<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1998
REGISTRATION NO. 333-43973
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EVOLVING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7389 84-1010843
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
9777 MT. PYRAMID COURT
ENGLEWOOD, COLORADO 80112
(303) 802-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
J. RICHARD ABRAMSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVOLVING SYSTEMS, INC.
9777 MT. PYRAMID COURT
ENGLEWOOD, COLORADO 80112
(303) 802-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES C. T. LINFIELD, ESQ. S. MICHAEL DUNN, P.C.
REX R. O'NEAL, ESQ. JEREMY W. MAKARECHIAN, ESQ.
COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP
2595 CANYON BOULEVARD, SUITE 250 1125 SEVENTEENTH STREET, SUITE 2525
BOULDER, COLORADO 80302-6737 DENVER, COLORADO 80202
(303) 546-4000 (303) 293-0760
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value... 4,600,000 shares $12.00 $55,200,000 $16,284
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- -----------------------------------------------------------------------------------------
</TABLE>
(1) Includes 600,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
4,000,000 SHARES
[LOGO OF EVOLVING SYSTEMS APPEARS HERE]
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
Of the 4,000,000 shares of Common Stock offered hereby, 3,090,909 shares are
being sold by Evolving Systems, Inc. and 909,091 shares are being sold by the
Selling Stockholders. See "Principal and Selling Stockholders". The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10 and $12 per share. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EVOL".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total(3)........... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $875,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted to the Underwriters
an option for 30 days to purchase up to an additional 600,000 shares at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. If such option is exercised in full, the
total initial public offering price, underwriting discount, proceeds to
Company and proceeds to Selling Stockholders will be $ , $ , $ and
$ , respectively. See "Principal and Selling Stockholders" and
"Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST
UBS SECURITIES
-----------
The date of this Prospectus is , 1998.
<PAGE>
STRATEGIC ARCHITECTURE FOR OPERATIONAL SUPPORT SYSTEMS
"OSS encompass a broad array of software and systems that perform critical
functions for telecommunications carriers, including ordering, provisioning,
service assurance and billing. Competition and regulations are driving the
need for telecommunications carriers to implement enterprise-wide, standards-
based data sharing among multiple, interoperable OSS. Evolving Systems'
approach to these requirements is through a strategic MetOSS architecture that
includes a common database, a shared services platform, applications and an
application development environment".
DATABASE APPLICATIONS
"The MetOSS-GEM Enterprise In- "MetOSS applications provide and
formation Model provides a data- enhance OSS functionality and
base designed to enable data are designed to be implemented
sharing across all OSS applica- as modular, plug-and-play car-
tions operating on the MetOSS- tridges. Applications will in-
GEM Shared Services Platform". clude Evolving Systems' and
third-party products for order-
ing, provisioning, service as-
surance and billing".
[Color graphic appears here depicting the relationship of the
functional elements of the typical OSS and the Company's
current and future products]
SHARED SERVICES PLATFORM APPLICATIONS DEVELOPMENT
ENVIRONMENT
"The MetOSS-GEM Shared Services
Platform provides common servic- "The MetOSS-GEM Development En-
es, such as transaction process- vironment is designed to provide
ing and security, among all ap- the application development
plications, enabling rules, standards and application
interoperability". programming interfaces which
govern how applications are de-
veloped in order to be
interoperable and compliant with
the MetOSS-GEM Shared Services
Platform and database".
----------------
2
<PAGE>
METOSS--EVOLVING SYSTEMS' NEXT
GENERATION OPERATIONAL SUPPORT
SYSTEMS
"MetOSS is Evolving Systems'
family of current and planned
OSS offerings, incorporating an
enterprise database, a gateway
to external systems, and a
shared services platform upon
which a range of OSS
applications provided by the
Company and third parties can
operate".
GATEWAY
"The Gateway is designed to
provide inter- and intra-carrier
communications and interfaces
and to support most common
external and legacy OSS".
[Color graphic appears here
representing the relationship of
the Company's current LNP
products and planned OSS
application products to the
planned OSS platform products]
CURRENT APPLICATIONS
"Current MetOSS LNP applications
include OrderPath, NumberManager
and NodeMaster, applications
designed to address carriers'
LNP requirements. These products
enable carriers to meet
regulatory requirements and
rapidly address competition".
<PAGE>
THIRD-PARTY APPLICATIONS
"Additional OSS applications for
ordering, service assurance and
billing are targeted for development
by third-party software developers
utilizing the MetOSS Application
Development Environment, expanding the
range of OSS offerings available to
MetOSS customers".
FUTURE APPLICATIONS
"Future MetOSS applications under
development include MetOSS-Local
Service Exchange, which addresses
carriers' requirements for responding
to increased local competition and
corresponding inter-carrier
transactions, and MetOSS-Number
Exchange, which enables carriers to
address telephone number pooling,
number allocation and call origination
and termination requirements created as
a result of LNP".
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. The discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
Prospectus.
Unless otherwise indicated, all information contained in this Prospectus (i)
reflects the conversion of all outstanding shares of Non-voting Common Stock
(the "Non-voting Common Stock") and Preferred Stock of the Company into shares
of voting Common Stock (the "Common Stock") of the Company and (ii) assumes no
exercise of the Underwriters' over-allotment option. Certain terms used herein
are defined under the heading "Glossary of Terms".
THE COMPANY
Evolving Systems, Inc. ("Evolving Systems" or the "Company") is a leading
provider of selected software solutions and services that enable
telecommunications carriers to address the technical challenges to their
operational support systems created by the industry's rapidly changing
competitive and regulatory environment. The Company develops, markets, sells
and supports standard software products that enable established and new
telecommunications companies to address local number portability ("LNP")
requirements and the impact of LNP on such companies' support systems. The
Company also provides custom software development services to leading
telecommunications companies. The Company's first-to-market LNP software
solution, which enables carriers to meet the requirement that customers retain
their local phone number when changing service providers, has been selected for
use by two of the five Regional Bell Operating Companies ("RBOCs") and two
leading local and long distance carriers. The Company believes that the
implementation of LNP will require significant changes in a broad range of
carriers' software and systems that perform mission-critical functions such as
ordering, provisioning, service assurance and billing, collectively known as
Operational Support Systems ("OSS").
Historically, telecommunications carriers operated in a highly regulated
environment with both local and long distance telephone service providers
operating as monopolies with little competition. The Telecommunications Act of
1996 and regulations promulgated thereunder (collectively, the "Act") provide
for the introduction of competition in local telephone service, allowing long
distance, wireless and other carriers to enter local telephone markets. The Act
requires RBOCs, wireless and other incumbent local exchange carriers
(collectively, "ILECs") to offer LNP. The Act also mandates that carriers
unbundle local services and facilities, thereby allowing competing
telecommunications carriers access to ILECs' OSS. These requirements pose
significant technological challenges to existing OSS, which are already
strained by the incremental changes necessitated by long distance deregulation
and the introduction of value-added services such as voice mail and call
waiting. Existing carriers must develop new systems that are interoperable with
their legacy systems, not only to support the LNP and unbundling requirements
of the Act but also to enable them to respond to increasing competitive
3
<PAGE>
challenges. In addition, carriers entering local telephone markets require LNP
solutions that do not depend on an existing OSS infrastructure and that can be
deployed quickly and cost-effectively. Thus, the Company believes that
carriers' OSS are evolving from back-office legacy systems to strategic
business systems that play an increasingly important role in enhancing
competitiveness as well as enabling compliance with the requirements of the
Act.
Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of solutions to satisfy technically challenging
OSS requirements to position itself as a provider of next-generation OSS
solutions while continuing to provide custom software development services.
From its inception in 1985 through 1996, the Company focused on providing
custom software development services to a limited number of telecommunications
companies. In order to capitalize on the market demand for OSS solutions to
implement LNP, the Company made a strategic decision in 1996 to expand its
focus to include development of standard software products to address a variety
of needs created by LNP. The Company's current LNP software products,
OrderPath, NumberManager and NodeMaster, allow carriers to accommodate customer
requests to change carriers while retaining the same telephone number and to
obtain and disseminate call routing data to the carriers' networks. To date,
customers for the Company's LNP solutions include Ameritech Corporation
("Ameritech"), Pacific Bell, Inc. ("Pacific Bell")/SBC Communications, Inc.
("Southwestern Bell"), Sprint Corporation ("Sprint") and WorldCom, Inc.
("WorldCom"). The Company's primary custom software development customers
include GTE Corporation ("GTE"), Lockheed-Martin IMS Corporation ("Lockheed")
and Lucent Technologies, Inc. ("Lucent"), formerly part of American Telephone &
Telegraph Company ("AT&T").
