure to retain personnel or to hire
qualified personnel on a timely basis could materially harm our business,
financial condition and results of operations.
We continue to put new financial, project accounting and sales tracking
software packages in place. Our ability to implement these new systems is likely
to place substantial demands on certain of our managerial resources. In
addition, if we are unable to implement these software packages effectively, we
may not be able to accurately forecast and manage our business. Our failure to
manage any expansion effectively, including any failure to integrate new
management and employees or failure to continue to implement and improve
financial, operations and management controls, systems and procedures, could
materially harm our business, financial condition and results of operations.
12
PRODUCT LIABILITY
Our agreements with our customers typically contain provisions designed
to limit our exposure to potential liability for damages arising out of the use
of or defects in our products. These limitations, however, tend to vary from
customer to customer and it is possible that these limitations of liability
provisions may not be effective. We currently have errors and omissions
insurance, which, subject to customary exclusions, covers claims resulting from
failure of our software products or services to perform the function or to serve
the purpose intended. To the extent that any successful product liability claim
is not covered by this insurance, we may be required to pay for a claim from
Company funds. This could be expensive, particularly since our software products
may be used in critical business applications. Defending such a suit, regardless
of its merits, could be expensive and require the time and attention of key
management personnel, either of which could materially harm our business,
financial condition and results of operations. In addition, our business
reputation could be harmed by product liability claims, regardless of their
merit or the eventual outcome of these claims.
PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
Our success and ability to compete are dependent to a significant degree
on our proprietary technology. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have U.S.
patents on elements of our three LNP products,
NumberManager-Registered Trademark-, OrderPath-Registered Trademark- and
NodeMaster-Registered Trademark-. In addition, we have registered or filed for
registration of certain of our trademarks. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use our products or
technology without authorization or to develop similar technology independently
through reverse engineering or other means. In addition, the laws of some
foreign countries do not adequately protect our proprietary rights. There can be
no assurance that our means of protecting our proprietary rights in the U.S. or
abroad will be adequate or that others will not independently develop
technologies that are similar or superior to our technology, duplicate our
technology or design around any of our patents. It is also possible that we will
inadvertently infringe upon the intellectual property rights of a third party.
Litigation may also be necessary in the future to enforce our intellectual
property rights, to determine the validity and scope of the proprietary rights
of others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of management time
and resources and could materially harm our business, financial condition and
results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
In the past, the trading price of Evolving Systems' Common Stock has
been subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products by
us or our competitors, changes in financial estimates by securities analysts,
the operating and stock price performance of other companies that investors may
deem comparable to Evolving Systems, general stock market and economic
considerations and other events or factors. This may continue in the future. In
addition, the stock market has experienced volatility that has particularly
affected the market prices of stock of many technology companies and that often
has been unrelated to the operating performance of these companies. These broad
market fluctuations may negatively impact the trading price of our Common Stock.
As a result of the foregoing factors, we cannot assure our investors that
Evolving Systems' Common Stock will trade at or higher than its current price.
13
ITEM 2. PROPERTIES
During fiscal year 2000, we leased office space at three locations
including one in Englewood, Colorado, one in Louisville, Colorado and one in
Santa Maria, California. We also lease sales offices in New Jersey, St. Louis,
Missouri and Vienna, Virginia. Our leases are shown below:
SQUARE LEASE
LOCATION FOOTAGE EXPIRATION
- -------- -------- ----------
Meridian................................................. 120,281 2/13/16
Santa Maria.............................................. 6,600 8/31/01
Louisville............................................... 10,992 10/31/02
Virginia................................................. 1,871 10/31/04
New Jersey............................................... 2,951 1/31/05
Missouri................................................. 2460 4/30/03
ITEM 3. LEGAL PROCEEDINGS
In June 1998, four securities class action complaints were filed against
Evolving Systems and certain of its current and former officers and directors in
the U.S. District Court for the District of Colorado alleging violations of the
federal securities laws. The complaints were consolidated. The plaintiffs
claimed to represent a class of persons who purchased our securities during the
period of May 12, 1998 through July 23, 1998. The complaints alleged that
Evolving Systems and certain of its officers misled the investing public
regarding our financial prospects. We denied these allegations. The parties
reached a settlement of $10 million, of which we paid $2.5 million in
April 1999. The Court approved the settlement on October 4, 1999. We had
approximately $719,000 in legal costs associated with the lawsuit.
From time to time we are involved in various legal proceedings arising
in the normal course of business operations. We do not expect that any such
proceedings will have a material adverse effect on our financial position,
results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 23, 2001, the Company solicited the written consent of its
security holders with respect to (a) Election of Directors; (b) Amendment of the
Company's Stock Option Plan; (c) Amendment to the Company's Employee Stock
Purchase Plan; and (d) Ratification of PricewaterhouseCoopers LLP as the
independent accountants of the Company.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our Common Stock began trading publicly through the NASDAQ National
Market under the symbol "EVOL" on May 12, 1998. Prior to that date, there was no
public market for the Common Stock. The closing price of our Common Stock as
reported on the NASDAQ National Market as of March 1, 2001 was $2.56 per share.
The following table sets forth for the periods indicated the high and low
closing sale quotations for the Common Stock as reported on the NASDAQ National
Market. The prices reported do not include retail mark-ups, markdowns or
commissions.
FOR THE FISCAL YEARS
ENDED DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter............................. $15.22 $7.75 $ 8.75 $3.63
Second Quarter............................ $12.00 $3.00 $ 6.13 $3.88
Third Quarter............................. $ 8.69 $4.75 $ 7.13 $3.75
Fourth Quarter............................ $ 6.94 $2.16 $10.50 $5.00
As of March 1, 2001, there were approximately 215 holders of record of
the Company's Common Stock.
We have not declared or paid a cash dividend on its Common Stock. We
currently intend to retain any future earnings, if any, to finance the growth
and development of our business and, therefore, do not anticipate paying cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for each of the years in the
five-year period ended December 31, 2000, have been derived from our
consolidated financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the financial statements and the notes thereto and other financial
information included elsewhere in this Annual Report on Form 10-K.
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue........................................ $52,842 $40,487 $37,238 $42,720 $36,918
Cost of revenue................................ 33,603 26,935 27,104 25,224 24,531
Sales and marketing............................ 8,491 4,516 5,739 5,065 2,913
General and administrative..................... 12,105 9,705 8,566 8,635 8,587
Research and development....................... 370 1,064 7,197 2,914 641
Income (loss) from operations.................. (1,727) (1,732) (11,368) 882 246
Other income (expense)......................... 682 (2,415) (60) (1,395) (1,422)
Provision for (benefit from) income taxes...... -- -- (601) (791) 81
Net income (loss) (1)(2)....................... (1,045) (4,148) (11,273) 278 (1,257)
Basic income (loss) per share.................. (0.08) (0.34) (1.43) 0.18 (0.82)
Diluted earning (loss) per share............... (0.08) (0.34) (1.43) 0.03 (0.82)
Working capital................................ 30,150 28,904 31,009 5,366 6,390
Total assets................................... 47,934 49,628 47,479 27,859 24,356
Long-term debt, net of current portion......... 0 170 825 16,465 18,096
Stockholder equity............................. 36,838 36,541 39,362 1,698 996
- ------------------------
(1) Prior to January 6, 1996, Evolving Systems was an S corporation for federal
and state income tax purposes, and, accordingly, our income was taxed
directly to our stockholders at that time. Net loss
15
for 1996 does not reflect the estimated federal and state income taxes that
would have been payable if we had not been an S corporation prior to
January 6, 1996.
