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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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 0-17920
METASOLV SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2436509
(State of Incorporation) (I.R.S. Employer Identification No.)
5560 Tennyson Parkway
Plano, Texas 75024
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 403-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.005
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of February 29, 2000 was approximately $1,131,000,000, based
upon the last reported sales price on such date. On February 29, 2000, there
were 34,996,600 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 16, 2000 are incorporated by reference
into Part III of this report. The Proxy Statement is expected to be filed with
the Commission not later than April 28, 2000.
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METASOLV SOFTWARE, INC.
1999 FORM 10-K
TABLE OF CONTENTS
Item Description Page
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PART I
1 Business.......................................................... 1
2 Properties........................................................ 18
3 Legal Proceedings................................................. 18
4 Submission of Matters to a Vote of Security Holders............... 18
PART II
5 Market for the Company's Common Equity and Related Stockholder
Matters.......................................................... 18
6 Selected Financial Data........................................... 19
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 20
7a Quantitative and Qualitative Disclosures about Market Risk........ 23
8 Financial Statements and Supplementary Data....................... 24
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 40
PART III
10 Directors and Executive Officers of the Registrant................ 41
11 Executive Compensation............................................ 41
12 Security Ownership of Certain Beneficial Owners and Management.... 41
13 Certain Relationships and Related Transactions.................... 41
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 42
PART I
Item 1. Business
General
We are a leading provider of software designed to make it easier for
emerging competitive communications service providers to take, manage and
fulfill orders for service from their customers. These communications service
providers offer a full array of communications services including local and
long-distance telephone services, high-speed data services and Internet
services, often as a bundled offering. We derive substantially all of our
revenue from the sale of licenses, related professional services, and
maintenance and support of our Telecom Business Solution(TM), or TBS(TM),
packaged software to these convergent communications service providers.
We are focused on creating open and flexible software to help communications
service providers take orders and fulfill those orders more efficiently in
today's complex communications environment. These complexities result from
regulatory changes and technological innovations. The regulated break-up of
the communications network beginning with the divestiture of AT&T and
continuing with the Telecommunications Act of 1996 enabled competition for
access to long-distance and local phone service. In early 1994 we began to
build order processing, management and fulfillment software focused on
simplifying and improving the ordering process necessary to connect local
telephone networks to those of the long-distance providers. As a result of the
Telecommunications Act of 1996, we expanded our product line to address the
needs of communications service providers involved in the resale and wholesale
of local and long-distance services. Our software, which was developed from
the outset as a standardized package rather than a custom solution, is
designed to automate and simplify the fulfillment of a variety of local and
long-distance communications services across interconnected networks.
The rapid introduction of communications technologies designed to bring
faster, cheaper communications services to homes and businesses has created
additional complexities in service fulfillment. In early 1997, we expanded our
TBS software to support order processing, management and fulfillment for
service providers offering voice and data communications services over high-
speed networks. Demand for faster, cheaper services is driven primarily by the
unprecedented growth in the Internet as a communications medium. With the
rapid emergence of the Internet, we enhanced our TBS software in 1998 and 1999
to support order processing and fulfillment of Internet-based services.
The combination of deregulation and advances in technology necessitate
extensive coordination in the order fulfillment process--both coordination
between communications service providers whose networks must interconnect in
order to establish service to the customer, and between different
communications technologies that must work together to carry the
communications service. Traditional software systems, unlike our TBS software,
were not designed to manage the complexities of a variety of communications
services delivered over a diverse network spanning multiple communications
service providers. Consequently, the new competitive service providers needed
non-traditional software systems like ours to handle rapidly changing market
and technology demands.
We have become a leading provider of order processing, management and
fulfillment software by continually enhancing our software to manage the
complexities of providing multiple communications services over a diverse,
interconnected network. We currently have approximately 70 customers
representing all facets of the communications industry. Our customers include
communications service providers competing in local-service markets, such as
Allegiance Telecom and GST Telecommunications; operators of the large, high-
speed networks that sell network capacity to other service providers or sell
high-speed communications services directly to customers, such as Qwest
Communications and Williams Communications; new service providers that
specialize in providing data-communications services, such as HarvardNET and
GTE Global Networks Infrastructure; incumbent communications service
providers, such as GTE and ALLTEL; and the emerging long-distance operations
of companies such as BellSouth and Ameritech.
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MetaSolv Software, Inc. was originally incorporated as Omnicase, Inc. in
Delaware on July 6, 1992. Our principal executive offices are located at 5560
Tennyson Parkway, Plano, Texas 75024 and our telephone number is (972) 403-
8300. Our Web site is www.metasolv.com. The information on our Web site is not
incorporated by reference into this Form 10-K.
The Company's Products
Our TBS software addresses a service provider's needs and requirements with
a flexible design that can scale, or grow along with their expanding business
operations. Our TBS software consists of a set of integrated subsystems: order
management, service provisioning, network inventory and design, customer care
and trouble management. These subsystems are coordinated by a common data
management and workflow management subsystem. The entire set of subsystems is
supported by a set of open application programming interfaces and gateways
that enable the electronic exchange of information between TBS software and
other systems. As shown in the diagram below, each subsystem supports a
critical aspect of a service provider's business from order management and
customer care to service provisioning, network inventory and design and
trouble management:
[WORK & DATA MANAGEMENT DIAGRAM]
Telecom Business Solution
A communications service provider can extend each subsystem by using add-on
software modules to tailor the TBS software to support unique products and
services. These modules support a variety of communications services including
resale and wholesale voice, data and Internet services, as well as network
technologies, including broadband, wireless, optical networks and digital
subscriber line (DSL).
One critical function provided by our TBS software design is information
management. By making information more accessible and reliable, our TBS
software enables a service provider to manage its business more efficiently,
to provide more services with the highest possible quality, and to deliver
superior customer care. The work management design integrates the subsystems,
allowing work to flow electronically across the service provider's
organization while providing ready access to performance and resource usage
information. Our integrated approach provides comprehensive support for
current and emerging services, network technologies and evolving business
processes.
Order Management
TBS software's order management subsystem enables the service provider to
manage the complete service delivery process, which often involves several
kinds of orders or transactions within a service provider's own
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organization, as well as between different service providers. Our order
management subsystem supports resale, retail or wholesale orders for local or
long-distance voice, data and Internet services.
Service Provisioning
The service provisioning subsystem helps the service provider design,
configure and assign inventory to fulfill even the most complex services,
whether through owned, leased or future communications network facilities. It
includes automated circuit-design capabilities to assure the fulfillment of
services according to the service provider's specifications. Through the
service provisioning subsystem, the service provider can deliver the wide
range of services that today's sophisticated customer requires, from
traditional voice to high-speed data and Internet-based technologies.
Network Inventory and Design
The network inventory and design subsystem enables service providers to
manage large communications networks, while also giving them the flexibility
to manage new as well as traditional technologies. This subsystem presents the
geographical, electrical, physical and logical dimensions of the network in a
single, cohesive view for service providers. In addition, this subsystem
supports the ability to manage past, present and future views of network
inventory--whether that inventory is owned or leased. A set of administration
and design modules work together to present this view, and these modules
provide an integrated tool for building and managing today's complex networks.
Customer Care
One of the key aspects of our TBS software design is that it provides a view
of the customer from numerous perspectives, all of which are important to
managing and strengthening the service provider's relationship with that
customer. For instance, bills are more accurate because the information passed
to the billing system is tightly integrated with information about other tasks
associated with the customer's service order. As each task is completed, the
relevant information goes automatically to the billing system. Because all
aspects of customer information are available in a single design, the people
who interact with the customer, such as the customer-service representative,
sales person, or repair technician, are able to see the entire customer
service history.
Trouble Management
Effective trouble management requires integrated information; information
about the service provider's network, about its customers and about the
services the network delivers to those customers. By linking TBS software's
trouble management subsystem with the order management, service provisioning
and network design subsystems, our software gives the service provider a
single comprehensive view of its customers, the services that each receives
and the way those services are provided. As a result, when a customer service
representative is dealing with a trouble incident, he can see immediately a
customer's past and current services, as well as services that are in the
process of being installed, along with the relevant technical design details
and trouble history.
Work Management
The work management subsystem brings all of the TBS software subsystems
together, enabling work to flow electronically across the service provider's
organization. This flow makes it possible for service providers to analyze how
various business processes are being performed and related resource
utilization. The foundation of workflow management is the ability to design
customized service fulfillment plans detailing all the tasks to satisfy the
customer's request for service. These fulfillment plans organize and manage
the flow of tasks, both electronic and manual, according to the service
provider's business processes. The work management subsystem coordinates
related service requests, to achieve the most efficient completion of the
tasks across multiple
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fulfillment plans. By providing a comprehensive look at where the customer's
request for service is in the process, the subsystem enables customer service
representatives to deliver exceptional customer care and service.
Data Management
The data management subsystem makes the information the service provider
needs to manage its entire operation more accessible and useful. This
subsystem maintains all industry, corporate and other reference data required
to assure quality and integrity throughout the business processes in a central
repository. Central data management means that service provider personnel
enter information only once, and that such information is accessible from all
appropriate areas of the TBS software application, including gateways and
interfaces with third-party systems.
Application Programming Interface and Gateway Management
Our TBS software is based on an open design that allows the electronic
exchange of information between the TBS software and other systems within the
service provider's organization as well as with external trading or service
partners' systems. This electronic exchange of information occurs through our
interfaces, commonly referred to as application programming interfaces. In
addition to open interfaces, we also offer gateways. These gateways are
interfaces that have been extended and customized to perform a specific
function such as pass information to a billing system.
Technology
We have developed the TBS software on a tiered client/server platform
designed to be reliable and to scale along with a service provider's expanding
operations. The three tiers of our TBS software design are as follows:
. User Interface Tier: includes the client-based graphical user interface
presentation services, which run on a browser or Windows, Windows NT, or
Windows 95/98. Some client-side application logic also resides on this
tier.
. Application Server Tier: includes the business logic in components
running on Microsoft Transaction Server. These business logic and
database access objects enable us to build different graphical user
interfaces with the same business logic code. In addition, application
programming interfaces give our customers and partners access to these
components. Open and fully-documented application programming interfaces
make it possible to customize and integrate the TBS software with
existing customer, partner and third-party software applications. We
introduced the Web Server, which allows our customers to offer self-
service application interfaces via the Internet, in January 2000.
. Data Tier: includes an Oracle relational database management system
where all TBS data is stored. We leverage the Oracle database features,
and we support operations on any platform supported by Oracle.
This three-tier technology design provides the following benefits to our
customers:
. Flexibility: Multiple graphical user interfaces enable our customers to
select the presentation platform of their choice, as well as to manage
the upgrade and internal distribution of the software.
. Scalability: The TBS software grows easily, from dozens to thousands of
users, while simultaneously maintaining high performance levels. Our
customers can add multiple servers as needed to any level of the system,
generally without service interruption.
. Data Integrity: The database design preserves data integrity while
ensuring fast, efficient transaction-oriented data retrieval methods. As
a demonstration of resilience, the database design has remained constant
during the life and evolution of other components of the software. This
stability provides reusability of the business functionality as new,
updated graphical user interfaces are developed.
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. Open Design: Our open, fully-documented application programming
interfaces allow our customers and alliance partners to integrate TBS
software with existing internal and external software systems.
Professional Services and Support
We believe that our ability to provide high-quality customer service and
support is critical to ensuring long-term customer satisfaction. We have
developed a broad array of service offerings to assist our diverse customer
base:
Professional Services
Our professional services organization provides the expertise necessary to
implement our TBS software, assist customers in putting the software into
production and to provide maintenance and technical support after the sale. As
of December 31, 1999, that organization consisted of 113 people in several
cities in the United States and in London, England. We supplement our
expertise with that of our systems integration partners who provide expertise
on large projects typically involving multiple systems, extensive program
management and the development of custom interfaces. We currently have more
than 340 consultants in our systems integration partners that are trained in
the installation and operation of TBS software.