The Company intends to leverage its initial LNP success and substantial
custom software expertise to address the evolving needs of carriers and
telecommunications service providers by developing and providing a family of
innovative OSS solutions. The Company's LNP and future OSS products are being
designed to provide comprehensive, flexible, reliable and scalable solutions to
meet the rapidly changing needs of today's multi-carrier environment. The
Company is developing its OSS platform, an OSS environment that supports
multiple applications and includes a scalable, extensible database, application
program interfaces ("APIs") for third-party developers to write compatible
applications, business logic that governs the data dissemination throughout
other OSS platforms and standard legacy application interfaces to facilitate
rapid implementation. The Company's approach seeks to offer carriers time-to-
market advantages, protection of legacy system investments and cost-effective
OSS deployment, staffing, operation and maintenance.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 3,090,909 shares
Common Stock offered by the Selling
Stockholders................................... 909,091 shares
Common Stock to be outstanding after this
offering....................................... 10,831,656 shares(1)
Use of Proceeds................................. Repayment of indebtedness, working capital
and other general corporate purposes. See
"Use of Proceeds".
Proposed Nasdaq National Market Symbol.......... EVOL
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
(i) 1,887,401 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 1997 under the Company's Amended and
Restated Stock Option Plan, at a weighted average exercise price of $4.92
per share, and (ii) 910,633 shares of Common Stock issuable upon exercise
of warrants outstanding as of December 31, 1997, at a weighted average
exercise price of $.80 per share. Assumes no other exercise of stock
options or warrants after December 31, 1997. See "Management--Employee
Benefit Plans", "Description of Capital Stock--Warrants" and Note 4 of
Notes to Financial Statements.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and related services.. $ -- $ -- $ -- $ 882 $20,034
Other services..................... 17,810 33,032 45,355 36,036 22,686
------- ------- ------- ------- -------
Total revenue...................... 17,810 33,032 45,355 36,918 42,720
Cost of revenue:
License fees and related services.. -- -- -- 450 6,339
Other services..................... 11,327 18,181 26,589 24,081 18,885
------- ------- ------- ------- -------
Total cost of revenue.............. 11,327 18,181 26,589 24,531 25,224
------- ------- ------- ------- -------
Gross margin........................ 6,483 14,851 18,766 12,387 17,496
Operating income ................... 4,109 8,150 6,815 246 882
Income (loss) before income taxes... 4,062 8,014 6,126 (1,176) (513)
Provision for (benefit from) income
taxes.............................. -- -- -- 81 (791)
------- ------- ------- ------- -------
Net income (loss)................... $ 4,062 $ 8,014 $ 6,126 $(1,257) $ 278
======= ======= ======= ======= =======
Pro forma (1):
Income (loss) before income taxes.. $ 4,062 $ 8,014 $ 6,126 $(1,176)
Provision for (benefit from) income
taxes............................. 1,626 3,007 2,301 (298)
------- ------- ------- -------
Net income (loss).................. $ 2,436 $ 5,007 $ 3,825 $ (878)
======= ======= ======= =======
Net income (loss) per common share
(2)(3)............................. $ 2.65 $ 5.24 $ 4.00 $ (0.82) $ 0.18
======= ======= ======= ======= =======
Diluted net income (loss) per common
share (2).......................... $ 2.65 $ 5.24 $ 4.00 $ (0.82) $ 0.03
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED (4)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 1,171 $ 19,553
Working capital........................................ 5,366 24,098
Total assets........................................... 27,859 46,242
Long-term obligations.................................. 16,465 4,579
Stockholders' equity................................... 1,698 32,443
</TABLE>
- --------
(1) Prior to January 6, 1996, the Company was an S corporation for federal and
state income tax purposes, and accordingly, the Company's income was taxed
directly to the Company's stockholders. Pro forma adjustments reflect the
federal and state income tax expense if the Company had not been an S
corporation prior to January 6, 1996.
(2) See Note 1 of Notes to Financial Statements for a discussion of the
computation of net income (loss) per common share and weighted average
common shares outstanding.
(3) Supplemental net income (loss) per share for the year ended December 31,
1996 and 1997, assuming the subordinated debt with stockholders was not
outstanding during any of the periods, would be $(.25) and $.32,
respectively. See "Use of Proceeds".
(4) Pro forma as adjusted to reflect the receipt of the estimated net proceeds
from the sale of 3,090,909 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $11.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company. The pro forma as
adjusted balances also reflect the anticipated application of the net
proceeds excluding any loss on extinguishment of debt on the repayment of
the Subordinated Notes and the Stockholder Notes (as defined herein), as
well as the conversion of all shares of Preferred Stock into Common Stock.
See "Capitalization" and "Use of Proceeds".
----------------
MetOSS(TM), OrderPath(TM), NumberManager(TM) and NodeMaster(TM) are
trademarks of the Company. All other trademarks, service marks or trade names
referred to in this Prospectus are the property of the respective owners
thereof.
5
<PAGE>
RISK FACTORS
In addition to other information contained in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. All
statements, trend analysis and other information contained in this Prospectus
relative to markets for the Company's products and trends in revenue, gross
margin and anticipated expense levels, as well as other statements including
such words as "anticipate", "believe", "plan", "estimate", "expect" and
"intend" and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
in the section entitled "Business", as well as those discussed elsewhere in
this Prospectus.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past
and are likely to continue to fluctuate significantly in the future.
Fluctuations in operating results may result in volatility in the price of the
Company's Common Stock. Although the Company was profitable in each of the
last three quarters, there can be no assurance that the Company will continue
to be profitable in the future or that the Company's level of profitability
will not vary significantly between quarters. These quarterly fluctuations may
result from a number of factors, including the magnitude, timing and signing
of new contracts; the Company's rate of progress under such contracts; the
timing of customer and market acceptance of the Company's product and service
offerings; actual or anticipated changes in government laws and regulations
related to the telecommunications market or judicial or administrative actions
with respect to such laws or regulations; the nature and pace of enforcement
of the Act; product lifecycles; the Company's success in effecting its planned
transition to a product-based business; the mix of products and services sold;
changes in demand for the Company's products and services; the timing of
third-party contractors' delivery of software and hardware; budgeting cycles
of the Company's customers; changes in the renewal rate of support agreements;
the timing and amount of expenditures made by the Company for research and
development and sales, general and administrative expenses; competition by
existing and emerging competitors in the telecommunications software markets;
the Company's success in developing and marketing new products, controlling
costs, attracting and retaining qualified personnel and expanding its sales
and marketing programs; regional office expansion; software defects and other
product quality problems; changes in the Company's strategy; the extent of
industry consolidation; expansion of the Company's international operations;
and general economic conditions.
A significant portion of the Company's revenue has been and is expected to
continue to be derived from a small number of customers. Accordingly, the loss
of any significant customer, delays in delivery or acceptance of any of the
Company's products or delays in the performance of services could have a
material adverse effect on the Company's business, financial condition and
results of operations. Historically, the Company has recognized both license
fees and service fee revenue under its customer contracts using the
percentage-of-completion method. The Company is broadening its strategy to
include the development and sale of software products. To the extent that the
Company is successful in doing so, the Company expects that it may be able to
record future revenue from license fees upon the delivery of a software
product to a customer. The Company's ability to recognize revenue on software
licenses as packaged software solutions at the time of delivery depends on its
ability to engage third parties to implement its software and to separately
license the software and separately sell implementation services, as well as
technical factors and customer expectations and requirements. There can be no
assurance that the Company will be able to achieve or maintain a sales model
that allows the Company to record license fees when software products are
delivered to customers. Software companies that account for revenue from
license fees upon delivery of software
6
<PAGE>
products may be exposed to increased risk of quarterly fluctuations. To the
extent that this pattern develops at the Company, any failure or delay in the
delivery of orders during any given quarter could have a material adverse
effect on the Company's business, financial condition and results of
operations. The timing of revenue recognition from the Company's contracts has
caused, and may continue to cause, material fluctuations in the Company's
operating results, particularly on a quarterly basis.