(2) Included in the net loss for 1998 is an extraordinary loss on early
extinguishment of debt of approximately $446,000, net of $220,000 in income
tax benefit.
The following table presents, for the periods indicated, certain items
contained in our statement of operations reflected as a percentage of total
revenue:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenue:
License fees and related services.................... 27.3% 20.1% 38.6%
Other services....................................... 72.7 79.9 61.4
----- ----- -----
Total revenue...................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
License fees and related services.................... 22.2 20.3 17.8
Other services....................................... 50.6 46.2 45.7
----- ----- -----
Total cost of revenue.............................. 72.8 66.5 63.5
----- ----- -----
Gross margin........................................... 27.2 33.5 36.5
Operating expenses:
Sales and marketing.................................. 15.4 11.2 16.1
General and administrative........................... 23.0 24.0 22.9
Research and development............................. 19.3 2.6 0.7
----- ----- -----
Total operating expenses............................... 57.7 37.8 39.7
----- ----- -----
Operating loss......................................... (30.5) (4.3) (3.2)
Other income (expense), net............................ (0.2) (6.0) 1.3
----- ----- -----
Loss before income taxes............................... (30.7) (10.3) (1.9)
Provision for (benefit from) income taxes.............. (1.6) 0.0 0.0
----- ----- -----
Net loss before extraordinary item..................... (29.1) (10.3) (1.9)
Extraordinary item, net of taxes....................... 1.2 -- --
----- ----- -----
Net loss............................................... (30.3) (10.3) (1.9)
----- ----- -----
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THIS SECTION AND IN THE SECTION ENTITLED "RISK
FACTORS."
INTRODUCTION
Evolving Systems, Inc. was formed in 1985, with the purpose of designing
and integrating software systems for the telecommunications industry. Software
projects are bid on either a fixed price or time and materials basis. From our
inception in 1985 through 1996, we focused on providing custom software
development services, primarily to two large customers. Beginning in 1996, we
broadened our focus to include the development and licensing of proprietary
software products in response to declining demand from key customers for custom
software development services that reflected the changing industry patterns for
software procurement.
16
The Company had an excellent market for its LNP products in 1997 as a
result of the mandated requirements for LNP capabilities in the Act. License
fees and related services revenues for 1997 were over $20,000,000. Other
services of the business also increased due to considerable integration support
needed to implement LNP. This market demand did not carry forward into 1998 or
1999 for those LNP products. We refocused our LNP products sales efforts to
other market segments such as wireless and infrastructure providers but these
segments were much smaller than the wire line portion of the telecommunications
market and FCC approved delays in implementation of LNP for the wireless
industry had an impact on sales of LNP products to wireless carriers. The result
was a substantial decline in license fee and related services in 1998 and 1999.
With the pressure from the FCC back on to comply with the Act, the demand has
again increased for LNP software and we have experienced significant sales of
LNP licenses and related services during the year ended December 31, 2000.
REVENUE RECOGNITION
Evolving Systems recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition," as amended. We
derive revenue from license fees and services under the terms of both fixed
price and time and materials contracts. License fees and related services
revenue consists of revenue from contracts involving our LNP software products
and related services. Other services revenue consists of revenue from custom
programming, systems integration of third party products, annual maintenance
contracts and training.
License fees and related services revenue is generated from fixed-price
contracts that provide for both licenses and services. Revenue under these
arrangements, where the services are essential to the functionality of the
delivered software, is generally recognized using the percentage-of-completion
method of accounting. The percentage-of-completion for each contract is
determined based on the ratio of direct labor hours incurred to total estimated
direct labor hours. Amounts billed in advance of services being performed are
recorded as unearned revenue. Unbilled work-in-progress represents revenue
earned but not yet billable under the terms of the fixed-price contracts and all
such amounts are expected to be billed and collected during the succeeding
12 months.
In arrangements where the services are not essential to the
functionality of the delivered software, we recognize license revenue when a
license agreement has been signed, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. Where applicable, fees from
multiple element arrangements are unbundled and recorded as revenue, as the
elements are delivered, to the extent that vendor specific objective evidence
("VSOE") exists. If VSOE does not exist, fees from such arrangements are
deferred until the earlier of the date that VSOE does exist, or all of the
elements are delivered.
Services revenue provided under fixed-price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed.
Annual maintenance revenue is recorded as deferred revenue and is
recognized ratably over the service period, which is generally 12 months.
Revenue from training services is recognized as the training services are
performed. When warranty or training services are bundled with the original
license fee arrangement, their fair value is deferred and recognized during the
periods such services are provided.
We may encounter budget and schedule overruns on fixed-price contracts
caused by increased material, labor or overhead costs. Adjustments to cost
estimates are made in the periods in which the facts requiring such revisions
become known. Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract costs indicate a loss.
17
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 2000
COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
REVENUE. Total revenue increased 31% from $40.5 million in 1999 to
$52.8 million in 2000. License fees and related services revenue increased 151%
primarily because of the increased demand for LNP systems and the FCC's
requirement to implement the Act. Other services revenue, consisting primarily
of custom system development revenue remained flat with $32.3 million in 1999
versus $32.4 million in 2000. As a percentage of revenue, license fees and
related services revenue increased from 20% in 1999 to 39% in 2000. Other
services revenue decreased on a relative basis from 80% in 1999 to 61% in 2000.
COST OF REVENUE. Cost of revenue consists primarily of personnel costs,
equipment depreciation, facilities costs and the cost of third party software.
Cost of license fees and related services increased by $1.2 million, or 15%,
with the related revenue increasing by 151% for the year ended December 31,
2000. Cost of revenue was favorably impacted as a result of increased LNP sales
for which less services are now required related to implementation and
customization on a proportionate basis as the licensed software becomes more
mature. As a result, the gross margin on license fees and related services
increased substantially to 54% for the year ended December 31, 2000 compared to
a negative 1% for the year ended December 31, 1999. The cost of revenue for
other services increased 29% in 2000 compared to 1999 with revenue remaining
essentially consistent in 2000 with 1999. We made an investment early in 2000 in
staff to provide integration services to customers purchasing licensed software.
However, the demand anticipated for integration services was not realized in
2000 resulting in gross margin for other services declining from 42% to 26% for
the years ended December 31, 1999 and December 31, 2000, respectively.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation costs (including commissions), travel expenses, field sales office
expenses and marketing communication expenses. Sales and marketing expenses
increased by $4 million, or 88%, to $8.5 million for the year ended
December 31, 2000 from $4.5 million for the year ended December 31, 1999. The
increase was primarily due to our addition of sales staff in the fourth quarter
of 1999 and the implementation of a new commission structure.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of compensation costs for administration, facilities, finance,
legal, human resources, quality assurance and general management personnel.
General and administrative expenses increased by $2.4 million, or 25%, to
$12.1 million for the year ended December 31, 2000 from $9.7 million for the
year ended December 31, 1999. The increased costs in 2000 were related primarily
to an increase in depreciation on equipment, annual salary increases and related
fringe benefits and an increase to the bad debt reserve of approximately
$603,630. General and administrative expenses as a percentage of revenue
declined 1% to 23% in 2000 from 24% in 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, equipment and software development tools.
Research and development expenses decreased 65%, or $694,442 to $369,950 in the
year ended December 31, 2000, from $1.1 million in the year ended December 31,
1999. As a percentage of revenue, research and development decreased to 1% in
2000 from 3% in 1999. This decrease resulted from the termination of several R&D
efforts for next generation software products in 2000.