Specific service offerings available from our professional services
organization include the following developed field tested packages:
Framework for Success is a set of tools and processes that enable a
successful implementation of TBS software and can be targeted to a specific
customer's needs. These tools and processes incorporate industry best
practices and techniques specific to MetaSolv's expertise and experience and
can be tailored on an ongoing basis as a customer's requirements change. By
shortening our customer's learning curve and streamlining the TBS
implementation cycle, Framework for Success saves time and money.
QuickStart is a program designed to simplify and speed the implementation of
TBS software. It consists of a TBS software database pre-loaded with data such
as service fulfillment plans, equipment specifications and products, along
with a defined training curriculum for the end user. As a result of this
program, TBS can be implemented in fewer than 90 days. Built from knowledge
acquired in previous TBS software implementations, the QuickStart program
makes maximum use of a customer's resources and shortens service-delivery
intervals.
Rapid Results is a workshop designed to improve the skills of the
individuals on the customer implementation team and to streamline the TBS
software implementation, primarily by improving business methods and
processes. The workshop provides in-depth exposure to TBS software concepts
and implementation requirements. Team members learn how and where information
is loaded in the TBS software database, and they see demonstrations of best
practices for setting up and maintaining TBS software.
Educational Offerings
We provide a comprehensive series of classes to our customers, employees and
alliance partners so they acquire the knowledge and skills necessary to
deploy, use and maintain our software solutions. These classes focus on the
technical aspects of our products and on real-world business issues and
processes. All classes include lectures, demonstrations, discussions and
hands-on use of our software. Classes are held regularly at our training
centers in our Plano, Texas headquarters and in our Englewood, Colorado and
McLean, Virginia facilities. We also offer Train-the-Trainer programs that
enable our customers to conduct their own internal end-user training.
Maintenance and Technical Support
Our maintenance and technical support services include help desk support,
problem resolution, software maintenance and scheduled software upgrades. We
provide technical support for our products from our
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headquarters and utilize the Web, telephone and electronic mail to respond to
and resolve customers' technical questions. Our automated customer service
system tracks each customer's inquiry through complete resolution. With our
TBS software, we provide complete documentation, including system
administration guides and programming interface-integration guides, as well as
online help. Our typical software maintenance agreement has a 12-month
renewable term.
Sales and Marketing
Sales
We market and sell our software directly through our sales force. To date,
we have concentrated our sales efforts on a range of service providers, from
small start-ups to large established communications service providers that
offer both voice and data services, including Internet-based services.
Our sales organization consisted of 45 employees as of December 31, 1999,
including 16 account executives with quota responsibility. Our direct sales
force is organized into two-person account teams, each with an account
executive and a sales analyst. After each sale, we assign account managers to
provide ongoing support and to identify additional sales opportunities. We
generate leads from contacts made through telemarketing, trade shows,
seminars, conferences, market research, our Web site, customers, partners and
our ongoing public relations program. We qualify each lead and assign an
account team to prospective customers. The account team initiates the sales
process, which generally involves multiple presentations and software
demonstrations to information technology and business users within the
prospective customer's organization. Our highly effective "corporate visit
program" brings the prospective customer together with executive management,
product and service managers, and software architects at our corporate
headquarters. These meetings include in-depth software and business
discussions, and set the foundation for a comprehensive, close relationship
with the resulting new customer. For our typical customer, the elapsed time
between initial contact and execution of a license agreement ranges from four
to nine months.
We complement our direct sales force through alliances with systems
integrators, complementary software application vendors and hardware/software
platform vendors. These alliance partners give our direct sales force a global
reach and provide significant leads and referrals. We also believe these
relationships lend credibility to our technology and help to gain market
acceptance of our software and services.
Most of our sales thus far have been to North American customers. However,
because of ongoing privatization and the resulting competition, we believe
there is significant demand for new order processing, management and
fulfillment products and services outside of North America. We intend to
expand our sales and marketing efforts accordingly through a combination of
direct sales in selected markets; continued partnerships and the extension of
our relationships with existing customers as they expand into international
markets.
Marketing
We focus our marketing efforts on developing market strategies and product
plans, creating awareness of our order processing, management and fulfillment
software and generating new sales opportunities. Our product management
organization provides direction on target markets and their order processing,
management and fulfillment requirements. We base our product strategy on an
analysis of market requirements, competitive offerings and projected return on
investment. Our product enhancement plans are developed by our product
management organization in partnership with our customers, leveraging their
communications experience with our market and competitive knowledge. Our
customer User Group maintains an active enhancement-ranking process, by which
members continually establish priorities for software improvements and
evaluate the enhancements we deliver. Our product managers are active in
numerous technology and industry forums.
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Through these domestic and international forums, we participate in various
projects that demonstrate our capability to support world-class packaged order
processing, management and fulfillment software.
In addition, we rely on several marketing activities to create awareness of
our TBS software solution and to generate sales opportunities. Through our
product marketing and marketing communications functions, we manage and
maintain our Web site, publish product-related communications and educational
white papers, and conduct seminars and user-group conferences. We also have an
aggressive public-relations program and maintain relationships with recognized
industry analysts; both are part of an ongoing effort to create awareness of
order processing, management and fulfillment solutions and our TBS software in
particular. We are an active sponsor of technology-related conferences and
demonstrate our product at trade shows targeted at providers of communications
services. We also focus on a range of joint marketing strategies and programs
with our alliance partners in order to leverage their respective market
relationships and resources.
Alliances and Partnerships
To optimize delivery of a comprehensive end-to-end solution for our
customers, we have established strategic relationships with organizations in
three general categories: systems integrators, complementary software
application vendors and hardware/software platform vendors.
Systems Integrators. We use systems-integration alliance partners to
provide, jointly or separately, a range of services to our customers. Among
our alliance partners are Ernst & Young; ADC Telecommunications; American
Management Systems; DMR Consulting Group; Business Edge; Akili Systems Group;
Encore Software and Stonebridge Technologies. They install our product at the
customer location and often assist us in generating sales leads. Using our
Framework for Success tools and processes mentioned above, we have trained
more than 340 consultants in these organizations in the implementation and
operation of our TBS software.
Complementary Software Application Vendors. We have joint marketing
relationships with several software vendors, which offer products and services
that complement our TBS software. Together with these partners, we provide our
customers with superior software solutions that combine best-of-breed
applications and the efficiency/cost-effectiveness of commercial, off-the-
shelf interfaces. Our software partners provide solutions for the operations-
support functions which our TBS software does not address; these include
customer care and billing, network management and electronic exchange of
information between service providers. In addition, we have alliances with
other software-integration vendors that provide commercial interfaces between
our TBS software and other third-party software systems. Our partners in this
area include:
. Customer Care and Billing--Siebel Systems, Saville Systems, Daleen and
Portal Software;
. Network Management--Harris, Nortel Networks and Syndesis;
. Interconnection Gateways--DSET and Quintessent Technologies; and
. Software Integration--Vitria Technology and Crossworlds Software.
Hardware/Software Platform Vendors. Our technology strategy is to focus
exclusively on our core order processing, management and fulfillment package,
TBS software. Accordingly, we have formed alliances with leading hardware and
software vendors, including Microsoft, Oracle, Iona, Merant and ESRI. We
intend to establish additional alliances to support new platforms and
functions.
Segment Information and Foreign and Domestic Operations
The information set forth in Note 11 to the accompanying consolidated
financial statements is incorporated herein by reference.
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Research and Development
Teams of development engineers, software architects and product managers are
responsible for our research and development efforts. The organization uses a
software development process that includes planning and documenting
deliverables in advance; rigorously adhering to coding standards; and
performing significant performance and function tests. Involving all
functional groups at various levels within MetaSolv, this process provides a
framework for all the steps necessary to turn concepts into products and to
market those products cost-effectively and successfully. In addition, we have
recruited development engineers, architects and product managers with
experience in order processing, management and fulfillment solutions and other
facets of software, along with senior managers experienced in software used by
communications service providers.
Our research and development expenditures totaled approximately:
. $17.0 million for the year ended December 31, 1999,
. $10.2 million for the year ended December 31, 1998; and
. $2.4 million for the year ended December 31, 1997; and
As of December 31, 1999, 160 employees were engaged in research and
development activities.
Competition
Competition in our markets is intense and involves rapidly-changing
technologies and customer requirements, as well as evolving industry standards
and frequent product introductions. We believe several factors provide
MetaSolv with a competitive advantage, including:
. the breadth and depth of our software;
. the quality and performance of our product;
. our high-quality customer service;
. our ability to implement and integrate solutions;
. the overall value that our software provides to customers; and
. the references of our customers.
Competitors vary in size and scope, in terms of products and services
offered. We encounter competition from several vendors, including Telcordia
Technology (formerly Bellcore), Lucent Technologies, Architel Systems, Eftia
OSS Solutions, Granite Systems and CommTech Corp. We also compete with systems
integrators and with the information-technology departments of large
communications service providers. We are aware of numerous other
communications service providers, software developers, and smaller
entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete with our TBS
software. We anticipate continued growth in the communications industry and
the entrance of new competitors in the order processing, management and
fulfillment software market, and that the market for our products and services
will remain intensely competitive.
Software Protection, Service Marks and Patents
To establish and protect our intellectual property, we rely on a combination
of patent, copyright, trade secret and trademark laws, as well as
confidentiality procedures and contractual restrictions. MetaSolv Software,
the MetaSolv logo, Telecom Business Solution, TBS, TBS QuickStart, PowerFrame
and Rapid Results are trademarks, and MetaSolv is a registered trademark of
MetaSolv Software, Inc. To maximize protection of our technology, we have set
up a patent-protection program. We have filed for patent protection on certain
aspects of our software, and we will continue to file patent applications to
establish exclusive rights to certain technology we have developed. While we
rely on patent, copyright, trade secret and trademark law to protect our
technology, we believe that the technical and creative skills of our
employees, frequent product enhancements and improved product quality are
greater factors in maintaining a technology-leadership position.
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We generally enter into confidentiality and license agreements with our
employees, alliance partners and customers, and generally control access to
and distribution of our software, documentation and other proprietary
information. We license, rather than sell, our TBS software and require our
customers to enter into license agreements that restrict their ability to use
the software.
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual
property, and we may not be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights. If third
parties infringe or misappropriate our copyrights, trademarks, trade secrets
or other proprietary information, our business could be seriously harmed. In
addition, although we believe that our proprietary rights do not infringe on
the intellectual property rights of others, other parties may assert
infringement claims against us or claim that we have violated their
intellectual property rights. Claims against us, either successful or
unsuccessful, could result in significant legal and other costs and may be a
distraction to management. We currently focus on intellectual property
protection within the United States. Protection of intellectual property
outside of the United States will sometimes require additional filings with
local patent, trademark, or copyright offices, as well as the implementation
of contractual or license terms different from those used in the United
States. Protection of intellectual property in many foreign countries is
weaker and less reliable than in the United States. If our business expands
into foreign countries, costs and risks associated with protecting our
intellectual property abroad will increase.
Executive Officers
The executive officers of MetaSolv and their ages as of December 31, 1999,
are as follows:
Name Age Position
---- --- --------
James P. Janicki........ 44 President and Chief Executive Officer
Sidney V. Sack.......... 54 Chief Operating Officer
Glenn A. Etherington.... 45 Chief Financial Officer
Jonathan K. Hustis...... 44 Vice President--Business Services, General Counsel and Corporate Secretary
Joseph W. Pollard....... 43 Vice President--Sales
Dana R. Brown........... 34 Vice President--Marketing
Eleanor M. Luce......... 56 Vice President--Services
Glenda J. Akers......... 45 Vice President--Engineering
James P. Janicki co-founded MetaSolv in July 1992 and since such time has
served in various capacities. Mr. Janicki was appointed Chief Executive
Officer in May 1999. He has served as President and a director of MetaSolv
since April 1994. From June 1982 to July 1992, Mr. Janicki was at Texas
Instruments where he served in many capacities, including as the manager of
the Texas Instruments' CASE consulting practice from July 1987 to August 1990
and as the manager of the Template software business from August 1990 until
July 1992. Texas Instruments develops and manufactures semiconductors and
other products in the electrical and electronics industry.