The Company's expense levels are based in significant part on its
expectations regarding future revenue. The Company's revenue is difficult to
forecast because the market for the Company's products and services is rapidly
evolving, and the Company's sales cycle and the size and timing of significant
contracts vary substantially among customers. Accordingly, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenue. For example, GTE, which had been the Company's largest
customer from 1991 through 1995, significantly reduced its demand for the
Company's services in 1995. Although the Company reduced its workforce in late
1995, the Company incurred operating losses during the quarter ended March 31,
1996. The Company also sustained an operating loss in the quarter ended March
31, 1997 as the Company incurred higher development costs as it expanded its
focus to include the development and sale of standard software products. More
recently, in anticipation of expected growth, the Company increased its
workforce by 54 new employees in 1997 and expects to continue hiring
additional consulting, support and development employees during 1998. Any
significant shortfall from anticipated levels of demand for the Company's
products and services could have a material adverse effect on the Company's
business, financial condition and results of operations.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter
to quarter. As a result, quarter-to-quarter comparisons of operating results
are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business
or generally, the market price of the Company's Common Stock would likely be
materially adversely affected. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The Company has experienced and is expected to continue to experience a
significant degree of seasonality, with a lower percentage of the Company's
revenue and net income being recognized in its first quarter. The Company
believes that such seasonality is the result of buying patterns linked to the
telecom company capital appropriation process. Because revenue, operating
margins and net income are greater in the fourth quarter, any shortfall in
revenue in that period would disproportionately affect the Company's annual
results.
DEPENDENCE UPON TELECOMMUNICATIONS INDUSTRY; REGULATORY UNCERTAINTIES
The market for the Company's LNP products was created and has primarily been
driven by the adoption of regulations under the Act requiring RBOCs to
implement LNP as a condition to being permitted to provide long distance
services. Therefore any changes to such regulations, or the adoption of new
regulations by federal or state regulatory authorities under the Act, or any
legal challenges to the Act, could have a material adverse effect upon the
market for the Company's products and services. Although the Act was designed
to expand competition in the telecommunications industry, the realization of
the objectives of the Act is subject to many uncertainties, including judicial
and administrative proceedings designed to define rights and obligations
pursuant to the Act, actions or inactions by ILECs and other carriers that
affect the pace at which the changes contemplated by the Act occur, resolution
of questions concerning which parties will finance such changes and other
regulatory, economic and political factors.
7
<PAGE>
The Company is aware of certain litigation challenging the validity of the
Act and the local telephone competition rules adopted by the Federal
Communications Commission ("FCC") to implement the Act. The U.S. Eighth
Circuit Court of Appeals has invalidated the pricing methodology and
unbundling requirements adopted by the FCC while upholding a portion of the
FCC's local competition rules. The Supreme Court has recently granted the
petitions of certioriari filed by both the United States government and the
ILECs in such case. In December 1997, a U.S. District Court in Texas held that
the provisions of the Act which require RBOCs to comply with certain
conditions, including LNP, in order to receive regulatory approval to enter
long distance markets are unconstitutional. The U.S. Justice Department,
representing the FCC, has appealed this decision. In February 1998, the U.S.
District Court in Texas stayed its decision pending appellate review. Such
litigation may serve to delay implementation of the Act, which could adversely
affect demand for the Company's products and services. Any delays in the
deadlines imposed by the Act or the FCC, or any invalidation, repeal or
modification in the requirements imposed by the Act or the FCC, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, customers may require, or the Company
otherwise may deem it necessary or advisable, that the Company modify its
products or services to address actual or anticipated changes in the
regulatory environment. Any other delay in implementation of the Act, or other
regulatory changes, could materially adversely affect the Company's business,
financial condition and results of operations.
Virtually all of the Company's revenue is derived from sales of products and
services for telecommunications and data communications applications. These
markets are characterized by intense competition, regulatory and legal
uncertainty, rapid technological change and short product life cycles. In
addition, the telecommunications market has undergone a period of rapid growth
and consolidation in the last few years. The Company's business, financial
condition and results of operations would be materially adversely affected in
the event of a significant slowdown in these markets. See "Business--Industry
Background--The Telecommunications Industry".
EXPANSION OF STRATEGIC FOCUS
The Company is expanding its strategic focus from its historic business of
consulting services to also offer standard software products, related
integration services and custom development services. This expansion of the
Company's strategic focus entails a number of risks. Prior to the introduction
of the Company's initial LNP products, the Company derived virtually all of
its revenue from contracts for consulting services for telecommunications
companies, including requirements definition, system design, project
management and other professional services and custom development services.
Although the Company intends to continue to offer such services, the Company
anticipates that such services will represent a declining percentage of the
Company's total revenue if the Company's expansion strategy is successful.
Approximately one-half of the Company's revenue for the year ended December
31, 1997 was attributable to its LNP products and related services, and the
Company believes that its revenue, at least through 1999, will continue to be
substantially dependent upon LNP products and related services. In addition,
the potential for future revenue growth is substantially dependent upon market
acceptance of the Company's LNP products and of the Company's MetOSS products
under development. The Company's principal customers for its LNP products to
date have been major telecommunications service providers, which historically
have developed or purchased highly customized solutions. Such customers may
resist the use of standardized products and product modules. In addition, such
customers historically have sought to be exclusive licensees of the Company's
solutions. Such customers may resist licensing products on a non-exclusive
basis, which may lengthen the Company's sales cycle and affect the Company's
ability to enter into contracts with new customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--MetOSS Products".
Many of the Company's initial LNP customers are ILECs, which have been
implementing LNP systems due to the requirements of the Act. Accordingly, once
such providers have complied with the provisions of the Act, demand for the
Company's LNP products may fall. Although a number of new carriers have
entered the local telephone market, the decisions by potentially competitive
carriers to
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enter the local telephone service market depend on a number of competitive,
regulatory and business factors, and the extent and pace of competitive entry
cannot be predicted. Recently, several large telecommunications carriers have
announced that they are deferring plans to enter the local telephone service
market. The Company's future revenue opportunities depend to a significant
extent on the Company's success in broadening the customer base for its LNP
products and services, successfully completing the development of new MetOSS
products and gaining acceptance of such products by existing and new
customers. If, as a result of judicial or regulatory action, carriers no
longer believe that it is necessary to implement LNP in a timely manner, the
market for the Company's LNP and related products and services would be
materially adversely affected. There can be no assurance that the Company will
successfully expand its base of LNP customers, that its new MetOSS products
will be successfully developed in a timely manner or that such products will
achieve acceptance by existing or new customers. If the Company's current or
future competitors release new products that have more advanced features,
offer better performance or are more price competitive than the Company's
products, demand for the Company's products may decline. Moreover, delays in
entry to the local telephone service market by competitive carriers could
adversely affect demand for the Company's products. Any decline in demand for
the Company's products as a result of competition, technological change or
other factors would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Competition".
The Company has made a number of changes in its management and is making
extensive changes in its business processes in connection with the expansion
of its strategic focus. During 1996 and 1997, the Company experienced
significant employee turnover as it underwent this strategic change, and there
can be no assurance that the Company will retain key personnel as it continues
this process. Development and implementation of new business processes can be
time-consuming and expensive. There can be no assurance that the Company will
successfully complete this expansion of its strategic focus, or that it will
not incur unanticipated difficulties or costs in doing so, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--Changes in Management; Management of Growth;
Dependence on Key Personnel".
RELIANCE ON SIGNIFICANT CUSTOMERS
Historically, a substantial portion of the Company's revenue has been
derived from a limited number of customers. Ameritech, GTE, Lockheed, Lucent,
Southwestern Bell and Sprint accounted for approximately 15%, 13%, 12%, 20%,
19% and 10%, respectively, of the Company's revenue in 1997. AT&T, BellSouth
Telecommunications, Inc. ("BellSouth"), GTE, Lockheed and Lucent accounted for
approximately 10%, 17%, 16%, 10% and 20% respectively, of the Company's
revenue in 1996. In addition, GTE and Lucent accounted for 58% and 20%,
respectively, of the Company's total revenue in 1995. The Company expects to
continue to depend on large contracts with a small number of significant
customers, which can cause its revenue and earnings to fluctuate between
quarters based on the timing of contracts and installation of the Company's
products by these customers. None of the Company's major customers has any
obligation to purchase additional products or services. Consequently, the
failure by the Company to develop relationships with significant new customers
would have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, business or marketplace
consolidations affecting one or more of the Company's major customers could
result in the loss of that customer, which also could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations", "Business--Customers" and Note 1 of Notes to
Financial Statements.
LENGTHY IMPLEMENTATION PROCESS; CUSTOMER ACCEPTANCE OF LNP PRODUCTS
Implementation of the Company's software is a relatively complex and lengthy
process that involves significant allocation of resources by the Company in
order to adapt and customize such software for each customer's unique
environment. Moreover, certain of the Company's customers may require rapid
deployment of the Company's software products, resulting in pressure on the
Company
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to meet demanding delivery and implementation schedules. Delays in
implementation may result in customer dissatisfaction and/or damage to the
Company's reputation and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's existing contracts, including LNP contracts, provide for
acceptance testing by the customer before the contract is considered complete.