OTHER INCOME (EXPENSE), NET. Other expense, net of other income, includes
interest expense on our capital leases and interest income on cash and cash
equivalents and short-term investments. Net other income increased to $699,555
in the year ended December 31, 2000, from a net other expense of $2.4 million in
the year ended December 31, 1999 as a result of the $3.2 million settlement of
the shareholder lawsuit including $719,000 in associated legal fees in 1999.
(See Item 3, Legal Proceedings.)
18
PROVISION FOR (BENEFIT FROM) INCOME TAXES. We recorded a partial valuation
allowance against our carryforward tax benefits to the extent that we believe
that it is more likely than not that all of such benefits will not be realized
in the foreseeable future. Our assessment of this valuation allowance was made
using all available evidence, both positive and negative. In particular, we
considered both our historical results and our projections of profitability for
only reasonably foreseeable future periods. We recorded no income tax benefit
related to 2000 operating losses as we deem it inappropriate to book such
benefits until projected operating results reflect greater certainty of
profitability and the ability to realize such benefits. Our realization of
recorded net deferred tax assets is dependent on future taxable income and,
therefore, we cannot assure that such benefits will be realized.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1999
COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUE. Total revenue increased 9% from $37.2 million in 1998 to
$40.5 million in 1999. License fees and related services revenue declined 20%
although we added new customers in fourth quarter of 1999, primarily because the
demand for LNP systems declined as the wire line portion of the
telecommunications industry substantially completed implementation of LNP in
1998. Other services revenue, consisting primarily of custom system development
revenue, increased 19% from $27.1 million in 1998 to $32.3 million in 1999 as we
focused on other services to counteract the software revenue shortfall. As a
percentage of revenue, license fees and related services revenue declined from
27% in 1998 to 20% in 1999. Other services revenue increased from 73% in 1998 to
80% in 1999.
COST OF REVENUE. Cost of revenue consists primarily of personnel costs,
equipment depreciation, facilities costs and the cost of third party software.
Cost of license fees and related services decreased by $54,000, or 1%, even
though the related revenue declined by 20% for the year ended December 31, 1999.
Cost of revenue was favorably impacted as a result of lower cost of sales for
certain arrangements where services were minimal. This favorable impact was
offset as we maintained a relatively consistent labor base and facilities
compared to the prior year. As a result of the consistent cost base and
declining revenues, the gross margin on license fees and related services
declined to a negative 1% for the year ended December 31, 1999 compared to 19%
for the year ended December 31, 1998. In the fourth quarter of 1998, we recorded
$302,000 in additional costs in connection with a contract for which all revenue
had previously been recorded. The cost of revenue for other services decreased
1% in 1999 even though revenue increased 19%. The gross margin for other
services improved from 30% to 42% for the years ending December 31, 1998 and
December 31, 1999, respectively, as staff utilization rates improved.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation costs (including commissions), travel expenses, field sales office
expenses and marketing communication expenses. Sales and marketing expenses
decreased by $1.2 million, or 21%, to $4.5 million for the year ended
December 31, 1999 from $5.7 million for the year ended December 31, 1998. The
decrease was primarily due to our refocus of sales plans that reduced
promotional expenses. In the second half of 1999, we increased the sales staff,
causing the fourth quarter 1999 expenses to increase substantially.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of compensation costs for administration, facilities, finance,
legal, human resources, quality assurance and general management personnel.
General and administrative expenses increased by $1.1 million, or 13%, to
$9.7 million for the year ending December 31, 1999 from $8.6 million for the
year ended December 31, 1998. The increase in cost was attributable to increased
real estate rents, property taxes and insurance premium costs.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, equipment and software development tools.
Research and development expenses decreased 85%, or $6.1 million to
$1.1 million in the year ended December 31, 1999, from $7.2 million in the year
19
ended December 31, 1998. As a percentage of revenue, research and development
decreased from 19% in 1998 to 3% in 1999. This decrease resulted from our
reduction in product development costs for next generation software products, as
well as significant research and development cost being recorded in 1998 to
complete the LNP product line.
OTHER INCOME (EXPENSE), NET. Other expense, net of other income, includes
interest expense on our debt financing and capital leases and interest income on
cash. The net expense increased to $2.4 million in the year ended December 31,
1999, from $60,000 in the year ended December 31, 1998 as a result of the
$3.2 million settlement of the shareholder lawsuit including $719,000 in
associated legal fees. (See Item 3, Legal Proceedings.)
EXTRAORDINARY ITEM. We recorded an extraordinary item of $445,702 net of
taxes relating to early retirement penalties and the write-off of capitalized
debt issue costs resulting from the repayment of debt associated with completion
of our initial public offering in the year ended December 31, 1998. We recorded
a tax benefit of $220,000 relating to the extraordinary item.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. We have recorded a partial
valuation allowance against our carryforward tax benefits to the extent that we
believe that it is more likely than not that all of such benefits will not be
realized in the foreseeable future. Our assessment of this valuation allowance
was made using all available evidence, both positive and negative. In
particular, we considered both our historical results and our projections of
profitability for only reasonably foreseeable future periods. We recorded no
income tax benefit related to 1999 operating losses as we deem it inappropriate
to book such benefits until projected operating results reflect greater
certainty of profitability and the ability to realize such benefits. Our
realization of recorded net deferred tax assets is dependent on future taxable
income and, therefore, we are not assured that such benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Evolving Systems has historically financed operations through a
combination of cash flow from operations and borrowings. At December 31, 2000,
our principal sources of liquidity included $4.4 million in cash and cash
equivalents, and $5.9 million in short-term investments. A $5.0 million secured
bank line of credit expired in September 2000 and was not replaced.
Net cash used in operating activities was $10.5 million in the year
ended December 31, 2000 compared to cash provided by operating activities of
$5.9 million in the year ended December 31, 1999. The main uses of cash for the
year ended December 31, 2000 were an increase in contract receivables of
$6.2 million, unbilled work-in-progress of $5.8 million and a decrease in
unearned revenue and customer deposits of $3.4 million. Offsetting increases to
cash for the year ended December 31, 2000 were depreciation and amortization of
$3.2 million and an increase in accounts payable and accrued liabilities of
$2.1 million.
Net cash provided by investing activities during the year ended
December 31, 2000 was $9.9 million compared to cash used in investing activities
during the year ended December 31, 1999 of $13.2 million. During 2000, we sold
$12.1 million, net of purchases, of short-term investments to fund operations
and purchased $2.2 million in property and equipment to support operations.
Financing activities provided $644,000 in the year ended December 31,
2000 compared to the use of $155,000 in cash in the year ended December 31,
1999. During 2000, proceeds from the issuance of common stock under our option
and Employee Stock Purchase Plan (ESPP) provided funding offset by repayments of
capital lease obligations.
We believe that our current cash and short-term investments, together
with anticipated cash flow from operations will be sufficient to meet our
working capital and capital expenditure requirements for at least the next
twelve months. Thereafter, we may require additional funds to
20
support such activity through public or private equity financing or from other
sources. There can be no assurance that additional financing will be available
at all or that if available, such financing will be obtainable on terms
favorable to us and would not be dilutive.
IMPACT OF INFLATION. Inflation has not had a significant effect on our
operations during the past three years ended December 31, 2000.
COSTS: Funding of all Year 2000 efforts were expensed as incurred. We
have spent approximately $1 million dollars. We believe that any additional
resources needed to address Year 2000 issues will not be material.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments, and hedging activities related
to those instruments, as well as other hedging activities. SFAS No. 133, as
amended, is effective for our first quarter beginning January 1, 2001. To date,
we have not entered into any derivative financial instruments or hedging
activities.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required pursuant to this item are
included in Item 14 of this Annual Report on Form 10-K and are presented
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the section of Evolving Systems' 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Proposal 1--Election of Directors," and the section entitled
"Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section of the Company's 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section of the Company's 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of the Company's 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Certain Relationships and Related Transactions."