Sidney V. Sack has served as Chief Operating Officer of MetaSolv since March
1999. Mr. Sack also acted as MetaSolv's interim chief financial officer from
March 1999 until May 1999. From November 1998 until March 1999, Mr. Sack
provided financial and operational consulting services to MetaSolv. From
September 1990 to July 1997, Mr. Sack was the Chief Financial Officer of
XcelleNet, Inc., a developer of remote and mobile communications management
software. In addition, from September 1996 until July 1997, Mr. Sack was the
Executive Vice President and Chief Operating Officer of XcelleNet.
Glenn A. Etherington has served as Chief Financial Officer of MetaSolv since
May 1999. Mr. Etherington held various senior management positions at Brite
Voice Systems, a leading provider of enhanced communications products and
interactive information systems, from August 1988 to May 1999. He was Chief
Financial Officer from August 1988 to May 1999, Treasurer from August 1988 to
May 1993 and Secretary from May 1993 to May 1999.
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Jonathan K. Hustis has served as General Counsel and Corporate Secretary of
MetaSolv since April 1997. He was appointed Vice President--Business Services
of MetaSolv in August 1998. Mr. Hustis was at Texas Instruments where he
worked in its Corporate Finance Group from November 1995 until April 1997 and
as Manager--Business Services in its Information Technology Group (Advanced
Information Management and Enterprise Solutions divisions) from September 1989
to November 1995.
Joseph W. Pollard has served as Vice President--Sales of MetaSolv since
February 1997. From July 1992 to February 1997, Mr. Pollard was the Director
of Sales, South-Central Region and Director of Sales, International for Tivoli
Systems, a provider of systems management software. From September 1989 to
July 1992 Mr. Pollard was Manager, International Sales and National Accounts,
for Visual Information Technologies, a provider of commercial image processing
systems.
Dana R. Brown joined MetaSolv at its founding in July 1992 and since such
time has served in various capacities. She has served as Vice President--
Marketing of MetaSolv since August 1997. Ms. Brown was the business unit
manager of MetaSolv's object-oriented component software group from August
1992 to March 1996 and the Director of Marketing from April 1996 to August
1997. From April 1989 to July 1992, Ms. Brown held various consulting
positions with Texas Instruments, Advanced Information Management software
division. From May 1987 to April 1989, Ms. Brown was a Management Information
Systems Consultant with Arthur Andersen, a public accounting firm. Ms. Brown
is the wife of Mr. Janicki, our President and Chief Executive Officer.
Eleanor M. Luce has served as Vice President--Services of MetaSolv since
February 1999. From February 1996 to February 1999, Ms. Luce was a Vice
President of Professional Services at Sybase, a database software company.
From June 1990 to February 1996, Ms. Luce was a Vice President at MCI Network
Systems, a developer of network management systems.
Glenda J. Akers has served as Vice President--Engineering of MetaSolv since
March 1999. From September 1998 to March 1999, Ms. Akers was the Vice
President of Engineering for WarpSpeed Communications, a developer of high-
speed networking products. From March 1996 to March 1998, she was the Vice
President of Server Engineering for Sybase, Inc., where she managed the
engineering development for Sybase's core product, SQL Server. From February
1990 to March 1996, Ms. Akers was Director--Engineering for Network and
Provisioning Systems at MCI Network Systems.
Employees
We believe that our growth and success is attributable in large part to our
high-caliber employees and an experienced management team, many members of
which have years of industry experience in building, implementing, marketing
and selling software applications critical to business operations. We maintain
a strong corporate culture and reinforce it by requiring employees to attend
an extensive 80-hour orientation program to learn our technology, the industry
we serve and our company values. We intend to continue teaching and promoting
our culture and believe such efforts provide us with a sustainable competitive
advantage. We offer a work environment that enables employees to make
meaningful contributions, as well as incentive programs to continue to
motivate and reward our employees. None of our employees is represented by a
labor union, and we have not experienced any work stoppages.
As of December 31, 1999, we had 391 full-time employees of whom:
. 113 were in professional services;
. 62 were in sales and marketing;
. 160 were in research and development; and
. 56 were in finance, administration and operations.
10
Forward-Looking Statements
From time to time, information provided by the company, statements made by
its employees or information included in its filings with the Securities and
Exchange commission, including this form 10-K report, may contain certain
"forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). The words "expects,"
"anticipates," "believes" and similar words generally signify a "forward-
looking" statement. These forward-looking statements are made pursuant to the
safe harbor provisions of the Act. The reader is cautioned that all forward-
looking statements are necessarily speculative and that there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements. Such
risks and uncertainties include those in the section below entitled "Certain
Factors That May Affect Future Results". The company undertakes no obligation
to publicly revise any forward-looking statement due to changes in
circumstances after the date of this report, or to reflect the occurrence of
unanticipated events.
Certain Factors That May Affect Future Results
The Communications Market is Changing Rapidly, and Failure to Anticipate and
React to the Rapid Change Could Result in Loss of Customers or Wasteful
Spending
Over the last decade, the market for communications products and services
has been characterized by rapid technological developments, evolving industry
standards, dramatic changes in the regulatory environment, emerging companies
and frequent new product and service introductions. Our future success depends
largely on our ability to enhance our existing products and services and to
introduce new products and services that are based on leading technologies and
that are capable of adapting to changing technologies, industry standards and
customer preferences. If we are unable to successfully respond to these
technological developments or do not respond in a timely or cost-effective
way, our sales could decline and our costs for developing competitive products
could increase.
New technologies, services or standards could require significant changes in
our business model, development of new products or provision of additional
services. New products and services may be expensive to develop and may result
in the introduction of additional competitors into the marketplace.
Furthermore, if the overall market for order processing, management and
fulfillment software grows more slowly than we anticipate, or if our products
and services fail in any respect to achieve market acceptance, our revenues
would be lower than we anticipate and operating results and financial
condition could be materially adversely affected.
The Communications Industry is Experiencing Consolidation, Which May Reduce
the Number of Potential Customers for Our Software
The communications industry has experienced significant consolidation. In
the future, there may be fewer potential customers requiring operations
support systems and related services, increasing the level of competition in
the industry. In addition, larger, consolidated communications companies have
strengthened their purchasing power, which could create pressure on the prices
we charge and the margins we could realize. These companies are also striving
to streamline their operations by combining different communications systems
and the related operations support systems into one system, reducing the
number of vendors needed. Although we have sought to address this situation by
continuing to market our products and services to new customers and by working
with existing customers to provide products and services that they need to
remain competitive, we cannot be certain that we will not lose customers as a
result of industry consolidation.
Competition from Larger, Better Capitalized or Emerging Competitors for the
Communications Products and Services that We Offer Could Result in Price
Reductions, Reduced Gross Margins and Loss of Market Share
Competition in the communications products market is intense. We compete
against other companies selling communications software and services, and
against the in-house development efforts of our customers. We expect
11
competition to persist and intensify in the future. We cannot be certain that
we will be able to compete successfully with existing or new competitors, and
increased competition could result in price reductions, reduced gross margins
and loss of market share.
Competitors vary in size and scope, in terms of products and services
offered. We encounter competition from several vendors, including Telcordia
Technology (formerly Bellcore), Lucent Technologies, Architel Systems, Eftia
OSS Solutions, Granite Systems and CommTech Corp. We also compete with systems
integrators and with the information-technology departments of large
communications service providers. We are aware of numerous other
communications service providers, software developers, and smaller
entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete with our TBS
software. We anticipate continued growth in the communications industry and
the entrance of new competitors in the order processing, management and
fulfillment software market, and that the market for our products and services
will remain intensely competitive.
Many of our current competitors have longer operating histories, a larger
customer base, greater brand recognition and greater financial, technical,
marketing and other resources than we do. This may place us at a disadvantage
in responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic alliances and other initiatives. In addition,
many of our competitors have well-established relationships with our current
and potential customers and have extensive knowledge of our industry. As a
result, our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote more resources to the development, promotion and sale of their products
and services than we can. To the extent that our competitors offer customized
products that are competitive with our more standardized product offerings,
our competitors may have a substantial competitive advantage, which may cause
us to lower our prices and realize lower margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with others to increase their
ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
products and services that are superior to, or have greater market acceptance
than, the products and related services that we offer.
If the Internet and Internet-Based Services Cease Growing, Demand for Our
Products May Fall
Our success depends heavily on the Internet being accepted and widely used
as a medium of commerce and communication. The growth of the Internet has
driven changes in the public communications network and has given rise to the
growth of the next-generation service providers who are our core customers.
Rapid growth in the use of the Internet and on-line services is a recent
phenomenon, and it may not continue. If use of the Internet does not continue
to grow or grows more slowly than expected, the market for software that
manages communications over the Internet may not develop and our sales would
be adversely affected. Consumers and businesses may reject the Internet as a
viable commercial medium for a number of reasons, including potentially
inadequate network infrastructure, slow development of technologies or
insufficient commercial support. The Internet infrastructure may not be able
to support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased government regulation could cause the Internet to lose
its viability as a commercial medium. Even if the required infrastructure,
standards, protocols or complementary products, services or facilities are
developed, we may incur substantial expense adapting our solutions to changing
or emerging technologies.
Changes in Communications Regulation Could Adversely Affect Our Customers and
May Lead to Lower Sales
Our customers are subject to extensive regulation as communications service
providers. Changes in legislation or regulation that adversely affect our
existing and potential customers could lead them to spend less
12
on order processing, management and fulfillment software, which would reduce
our revenues, which could seriously affect our business and financial
condition.
We Have a Limited Operating History with Inconsistent Profitability, which
Makes Our Future Operating Results Uncertain
We were founded in July 1992 and began development of order processing,
management and fulfillment software in early 1994. Accordingly, our prospects
must be considered in light of the risks and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new, rapidly evolving and highly competitive markets. To address
these risks, we must respond effectively to competition, continue to attract,
retain and motivate qualified personnel and continue to improve our products.
Although we achieved profitability in 1999, we had a net loss in 1998,
following three years of only limited profitability. Our operating losses and
marginal profitability have been due largely to the commitment of significant
resources to our research and development, sales and marketing and
professional services organizations. We expect to devote additional resources
to these areas and, as a result, will need to continue increasing our
quarterly revenues to maintain profitability. Although our revenues have
increased in recent periods, we cannot be certain that our revenues will grow
at past rates or that we will sustain profitability on a quarterly or annual
basis in the future.
We Have Relied and Expect to Continue to Rely on Sales of Our Telecom
Business Solution Product for Our Revenue
We currently derive all of our revenue from the licensing, related
professional services and maintenance and support of our Telecom Business
Solution software product. We expect that we will continue to depend on
revenue related to new and enhanced versions of our TBS software for the
foreseeable future. We cannot be certain that we will be successful in
upgrading and marketing our TBS software or that we will successfully develop
and market new products or services. Any failure to continue to increase
revenue related to our TBS software or to generate revenue from new products
and services would adversely affect our operating results and financial
condition.
We Rely on a Limited Number of Customers for a Significant Portion of Our
Revenue
We currently derive, and we expect to continue to derive, a significant
portion of our revenue through large financial commitments by a limited number
of customers. In 1999, our ten largest customers accounted for approximately
44% of our total revenues, with Qwest Communications accounting for 13% of the
total. The amount of revenue we derive from a specific customer is likely to
vary from period to period, and a major customer in one period may not produce
significant additional revenue in a subsequent period. To the extent that any
major customer terminates its relationship with us, our revenue could decline
significantly.