To date, none of the Company's LNP customers has notified the Company of their
final acceptance of the Company's software. Unanticipated difficulties or
delays in the customer acceptance process could result in higher costs and
delayed payments. Moreover, if the Company fails to satisfy acceptance
criteria within prescribed times, the customer may be entitled to cancel its
contract and receive a refund of all or a portion of amounts previously paid
or other amounts as liquidated damages, which could exceed related contract
revenue and which could result in a future charge to earnings. Any failure or
delay in achieving final acceptance of the Company's software and services
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
LENGTHY SALES CYCLE
The Company's software products and services are generally used by large
telecommunications service providers for enterprise-wide, mission-critical
purposes, involving significant capital expenditures and lengthy
implementation plans. Prospective customers typically commit significant
resources to the technical evaluation of the Company's products and services
and require the Company to expend substantial time, effort and money providing
education regarding the Company's solutions. This evaluation process often
results in an extensive and lengthy sales cycle, typically ranging between six
and 12 months, making it difficult for the Company to forecast the timing and
magnitude of sales contracts. Delays associated with customers' internal
approval and contracting procedures, procurement practices, and testing and
acceptance process are common. For example, customers' budgetary constraints
and internal acceptance reviews may cause potential customers to delay or
forego a purchase. The delay or failure to complete one or more large
contracts could have a material adverse effect on the Company's business,
financial condition or results of operations and cause the Company's operating
results to vary significantly from quarter to quarter. See "Business--
Marketing and Sales".
FIXED-PRICE CONTRACTS
The Company historically had derived a majority of its revenue from
contracts that were billed on a time-and-materials basis. Beginning in mid-
1996, a majority of the Company's revenue has been derived from contracts that
were billed on a fixed-price basis. The Company in the past has incurred
budget overruns on certain fixed-price contracts, resulting in lower than
anticipated margins, and there can be no assurance that the Company will not
incur such budget overruns in the future. If the Company incurs such budget
overruns, the Company's gross margins and results of operations may be
materially adversely affected. To the extent that the Company continues to
provide custom software development or consulting services, it anticipates
that customers will continue to request that the Company provide software and
implementation services as a total solution on a fixed-price basis. These
contracts specify certain obligations and deliverables to be met by the
Company regardless of actual costs incurred by the Company. There can be no
assurance that the Company can successfully complete these contracts on
budget, and the Company's inability to do so could have a material adverse
effect on its business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW VERSIONS AND NEW
PRODUCTS; RISKS OF SOFTWARE DEFECTS
The market for the Company's products and services is subject to rapid
technological changes, evolving industry standards, changes in carrier
requirements and preferences and frequent new
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product introductions and enhancements. The introduction of products that
incorporate new technologies and emergence of new industry standards can
render existing products obsolete and unmarketable. To compete successfully,
the Company must continue to design, develop and sell enhancements to existing
products and new products that provide higher levels of performance and
reliability in a timely manner, take advantage of technological advancements
and changes in industry standards and respond to new customer requirements.
There can be no assurance that the Company will successfully identify new
product opportunities or will achieve market acceptance of new products
brought to market. Products developed by others may render the Company's
products obsolete or noncompetitive. Any failure by the Company to anticipate
or respond adequately to changes in technology and customer preferences,
failure of the Company's products to perform satisfactorily or any significant
delay in product development or introductions could have a material adverse
effect on its business, financial condition and results of operations.
The Company intends to issue interim and new releases of its family of
software products periodically. As a result of the complexities inherent in
software development, major new product enhancements and new products can
require long development and testing periods before they are commercially
released. There can be no assurance that delays will not occur in the future.
The Company's products consist of software developed by the Company and
others. Errors or compatibility problems in the Company's products, including
those in licensed third-party software, which are detected prior to a new
product release could cause the Company to delay the introduction of new
products and incur additional expense. The Company's new products and new
versions of existing products also may contain errors or compatibility
problems which may not be discovered until after the product has been
installed and used by customers. There can be no assurance that errors will
not be found in new versions of the Company's products before or after
commencement of commercial use, or that any such errors will not result in
adverse customer reaction, negative publicity regarding the Company and a loss
of or delay in market acceptance and have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
currently has errors and omissions insurance which, subject to customary
exclusions, covers claims resulting from failure of the Company's software
products or services to perform the function or to serve the purpose intended.
To the extent that any successful product liability claim is not covered by
such insurance, the Company's business, financial condition and results of
operations may be materially adversely affected.
COMPETITION
The Company's primary markets are intensely competitive and are subject to
rapid technological change, evolving industry standards and regulatory
developments. The Company faces continuous demand for improved product
performance, new product features and reduced prices, as well as intense
pressure to accelerate the release of new products and product enhancements.
The Company's existing and potential competitors include many large domestic
and international companies, including certain of the Company's customers,
that have substantially greater financial, manufacturing, technological,
marketing, distribution and other resources, larger installed customer bases
and longer-standing relationships with customers than the Company. The
Company's principal competitors in the LNP market include Bell Communications
Research, Inc. ("Bellcore"), Lucent, Northern Telecom, Inc. ("Nortel") and
Tekelec, Inc. ("Tekelec"). The Company believes that competitors of its MetOSS
products will include AG Communications Systems Corporation ("AG
Communications"), Bellcore, Cincinnati Bell Information Systems, Inc.
("CBIS"), Ericcson, Inc. ("Ericcson") and Lucent. One of the Company's
principal customers, Lucent, competes with the Company with respect to certain
of the Company's products and services, and there can be no assurance that
Lucent will not expand the range of products and services that it offers in
competition with the Company. In addition, Lockheed has retained rights to the
NPAC software developed for
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Lockheed by the Company, and Lockheed potentially could compete with the
Company with respect to LNP products and related services. There also can be
no assurance that other customers will not offer competitive products or
services in the future. The Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier
than the Company's solutions. Many telecommunications companies have large
internal development organizations which develop software solutions and
provide services similar to the Company's products and services. Moreover,
customers who have purchased custom software solutions from the Company are
not precluded from competing with the Company.
Although the Company developed certain NPAC software for Lockheed, Lockheed
is under no obligation to utilize the Company as a vendor on future LNP-
related projects. In addition, there can be no assurance that carriers will
look to the Company for future LNP software products.
The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside of its control, including
responsiveness to service providers' needs, quality and reliability of the
Company's and its competitors' products and services, price, project
management capabilities, technical subject matter expertise, quality of
customer service and support, the emergence of new industry standards, the
development of technical innovations, the attraction and retention of
qualified personnel, regulatory changes and general market and economic
conditions. A variety of potential actions by the Company's competitors,
including a reduction of product prices or increased promotion, announcement
or accelerated introduction of new or enhanced products, or cooperative
relationships among competitors, could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully with
existing or new competitors or will properly identify and address the demands
of new markets. The failure by the Company to adapt to emerging market
demands, respond to regulatory and technological changes or to compete
successfully with existing and new competitors would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Competition".
CHANGES IN MANAGEMENT; MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
Most of the senior management team joined the Company recently and have
worked together at the Company for only a brief period. J. Richard Abramson,
President and Chief Executive Officer, Jeffrey J. Finn, Senior Vice President
and General Manager of Product Development and Distribution, James M. Ross,
Senior Vice President and General Manager of Services, and Roger A. Barnes,
Senior Vice President of Finance and Chief Financial Officer, joined the
Company in August 1996, July 1996, June 1997 and November 1997, respectively.
The loss of one or more key employees could have a material adverse effect on
the Company. The Company does not maintain key man insurance policies on any
members of senior management.
The Company is currently experiencing a period of rapid growth in license
fees and related services revenue, placing significant demands on its
administrative, operations and financial personnel and systems. The Company's
ability to manage future expansion, if any, effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate
new management and employees into its overall operations and to continue to
improve its operational, financial and management systems. The Company
anticipates that it will need to hire additional research and development
personnel. Competition for research and development and other technical
personnel is intense, and there can be no assurance that the Company will be
able to hire additional personnel on a timely basis, if at all. Because of the
complexity of the Company's software products, a significant
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time lag exists between the hiring date of technical and sales personnel and
the time at which they become fully productive. Although the Company has
increased the number of its sales, marketing, service and support personnel in
recent years, the Company has at times experienced and continues to experience
difficulty in recruiting such personnel. Any failure by the Company to hire
qualified personnel on a timely basis could materially adversely affect the
Company's business, financial condition and results of operations.