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements: The following consolidated
financial statements of Evolving Systems, Inc. are filed as part of
this report.
Report of Independent Accountants........................... F-1
Balance Sheets at December 31, 1999 and 2000................ F-2
Statements of Operations for the years ended December 31,
1998, 1999 and 2000....................................... F-3
Statement of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1999 and 2000.................... F-4
Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000....................................... F-5
Notes to Financial Statements............................... F-6
2. Financial Statement Schedule. The following financial statement
schedule for each of the years ended December 31, 2000, 1999 and 1998
is filed as part of this Annual Report on Form 10-K and should be
read in conjunction with the Financial Statements and the related
notes thereto.
Schedule II--Valuation and Qualifying Accounts.............. S-1
Schedules other than the one listed above have been omitted
since they are not applicable.
3. Exhibits.
23
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
3.1^ Restated Certificate of Incorporation.
3.2^ Amended and Restated Bylaws.
4.1^ Reference is made to Exhibits 3.1 and 3.2.
4.2^ Specimen stock certificate representing shares of Common
Stock.
10.1^ Indemnification Agreement, entered into by the Registrant
and each of its directors and executive officers, dated as
of January 1, 1998.
10.2^* Amended and Restated Stock Option Plan.
10.3^* Employee Stock Purchase Plan.
10.10^ Software Development Agreement, by and between the
Registrant and American Telephone and Telegraph Company,
dated as of May 1, 1993. (The division of American Telephone
& Telegraph Company responsible for this Agreement has split
off from AT&T and is now known as Lucent Technologies,
Inc.).
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.1 Power of Attorney (included on signature page).
- ------------------------
^ Incorporated by reference to the Registrant's Registration Statement on
Form S-1 No. 333-43973.
* Indicates each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K dated November 3, 1999 describing
the appointment of James M. Ross to President and Chief Operating Officer and
also naming him as a director of Evolving Systems.
We filed a current report on Form 8-K dated July 8, 1999 describing the
adoption of a Rights Plan.
We filed a current report on Form 8-K dated February 8, 2001 describing
a material transaction with Qwest Communications International, Inc.
24
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 TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED; THEREUNTO DULY AUTHORIZED, ON THE 20TH DAY OF
MARCH, 2001.
EVOLVING SYSTEMS, INC.
By: /s/ GEORGE A. HALLENBECK
-----------------------------------------
GEORGE A. HALLENBECK
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints George A. Hallenbeck and Anita T. Moseley, or any
of them, his or her attorney-in-fact, each with the power of substitution, for
him or her in any and all capacities, to sign any amendments to this Report, and
to file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED HAVE SIGNED THIS REPORT BELOW.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer,
/s/ GEORGE A. HALLENBECK Chairman of the Board of
------------------------------------------- Directors (Principal March 23, 2001
GEORGE A. HALLENBECK Executive Officer)
/s/ JAMES M. ROSS
------------------------------------------- President, Chief Operating March 23, 2001
JAMES M. ROSS Officer, Director
Senior Vice President,
Chief
/s/ DAVID R. JOHNSON Financial Officer
------------------------------------------- (Principal March 23, 2001
DAVID R. JOHNSON Financial and Accounting
Officer)
/s/ DAVID J. MOLNY
------------------------------------------- Director March 23, 2001
DAVID J. MOLNY
25
/s/ HARRY B. FAIR
------------------------------------------- Director March 23, 2001
HARRY B. FAIR
/s/ DONALD R. DIXON
------------------------------------------- Director March 23, 2001
DONALD R. DIXON
/s/ ROBERT J. LOARIE
------------------------------------------- Director March 23, 2001
ROBERT J. LOARIE
26
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the financial statements listed in the index appearing under
Item 14(a) (1) on page 23 present fairly, in all material respects, the
financial position of Evolving Systems, Inc. at December 31, 1999 and 2000, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item 14(a)
(2) on page 23 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
February 22, 2001
F-1
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,265,956 $ 4,381,874
Short-term investments--unrestricted...................... 12,086,926 5,930,784
Short-term investments--restricted........................ 5,920,111 --
Contract receivables net of allowance of $39,006 and
$642,637 at December 31, 1999 and December 31, 2000,
respectively............................................ 9,623,555 15,202,052
Unbilled work-in-progress................................. 8,349,436 14,109,994
Prepaid and other current assets.......................... 1,574,906 1,621,636
----------- -----------
Total current assets.................................... 41,820,890 41,246,340
Property and equipment, net................................. 6,259,939 5,140,909
Deferred tax assets......................................... 1,547,007 1,547,007
----------- -----------
Total assets............................................ $49,627,836 $47,934,256
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................. $ 640,010 $ 162,523
Accounts payable and accrued liabilities.................. 2,998,514 5,053,637
Unearned revenue and customer deposits.................... 9,278,058 5,880,343
----------- -----------
Total current liabilities............................... 12,916,582 11,096,503
Long-term obligations....................................... 169,960 --
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued or outstanding............. -- --
Common stock, $.001 par value; 25,000,000 shares
authorized; 12,446,965 and 12,950,620 shares issued and
outstanding as December 31, 1999 and December 31, 2000,
respectively............................................ 12,447 12,951
Additional paid-in capital................................ 51,774,076 53,062,824
Deferred compensation..................................... (89,454) (37,165)
Accumulated deficit....................................... (15,155,775) (16,200,857)
----------- -----------
Total stockholders' equity.............................. 36,541,294 36,837,753
----------- -----------
Total liabilities and stockholders' equity.............. $49,627,836 $47,934,256
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
------------ ----------- -----------
REVENUE:
License fees and related services................... $ 10,183,533 $ 8,137,972 $20,404,543
Other services...................................... 27,054,063 32,349,270 32,437,846
------------ ----------- -----------
Total revenue..................................... 37,237,596 40,487,242 52,842,389
Cost of revenue:
License fees and related services................... 8,270,718 8,216,897 9,444,924
Other services...................................... 18,833,172 18,718,018 24,157,779
------------ ----------- -----------
Total cost of revenue............................. 27,103,890 26,934,915 33,602,703
------------ ----------- -----------
Gross margin.......................................... 10,133,706 13,552,327 19,239,686
Operating expenses:
Sales and marketing................................. 5,738,827 4,515,561 8,490,940
General and administrative.......................... 8,565,620 9,704,785 12,105,433
Research and development............................ 7,197,309 1,064,392 369,950
------------ ----------- -----------
Total operating expenses.......................... 21,501,756 15,284,738 20,966,323
------------ ----------- -----------
Loss from operations.................................. (11,368,050) (1,732,411) (1,726,637)
Other income (expense):
Interest income..................................... 935,053 907,197 828,886
Interest expense.................................... (994,989) (171,814) (147,331)
Litigation settlement and expenses.................. -- (3,150,699) --
------------ ----------- -----------
Total............................................. (59,936) (2,415,316) 681,555
------------ ----------- -----------
Loss before income taxes.............................. (11,427,986) (4,147,727) (1,045,082)
Provision for (benefit from) income taxes............. (600,564) -- --
------------ ----------- -----------
Loss before extraordinary item........................ (10,827,422) (4,147,727) (1,045,082)
------------ ----------- -----------
Extraordinary item, net of taxes...................... 445,702 -- --
------------ ----------- -----------
Net loss.............................................. $(11,273,124) $(4,147,727) $(1,045,082)
============ =========== ===========
Basic and diluted loss per common share before
extraordinary item.................................. $ (1.37) $ (0.34) $ (0.08)
Extraordinary item.................................... $ (0.06) -- --
------------ ----------- -----------
Basic and diluted loss per common share............... $ (1.43) $ (0.34) $ (0.08)
============ =========== ===========
Basic and diluted weighted average common shares
outstanding......................................... 7,887,000 12,137,783 12,672,633
The accompanying notes are an integral part of these financial statements.