If We Fail to Accurately Estimate the Resources Necessary to Complete Any
Fixed-Price Contract, Or If We Fail to Meet Our Performance Obligations, We
May Be Required to Absorb Cost Overruns and We May Suffer Losses On Projects
In addition to time and materials contracts, we have periodically entered
into fixed-price contracts for software implementation, and we may do so in
the future. These fixed-price contracts involve risks because they require us
to absorb possible cost overruns. Our failure to accurately estimate the
resources required for a project or our failure to complete our contractual
obligations in a manner consistent with the project plan would likely cause us
to have lower margins or to suffer a loss on such a project, which would
negatively impact our operating results. On occasion we have been required to
commit unanticipated additional resources to complete projects. We may
experience similar situations in the future. In addition, for specific
projects, we may fix the price before the requirements are finalized. This
could result in a fixed price that turns out to be too low, which would cause
us to suffer a loss on the project that would negatively impact our operating
results.
13
Our Quarterly Operating Results Have Varied Significantly and May Cause Our
Stock Price to Fluctuate
Our quarterly operating results have varied significantly and are difficult
to predict. As a result, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It
is likely that in some future quarter or quarters our operating results will
be below the expectations of public market analysts or investors. In such an
event, the market price of our common stock may decline significantly. A
number of factors are likely to cause our quarterly results to vary,
including:
. The overall level of demand for communications services by consumers and
businesses and its effect on demand for our products and services by our
customers;
. Our customers' willingness to buy, rather than build, order processing,
management and fulfillment software;
. The timing of individual software orders, particularly those of our
major customers involving large license fees that would materially
affect our revenue in a given quarter;
. The introduction of new communications services and our ability to react
quickly compared to our competitors;
. Our ability to manage costs, including costs related to professional
services and support services costs;
. The utilization rate of our professional services employees and the
extent to which we use third party subcontractors to provide consulting
services;
. Costs related to possible acquisitions of other businesses;
. Our ability to collect outstanding accounts receivable from very large
product licenses;
. Innovation and introduction of new technologies, products and services
in the communications and information technology industries; and
. Costs related to the expansion of our operations.
We forecast the volume and timing of orders for our operational planning,
but these forecasts are based on many factors and subjective judgments, and we
can not assure their accuracy. We have hired and trained a large number of
personnel in core areas, including product development and professional
services, based on our forecast of future revenues. As a result, a significant
portion of our operating expenses are fixed in the short term. Therefore,
failure to generate revenue according to our expectations in a particular
quarter could have an immediate negative effect on results for that quarter.
Our quarterly revenue is largely dependent upon orders booked and delivered
during that quarter. We expect that our sales will continue to involve large
financial commitments from a relatively small number of customers. As a
result, the cancellation, deferral, or failure to complete the sale of even a
small number of licenses for our products and related services may cause our
revenues to fall below expectations. Also, we have often booked a large
portion of our quarterly sales in the last month of any given quarter. This
sales pattern is caused by our quarterly incentive compensation programs and
customer purchasing patterns driven by quarterly capital expenditure budgets.
Accordingly, delays in the completion of sales near the end of a quarter could
cause quarterly revenue to fall substantially short of anticipated levels.
Significant sales may also occur earlier than expected, which could cause
operating results for later quarters to compare unfavorably with operating
results from earlier quarters.
Some contracts for software licenses may not qualify for revenue recognition
upon product delivery. Revenue may be deferred when there are significant
elements required under the contract that have not been completed, there are
express conditions relating to product acceptance, there are deferred payment
terms, or when collection is not considered probable. With these uncertainties
we may not be able to predict accurately when revenue from these contracts
will be recognized.
14
In Order to Increase Market Awareness of Our Products and Generate Increased
Revenue, We Need to Expand Our Sales and Distribution Capabilities
We must expand our direct and indirect sales operations to increase market
awareness of our products and to generate increased revenue. We cannot be
certain that we will be successful in these efforts. Our products and services
require a sophisticated sales effort targeted at the senior management of our
prospective customers. New hires will require training and take time to
achieve full productivity. We cannot be certain that our recent hires will
become as productive as necessary or that we will be able to hire enough
qualified individuals in the future. We also plan to expand our relationships
with systems integrators and other third-party resellers to build an indirect
sales channel. Failure to expand these sales channels could adversely affect
our revenues and operating results. In addition, we will need to manage
potential conflicts between our direct sales force and third-party reselling
efforts.
We Depend on Certain Key Personnel, and the Loss of Any Key Personnel Could
Affect Our Ability to Compete
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining business contacts with our
customers. Our senior management team and key technical personnel would be
very difficult to replace and the loss of any of these key employees could
seriously harm our business. In addition, we currently do not have non-compete
agreements in place, and if any of these key employees were to join a
competitor or form a competing company, some of our customers might choose to
use the products or services of that competitor or of a new company instead of
ours.
Our Ability to Attract, Train and Retain Qualified Employees is Crucial to
Results of Operations and Future Growth
As a company focused on the development, sale and delivery of software
products and related services, our personnel are our most valued assets. Our
future success depends in large part on our ability to hire, train and retain
software developers, systems architects, project managers, communications
business process experts, systems analysts, trainers, writers, consultants and
sales and marketing professionals of various experience levels. Skilled
personnel are in short supply, and this shortage is likely to continue. As a
result, competition for these people is intense, and the industry turnover
rate for them is high. Any inability to hire, train and retain a sufficient
number of qualified employees could hinder the growth of our business.
Our Future Success Depends on Our Continued Use of Strategic Relationships to
Implement and Sell Our Products
We have entered into relationships with third-party systems integrators, as
well as with hardware platform and software applications developers. We rely
on these third parties to assist our customers and to lend expertise in large
scale, multi-system implementation and integration projects, including overall
program management and development of custom interfaces for our product.
Should these third parties go out of business or choose not to provide these
services, we may be forced to develop those capabilities internally, incurring
significant expense and adversely affecting our operating margins. In
addition, we have derived and anticipate that we will continue to derive, a
significant portion of our revenues from customers that have established
relationships with our marketing and platform alliances. We could lose sales
opportunities if we fail to work effectively with these parties or fail to
grow our base of marketing and platform alliances.
Our Planned International Operations May Be Difficult and Costly
To date, international revenues have been minimal. We intend, however, to
expand our operations in the future by opening more international offices and
will need to devote significant management and financial resources for our
international expansion. In particular, we will have to attract experienced
management, technical, sales, marketing and support personnel for our
international offices. Competition for these people is intense and we may be
unable to attract qualified staff. International expansion may be more
difficult or take
15
longer than we anticipate, especially due to language barriers, currency
exchange risks and the fact that the communications infrastructure in foreign
countries may be different than the communications infrastructure in the
United States. If we are unable to expand our international operations
successfully and in a timely manner, our expenses could increase at a greater
rate than our revenues, and our operating results could be adversely affected.
Moreover, international operations are subject to a variety of additional
risks that could adversely affect our operating results and financial
condition. These risks include the following:
. Longer payment cycles;
. Problems in collecting accounts receivable;
. The impact of recessions in economies outside the United States;
. Unexpected changes in regulatory requirements;
. Higher levels of regulation specific to the communications industry;
. Trade barriers and barriers to foreign investment, in some cases
specifically applicable to the communications industry;
. Barriers to the repatriation of capital or profits;
. Fluctuations in currency exchange rates;
. Restrictions on the import and export of certain technologies;
. Lower protection for intellectual property rights;
. Seasonal reductions in business activity during the summer months,
particularly in Europe;
. Potentially adverse tax consequences;
. Increases in tariffs, duties, price controls or other restrictions on
foreign currencies; and
. Requirements of a locally domiciled business entity.
Potential Future Acquisitions Could Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value and Adversely Affect Our Operating Results
We may acquire other businesses in the future, which would complicate our
management tasks. We may need to integrate widely dispersed operations that
have different and unfamiliar corporate cultures. These integration efforts
may not succeed or may distract management's attention from existing business
operations. Our failure to successfully manage future acquisitions could
seriously harm our business. Also, our existing stockholders would be diluted
if we financed the acquisitions by issuing equity securities.
Our Failure to Meet Customer Expectations or Deliver Error-Free Software
Could Result in Losses and Negative Publicity
The complexity of our products and the potential for undetected software
errors increase the risk of claims and claim-related costs. Due to the
mission-critical nature of order processing, management and fulfillment
software, undetected software errors are of particular concern. The
implementation of our products, which we accomplish through our professional
services division and with our alliance partners, typically involves working
with sophisticated software, computing and communications systems. If our
software contains undetected errors or we fail to meet our customers'
expectations or project milestones in a timely manner, we could experience:
. Delayed or lost revenues and market share due to adverse customer
reaction;
. Loss of existing customers;
. Negative publicity regarding us and our products, which could adversely
affect our ability to attract new customers;
16
. Expenses associated with providing additional products and customer
support, engineering and other resources to a customer at a reduced
charge or at no charge;
. Claims for substantial damages against us, regardless of our
responsibility for any failure;
. Increased insurance costs; and
. Diversion of development and management time and resources.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. In
addition, our license agreements usually cap the amounts recoverable for
damages to the amounts paid by the licensee to us for the product or services
giving rise to the damages. However, we cannot be sure that these contractual
provisions will protect us from additional liability. Furthermore, our general
liability insurance coverage may not continue to be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or the
insurer may disclaim coverage as to any future claim. The successful assertion
of any large claim against us could adversely affect our operating results and
financial condition.
Our Limited Ability to Protect Our Proprietary Technology May Adversely
Affect Our Ability to Compete, and We May Be Found to Infringe on the
Proprietary Rights of Others
Our success depends in part on our proprietary software technology. We rely
on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our technology. We cannot guarantee that
the steps we have taken to protect our proprietary rights will be adequate to
deter misappropriation of our intellectual property, and we may not be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights. If third parties infringe or misappropriate our copyrights,
trademarks, trade secrets or other proprietary information, our business could
be seriously harmed. In addition, although we believe that our proprietary
rights do not infringe on the intellectual property rights of others, other
parties may assert infringement claims against us or claim that we have
violated their intellectual property rights. Claims against us, either
successful or unsuccessful, could result in significant legal and other costs
and may be a distraction to management. We currently focus on intellectual
property protection within the United States. Protection of intellectual
property outside of the United States will sometimes require additional
filings with local patent, trademark, or copyright offices, as well as the
implementation of contractual or license terms different from those used in
the United States. Protection of intellectual property in many foreign
countries is weaker and less reliable than in the United States. If our
business expands into foreign countries, costs and risks associated with
protecting our intellectual property abroad will increase.
17
Item 2. Properties
We lease two buildings in an office park in Plano, Texas, which total
approximately 160,000 square feet, and we own an adjacent, undeveloped lot
available for expansion. These buildings are used as our headquarters under a
lease that expires in 2010. In addition, we lease facilities and offices in
Englewood, Colorado; Chicago, Illinois; McLean, Virginia; San Francisco,
California; Atlanta, Georgia; and London, England. Lease terms for these
locations expire at various times through July 2006. We believe that the
facilities we now lease are sufficient to meet our needs through at least the
next 12 months. However, we may require additional office space after that
time, and we now are evaluating expansion possibilities.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No information is required in response to this Item, as no matter was
submitted to a vote of our security holders during the fourth quarter of the
fiscal year covered by this report.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock is traded on The Nasdaq Stock Market(R) under the
symbol MSLV. Prices per share reflected in the following table represent the
range of high and low sales prices for the quarters indicated.