The Company is currently in the process of implementing new financial and
project accounting software packages. The Company's ability to implement these
new systems is likely to place substantial demands on certain of the Company's
managerial resources. In addition, if the Company is unable to implement these
software packages in a timely manner, the Company's ability to accurately
forecast and manage its business may be adversely affected. The Company's
failure to manage any expansion effectively, including any failure to
integrate new management and employees or failure to continue to implement and
improve financial, operational and management controls, systems and
procedures, could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS OF PLANNED INTERNATIONAL EXPANSION
Although the Company derived no revenue from international markets in 1997
or prior years, the Company has recently begun to pursue such opportunities.
Regulatory standards and the pace of adoption of new telecommunications
technologies vary widely from country to country and may be different from
those in the U.S. To the extent that such regulatory standards and market
conditions do not encourage the deployment of products similar to the
Company's, the Company may not be able to develop international markets for
its products or services, which could have an adverse impact on the Company's
future marketing prospects. International expansion of the Company's business
may cause an increased portion of the Company's revenue, cost of revenue and
operating expenses to be denominated in foreign currencies. To the extent that
revenue or expenses are denominated in foreign currencies, the Company will be
exposed to increased risk associated with currency exchange fluctuations.
Adverse currency exchange fluctuations could have a material adverse effect on
the Company's business, financial condition and results of operations. In
order to manage such exposure, the Company may undertake foreign exchange
hedging transactions, although none are currently contemplated. There can be
no assurance that any such hedging transactions will adequately hedge the
Company's foreign currency exposure, or that such transactions will not result
in losses to the Company.
International expansion of the Company's business will require significant
management attention and financial resources. Traditionally, international
operations may be characterized by higher operating expenses, such as the
establishment of foreign offices, the hiring of additional personnel, the
localization and marketing of products for particular foreign markets and the
development of relationships with international service providers. As a
result, if international revenue is generated, operating margins may be
adversely affected. Moreover, in order to expand internationally, the Company
will be required to establish relationships with distributors and third-party
integrators. There can be no assurance that the Company will be able to
effectively establish such relationships. If international revenue is not
adequate to offset the additional expense of expanding foreign operations, the
Company's business, financial condition and results of operations could be
materially adversely affected.
PRODUCT LIABILITY
The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential liability for damages
arising out of use of or defects in the Company's products. The nature and
extent of such limitations, however, tend to vary from customer to customer
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and it is possible that such limitations of liability provisions may not be
effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions. In addition, the Company currently has errors
and omissions insurance which, subject to customary exclusions, covers claims
resulting from failure of the Company's software products or services to
perform the function or to serve the purpose intended. To the extent that any
successful product liability claim is not covered by such insurance, the
Company's business, financial condition and results of operations may be
materially adversely affected, particularly since the Company's software
products may be used in critical business applications. Defending such a suit,
regardless of its merits, could involve substantial expense and require the
time and attention of key management personnel, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's business reputation could be
adversely affected by product liability claims, regardless of their merit or
the eventual outcome of such claims.
YEAR 2000 CAPABILITY
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
The Company believes that the purchasing patterns of customers and potential
customers may be significantly affected by Year 2000 issues. Many companies
are expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase software products such as those offered by the
Company. Many potential customers may also defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus
resulting in potentially deferred sales. Conversely, Year 2000 issues may
cause other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
products. Additionally, Year 2000 issues could cause a significant number of
companies, including current customers of the Company, to reevaluate their
current system needs and as a result consider switching to other systems or
suppliers. This could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company currently offers software products that are designed to be Year
2000 compatible, and the Company's current contracts with its customers
require that the Company warrant Year 2000 capability. Although the Company
has designed its products to be Year 2000 capable and tests third-party
software that is incorporated with the Company's products, there can be no
assurance that the Company's software products, particularly when such
products incorporate third-party software, contain all necessary date code
changes.
The Company utilizes off-the-shelf and custom software developed internally
and by third parties. To the extent that such software and systems do not
comply with Year 2000 requirements, there can be no assurance that potential
systems interruptions or the cost necessary to update such software will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect its
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proprietary rights. The Company presently has no patents, but has patent
applications pending in the U.S. on elements of its three LNP products,
NumberManager, OrderPath and NodeMaster. In addition, the Company has
registered or filed for registration of certain of its trademarks. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's products or technology without authorization or
to develop similar technology independently through reverse engineering or
other means. In addition, the laws of some foreign countries do not adequately
protect the Company's proprietary rights. There can be no assurance that the
Company's means of protecting its proprietary rights in the U.S. or abroad
will be adequate or that others will not independently develop technologies
that are similar or superior to the Company's technology, duplicate the
Company's technology or design around any patent of the Company. Moreover,
litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
management time and resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
There has been substantial litigation in the software industry regarding
intellectual property rights, and there can be no assurance that third parties
will not claim infringement by the Company of their intellectual property
rights. If the Company were found to have infringed the intellectual property
rights of any third party, the Company could be subject to liabilities for
such infringement, which liabilities could be material. The Company could be
required to seek licenses from other companies or to refrain from using or
selling certain products or using certain processes. Although holders of
patents and other intellectual property rights may offer licenses to their
patent or other intellectual property rights, no assurance can be given that
licenses would be offered or that the terms of any offered license would be
acceptable to the Company. Any need to redesign the products or to enter into
any royalty or licensing agreement could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company currently distributes software upgrades, enhancements and
patches to its customers through its internal website. Although the Company
attempts to ensure that access to such material is limited to customers, there
can be no assurance that these protective measures will be sufficient to
prevent unauthorized persons from gaining access to portions of the Company's
products, allowing them to copy or use the materials.
The Company also relies on certain other technology which it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform certain key functions.
There can be no assurances that such third-party products do not infringe the
intellectual property rights of others. Although the licenses provided to the
Company by such third parties typically contain intellectual property
warranties and indemnification clauses, such clauses often are not as broad as
those required by the Company's customers. Even when the indemnity that the
Company received from a third-party licensor is as broad as the indemnity that
the Company provides to its customers, the third-party licensors from which
the Company would be receiving indemnity are often not well-capitalized and
may not be able to indemnify the Company in the event that such third-party
technology infringes the proprietary rights of others. Accordingly, the
Company could have substantial exposure in the event that the technology
licensed from a third party infringes another party's proprietary rights. In
addition, the Company's LNP products, OrderPath, NumberManager and NodeMaster,
all contain certain core software licensed from a current customer under a
non-exclusive license, which may be licensed to other parties, including
competitors of the Company. This license is terminable by the customer if the
Company fails to meet certain contractual obligations.
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SECURITY
The Company has included security features in certain of its products that
are intended to protect the privacy and integrity of customer data. Despite
the existence of these security features, the Company's software products may
be vulnerable to breaches in security due to defects in the security
mechanisms, as well as vulnerabilities inherent in the operating system or
hardware platform on which the product runs, and/or the networks attached to
that platform. Security vulnerabilities, regardless of origin, could
jeopardize the security of information stored in and transmitted through the
computer systems of the Company's customers. On all projects to date, the
Company's customers have accepted responsibility for security issues
associated with the operating system, hardware platform and network
configuration; however, this may change in the future. Solving any future
security problems may require significant capital expenditures and affect the
Company's reputation and product acceptance, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, the Company's current directors and
executive officers and their respective affiliates will beneficially own
approximately 55.7% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal and Selling Stockholders".
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Company's Common Stock will develop or be sustained after this offering.
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the Underwriters. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, changes in financial estimates by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to the Company, general stock market and
economic considerations and other events or factors. In addition, the stock
market has experienced volatility that has particularly affected the market
prices of equity securities of many technology companies and that often has
been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the trading price of the Company's
Common Stock. As a result of the foregoing factors, there can be no assurance
that the Company's Common Stock will trade at or higher than the initial
public offering price.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock will suffer an immediate and substantial
dilution in the net tangible book value per share of the Common Stock from the
proposed initial public offering price. To the extent that options or warrants
to purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution".
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this offering, the Company will have 10,837,909 shares of
Common Stock outstanding, of which the 3,090,909 shares offered hereby by the
Company and the 909,091 shares offered hereby by the Selling Stockholders will
be freely tradable without restriction or registration
16
<PAGE>
under the Securities Act of 1933, as amended (the "Securities Act"), unless
purchased by "affiliates" of the Company as that term is defined under the
Securities Act and the regulations promulgated thereunder. The remaining
6,837,909 shares of Common Stock are "restricted securities" as that term is
defined by Rule 144 promulgated under the Securities Act. Beginning 90 days
from the date of this Prospectus, approximately 28,744 shares will be eligible
for sale in the public market pursuant to the provisions of Rule 144 and Rule
701 under the Securities Act. The Company, the Selling Stockholders, the
directors, executive officers and certain other stockholders and optionees of
the Company, holding in the aggregate approximately 6,809,165 shares of Common
Stock, have agreed that they will not, directly or indirectly, offer to sell,
dispose of or transfer any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock for a period
of 180 days from the date of this Prospectus without the prior written consent
of Goldman, Sachs & Co. on behalf of the Underwriters. Upon the expiration of
this 180-day lock-up period, all of such shares will become available for sale
in the public market subject to compliance with Rule 144, Rule 144(k) or Rule
701. Holders of 6,740,909 shares of Common Stock have the right, under certain
conditions, to participate in future Company registrations or to cause the
Company to register certain shares of Common Stock owned by them.