F-3
EVOLVING SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL
SERIES A $.001 PAR PAID-IN DEFERRED
PREFERRED STOCK COMMON STOCK CAPITAL COMPENSATION
------------------- ---------------------- ----------- ------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- ---------- ---------
Balance, December 31, 1997............................. 8,160 $ 8 1,620,760 $ 1,621 $ 2,423,060 $ (992,188)
Issuance of shares in initial public offering, net, and
conversion of preferred stock........................ (8,160) (8) 9,918,000 9,918 47,946,839
Stock option exercises................................. 283,118 283 226,211
Compensation related to stock options.................. 65,421
Amortization of deferred compensation.................. (231,056) 647,719
Common Stock issued pursuant to the Employee Stock
Purchase Plan........................................ 66,143 66 272,610
Net loss...............................................
------ ------ ---------- --------- ----------- ----------
Balance, December 31, 1998............................. -- -- 11,888,021 11,888 50,703,085 (344,469)
------ ------ ---------- --------- ----------- ----------
Stock option exercises................................. 464,567 465 698,164
Compensation related to stock options..................
Amortization of deferred compensation.................. 255,015
Common Stock issued pursuant to the Employee Stock
Purchase Plan........................................ 94,377 94 372,827
Net loss...............................................
------ ------ ---------- --------- ----------- ----------
Balance, December 31, 1999............................. -- -- 12,446,965 12,447 51,774,076 (89,454)
------ ------ ---------- --------- ----------- ----------
Stock option exercises.................................
Compensation related to stock options.................. 349,820 350 855,794 52,289
Amortization of deferred compensation..................
Common Stock issued pursuant to the Employee Stock
Purchase Plan........................................ 153,835 154 432,954
Net loss...............................................
------ ------ ---------- --------- ----------- ----------
Balance, December 31, 2000............................. 0 $ 0 12,950,620 $ 12,951 $53,062,824 $ (37,165)
====== ====== ========== ========= =========== ==========
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(DEFICIT) EQUITY
------------ -------------
Balance, December 31, 1997............................. $ 265,076 $ 1,697,577
Issuance of shares in initial public offering, net, and
conversion of preferred stock........................ 47,956,749
Stock option exercises................................. 226,494
Compensation related to stock options.................. 65,421
Amortization of deferred compensation.................. 416,663
Common Stock issued pursuant to the Employee Stock
Purchase Plan........................................ 272,676
Net loss............................................... (11,273,124) (11,273,124)
------------ ------------
Balance, December 31, 1998............................. (11,008,048) 39,362,456
------------ ------------
Stock option exercises................................. 698,629
Compensation related to stock options..................
Amortization of deferred compensation.................. 255,015
Common Stock issued pursuant to the Employee Stock
Purchase Plan........................................ 372,921
Net loss............................................... (4,147,727) (4,147,727)
------------ ------------
Balance, December 31, 1999............................. (15,155,775) 36,541,294
------------ ------------
Stock option exercises.................................
Compensation related to stock options.................. 856,144
Amortization of deferred compensation.................. 52,289
Common Stock issued pursuant to the Employee Stock
Purchase Plan........................................ 433,108
Net loss............................................... (1,045,082) (1,045,082)
------------ ------------
Balance, December 31, 2000............................. $(16,200,857) $ 36,837,753
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
EVOLVING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
------------ ----------- -----------
OPERATING ACTIVITIES:
Net loss.................................................... $(11,273,124) $(4,147,727) $(1,045,082)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for uncollectible accounts...................... (211,890) -- 603,631
Amortization of deferred compensation..................... 416,663 255,015 52,289
Depreciation and amortization............................. 4,379,307 3,511,132 3,214,435
Loss on disposal of property and equipment................ 132,984 13,049 52,416
Benefit from deferred income taxes........................ (671,218) -- --
Change in operating assets and liabilities:
Contract receivables.................................... (683,567) 4,884,945 (6,182,128)
Unbilled work in-progress............................... (2,533,477) (5,244,071) (5,760,558)
Prepaid and other assets................................ (737,218) 456,322 (46,730)
Accounts payable and accrued liabilities................ (240,652) (3,193) 2,055,123
Unearned revenue and customer deposits.................. (2,975,680) 6,199,317 (3,397,715)
------------ ----------- -----------
Net cash provided by (used in) operating activities......... (14,397,872) 5,924,789 (10,454,319)
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment......................... (2,300,743) (2,153,221) (2,181,806)
Proceeds from sale of property and equipment................ 25,604 -- 33,985
Purchases of short-term investments......................... (6,818,617) (45,885,623) (33,709,198)
Sales of short-term investments............................. -- 34,828,190 45,785,451
------------ ----------- -----------
Net cash provided by (used in) investing activities......... (9,093,756) (13,210,654) 9,928,432
------------ ----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term obligations......................... (14,428,387) (1,226,292) (647,447)
Borrowings from line of credit.............................. 6,686,000 -- --
Repayments of line of credit................................ (6,686,000) -- --
Proceeds from issuance of common stock, net................. 48,455,919 1,071,550 1,289,252
------------ ----------- -----------
Net cash provided by (used in) financing activities......... 34,027,532 (154,742) 641,805
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 10,535,904 (7,440,607) 115,918
Cash and cash equivalents at beginning of period............ 1,170,659 11,706,563 4,265,956
------------ ----------- -----------
Cash and cash equivalents at end of period.................. $ 11,706,563 $ 4,265,956 $ 4,381,874
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH AND NON-CASH INVESTING
AND FINANCING TRANSACTIONS
Interest paid............................................... $ 920,450 $ 171,814 $ 79,641
Income taxes paid........................................... -- -- 18,000
Assets acquired under capital lease......................... 86,839 -- --
The accompanying notes are an integral part of these financial statements.
F-5
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Evolving Systems designs, develops, markets and supports OSS products
and solutions for the telecommunications industry and provides a broad range of
both fixed price and time and materials software solutions. We provide these
systems and software products through a combination of our own proprietary
software integrated with software packages purchased from other companies to
form complete software solutions for our customers.
INITIAL PUBLIC OFFERING
In May 1998, Evolving Systems completed an initial public offering
(IPO). Of the 5.3 million shares of common stock sold to the public at $14.00
per share, we issued 3.8 million shares and selling shareholders sold
1.5 million shares. We realized approximately $48 million from the offering
after deducting expenses of the offering of approximately $5.2 million.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Significant estimates have been made by management with
respect to the collectibility of accounts receivable and the estimates to
complete long-term contracts. Actual results could differ from these estimates.
REVENUE RECOGNITION
Evolving Systems recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition". We derive revenue
from license fees and services under the terms of both fixed-price and
time-and-materials contracts. License fees and related services revenue consists
of revenue from contracts involving our LNP software products and related
services. Other services revenue consists of revenue from custom programming,
systems integration of third party products, annual maintenance contracts and
training.
License fees and related services revenue is generated from fixed-price
contracts that provide for both licenses and services. Revenue under these
arrangements, where the services are essential to the functionality of the
delivered software, is generally recognized using the percentage-of-completion
method of accounting. The percentage of completion for each contract is
determined based on the ratio of direct labor hours incurred to total estimated
direct labor hours. Amounts billed in advance of services being performed are
recorded as unearned revenue. Unbilled work-in-progress represents revenue
earned but not yet billable under the terms of the fixed-price contracts and all
such amounts are expected to be billed and collected during the succeeding
12 months.