High Low
------- -------
1999
March 31..................................................... N/A N/A
June 30...................................................... N/A N/A
September 30................................................. N/A N/A
December 31.................................................. $ 97.00 $ 19.00
The Company has not paid cash dividends on its common stock, and does not
plan to pay cash dividends to its stockholders in the near future. The Company
is not bound by any contractual terms that prohibit or restrict the payment of
dividends; however, the Company presently intends to retain its earnings to
finance future growth of its business.
As of February 29, 2000, the Company believes it had approximately 6,000
beneficial stockholders, including approximately 35 stockholders of record.
18
Item 6. Selected Financial Data
The following table contains certain selected financial data that should be
read in conjunction with the Company's financial statements and notes thereto
and with Management's Discussion and Analysis of Financial Condition and
Results of Operations. The selected financial data have been derived from the
Company's audited financial statements.
Years Ended December 31,
------------------------------------
1999 1998 1997 1996 1995
-------- ------ ------ ------ -----
(In thousands, except per share
data)
Statement of Operations Data:
Total revenues......................... $ 73,007 42,576 9,299 3,822 2,219
Gross profit........................... $ 46,073 26,475 6,717 3,185 1,953
Income (loss) from operations.......... $ 3,718 (508) 65 581 (19)
Net income (loss)...................... $ 2,645 (186) 120 648 9
Earnings (loss) per share of common
stock:
Basic................................ $ 0.17 $(0.02) $ 0.01 $ 0.06 $0.00
Diluted.............................. $ 0.08 $(0.02) $ 0.00 $ 0.03 $0.00
Balance Sheet Data:
Cash and cash equivalents.............. $112,341 $7,984 $3,639 $2,983 $ 334
Working capital........................ 108,917 9,761 2,393 3,482 918
Total current liabilities.............. 28,291 11,935 5,346 1,806 296
Redeemable convertible preferred
stock................................. -- 12,610 2,610 -- --
Total stockholders' equity............. 118,615 1,826 1,939 4,314 1,189
Quarters Ended
------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
(In thousands, except per share data)
Quarterly Financial Data:
1999:
Total revenues.................... $22,021 $18,849 $17,366 $14,771
Gross profit...................... 14,639 11,887 10,871 8,676
Income from operations............ 1,737 878 644 459
Net income........................ 1,466 463 359 357
Diluted earnings per share of
common stock..................... $ .04 $ .01 $ .01 $ .01
1998:
Total revenues.................... $16,704 $12,549 $ 8,667 $ 4,656
Gross profit...................... 11,166 7,136 5,239 2,934
Income (loss) from operations..... 1,672 (601) (330) (1,249)
Net income (loss)................. 1,537 (411) (245) (1,067)
Diluted earnings (loss) per share
of common stock.................. $ .05 $ (.04) $ (.02) $ (.09)
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Founded in 1992, we began development of order processing, management and
fulfillment software in early 1994. We have continually upgraded and expanded
our TBS software product since that time, adding support for networks that
combine voice and data services in early 1997. Throughout 1998 and 1999, we
expanded our TBS software to support the creation and delivery of services
that utilize the Internet as a communications network.
To date, we have derived substantially all of our revenues from the license
of our TBS software and the sale of related services, including training,
consulting and software maintenance. Licensing and service terms are typically
covered by a signed order that references our master agreement with the
customer.
We generally recognize license revenues when our customer has signed a
license agreement, we have delivered the software product, product acceptance
is not subject to express conditions, the fees are fixed or determinable and
we consider collection to be probable. We allocate the agreed fees for
multiple products and services licensed or sold in a single transaction among
the products and services on a pro-rata basis using estimates of fair value.
On occasion we may enter into a license agreement with a customer requiring
development of additional software functions or services necessary for the
software's performance of specified functions. For those agreements, we
recognize revenue for the entire arrangement on a percentage-of-completion
basis as the development services are provided. We generally recognize service
revenues as the services are performed. We recognize revenues from maintenance
agreements ratably over the maintenance period, usually one year.
Our quarterly revenues are largely dependent on orders booked and delivered
during that quarter. Our sales for a given period typically involve large
financial commitments from a relatively small number of customers, and we
often receive a large portion of our orders in the last month of any given
quarter. Accordingly, delays in the completion of sales near the end of a
quarter could negatively impact revenues in that quarter. On occasion,
consistent with industry practice, we may agree to bill our license fees in
more than one installment. Extended payment terms that do not exceed six
months are considered fixed obligations. In these situations, amounts not
billed immediately are recorded as unbilled receivables. Obligations that
extend beyond six months from shipment of software are deferred and recorded
as revenue when billed.
We have structured the pricing of our TBS software to meet the needs of each
of our target market segments, from start-up resellers to large, facility-
based incumbent service providers. We charge a base price for the core TBS
subsystems, coupled with additional license fees for add-on modules. In
addition, we charge a per-user license fee, with customary volume discounts on
purchases of large numbers of user licenses. We price annual maintenance and
support contracts as a percentage of the license fee that is current for the
product being maintained. For a new customer, our initial sale of licenses and
associated services, including maintenance and support, will generally range
from $750,000 to several millions of dollars.
Service revenues consist principally of software implementation consulting
and customer training, as well as software maintenance agreements that include
both customer support and the right to product updates and releases. We use
our own employees and subcontract with our alliance partners to provide
consulting services to our customers to implement our software. We offer
services on both an hourly and a fixed-price basis. We offer and expect to
continue to offer the majority of our services on an hourly basis.
We anticipate that future revenues will be generated from five principal
sources:
. License fees from new customers;
. License fees for additional products to existing customers;
. License fees for additional users in our existing customer base;
. Implementation service fees related to product license sales; and
. Maintenance fees from both existing and new customers.
Revenues
Total revenues in 1999 were $73.0 million, compared to $42.6 million in 1998
and $9.3 million in 1997. Revenues in 1999 increased 71% over 1998 due to an
increase in both license fee and services revenue.
20
License fees. License fee revenues increased to $38.8 million in 1999 from
$23.4 million in 1998 and $5.3 million in 1997, representing year over year
increases in 1999 and 1998 of 66% and 345%, respectively. The continued growth
in license fee revenues is due to an increased number of customers choosing
TBS as their operational support software for ordering and provisioning of
their communications services and growth in our existing customer base that
generated substantial follow-on revenues from licenses for new software
modules and additional users.
Services. Revenues from services increased to $34.2 million in 1999 from
$19.1 million in 1998 and $4.0 million in 1997, representing year over year
increases in 1999 and 1998 of 79% and 374%, respectively. The growth in
service revenues was due to growth in the number of customers subscribing to
maintenance agreements, and to a lesser extent, higher implementation
consulting and training services associated with growth in license revenues.
Post contract customer support, or maintenance revenues, increased to $10.5
million in 1999 from $4.7 million in 1998, and $897,000 in 1997, representing
year over year increases in 1999 and 1998 of 125% and 421%, respectively.
Professional services revenue increased to $23.7 million in 1999 from $14.5
million in 1998 and $3.1 million in 1997, representing year over year
increases of 64% and 361%, respectively. We expect the maintenance component
of service revenues to continue to increase faster than the company's
consulting and training revenues, due to maintenance agreement renewals from
our growing customer base, shortened TBS implementation times that reduce
consulting costs for our customers, and the increasing ability of alliance
partners to provide consulting services directly to our customers.
Cost of Revenues
License Costs. License costs consist primarily of royalties that relate to
product features that were originally developed for specific customers. These
features are now included in our TBS software and payments are made to some
original customers who funded the development. Cost of license revenues also
includes costs of packaging materials and the production of software media and
documentation.
License costs were $1.7 million in 1999, $1.3 million in 1998 and $0.2
million in 1997, representing 4%, 6% and 4% of license revenues in each year,
respectively. The increases in license costs was due to an increase in license
revenues on which royalty payments are based. We intend to reduce our reliance
on customer-funded development to introduce new software functionality. Most
of our royalty agreements provide for payment caps or time limitations.
Accordingly, we expect that royalty costs, as a percentage of revenues, will
decrease compared to current levels.
Service Costs. Service costs consist primarily of costs associated with
providing consulting, training and customer support services. These costs
include compensation, travel and related expenses for MetaSolv employees and
fees for third-party consultants who provide services for our customers.
Service costs were $25.2 million in 1999, $14.8 million in 1998 and $2.4
million in 1997, representing 74%, 77% and 58% of service revenues in each
year, respectively. These increases in service costs resulted from the
significant expansion of our professional services resources across all
categories, including professional services, training and customer support.
The increase in service costs as a percentage of service revenues in 1998 and
1999 compared to 1997 was primarily due to the increased use of third-party
subcontractors to provide consulting services to meet rapid growth in customer
demand for software implementation. Use of third-party consultants allows the
company to grow its business quickly, but results in lower margins than
MetaSolv provided services. We are working to improve services gross margin
while continuing to grow the business by developing repeatable consulting
packages, software enhancements that facilitate ease of implementation, and
training alliance partners to provide consulting directly to customers. We
believe the margin improvement from 1998 to 1999 reflects progress in this
area.
We expect future service costs to increase due to growth in staffing to meet
demand for services related to expected increases in TBS implementations,
upgrades and integration projects. Services costs will also increase as we
establish product support for overseas customers, and incur expenses to
develop a Training and Application Development Center. This center includes
TBS operating environments where customers, system integrators, software
vendors and alliance partners can simulate customer operating environments,
develop and test customer solutions.
21
Operating Expenses
Research and Development Expenses. Research and development expenses consist
of costs related to our staff of software developers, contracted development
services costs, and the associated infrastructure costs required to support
software product development. Product research and development expenses
increased to $17.0 million in 1999 from to $10.2 million in 1998 and $2.4
million in 1997, representing year over year increases in 1999 and 1998 of 67%
and 330%, respectively. Research and development expenses were 23%, 24% and
25% of total revenues in each year, respectively. The increase in expenses was
due to a rapid increase in research and development personnel to meet market
demand for new features and functionality. The new functionality includes
enhancements for high-speed Internet and data communications networks, and
adapting our software for international differences in data formats, standards
and language. We expect to continue to increase our investment in product
development to address emerging technologies and to extend product
functionality for next-generation communications providers.
Our product development methodology generally establishes technological
feasibility near the end of process, when we have a working model.
Accordingly, we have not capitalized any software development costs.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salary, commission, travel, trade show and other related expenses required
to sell our TBS software in our targeted markets. Sales and marketing expenses
were $14.3 million in 1999, $11.6 million in 1998 and $3.0 million in 1997,
representing 20%, 27%, and 32% of revenues in each year, respectively. Sales
and marketing expenses have increased each year primarily due to the expansion
of our sales and marketing staff, increased commission expense, and increased
travel costs in response to the demand for our TBS Software. The decline in
sales and marketing expenses as a percentage of revenues was due to increased
productivity of our sales staff and a larger revenue base over which to spread
the fixed costs of sales and marketing administration. We expect that our
sales and marketing expenses will continue to increase, particularly as we
pursue business in Europe and Latin America.
General and Administrative Expenses. General and administrative expenses
consist of costs related to finance and accounting, legal, human resources,
facilities, information technologies and corporate management, which have not
been allocated to other departments. General and administrative expenses were
$11.1 million in 1999, $5.2 million in 1998 and $1.3 million in 1997,
representing 15%, 12% and 14% of revenues in each year, respectively. The
increase in general and administrative expenses resulted primarily from
increases in executive, finance and administrative personnel to support the
increased scale of our operations. In addition, the increase in 1998 included
$0.6 million in severance obligations to executives whose employment was
terminated during 1998. We expect general and administrative expenses to
continue to increase in support of our growth, including expenses associated
with our 100,000 square foot facilities expansion in Plano, Texas.