Additionally, holders of the Company's outstanding warrants to purchase
910,633 shares of Common Stock are entitled to registration rights upon the
exercise of such warrants. In addition, the Company intends to file a
registration statement on Form S-8, which will result in registration of a
total of approximately 3,313,011 shares of Common Stock reserved for issuance
under the Company's Amended and Restated Stock Option Plan (the "Stock Option
Plan") and Employee Stock Purchase Plan (the "Purchase Plan"), of which
options to purchase 1,887,401 shares were outstanding at December 31, 1997.
Sales of substantial amounts of Common Stock in the public market may have an
adverse impact on its market price. See "Description of Capital Stock--
Warrants", "--Registration Rights", "Shares Eligible for Future Sale" and
"Underwriting".
CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of this offering, the Company's Board of Directors will have
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. Such issuance of Preferred Stock, while providing desired flexibility
in connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of Delaware General Corporation Law,
which prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in the prescribed manner. The application of
Section 203 and certain provisions of the Company's Restated Certificate of
Incorporation, including a classified Board of Directors, may have the effect
of delaying or preventing changes in control of management of the Company,
which could adversely affect the market price of the Company's Common Stock by
discouraging or preventing takeover attempts that might result in the payment
of a premium price to the Company's stockholders. See "Description of Capital
Stock--Delaware Anti-Takeover Law and Certain Charter Provisions".
SUBSTANTIAL DISCRETION IN USE OF PROCEEDS
The Company currently has no specific plans for a portion of the net
proceeds of this offering. As a consequence, the Company's management will
have the discretion to allocate this portion of the net proceeds of this
offering to uses that the stockholders may not deem desirable, and there can
be no assurance that these proceeds can or will be invested to yield a
significant return. See "Use of Proceeds".
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,090,909 shares of
Common Stock offered by the Company hereby are estimated to be $30,744,999
($32,730,550 if the Underwriters' over-allotment option is exercised in full),
based on an assumed public offering price of $11.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of the shares being sold by the Selling Stockholders.
See "Principal and Selling Stockholders".
The Company intends to use the net proceeds of this offering primarily for
repayment of its obligations under the Subordinated Notes and Stockholder
Notes (as defined herein), working capital and other general corporate
purposes. The respective principal amounts (exclusive of $56,517 in accrued
interest) outstanding under the Subordinated Notes and the Stockholder Notes
are $6,792,885 and $5,092,859 and bear interest at the rates of 9% (with
deferred interest accrued at the rate of 12%) and 7.25%, respectively, with
respective maturity dates of June 1, 2004 and January 2, 2006. The amounts
actually expended by the Company for working capital purposes will depend upon
a number of factors, including future revenue growth, the amount of cash
generated by the Company's operations and the progress of the Company's
product development efforts. The Company may also use a portion of such net
proceeds to acquire or invest in businesses, products and technologies that
are complementary to those of the Company, although no specific acquisitions
are planned as of the date of this Prospectus, and no portion of the net
proceeds has been allocated for any particular acquisition.
Pending the uses described above, the Company intends to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY AND S CORPORATION STATUS
From June 7, 1985 to January 5, 1996, the Company was, for federal income
tax purposes, an S corporation under the Internal Revenue Code of 1986, as
amended (the "Code"), and was also an S corporation for state income tax
purposes under comparable state laws. As a result, the Company's net income
during this period was taxed for federal and certain state income tax purposes
directly to the Company's existing stockholders at that time at their
individual federal and state income tax rates, rather than to the Company.
During the fiscal years ended December 31, 1995 and December 31, 1996, the
Company made aggregate S corporation distributions to its stockholders in the
amounts of $5,811,810 and $7,257,623, respectively.
Since January 5, 1996, at which time the Company ceased to be an S
corporation, the Company has not declared or paid any cash dividends. The
Company currently intends to retain future earnings, if any, to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future.
18
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company, as of
December 31, 1997, was approximately $(1,041,000) or $(0.13) per share. Pro
forma net tangible book value (deficit) per share is equal to the Company's
total tangible assets less its total liabilities, divided by the number of pro
forma outstanding shares of Common Stock. After giving effect to the sale of
the 3,090,909 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $11.00 per share), the pro forma net
tangible book value of the Company at December 31, 1997 would have been
approximately $29,704,000 or $2.74 per share. This represents an immediate
increase in such net tangible book value of $2.87 per share to existing
stockholders and an immediate dilution of $8.26 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
Pro forma net tangible book value (deficit) per share.......... $(0.13)
Increase per share attributable to new investors(2)............ 2.87
------
Pro forma net tangible book value per share after this
offering(3)..................................................... 2.74
------
Dilution per share to new investors.............................. $ 8.26
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1997, the difference between the number of shares purchased from the Company,
the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed
initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 7,740,747 71.5% $ 72,650 .2% $ .01
New investors.............. 3,090,909 28.5 33,999,999 99.8 11.00
------------ ------- ----------- ----- -----
Totals................... 10,831,656 100.0% $34,072,649 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) Excludes 1,887,401 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of December 31, 1997 under the
Company's Stock Option Plan, at a weighted average exercise price of $4.92
per share, and 910,633 shares of Common Stock reserved for issuance upon
exercise of warrants outstanding as of December 31, 1997, at a weighted
average exercise price of $.80 per share. In addition, in December 1997,
the Board of Directors adopted an Employee Stock Purchase Plan and
reserved an aggregate of 250,000 shares for issuance thereunder. To the
extent that outstanding options and warrants are exercised in the future,
there will be further dilution to new investors. See "Management--Employee
Benefit Plans" and "Description of Capital Stock--Warrants".
(2) Does not give effect to the exercise of the Underwriters' over-allotment
option.
(3) After deducting estimated underwriting discounts and commissions and
estimated offering expenses of approximately $875,000 payable by the
Company.
19
<PAGE>
CAPITALIZATION
The following table sets forth the long-term obligations and capitalization
of the Company as of December 31, 1997, (i) on an actual basis, (ii) on a pro
forma basis after giving effect to the conversion of all outstanding shares of
Non-voting Common Stock and Preferred Stock into Common Stock and (iii) pro
forma as adjusted to give effect to the sale of 3,090,909 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share (after deducting the estimated underwriting
discounts and commissions and estimated offering expenses) and the application
of the estimated net proceeds therefrom. This table should be read in
conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term
obligations....................... $ 3,178 $ 3,178 $ 2,885
=========== =========== ===========
Long-term obligations.............. $ 13,287 $ 13,287 $ 1,694
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value;
8,160 shares authorized, 8,160
shares outstanding actual; no
shares outstanding pro forma and
pro forma as adjusted........... $ -- $ -- $ --
Common Stock, $.001 par value;
4,930,000 non-voting shares
authorized and 1,620,760 shares
outstanding actual; 10,070,000
voting shares authorized and
7,740,747 shares outstanding pro
forma; 25,000,000 shares
authorized and 10,831,656
outstanding pro forma as
adjusted(1)..................... 2 8 11
Additional paid-in capital....... 2,423 2,417 33,159
Deferred compensation............ (992) (992) (992)
Retained earnings................ 265 265 265
----------- ----------- -----------
Total stockholders' equity..... 1,698 1,698 32,443
----------- ----------- -----------
Total capitalization........... $ 14,985 $ 14,985 $ 34,137
=========== =========== ===========
</TABLE>
- --------
(1) Excludes 1,887,401 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of December 31, 1997 under the
Company's Stock Option Plan, at a weighted average exercise price of $4.92
per share, and 910,633 shares of Common Stock reserved for issuance upon
exercise of warrants outstanding as of December 31, 1997, at a weighted
average exercise price of $.80 per share. In addition, in December 1997,
the Board of Directors adopted an Employee Stock Purchase Plan and
reserved an aggregate of 250,000 shares for issuance thereunder. To the
extent that outstanding options and warrants are exercised in the future,
there will be further dilution to new investors. See "Management--Employee
Benefit Plans" and "Description of Capital Stock--Warrants".