In arrangements where the services are not essential to the
functionality of the delivered software, we recognize license revenue when a
license agreement has been signed, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. Where applicable, fees from
multiple element arrangements are unbundled and recorded as revenue as the
elements are delivered to the extent that vendor specific objective evidence of
fair value ("VSOE") exists. If VSOE does not
F-6
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exist, fees from such arrangements are deferred until the earlier of the date
that VSOE does exist or all of the elements are delivered.
Services revenue provided under fixed-price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed.
Annual maintenance revenue is recorded as deferred revenue and is
recognized ratably over the service period, which is generally 12 months.
Revenue from training services is recognized as the training services are
performed. When maintenance or training services are bundled with the original
license fee arrangement, their fair value is deferred and recognized during the
periods such services are provided.
We may encounter budget and schedule overruns on fixed price contracts
caused by increased material, labor or overhead costs. Adjustments to cost
estimates are made in the periods in which the facts requiring such revisions
become known. Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract costs indicate a loss.
SOFTWARE RESEARCH AND DEVELOPMENT COSTS
Expenditures for software research and development are expensed as
incurred. Such costs are required to be expensed until the point that
technological feasibility of the product is established after which time such
costs are capitalized until general availability of the product. The period
between achieving technological feasibility and the general availability of such
software has historically been short. Consequently, costs otherwise
capitalizable after technological feasibility is achieved are expensed because
they are insignificant.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments and investments with a maturity of three
months or less when purchased are considered to be cash equivalents. All cash
equivalents are carried at cost, which approximates fair value. Short-term
investments consist of high-grade commercial paper, maturing within one year.
Such short-term investments are classified as held-to-maturity and, accordingly,
carried at amortized cost.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Evolving Systems to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. We have cash investment policies
that limit investments to investment grade securities and certificates of
deposit. We perform ongoing evaluations of its customers' financial condition
and, generally, requires no collateral from our customers. During the years
ending December 31, 1998, 1999 and 2000, we recognized approximately 87%, 84%
and 93% of total revenue from six, five and ten customers, respectively, all in
the telecommunications industry. As of December 31, 1999 and 2000, these
customers accounted for 78% and 95% of contract receivables, respectively.
Customers providing the largest revenues for the year ended December 31, 1999
were Lockheed Martin (23%), Lucent (23%), GTE (18%) and SBC (12%). Customers
providing the largest revenues for the year ended December 31, 2000 were Lucent
(20%), SBC (17%), Neustar (15%) and Qwest (15%).
F-7
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of our financial instruments, including cash and cash
equivalents, certificates of deposit, contract receivables, accounts payable and
accrued expenses, management believes that the carrying amounts approximate fair
value due to their short maturities.
PROPERTY AND EQUIPMENT AND LONG-LIVED ASSETS
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally four to seven years or the lease term, if
shorter, using the straight-line method. Leasehold improvements are stated at
cost and are depreciated over the shorter of the lease term or useful life of
the asset.
We evaluate the carrying value of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the evaluation, we estimate the future
undiscounted cash flows of the operations to which the long-lived assets relate
to ensure the carrying value has not been impaired.
STOCK-BASED COMPENSATION
We apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), in accounting for stock-based
compensation arrangements. We have included the pro-forma disclosures required
under SFAS No. 123, "Accounting for Stock-Based Compensation," in Note 4.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying balance sheets, as well as
operating loss and tax credit carryforwards. Deferred tax assets may be reduced
by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that these benefits will not be realized.
EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net loss by the
weighted average number of shares outstanding during the period. Diluted EPS is
computed using the weighted average number of shares outstanding plus all
dilutive potential common shares outstanding. The following is
F-8
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the years ended December 31:
1998 1999 2000
------------ ----------- -----------
BASIC EARNINGS PER SHARE
Net loss.............................................. $(11,273,124) $(4,147,727) $(1,045,082)
Basic weighted average common shares outstanding...... 7,887,000 12,137,783 12,672,633
Basic earnings per common share....................... $ (1.43) $ (0.34) $ (0.08)
------------ ----------- -----------
DILUTED EARNINGS PER SHARE
Net loss.............................................. $(11,273,124) $(4,147,727) $(1,045,082)
------------ ----------- -----------
Basic weighted average number of shares outstanding... 7,887,000 12,137,783 12,672,633
EFFECT OF DILUTIVE SECURITIES
Options and warrants.................................. -- -- --
Diluted weighted average common shares outstanding.... 7,887,000 12,137,783 12,672,633
------------ ----------- -----------
Diluted earnings per share............................ $ (1.43) $ (0.34) $ (0.08)
============ =========== ===========
All options and warrants outstanding during all periods were excluded from
computation of diluted EPS because of their anti-dilutive effect on the net loss
per share.
2. BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
DECEMBER 31,
---------------------------
1999 2000
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment and purchased software........ $ 20,112,423 $ 21,775,012
Furniture, fixtures and leasehold improvements... 4,321,859 4,090,347
------------ ------------
24,434,282 25,865,359
Less: accumulated depreciation................... (18,174,343) (20,724,450)
------------ ------------
$ 6,259,939 $ 5,140,909
============ ============
Included in property and equipment at December 31, 1999 and 2000 are
assets under capital lease of $2,786,429 and $2,786,429, respectively. Related
accumulated depreciation is $2,400,813 and $2,611,056 as of December 31, 1999
and 2000, respectively.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable..................................... $ 730,286 $1,259,978
Accrued compensation and related expenses............ 1,216,310 2,884,224
Other................................................ 1,051,918 909,435
---------- ----------
$2,998,514 $5,053,637
========== ==========
F-9
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM OBLIGATIONS, INCLUDING RELATED PARTY OBLIGATIONS AND COMMITMENTS
LINE OF CREDIT
Under a borrowing arrangement with a bank, we had a revolving line of
credit with $5,000,000 of maximum available credit at December 31, 1999 bearing
interest at the bank's prime rate. The line of credit expired in September 2000
and was not subsequently renewed or replaced with another line of credit. The
line of credit was collateralized by short-term commercial paper investments of
$5,920,111.
We also had a term debt facility under which we could draw up to a
maximum of $5,000,000. The term debt facility expired September 16, 1999 and
there were no borrowings against the facility at the time of termination.
LEASE COMMITMENTS
We lease our office and operating facilities and various equipment under
non-cancelable operating leases. Rent expense was $3,804,613, $1,916,912 and
$1,906,757 for the years ended December 31, 1998, 1999 and 2000, respectively.
Rent expense is net of sublease rental income of $515,638, $1,110,826 and
$929,695 for the years ended December 31, 1998, 1999 and 2000, respectively. In
connection with our obligations under certain of our office facility leases, we
have letters of credit totaling and $100,000 and $0 at December 31, 1999 and
2000, respectively.