Interest and Other Income, Net
Interest and other income consisting of interest income, interest expense,
and gains and losses on disposition of assets, was $0.7 million in 1999, $0.3
million in 1998 and $0.1 million in 1997. The increase in 1999 was the result
of interest earned on higher cash balances resulting from the company's
initial public offering in November 1999, and the increase in 1998 was the
result of interest earned on proceeds from the sale of Class C Preferred Stock
in June 1998.
Income Tax Expense (Benefit)
Income tax expense was $1.8 million in 1999, compared to a benefit of
$24,000 in 1998 and expense of $60,000 in 1997. As a percentage of income
before taxes, income tax expense was 40.7% in 1999. The variance from the US
statutory tax rate was primarily due to state and local income taxes, and
expenses that are not deductible for federal income tax purposes.
Liquidity and Capital Resources
At December 31, 1999, our primary sources of liquidity were cash and cash
equivalents totaling $112.3 million and representing 76% of total assets. Cash
assets include $100.4 million in net proceeds from our initial public stock
offering on November 17, 1999. The company has invested its cash in excess of
current operating requirements in short term investment grade securities that
are available for sale as needed to finance future company growth.
22
Our operating activities generated $10.4 million in cash during 1999,
compared to using cash of $2.3 million in 1998 and generating $1.9 million in
1997. In 1999, cash from operating activities increased due to the improved
profitability of the company and an increase in deferred revenues where
payments have been received but revenue has not yet been earned, primarily
from prepaid maintenance contracts. Deferred revenues were $11.7 million as of
December 31, 1999, compared to $2.6 million at December 31, 1998, reflecting
an increase in prepaid maintenance contracts due to a larger customer base,
and deferrals of software revenues that depend on future delivery of software.
Accounts receivable increased to $16.8 million as of December 31, 1999 from
$11.1 million at the end of 1998. The increase in accounts receivable resulted
from higher revenues, significant portions of which were generated during the
last month of each year. The allowance for doubtful accounts increased to $1.5
million, or 8.3% of accounts receivable at December 31, 1999, from $0.6
million, or 5.1% of accounts receivable at December 31, 1998.
Net cash used for investing activities was $7.1 million in 1999 of which
$3.7 million was to purchase undeveloped land for future expansion. Net cash
used for investing activities in 1998 and 1997 was $3.3 million and $1.4
million, respectively. We have no significant capital commitments at December
31, 1999, and believe our principal commitments consist of obligations under
operating leases. See Note 9 of Notes to Financial Statements.
We believe that our current cash balances, together with cash flows
generated by operations will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.
From time to time, we evaluate potential acquisitions of complementary
businesses or products. Should cash balances be insufficient to complete one
of these acquisitions, we may seek to sell additional equity or debt
securities. The decision to sell additional equity or debt securities could be
made at any time and could result in additional dilution to our stockholders.
New Accounting Standards
On December 15, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-9, Modification of SOP 97-2, "Software Revenue Recognition," With
Respect to Certain Transactions. This statement amends SOP 97-2 to require
recognition of revenue using the "residual method" when there is vendor-
specific objective evidence ("VSOE") of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting and VSOE of fair value does not exist for one or
more of the delivered elements in the arrangement. Under the residual method,
the total fair value of the undelivered elements is deferred and subsequently
recognized in accordance with SOP 97-2. We adopted this standard January 1,
2000. The adoption of this standard is not expected to have a material effect
on our results of operations or financial position.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Through December 31, 1999, our exposure to adverse movements in foreign
exchange rates is insignificant. Therefore, we do not hedge our foreign
currency exposure, nor do we use derivative financial instruments for
speculative trading purposes.
Our exposure to market risks principally relates to changes in interest
rates that may affect our fixed income investments. Our excess cash is
invested in debt securities issued by U.S. government agencies and corporate
debt securities. We place our investments with high quality issuers, and limit
our credit exposure by restricting the amount of securities that may be placed
with any single issuer.
Our general policy is to limit the risk of principal loss and assure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with less than three months to maturity are considered to be cash
equivalents; investments with maturities between three months and twelve
months are considered to be short-term investments; investments with
maturities in excess of twelve months are considered to be long-term
investments. At December 31, 1999, all investments have less than three months
to maturity. The weighted average pre-tax interest rate on the investment
portfolio is approximately 6.4%. We do not expect any material loss with
respect to our investment portfolio.
23
Item 8. Financial Statements and Supplementary Data
Page
----
Independent Auditors' Report............................................. 25
Balance Sheets as of December 31, 1999 and 1998.......................... 26
Statements of Operations for the Years Ended December 31, 1999, 1998 and
1997.................................................................... 27
Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997........................................................... 28
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and
1997.................................................................... 29
Notes to Financial Statements............................................ 30
Supplemental Schedule:
Schedule II--Valuation and Qualifying Accounts........................... 40
Note: Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable.
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MetaSolv Software, Inc.:
We have audited the accompanying balance sheets of MetaSolv Software, Inc.
as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. In connection with our audits of the financial
statements, we also have audited the related financial statement schedule.
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 1, 2000
25
METASOLV SOFTWARE, INC.
BALANCE SHEETS
December 31, 1999 and 1998
(In thousands except share and per share data)
December 31,
-----------------
1999 1998
-------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $112,341 $ 7,984
Trade accounts receivable, less allowance for doubtful
accounts of $1,523 in 1999 and $600 in 1998.............. 16,755 11,078
Unbilled receivables...................................... 4,064 957
Prepaid expenses.......................................... 1,845 859
Other current assets...................................... 2,203 818
-------- -------
Total current assets.................................... 137,208 21,696
Property and equipment, net................................. 9,950 4,738
Other assets................................................ 58 93
-------- -------
Total assets............................................ $147,216 $26,527
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,503 $ 2,216
Accrued expenses.......................................... 11,094 7,071
Deferred revenue.......................................... 11,694 2,648
-------- -------
Total current liabilities............................... 28,291 11,935
Deferred income taxes....................................... 310 156
Class B redeemable convertible preferred stock, $.0025 par
value; 6,738,160 shares authorized, issued and outstanding
at December 31, 1998....................................... -- 2,610
Class C redeemable convertible preferred stock, $.50 par
value; 2,857,146 shares authorized, issued and outstanding
at December 31, 1998....................................... -- 10,000
Stockholders' equity:
Class A convertible preferred stock, $.0025 par value;
6,650,000 shares authorized, issued and outstanding at
December 31, 1998........................................ -- 18
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding.............. -- --
Common stock, $.005 par value, 100,000,000 shares
authorized, and 34,504,334 issued at December 31, 1999,
and 11,646,580 shares issued and outstanding at December
31, 1998................................................. 172 58
Additional paid-in capital................................ 116,508 1,890
Deferred compensation..................................... (556) --
Less treasury stock at cost, 24,000 shares at December 31,
1999..................................................... (14) --
Retained earnings (deficit)............................... 2,505 (140)
-------- -------
Total stockholders' equity.............................. 118,615 1,826
-------- -------
Commitments and contingencies...............................
Total liabilities and stockholders' equity.............. $147,216 $26,527
======== =======
See accompanying notes to financial statements.
26
METASOLV SOFTWARE, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except per share data)
Year Ended December
31,
-----------------------
1999 1998 1997
------- ------- ------
Revenues:
License.............................................. $38,788 $23,432 $5,262
Service.............................................. 34,219 19,144 4,037
------- ------- ------
Total revenues..................................... 73,007 42,576 9,299
------- ------- ------
Cost of revenues:
License.............................................. 1,719 1,298 223
Service.............................................. 25,215 14,803 2,359
------- ------- ------
Total cost of revenues............................. 26,934 16,101 2,582
------- ------- ------
Gross profit........................................... 46,073 26,475 6,717
------- ------- ------
Operating expenses:
Research and development............................. 16,952 10,170 2,367
Sales and marketing.................................. 14,331 11,634 2,996
General and administrative........................... 11,072 5,179 1,289
------- ------- ------
Total operating expenses........................... 42,355 26,983 6,652
------- ------- ------
Income (loss) from operations.......................... 3,718 (508) 65
Interest and other income, net......................... 742 298 115
------- ------- ------
Income (loss) before taxes............................. 4,460 (210) 180
Income tax expense (benefit)........................... 1,815 (24) 60
------- ------- ------
Net income (loss)...................................... $ 2,645 $ (186) $ 120
======= ======= ======
Earnings (loss) per share of common stock:
Basic................................................ $ 0.17 $ (0.02) $ 0.01
======= ======= ======
Diluted.............................................. $ 0.08 $ (0.02) $ 0.00
======= ======= ======
See accompanying notes to financial statements.
27
METASOLV SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(In thousands except share amounts)
Class A
Convertible Treasury
Preferred stock Common stock stock Additional Common Retained
------------------ ----------------- ------------- paid-in stock Deferred earnings
Shares Amount Shares Amount Shares Amount capital subscription compensation (deficit) Total
---------- ------ ---------- ------ ------ ------ ---------- ------------ ------------ --------- --------
Balance, December
31, 1996......... 6,650,000 $ 18 11,409,200 $ 57 -- $ -- $ 1,818 $-- $ -- $ (74) $ 1,819
Exercise of
stock options.. -- -- 160 -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- 120 120
---------- ---- ---------- ---- ------ ----- -------- ---- ----- ------ --------
Balance, December
31, 1997......... 6,650,000 18 11,409,360 57 -- -- 1,818 -- -- 46 1,939
Exercise of
stock options.. -- -- 237,220 1 -- -- 72 -- -- -- 73
Net loss........ -- -- -- -- -- -- -- -- -- (186) (186)
---------- ---- ---------- ---- ------ ----- -------- ---- ----- ------ --------
Balance, December
31, 1998......... 6,650,000 18 11,646,580 58 -- -- 1,890 -- -- (140) 1,826
Exercise of
stock options.. -- -- 862,448 4 -- -- 775 (47) -- -- 732
Purchase of
treasury
stock.......... -- -- -- -- 24,000 (14) -- -- -- -- (14)
Issuance of
common stock... -- -- 5,750,000 29 -- -- 100,374 -- -- -- 100,403
Conversion of
redeemable
convertible
preferred
stock.......... -- -- 9,595,306 48 -- -- 12,562 -- -- -- 12,610
Conversion of
convertible
preferred
stock.......... (6,650,000) (18) 6,650,000 33 -- -- (58) -- -- -- (43)
Tax benefit from
disqualifying
dispositions... -- -- -- -- -- -- 356 -- -- -- 356
Deferred
compensation... -- -- -- -- -- -- 656 -- (656) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- 100 -- 100
Net income...... -- -- -- -- -- -- -- -- -- 2,645 2,645
---------- ---- ---------- ---- ------ ----- -------- ---- ----- ------ --------
Balance, December
31, 1999......... -- $ -- 34,504,334 $172 24,000 $ (14) $116,555 $(47) $(556) $2,505 $118,615
========== ==== ========== ==== ====== ===== ======== ==== ===== ====== ========
See accompanying notes to financial statements.