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the financial statements and the notes thereto and other
financial information included elsewhere in this Prospectus. The statement of
operations data set forth below for the years ended December 31, 1995, 1996
and 1997 and the balance sheet data as of December 31, 1996 and 1997 are
derived from, and are qualified by reference to, the audited financial
statements of the Company appearing elsewhere in this Prospectus. The
statements of operations data for the years ended December 31, 1993 and 1994
and the balance sheet data as of December 31, 1993, 1994 and 1995 are derived
from audited financial statements of the Company not included in this
Prospectus. Historical results are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and
related services...... $ -- $ -- $ -- $ 882 $20,034
Other services......... 17,810 33,032 45,355 36,036 22,686
------- ------- ------- ------- -------
Total revenue.......... 17,810 33,032 45,355 36,918 42,720
------- ------- ------- ------- -------
Cost of revenue:
License fees and
related services...... -- -- -- 450 6,339
Other services......... 11,327 18,181 26,589 24,081 18,885
------- ------- ------- ------- -------
Total cost of revenue.. 11,327 18,181 26,589 24,531 25,224
------- ------- ------- ------- -------
Gross margin............ 6,483 14,851 18,766 12,387 17,496
Operating expense:
Sales and marketing.... 881 1,898 3,405 2,913 5,065
General and
administrative........ 1,280 4,321 7,725 8,587 8,635
Research and
development........... 213 482 821 641 2,914
------- ------- ------- ------- -------
Total operating
expense............... 2,374 6,701 11,951 12,141 16,614
------- ------- ------- ------- -------
Operating income ....... 4,109 8,150 6,815 246 882
Other income (expense),
net.................... (47) (136) (689) (1,422) (1,395)
------- ------- ------- ------- -------
Income (loss) before
income taxes........... 4,062 8,014 6,126 (1,176) (513)
Provision for (benefit
from) income taxes..... -- -- -- 81 (791)
------- ------- ------- ------- -------
Net income (loss)....... $ 4,062 $ 8,014 $ 6,126 $(1,257) $ 278
======= ======= ======= ======= =======
Pro forma(1):
Income (loss) before
income taxes.......... $ 4,062 $ 8,014 $ 6,126 $(1,176)
Provision for (benefit
from) income taxes.... 1,626 3,007 2,301 (298)
------- ------- ------- -------
Net income (loss)...... $ 2,436 $ 5,007 $ 3,825 $ (878)
======= ======= ======= =======
Net income (loss) per
common share(2)(3)..... $ 2.65 $ 5.24 $ 4.00 $ (0.82) $ 0.18
======= ======= ======= ======= =======
Diluted net income
(loss) per common share
(2).................... $ 2.65 $ 5.24 $ 4.00 $ (0.82) $ 0.03
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- - ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $3,964 $ 8,186 $ 1,269 $ 3,184 $ 1,171
Working capital....... 2,484 4,728 3,174 6,390 5,366
Total assets.......... 8,527 17,901 19,203 24,356 27,859
Long-term obligations. 1,128 2,610 6,059 18,096 16,465
Stockholders' equity.. 3,863 8,859 9,173 996 1,698
</TABLE>
- -------
(1) Prior to January 6, 1996, the Company was an S corporation for federal and
state income tax purposes, and accordingly, the Company's income was taxed
directly to the Company's stockholders at that time. Pro forma adjustments
reflect the estimated federal and state income taxes that would have been
payable if the Company had not been an S corporation prior to January 6,
1996.
(2) See Note 1 of Notes to Financial Statements for a discussion of the
computation of net income (loss) per common share and weighted average
common shares outstanding.
(3) Supplemental basic net income (loss) per share for the year ended December
31, 1996 and 1997, assuming the subordinated debt with stockholders was
not outstanding during any of the periods, and using the net proceeds of
the offering, would be $(.25) and $.32, respectively. See "Use of
Proceeds".
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion and elsewhere in this Prospectus relative to markets for
the Company's products and services, and trends in revenue, gross margin and
anticipated expense levels, as well as other statements including words such
as "anticipate", "believe", "plan", "estimate", "expect" and "intend" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and the Company's actual results of operations may differ
materially from those contained in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this Prospectus.
OVERVIEW
The Company designs, develops, markets and supports OSS products for the
telecommunications industry and provides a broad range of both fixed-price and
time-and-materials custom software solutions. From its inception in 1985
through 1996, the Company focused on providing custom software development
services, primarily to two telecommunications companies. Beginning in mid-
1995, one of the Company's major customers substantially reduced its purchases
of custom software development services. The Company sought additional
contracts to replace the lost business and deferred reducing staffing and
related expenditures pending results of such efforts, resulting in a
percentage decline of gross margins in 1995.
In May 1996, the Company obtained financing from new investors and
reconstituted its Board of Directors. The new Board of Directors replaced the
Company's senior management team beginning in July 1996. Under the direction
of new management, the Company further reduced headcount to 270 employees by
the end of 1996, representing a decrease of 44% from a high of 480 employees
in the second quarter of 1995. Because the Company's cost structure is
predominantly tied to personnel-related expenses, the Company did not begin to
realize benefits from staff reductions until the fourth quarter of 1996, and,
thus, the shortfall of expected new contracts in 1996 resulted in a
significant decline in gross margins in 1996. The Company also made a
strategic decision to broaden its emphasis from being a time-and-materials
based custom software developer to a provider of both time-and-materials and
fixed-price custom software development services and standard software
products and related services in order to capitalize on the market opportunity
for LNP solutions. In the fourth quarter of 1996, the Company began marketing
its first LNP products and generating license and related services revenue
that accounted for 47% of the Company's total revenue for 1997. As the Company
increasingly focuses on licensing standard software products, the Company
believes that license and related services revenue as well as associated
maintenance revenue will modestly increase, and other services revenue will
decline proportionately, as a percentage of total revenue. See "Risk Factors--
Expansion of Strategic Focus".
The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition". The Company
derives revenue from license fees and services under the terms of both fixed-
price and time-and-materials contracts. License fees and related services
revenue during 1996 consisted of fees from non-LNP software products.
Subsequent to 1996, license fees and related services revenue consists of
revenue from contracts involving the Company's LNP products and related
services. Other services revenue consists of custom programming, systems
integration of third-party products, maintenance and training.
License fees and related services revenue is generated from fixed-price
contracts that provide for both licenses and services and is recognized using
the percentage-of-completion method of accounting. The percentage-of-
completion for each contract is determined based on the ratio of direct
22
<PAGE>
labor hours incurred to total estimated direct labor hours. Amounts billed and
collected in advance of services being performed are recorded as unearned
revenue. Unbilled work-in-progress represents revenue earned but not yet
billable under the terms of the fixed-price contracts and all such amounts are
expected to be billed and collected during the succeeding 12-month period.
Services revenue provided under fixed-price contracts is recognized using
the percentage-of-completion method of accounting described above. Revenue
from other services provided pursuant to time-and-materials contracts is
recognized as the services are performed. Maintenance revenue is recorded as
deferred revenue and recognized ratably over the service period, which is
generally 12 months. Revenue from training is recognized as the training is
performed. When maintenance and training services are bundled with the
original license fee arrangement, their fair value is deferred and recognized
during the period such services are performed.
The Company may encounter budget and schedule overruns on fixed-price
contracts caused by increased material, labor or overhead costs. Adjustments
to cost estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, should they occur, would be recorded
in the period in which current estimates of total contract revenue and
contract cost indicate a loss. The Company does not anticipate a change in the
timing of revenue recognition upon adoption of Statement of Position 97-2,
"Software Revenue Recognition". See "Risk Factors--Lengthy Implementation
Process; Customer Acceptance of LNP Products" and "--Fixed-Price Contracts".
During the years ended December 31, 1995, 1996 and 1997, the Company
recognized approximately 78%, 73% and 89% of total revenue from two, five and
six customers, respectively, each of which accounted for greater than 10% of
the Company's revenue in such periods. As of December 31, 1995, 1996 and 1997,
these customers accounted for 65%, 75% and 85% of contract receivables,
respectively. The Company's payment terms generally range from 30 to 60 days
from the date of invoice following achievement of specified contractual
milestones. See "Risk Factors--Reliance on Significant Customers".