Future minimum non-cancelable commitments as of December 31, 2000 for
capital leases and non-cancelable operating leases with initial terms in excess
of one year are as follows:
Future minimum non-cancelable commitments under these leases as of December 31,
2000, are as follows:
OPERATING LEASES CAPITAL LEASES
---------------- --------------
2001............................................ $ 1,742,497 $ 168,542
2002............................................ 1,673,864
2003............................................ 1,487,505
2004............................................ 1,460,436
2005............................................ 1,358,008
Thereafter...................................... 14,745,993
----------- ----------
22,468,303 168,542
Less: interest.................................. -- (6,019)
----------- ----------
$22,468,303 $ 162,523
=========== ==========
F-10
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTIONS
On January 19, 1996, the Company's Board of Directors approved a stock
option plan. Under the stock option plan, 5,850,000 shares of the Company's
common stock are reserved for issuance, of which 1,532,632 shares are available
for grant as of December 31, 2000. The Company has also reserved 910,633 shares
of common stock for the issuance of warrants. Options issued under the stock
option plan shall be at the discretion of the Board of Directors, including the
provisions of each stock option granted, which need not be identical. Options
generally vest over four years and expire no more than ten years from the date
of grant. Certain options were automatically vested upon the effectiveness of
the IPO. On September 25, 1998, 61,734 stock options for non-officer employees
were repriced to $2.75, the fair market value at that date. On November 5, 1998,
238,250 options for officers were repriced to $2.75, a price above the fair
value at that date but equal to the price set for non-officer employees. No
compensation expense was recorded, as the options were repriced to an exercise
price greater than or equal to fair market.
Generally, stock options are granted with an exercise price not less
than fair value of the Company's common stock as determined by the Board of
Directors at the date of grant, and accordingly, no compensation cost was
recognized prior to 1997. During the year ended December 31, 1997, the Company
recorded $1,347,534 as deferred compensation, representing the excess of the
deemed fair value of the Company's common stock over the exercise price of
options granted during 1997. Such deferred compensation cost is being amortized
over the vesting period of the options. Of the total amount, $416,663, $255,015
and $52,289 were recognized as expense during the years ended December 31, 1998,
1999 and 2000, respectively.
Based on calculations using the Black-Scholes option-pricing model, the
weighted average grant date fair value of options and warrants was $1.76, $3.40,
and $4.25 in 1998, 1999 and 2000, respectively. The fair value has been
estimated using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998, 1999 and 2000, respectively: no dividend
yield for all periods; an expected life of 3 years for all periods; volatility
of 104%, 91% and 134%; and weighted average risk free interest rates of 4.7%,
5.8% and 6.5%.
The pro forma impact on the Company's net loss per share had
compensation cost been recorded at the date of grant based on the method
prescribed by SFAS No. 123 is shown below:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ----------------- -----------------
Net loss:
As reported.................................. $(11,273,124) $(4,147,727) $(1,045,082)
SFAS No. 123 Pro forma....................... $(11,889,569) $(4,669,255) $(3,832,512)
Net loss per common share:
As reported.................................. $(1.43) $(0.34) $(0.08)
SFAS No. 123 Pro forma....................... $(1.51) $(0.38) $(0.30)
F-11
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The status of total stock options and warrants outstanding and
exercisable under the Plan as of December 31, 2000 follows:
STOCK OPTIONS AND STOCK OPTIONS AND
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES LIFE (YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
--------------- --------- ------------ -------------- --------- --------------
Options...................... $ 0.80 135,545 4.35 $0.80 112,646 $0.80
$2.00-$3.00 1,046,593 7.14 $2.69 656,575 $2.71
$3.19-$4.50 287,535 8.97 $4.02 63,595 $4.15
$4.88-$7.19 1,393,719 9.06 $5.59 276,830 $5.60
$7.50-$11.13 268,533 9.09 $9.09 47,846 $8.95
--------- ---- ----- --------- -----
3,131,925 8.21 $4.51 1,157,492 $3.56
--------- ---- ----- --------- -----
Warrants..................... $ 0.80 910,633 3.40 $0.80 910,633 $0.80
The following is a summary of stock option activity:
WEIGHTED WEIGHTED
NUMBER OF SHARES AVERAGE OPTIONS AND AVERAGE
--------------------- EXERCISE WARRANTS EXERCISE
OPTIONS WARRANTS PRICE EXERCISABLE PRICE
---------- -------- -------- ----------- --------
Options and warrants outstanding December 31,
1997........................................... 1,887,401 910,633 $ 3.58 1,249,894 $0.80
Options granted................................ 2,349,723 -- 4.16
Less options forfeited......................... (1,609,055) -- 8.49
Less options exercised......................... (283,118) -- 0.80
---------- ------- ------
Options and warrants outstanding December 31,
1998........................................... 2,344,951 910,633 $ 1.85 1,293,130 $0.85
Options granted................................ 1,485,875 -- 5.63
Less options forfeited......................... (379,235) -- (3.09)
Less options exercised......................... (464,567) -- (1.50)
---------- ------- ------
Options and warrants outstanding December 31,
1999........................................... 2,987,024 910,633 $ 3.21 1,500,978 $1.43
Options granted................................ 1,132,567 -- 6.13
Less options forfeited......................... (637,846) -- 5.49
Less options exercised......................... (349,820) -- 2.59
---------- ------- ------
Options and warrants outstanding December 31,
2000........................................... 3,131,925 910,633 $ 3.72 2,068,125 $2.34
========== ======= ======
Included in total options and warrants exercisable at December 31, 1998,
1999 and 2000, are 910,633 warrants issued in connection with a 1996 debt
financing. The warrants are exercisable at $.80 per share and expire May 31,
2003. Subsequent to December 31, 2000, the Company granted options to purchase
757,000 shares of common stock at a weighted average exercise price of $2.19 per
share.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, the Company is authorized to
issue up to 450,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the plan, employees
may elect to have up to 15% of their gross salaries withheld by payroll
deduction to purchase the Company's common stock. The purchase price of the
stock is 85% of
F-12
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the lower of market price at the beginning or end of each six-month
participation period. Under the plan, employees purchased 94,377 and 153,835
shares in 1999 and 2000, respectively.
The fair value of each stock purchase plan grant was estimated on the
date of grant using the Black-Scholes model with the following assumptions for
1999 and 2000, respectively: no dividend yield for all periods; an expected life
of .5 years and .5 years; volatility of 91% and 134%; and a risk free interest
rate of 5.62% and 5.93%.
5. INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
--------- ---------- ----------
Current:
Federal............................................ $(156,797) $ -- $ --
State.............................................. 7,451 -- --
Deferred:
Federal............................................ (611,834) -- --
State.............................................. (59,384) -- --
--------- ---------- ----------
Total................................................ $(820,564) $ -- $ --
========= ========== ==========
Of the total 1998 benefit from income taxes, $220,000 is reflected in
the extraordinary item on the income statement.
Components of the Company's deferred tax assets and liabilities are as
follows as of December 31:
1999 2000
----------- -----------
Deferred tax assets:
Deferred revenue................................. $ 112,105 $ 297,654
Research and development credit carryforwards.... 1,701,244 1,401,244
Allowance for doubtful accounts.................. 14,549 239,704
Net operating loss carryforwards................. 5,966,596 5,941,119
Other............................................ 48,125 30,945
----------- -----------
Total deferred tax assets...................... 7,842,619 7,910,666
----------- -----------
Deferred tax liabilities:
Accumulated depreciation......................... (413,237) (297,404)
----------- -----------
Total deferred tax liabilities................. (413,237) (297,404)
----------- -----------
Net deferred tax asset before valuation
allowance........................................ 7,429,382 7,613,262
Valuation allowance................................ (5,882,375) (6,066,255)
----------- -----------
Net deferred tax asset............................. $ 1,547,007 $ 1,547,007
=========== ===========
F-13
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The provision for (benefit from) income taxes differs from the amounts
computed by applying the federal statutory rate to loss before income taxes and
extraordinary item. The amounts are reconciled as follows for the years ended
December 31:
1998 1999 2000
----------- ----------- ---------
Federal income taxes benefit at statutory rate........... $(3,885,515) $(1,410,227) $(355,328)
State income tax, net of federal benefit................. (390,335) (128,160) (41,660)
Increase in valuation allowance.......................... 3,822,877 2,059,498 183,880
Research and development tax credits..................... (300,000) (300,000) --
Amortization of deferred compensation.................... 141,665 (135,599) 437
Prior year filing effects................................ -- -- 300,000
Other.................................................... 10,744 (85,512) (87,329)
----------- ----------- ---------
Provision for (benefit from) income taxes................ $ (600,564) $ -- $ --
=========== =========== =========
The tax effect of $220,000 related to the extraordinary item in 1998
approximates the federal statutory rate.