28
METASOLV SOFTWARE, INC
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
-------- ------- -------
Cash flows from operating activities:
Net income (loss)................................. $ 2,645 $ (186) $ 120
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 1,841 763 293
Loss on asset disposal........................... 180 -- --
Deferred tax expense (benefit)................... (583) (524) 35
Tax benefit for disqualifying dispositions....... 356 -- --
Changes in operating assets and liabilities:
Restricted cash................................. -- 689 (353)
Trade accounts receivable, net.................. (5,677) (9,050) (363)
Unbilled receivables............................ (3,107) (60) (897)
Other assets.................................... (1,642) (679) (408)
Accounts payable and accrued expenses........... 7,310 6,942 1,740
Deferred revenue................................ 9,046 (234) 1,708
-------- ------- -------
Net cash provided by (used in) operating
activities.................................... 10,369 (2,339) 1,875
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment............... (7,133) (3,296) (1,682)
Sale of marketable securities..................... -- -- 260
-------- ------- -------
Net cash used in investing activities.......... (7,133) (3,296) (1,422)
-------- ------- -------
Cash flows from financing activities:
Proceeds from sale of redeemable preferred stock.. -- 10,000 110
Borrowing from bank............................... 1,866 1,000 93
Payments on debt.................................. (1,866) (1,093) --
Proceeds from issuance of common stock............ 100,403 -- --
Proceeds from issuance of common stock on exercise
of options....................................... 732 73 --
Purchase of treasury stock........................ (14) -- --
-------- ------- -------
Net cash provided by financing activities...... 101,121 9,980 203
-------- ------- -------
Increase in cash and cash equivalents.............. 104,357 4,345 656
Cash and cash equivalents, beginning of year....... 7,984 3,639 2,983
-------- ------- -------
Cash and cash equivalents, end of year............. $112,341 $ 7,984 $ 3,639
======== ======= =======
Supplemental disclosures of cash flow information--
Cash paid during the year for:
Interest......................................... $ 155 $ 26 $ 7
======== ======= =======
Income taxes..................................... $ 868 $ 33 $ 7
======== ======= =======
See accompanying notes to financial statements.
29
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
1) Organization and Summary of Significant Accounting Policies
MetaSolv Software, Inc. (the "Company"), a Delaware corporation
headquartered in Plano, Texas, develops, delivers and supports software
designed to make it easier for emerging competitive communications service
providers to take, manage and fulfill orders for service from their customers.
These communications service providers offer a full array of communications
services including local and long distance telephone services, high-speed data
services and Internet services, often as a bundled offering. The Company
derives substantially all if its revenue from the sale of licenses, related
professional services and maintenance and support of its Telecom Business
Solution(TM), or TBS(TM), packaged software to these competitive
communications service providers.
a) Revenue Recognition
The Company's software products are licensed to customers through the
Company's direct sales force. Software license revenue is generally recognized
when the following criteria have been met: (a) a written contract for the
license of software has been executed, (b) the Company has delivered the
product to the customer, (c) the license fee is fixed or determinable, and (d)
collectibility of the resulting receivable is deemed probable. Revenue from
maintenance contracts is recognized ratably over the contract period. Revenue
for implementation, training and other services is recognized as the service
is performed.
The Company is frequently engaged to provide consulting and implementation
services in connection with the licensing of its software. In situations where
such services include significant modification or customization of the
software or are otherwise essential to the functionality of the software,
revenues relating to the software license and services are aggregated and the
combined revenues are recognized using the percentage-of-completion method.
Revenue earned using the percentage-of-completion method is based on
management's estimate of progress towards completion. Changes to estimates of
progress towards completion, if any, are accounted for as a change in estimate
in the period of the change. Of total deferred revenues, $703,416 and $49,328
as of December 31, 1999 and 1998, respectively, represent billings in excess
of costs and related profits on certain contracts accounted for under the
percentage-of-completion method. Of total unbilled receivables, $0 and
$335,000 as of December 31, 1999 and 1998, respectively, represent costs and
related profits in excess of billings on contracts accounted for under the
percentage-of-completion method.
Accounts receivable include only those amounts due from customers for which
revenue has been recognized. Deferred revenue includes amounts received from
customers for which revenue has not been recognized. Accounts receivable at
December 31, 1999 and 1998 includes $408,854 and $583,573, respectively, which
has not been paid in accordance with the retainage provisions of a long-term
contract with a customer.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition" as
amended by SOP-98-4 and SOP-98-9. Effective January 1, 1998, the Company
adopted SOP 97-2. SOP 97-2 generally requires revenue from software
arrangements to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, consulting,
education services, installation or post-contract customer support. Fair
values are based upon vendor specific objective evidence. If evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does
exist, or until all elements of the arrangement are delivered.
30
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
b) Cash and Cash Equivalents
Cash equivalents consist of investments in an interest-bearing money market
account and investment grade securities issued by corporations and U.S.
government agencies with maturities of three months or less. For purposes of
the statements of cash flows, the Company considers all highly liquid
investments with remaining maturities of three months or less at the date of
purchase to be cash equivalents.
c) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from three to twelve years.
d) Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value due to their short
maturities.
e) Research and Development Costs
Research and development costs incurred prior to the establishment of
technological feasibility of the product are expensed as incurred. After
technological feasibility is established, any additional software development
costs are capitalized in accordance with SFAS No. 86. The Company believes its
process for developing software was essentially completed concurrently with
the establishment of technological feasibility and, accordingly, no software
development costs have been capitalized to date.
f) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairments to be recognized are measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of their carrying amount or fair
value less cost to sell.
g) Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the amounts of existing
assets and liabilities recorded for financial reporting purposes and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is reflected in income tax expense in the
period that includes the enactment date.
h) 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,
31
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
i) Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense is recorded only
if the fair value of the underlying stock exceeded its exercise price on the
date of grant.
j) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. The statement
requires additional disclosures in the financial statements, but does not
affect the Company's financial position or results of operations. Net income
(loss) as reported in the statements of operations is the Company's only
component of comprehensive income during all periods presented.
k) Earnings (Loss) Per Share of Common Stock
Earnings (loss) per share of common stock is presented in accordance with
the provisions of SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic
earnings (loss) per share excludes dilution for potentially dilutive
securities and is computed by dividing income or loss available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share reflects the potential
dilution that could occur if stock options or preferred stock were exercised
or converted into common stock. Potentially dilutive securities are excluded
from the computation of diluted earnings (loss) per share when their inclusion
would be antidilutive.
2) Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
--------------
1999 1998
------ ------
Property and equipment at cost...............................
Land....................................................... $3,665 $ --
Computer equipment and software............................ 5,571 3,707
Furniture and fixtures..................................... 1,875 1,357
Leasehold improvements..................................... 1,020 885
Construction in progress................................... 501 --
------ ------
12,632 5,949
Less accumulated depreciation................................ (2,682) (1,211)
------ ------
Property and equipment, net.................................. $9,950 $4,738
====== ======
32
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
3) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and
1997 consists of the following (in thousands):
December 31,
-------------------
1999 1998 1997
------ ----- ----
Current income tax expense:
Federal................................................ $2,055 $ 434 $17
State.................................................. 343 66 8
------ ----- ---
2,398 500 25
------ ----- ---
Deferred income tax expense (benefit):
Federal................................................ (489) (462) 35
State.................................................. (94) (62) --
------ ----- ---
(583) (524) 35
------ ----- ---
Total expense (benefit).................................. $1,815 $ (24) $60
====== ===== ===
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to income (loss) before taxes
in the years ended December 31, 1999, 1998 and 1997 as follows (in thousands):
December 31,
-----------------
1999 1998 1997
------ ---- ----
Computed "expected" tax expense (benefit)............... $1,516 $(71) $ 61
Utilization of net operating loss carry-forwards for
which no benefit had been recognized................... -- -- (40)
Expenses not deductible for tax purposes................ 73 42 14
Effect of state and local taxes, net of federal
benefit................................................ 177 2 8
Other................................................... 49 3 17
------ ---- ----
Income tax expense (benefit).......................... $1,815 $(24) $ 60
====== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
December 31,
-------------
1999 1998
------ -----
Deferred tax assets:
Accrued expenses............................................ $ 809 $ 489
Allowance for doubtful accounts............................. 573 156
------ -----
Total gross deferred tax assets............................. 1,382 645
Deferred tax liability--property and equipment due to
differences in depreciation................................ (310) (156)
------ -----
Net deferred tax asset liability.......................... $1,072 $ 489
====== =====
33
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Based upon the level of historical
taxable income and projections for future taxable income over the periods
which the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences.
4) Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
---------------
1999 1998
------- -------
Employee compensation....................................... $ 4,755 $ 3,929
Income taxes payable........................................ 1,636 474
Sales tax payable........................................... 1,093 496
Other expenses.............................................. 3,610 2,172
------- -------
$11,094 $ 7,071
======= =======
5) Line of Credit
The Company has a committed revolving line of credit agreement with a bank,
expiring in July 2002, in the amount of $6,000,000 and an equipment term loan
facility that provides for borrowings up to $4,000,000. Interest on
outstanding borrowings accrues at the bank's prime rate of interest (8.5% as
of December 31, 1999 and 1998). The facility is secured by substantially all
of the Company's tangible assets. As of December 31, 1999 and 1998 there were
no outstanding borrowings under the revolving line of credit. The Company also
had a standby letter of credit (in lieu of a security deposit) totaling
$1,300,000 as of December 31, 1999 and 1998, which reduces the borrowing
availability under the revolving line of credit.
6) Convertible Preferred Stock and Redeemable Convertible Preferred Stock
In 1996, the Company issued 6,458,480 shares of Class B redeemable
convertible preferred stock for net cash proceeds of $2,475,400. In 1997, the
Company issued 279,680 additional shares of Class B redeemable convertible
preferred stock for cash proceeds of $110,400. In 1998, the Company issued
2,857,146 shares of Class C redeemable convertible preferred stock for cash
proceeds of $10,000,011. In November 1999, effective with the company's
initial public offering, each share of outstanding convertible preferred stock
and redeemable convertible preferred stock was converted to one share of
common stock. These share amounts have been adjusted for stock splits in June
1998 and October 1999.
7) Stock Option Plan and Employee Stock Purchase Plan
In 1992, the Company adopted a stock option plan pursuant to which the Board
of Directors may grant stock options to officers and employees. In August
1999, the Company adopted the MetaSolv Software, Inc. Long-Term Incentive Plan
which was subsequently merged with the existing stock option plan. The plan at
its adoption authorized grants of options to purchase up to 9,320,000 shares
of authorized but unissued common stock. The number of shares issuable under
the plan increases by 5% of the Company's outstanding common stock as of
January 1 of each of the first five calendar years following the plan merger.
Accordingly, as of January 1, 2000, the number of shares authorized under the
plan increased to 11,044,017. Stock options are
34
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
granted with an exercise price equal to the stock's fair market value at the
date of grant. All options have terms of ten years or less, and most options
vest in four or five equal cumulative installments beginning on the first
anniversary of the grant date.
At December 31, 1999, there were 1,895,860 additional shares available for
grant under the plan. The per share weighted-average fair value of stock
options granted for the years ended December 31, 1999, 1998 and 1997 was $.99,
$.415 and $.075, respectively, as estimated using the minimum value option-
pricing model with the following assumptions: expected dividend yield of 0%,
risk-free interest rate of 6%, and an expected life of five years.
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees and non-employee directors under its stock option plans.
The Company recorded $656,400 of deferred compensation during 1999, as a
result of granting stock options with exercise prices below the estimated fair
value per share of the Company's common stock at the date of grant. Deferred
compensation has been recorded as a component of stockholders' equity and is
being amortized as a charge to operations over the vesting period of the
applicable options. Amortization of deferred compensation of $100,000 was
recognized in 1999.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation, the Company's net
income would have been reduced to the pro forma amounts indicated below (in
thousands):
Year ended December
31,
--------------------
1999 1998 1997
------ ------ -----
Net income (loss):
As reported........................................... $2,645 $ (186) $ 120
Pro forma............................................. 2,194 (278) 88
Earnings per share:
Basic:
As reported......................................... $ 0.17 $(0.02) $0.01
Pro forma........................................... 0.14 (0.02) 0.01
Diluted:
As reported......................................... $ 0.08 $(0.02) $0.00
Pro forma........................................... 0.07 (0.02) 0.00
Pro forma net income (loss) reflects only stock options granted after
December 31, 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma amounts
presented above because compensation cost is reflected over the options'
vesting periods of five years and compensation expense pertaining to stock
options granted in prior periods is not considered.
35
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
Stock option activity during the periods indicated is as follows:
Weighted-
Number average
of shares exercise price
--------- --------------
Balance as of December 31, 1996....................... 1,664,760 $ .28
Granted............................................. 2,060,600 .34
Exercised........................................... (160) .34
Forfeited........................................... (346,640) .34
---------
Balance as of December 31, 1997....................... 3,378,560 .31
Granted............................................. 1,693,700 1.79
Exercised........................................... (237,220) .31
Forfeited........................................... (404,600) 1.36
---------
Balance as of December 31, 1998....................... 4,430,440 .78
Granted............................................. 3,209,200 3.93
Exercised........................................... (862,448) 0.86
Forfeited........................................... (462,080) 1.97
---------
Balance as of December 31, 1999....................... 6,315,112 2.28
=========
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.24 to $13.00 and 8.15
years, respectively. The following table presents information about
outstanding stock options as of December 31, 1999:
Options vested and
Weighted average exercisable
---------------- ------------------
Range of Remaining Weighted
Exercise Number of Exercise contractual Number of average
Prices options price life options price
-------- --------- -------- ----------- --------- --------
$ .24 - .60 2,808,174 $ 0.36 6.72 1,413,694 $0.31
1.75 - 3.50 1,102,500 3.43 8.99 106,064 3.42
3.65 - 5.00 2,346,838 3.77 9.43 12,604 3.65
13.00 57,600 13.00 9.83 --
--------- ---------
Totals 6,315,112 1,532,362
========= =========
At December 31, 1999, 1998 and 1997, 1,532,362, 1,232,080, and 644,860
options were vested and exercisable at a weighted-average exercise price of
$.56, $.30, and $.26 respectively.
In August 1999, the Company adopted the MetaSolv Software, Inc. Employee
Stock Purchase Plan. The plan is authorized to issue 600,000 shares of
authorized and unissued common stock, and shares issuable under the plan will
increase annually during the first five years following adoption of the plan
by 1% of the Company's outstanding common stock. Accordingly, as of January 1,
2000, the number of shares authorized under the plan increased to 944,803. No
shares had been issued under this plan.
8) 401(k) Plan and Trust Agreement
The Company has a 401(k) Plan and Trust Agreement under which employees are
entitled to contribute up to 15% of their salary, subject to certain
regulatory limitations. In 1999, 1998 and 1997 the Company made discretionary
profit sharing contributions of $594,143, $337,084 and $123,444, respectively,
to the plan.
36
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
9) Commitments and Contingencies
Leases
The Company leases its offices under operating leases, which expire through
2010. Future minimum annual rent payments for leases having initial or
remaining noncancelable lease terms in excess of one year are as follows (in
thousands):
Total minimum
Years ending lease
December 31, payments
------------ -------------
2000....................................................... 2,579
2001....................................................... 3,010
2002....................................................... 3,074
2003....................................................... 3,102
2004....................................................... 2,940
Thereafter................................................. 15,775
-------
$30,480
=======
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted
to $1,675,390, $1,175,047 and $558,778, respectively.
Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
10) Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Year ended December 31,
------------------------
1999 1998 1997
------- ------- -------
Numerator:
Net income (loss)............................... $ 2,645 $ (186) $ 120
======= ======= =======
Denominator:
Denominator for basic earnings (loss) per
share--weighted-average:
Common shares outstanding..................... 15,582 11,472 11,409
Effect of dilutive securities:
Preferred stock............................... 13,538 -- 13,248
Employee stock options........................ 4,042 -- 286
------- ------- -------
Denominator for diluted earnings (loss) per
share--weighted-average:
Common and common equivalent shares
outstanding.................................. 33,162 11,472 24,943
======= ======= =======
Earnings (loss) per common share:
Basic........................................... $ .17 (0.02) 0.01
======= ======= =======
Diluted......................................... $ .08 (0.02) 0.00
======= ======= =======
37
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
Securities that were not included in the computation of diluted earnings per
share in 1998 because their effect was antidilutive consist of 16,245,306
shares of preferred stock and options to purchase 4,430,440 shares of common
stock.
11) Segment Information and Concentration of Credit Risk
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to stockholders. The method for determining what information to
report is based on the way management organizes the operating segments within
the Company for making operating decisions and assessing financial
performance.
The Company's chief operating decision-maker is considered to be the Chief
Executive Officer ("CEO"). The CEO reviews financial information presented on
a company-wide basis accompanied by disaggregated information about revenues
by product and service line for purposes of making operating decisions and
assessing financial performance. The financial information reviewed by the CEO
is identical to the information presented in the accompanying statements of
operations. Therefore, the Company operates in a single operating segment:
communications software and related services.
Revenue information regarding operations for different products and services
is as follows (in thousands):
Year ended December
31,
----------------------
1999 1998 1997
------- ------- ------
Revenues:
Software license fees.............................. $38,788 $23,432 $5,262
Professional services.............................. 23,710 14,472 3,140
Post-contract customer support..................... 10,509 4,672 897
------- ------- ------
Total revenues....................................... $73,007 $42,576 $9,299
======= ======= ======
The Company has derived substantially all of its revenues from the United
States and Canada. Accordingly, the Company does not produce reports that
measure performance of segments by geographic region.
The Company evaluates the performance of its operating segments based on
revenues only. The Company does not assess the performance of its segments on
other measures of income or expense, such as depreciation and amortization,
operating income or net income. In addition, the Company's assets are not
allocated to any specific segment, and the Company does not produce reports
that measure segment performance based on any asset-based metrics. Therefore,
segment information is presented only for revenues.
38
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1999, 1998 and 1997
The Company licenses its communications software products to incumbent local
exchange telephone carriers, and emerging competitive communications service
providers. The Company performs ongoing credit evaluations of its customers'
financial condition but does not require collateral or other security to
support its trade accounts receivable. The table below presents the portion of
the Company's revenues derived from customers whose revenue exceeded 10% of
total revenues in any of the years presented and the portion of accounts
receivable as of December 31, 1999 and 1998 related to those customers:
Accounts
Receivable Revenues
--------------- ----------------
Year ended Year ended
December 31, December 31,
--------------- ----------------
Customers 1999 1998 1999 1998 1997
--------- ------ ------ ---- ---- ----
A............................................. 12% 31% 13% 22% 12%
B............................................. -- 6% 1% 11% 2%
C............................................. 1% 9% 3% 5% 26%
D............................................. 2% 4% 2% 3% 21%
E............................................. -- -- 1% 4% 10%
12) Stock Split
On October 28, 1999, the Company consummated a 2 for 1 split of all classes
of its common and preferred stock. The financial statements have been adjusted
to give retroactive effect to the stock split.
39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
- ----------- ---------- ---------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1999...... $600 $1,750 $827 $1,523
Year ended December 31, 1998...... $ 90 $ 510 $ -- $ 600
Year ended December 31, 1997...... $ 35 $ 186 $131 $ 90
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
40
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information concerning Directors of the Company required by Item 401 of
Regulation S-K will be contained in the Company's 1999 Proxy Statement under
the heading "Election of Directors", and is incorporated herein by reference.
Executive Officers
The information concerning executive officers of the Company required by
this Item is set forth in Item 1 hereof under the heading "Executive
Officers".
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K will be contained in
the Company's 1999 Proxy Statement under the headings "Compensation of
Directors and Executive Officers", "Compensation Committee Interlocks and
Insider Participation", "Report of Compensation Committee on Executive
Compensation" and "Company Performance", "Management Compensation" and "Stock
Performance Graph", and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 403 of Regulation S-K will be contained in
the Company's 1999 Proxy Statement under the heading "Common Stock Ownership",
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 404 of Regulation S-K will be contained in
the Company's 1999 Proxy Statement under the heading "Compensation Committee
Interlocks and Insider Participation", and is incorporated herein by
reference.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements. The financial statements, notes and independent
auditors' report described in Item 8, to which reference is hereby made.
(2) Financial Statement Schedule. The financial statement schedule
described in Item 8, to which reference is hereby made.
(3) Exhibits. The following exhibits:
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. Incorporated by reference to exhibits to the
Company's Registration Statement on form S-1 filed on September
10, 1999, registration number 333-86937.
3.2 Amended and Restated Bylaws of the Registrant. Incorporated by
reference to exhibits to the Company's Registration Statement on
form S-1 filed on September 10, 1999, registration number 333-
86937.
4.1 Investors' Rights Agreement, dated June 2, 1998, among the
Registrant and the shareholders named therein, as amended.
Incorporated by reference to exhibits to the Company's
Registration Statement on form S-1 filed on September 10, 1999,
registration number 333-86937.
4.2 Specimen Certificate of the Registrant's common stock.
Incorporated by reference to exhibits to the Company's
Registration Statement on form S-1 filed on September 10, 1999,
registration number 333-86937.
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and executive officers.
Incorporated by reference to exhibits to the Company's
Registration Statement on form S-1 filed on September 10, 1999,
registration number 333-86937.
10.2 1992 Stock Option Plan. Incorporated by reference to exhibits to
the Company's Registration Statement on form S-1 filed on
September 10, 1999, registration number 333-86937.
10.3 Long-Term Incentive Plan. Incorporated by reference to exhibits
to the Company's Registration Statement on form S-1 filed on
September 10, 1999, registration number 333-86937.
10.4 Employee Stock Purchase Plan. Incorporated by reference to
exhibits to the Company's Registration Statement on form S-1
filed on September 10, 1999, registration number 333-86937.
10.5 Mutual Release between the Registrant and Michael J. Watters,
dated November 20, 1998. Incorporated by reference to exhibits
to the Company's Registration Statement on form S-1 filed on
September 10, 1999, registration number 333-86937.
42
Exhibit
No. Description
------- -----------
10.6 Commercial Lease Agreement between the Registrant and
CrownInvest I, L.P., dated April 1, 1997, as amended to date.
Incorporated by reference to exhibits to the Company's
Registration Statement on form S-1 filed on September 10, 1999,
registration number 333-86937.
10.7 Commercial Lease Agreement between the Registrant and William
R. Cooper and Craig A. Cooper, dated August 21, 1998, as
amended to date. Incorporated by reference to exhibits to the
Company's Registration Statement on form S-1 filed on September
10, 1999, registration number 333-86937.
10.8 Master Software License and Service Agreement entered into
between Registrant and Qwest Communications Corporation, dated
May 30, 1997. Incorporated by reference to exhibits to the
Company's Registration Statement on form S-1 filed on September
10, 1999, registration number 333-86937.
10.9 Master License, Development and Service Agreement entered into
between Registrant and Time Warner Communications Holdings,
Inc., dated May 7, 1998. Incorporated by reference to exhibits
to the Company's Registration Statement on form S-1 filed on
September 10, 1999, registration number 333-86937.
10.10 Master Software License and Services Agreement entered into
between Registrant and Allegiance Telecom, Inc., dated December
19, 1997. Incorporated by reference to exhibits to the
Company's Registration Statement on form S-1 filed on September
10, 1999, registration number 333-86937.
23.1 Consent of KPMG LLP, independent auditors.
27.1 Financial Data Schedule.
43
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.
MetaSolv Software, Inc.
/s/ James P. Janicki
Dated: March 28, 2000 By: _________________________________
James P. Janicki
Chief Executive Officer
/s/ Glenn A. Etherington
By: _________________________________
Glenn A. Etherington
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John W. White Chairman of the Board March 17, 2000
______________________________________
John W. White
/s/ James P. Janicki Chief Executive Officer, March 17, 2000
______________________________________ President and Director
James P. Janicki
/s/ Barry F. Eggers Director March 17, 2000
______________________________________
Barry F. Eggers
/s/ David R. Semmel Director March 17, 2000
______________________________________
David R. Semmel
/s/ William N. Sick Director March 17, 2000
______________________________________
William N. Sick
/s/ Adam Solomon Director March 17, 2000
______________________________________
Adam Solomon
/s/ John D. Thornton Director March 17, 2000
______________________________________
John D. Thornton
44