As of December 31, 2000, the Company has research and development tax
credit carryforwards for federal income tax purposes of $1,401,244, which begin
to expire in 2011. Additionally, the Company has net operating loss
carryforwards of $15,891,943 which expire beginning in 2018.
The Company has recorded a partial valuation allowance against its
carryforward tax benefits to the extent that it believes that it is more likely
than not all of such benefits will not be realized in the foreseeable future.
The Company's assessment of this valuation allowance was made using all
available evidence, both positive and negative. In particular, the Company
considered both its historical results and its projections of profitability for
only the reasonably foreseeable future periods. The Company's realization of its
recorded net deferred tax assets is dependent on future taxable income and,
therefore, the Company is not assured that such benefits will be realized.
6. BENEFIT PLANS
Evolving Systems has established a 401(k) Plan that is available to all
employees 21 years of age or older with one-quarter year service. Employees may
contribute up to 15% of gross compensation not to exceed the maximum statutory
contribution amount. The Company may make discretionary matching contributions
and has done so. All employee contributions are fully vested immediately and
employer contribution vest 100% after completion of three years service. During
1998, 1999 and 2000, the Company contributed $1,244,842, $1,250,480 and
$1,478,969, respectively, under the 401(k) Plan.
7. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," we define operating segments as components
of an enterprise for which discrete financial information is available and is
reviewed regularly by the chief operating decision-maker, or decision-making
group, to evaluate performance and make operating decisions. We identified our
chief operating decision-makers as three key executives--the Chief Executive
Officer, Chief Operating Officer, and Chief Financial Officer. This chief
operating decision-making group reviews the revenue and overall results of
operations by the nature of the products and services provided. The accounting
policies of the operating segments presented below are the same as those
described in the summary of
F-14
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
significant accounting policies. We develop products and solutions for the
telecommunications industry and provide a broad range of both fixed-price and
time-and-materials software solutions.
The groupings presented below represent an aggregation of financial
information for business segments meeting certain criteria, including economic
characteristics, similar customers, and the same products and services. The OSS
Products Group encompasses a broad array of software and systems that perform
critical functions for telecommunications carriers, including ordering,
provisioning, service assurance and billing. The Wireless Data Group provides
custom software infrastructure products for Lucent, a leading equipment
supplier. The infrastructure products enable Cellular Digital Packet Data
(CDPD), CDMA, and Over-the-Air-Service Provisioning (OTASP) in wireless network
environments. Our Company provides services and products solely within the
United States geographic area. Total assets and gross margins have not been
specified by segment as it is impractical to do so as this information is not
available to the decision-making group. Further, 1998 data is not provided as it
is also impractical to obtain. The following table provides revenue by segment
for the years ended December 31, 1999 and December 31, 2000, respectively:
YEAR ENDED DECEMBER 31,
-------------------------
1999 2000
----------- -----------
REVENUE
OSS Products Group:
LNP.............................................. $12,308,280 $25,990,041
NPAC............................................. 7,400,119 7,578,037
OSS Solutions.................................... 10,735,899 7,444,163
Wireless Data Group:
Wireless......................................... 10,042,944 11,830,148
----------- -----------
Total Revenue...................................... $40,487,242 $52,842,389
=========== ===========
8. LEGAL PROCEEDINGS
In June 1998, four securities class action complaints were filed against
Evolving Systems and certain of our current and former officers and directors in
the Federal Court for the District of Colorado alleging violations of the
federal securities laws. The complaints were consolidated. The plaintiffs
purported to represent a class of persons who purchased our securities during
the period of May 12, 1998 through July 23, 1998. The complaints alleged that
the Company and certain of our officers misled the investing public regarding
our financial prospects. We denied these allegations. The parties reached a
settlement of $10 million, of which the Company paid $2.5 million in
April 1999. The settlement was approved by the Court on October 4, 1999. We
incurred approximately $719,000 in legal costs associated with the lawsuit.
From time to time we are involved in various legal proceedings arising
in the normal course of business operations. Management does not expect that any
such proceedings will have a material adverse effect on our financial position,
results of operations or cash flows.
F-15
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Our quarterly financial information for fiscal 1999 and fiscal 2000 is as
follows (in thousands, except per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1999
Total revenue........................................... $ 8,859 $ 9,805 $10,782 $11,041
Less: cost of revenue................................. 6,788 7,156 6,353 6,638
------- ------- ------- -------
Gross margin............................................ 2,071 2,649 4,429 4,403
Less: operating expenses.............................. 3,489 3,302 4,320 4,174
------- ------- ------- -------
Operating income (loss)................................. (1,418) (653) 109 229
------- ------- ------- -------
Income (loss) before income taxes....................... (4,491) (532) 380 495
Net income (loss)....................................... $(4,491) $ (532) $ 380 $ 495
======= ======= ======= =======
Net income (loss) per common share
Basic................................................. $ (0.37) $ (0.04) $ 0.03 $ 0.04
Diluted............................................... $ (0.37) $ (0.04) $ 0.03 $ 0.04
YEAR ENDED DECEMBER 31, 2000
Total revenue........................................... $11,689 $14,101 $11,414 $15,638
Less: cost of revenue................................. 7,168 8,513 9,337 8,585
------- ------- ------- -------
Gross margin............................................ 4,521 5,588 2,077 7,053
Less: operating expenses.............................. 4,450 5,199 5,356 5,961
------- ------- ------- -------
Operating income (loss)................................. 71 389 (3,279) 1,092
------- ------- ------- -------
Income (loss) before income taxes....................... 313 600 (3,166) 1,208
Net income (loss)....................................... $ 313 $ 600 $(3,166) $ 1,208
======= ======= ======= =======
Net income (loss) per common share
Basic................................................. $ 0.03 $ 0.05 $ 0.25 $ 0.09
Diluted............................................... $ 0.02 $ 0.05 $ 0.25 $ 0.09
F-16
FINANCIAL STATEMENT SCHEDULE
THE FOLLOWING FINANCIAL STATEMENT SCHEDULE IS FILED AS A PART OF THIS REPORT
UNDER SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS
ENDED DECEMBER 31, 2000. ALL OTHER SCHEDULES CALLED FOR BY FORM 10-K ARE OMITTED
BECAUSE THEY ARE INAPPLICABLE OR THE REQUIRED INFORMATION IS SHOWN IN THE
FINANCIAL STATEMENTS OF NOTES THERETO, INCLUDED HEREIN.
VALUATION AND QUALIFYING ACCOUNTS
WRITE-
OFFS
BALANCE AT CHARGED TO MANAGEMENT CHARGED BALANCE
FISCAL BEGINNING BAD DEBT REDUCTION TO AT END OF
YEAR DESCRIPTION OF PERIOD EXPENSE IN ALLOWANCE ALLOWANCE PERIOD
------ ----------- ---------- ---------- ------------ --------- ---------
2000........................... Allowance for doubtful accounts $ 39,007 $603,631 $642,638
1999........................... Allowance for doubtful accounts $308,110 $263,304 $5,799 $ 39,007
1998........................... Allowance for doubtful accounts $520,000 $211,890 $308,110
S-1