23
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
contained in the Company's statement of operations reflected as a percentage
of total revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
License fees and related services................ -- % 2.4% 46.9%
Other services................................... 100.0 97.6 53.1
------- ------- -------
Total revenue.................................. 100.0 100.0 100.0
------- ------- -------
Cost of revenue:
License fees and related services................ -- 1.2 14.8
Other services................................... 58.6 65.2 44.2
------- ------- -------
Total cost of revenue.......................... 58.6 66.4 59.0
------- ------- -------
Gross margin....................................... 41.4 33.6 41.0
Operating expenses:
Sales and marketing.............................. 7.5 7.9 11.9
General and administrative....................... 17.0 23.3 20.2
Research and development......................... 1.8 1.7 6.8
------- ------- -------
Total operating expenses....................... 26.3 32.9 38.9
------- ------- -------
Operating income................................... 15.1 0.7 2.1
Other income (expense), net........................ (1.5) (3.9) (3.3)
------- ------- -------
Income (loss) before income taxes.................. 13.6 (3.2) (1.2)
Provision for (benefit from) income taxes.......... -- 0.2 (1.9)
------- ------- -------
Net income (loss).................................. 13.6% (3.4)% 0.7%
======= ======= =======
Pro forma provision for (benefit from) income
taxes............................................. 5.1 (0.8)
------- -------
Pro forma net income (loss)........................ 8.5% (2.4)%
======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Total revenue increased $5.8 million, or 16%, to $42.7 million in
the year ended December 31, 1997 from $36.9 million in the year ended December
31, 1996. License fees and related services revenue increased by $19.1
million, or 2,171%, to $20.0 million in the year ended December 31, 1997 from
$882,000 in the year ended December 31, 1996, reflecting the Company's
progress toward the successful introduction of the Company's initial LNP
products. Other services revenue, a majority of which was attributable to
custom development projects for the Company's telecommunications customers,
decreased by $13.3 million, or 37%, to $22.7 million in the year ended
December 31, 1997 from $36.0 million for the year ended December 31, 1996,
reflecting the Company's expanded focus in 1997 to encompass both standard
software products as well as custom development projects. License fees and
related services revenue as a percentage of total revenue increased to 47% for
the year ended December 31, 1997 from 2% for the year ended December 31, 1996.
COST OF REVENUE. Cost of revenue consists primarily of personnel-related
costs, equipment depreciation and facilities costs and the cost of third-party
software. Cost of license fees and related services increased by $5.9 million,
or 1,309%, to $6.3 million for the year ended December 31, 1997 from $450,000
for the year ended December 31, 1996. As a percentage of revenue, cost of
license fees and related services increased to 15% for the year ended December
31, 1997 from 1% for the
24
<PAGE>
year ended December 31, 1996. These increased costs reflected the Company's
expanded focus to include standard software products and associated
integration services. Cost of other services decreased $5.2 million, or 22%,
to $18.9 million for the year ended December 31, 1997 compared to $24.1
million for the year ended December 31, 1996. As a percentage of total
revenue, cost of other services decreased to 44% for the year ended December
31, 1997 from 65% for the year ended December 31, 1996. The absolute amount of
other services costs decreased in connection with the reduction in the
Company's lease commitments, increased productivity of Company personnel and a
shift of personnel from custom development projects to provide necessary
integration services for the Company's standard software products.
SALES AND MARKETING. Sales and marketing expenses consist principally of
compensation costs (including commissions), travel expenses, field sales
office expenses and marketing communication expenses. Sales and marketing
expenses increased by $2.2 million, or 74%, to $5.1 million in the year ended
December 31, 1997 from $2.9 million in the year ended December 31, 1996. As a
percentage of revenue, sales and marketing expenses increased to 12% in the
year ended December 31, 1997 from 8% in the year ended December 31, 1996. This
increase was attributable to the Company's expansion of its direct sales force
by 12 persons to 16 to support sales of the Company's new standard software
products and an increase in the Company's marketing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation costs for administration, facilities, finance, human
resources, quality assurance and general management personnel, as well as
legal and accounting expenses. General and administrative expenses totaled
$8.6 million in the years ended December 31, 1997 and December 31, 1996. As a
percentage of revenue, general and administrative expenses decreased to 20% in
the year ended December 31, 1997 from 23% in the year ended December 31, 1996.
On a percentage basis, this decrease reflected increased revenue. In late 1996
and in 1997, the Company implemented cost and headcount controls and made
additional investments to improve the Company's operational, financial,
management information and software development processes.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, equipment and software development tools.
Research and development expenses increased by $2.3 million, or 355%, to $2.9
million in the year ended December 31, 1997 from $641,000 in the year ended
December 31, 1996. As a percentage of revenue, research and development
expenses increased to 7% in the year ended December 31, 1997 from 2% in the
year ended December 31, 1996. This increased cost resulted from additional
staffing and associated costs in connection with the Company's strategic
commitment to the development of MetOSS software product offerings. In
addition, significant research and development expenses were recorded as cost
of revenue in the year ended December 31, 1997. This resulted from the Company
entering into a license with a major customer prior to the completion of the
development effort. No research and development expenses were recorded as cost
of revenue in the year ended December 31, 1996.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, includes interest
expense on the Company's debt financing and capital lease obligations and
interest income on cash. Other expense, net of other income, totaled $1.4
million in both of the years ended December 31, 1997 and December 31, 1996. As
a percentage of revenue, other expense declined to 3% in the year ended
December 31, 1997 from 4% in the year ended December 31, 1996, reflecting
increased revenue in 1997.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company recorded an income
tax benefit in the year ended December 31, 1997 of $791,000 which resulted
primarily from the Company's pretax loss coupled with significant research and
development tax credits generated during this period. The change from the
provision for income taxes recorded in 1996 was a result of such research and
development tax credits and the effect of converting to taxable status in
1996. Prior to January 6, 1996, the Company operated as an S corporation for
tax purposes and did not pay taxes at the corporate
25
<PAGE>
level. On a pro forma basis, assuming the Company had been a taxable entity
since its inception, the income tax benefit would have been approximately
$298,000 for the year ended December 31, 1996, resulting in an effective
income tax rate of 25%. The pro forma rate was lower than the federal
statutory rate primarily because of a permanent difference associated with the
conversion to a C corporation for tax purposes and the cancellation of certain
indebtedness.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenue decreased by $8.5 million, or 19%, to $36.9 million
in 1996 from $45.4 million in 1995. The decrease was primarily the result of a
significant reduction in custom software consulting revenue from a major
customer and the inability of the Company to replace the lost revenue with new
customer contracts.
COST OF REVENUE. Cost of revenue decreased by $2.1 million, or 8%, in 1996
to $24.5 million from $26.6 million in 1995. As a percentage of revenue, cost
of revenue increased to 66% in 1996 from 59% in 1995. The Company incurred
budget overruns on certain fixed-price contracts in 1996; however, none of
these budget overruns resulted in losses on these contracts. The Company also
experienced a significant decline in gross profit margins and operating income
in 1996 as compared to 1995, which resulted largely from overstaffing and
infrastructure investments made in late 1995 in anticipation of contracts that
were not realized in 1996. Costs did not decrease proportionately with the
decrease in revenue as commitments that had been made in prior periods under
facilities, equipment and consulting contracts contributed to higher-than-
desired expense levels.
SALES AND MARKETING. Sales and marketing expenses decreased by $492,000, or
14%, to $2.9 million in 1996 from $3.4 million in 1995. As a percentage of
revenue, sales and marketing expenses remained constant at 8% for 1996 and
1995. The decrease in absolute dollars was primarily due to the transfer of
marketing personnel to custom software development projects.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$862,000, or 11%, in 1996 to $8.6 million from $7.7 million in 1995. As a
percentage of revenue, general and administrative expenses increased to 23% in
1996 from 17% in 1995. This increase as a percentage of revenue was
attributable to a decline in revenue and the opening of a new development
facility, offset by a reduction in headcount and related expenditures.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
$180,000, or 22%, to $641,000 in 1996 from $821,000 in 1995. As a percentage
of revenue, research and development expenses remained constant at 2% in 1996
and 1995. This absolute dollar decrease reflected management's decision to
reduce staff and support costs in response to the loss of revenue.
OTHER INCOME (EXPENSE), NET. Net other expense increased by $733,000, or
106%, to $1.4 million in 1996 from $689,000 in 1995. As a percentage of
revenue, other expense increased to 4% in 1996 from 2% in 1995. The increase
resulted primarily from the interest expense incurred on subordinated debt
issued by the Company in May 1996.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. Prior to January 6, 1996, the
Company operated as an S corporation for tax purposes and, accordingly, no
income tax provision or liability was recorded because the results of the
Company's operations were included in the returns of the individual
stockholders. The tax benefit in 1996 differed from expected income tax rates
primarily as a result of the conversion to a taxable corporation. On a pro
forma basis, assuming the Company had been a taxable entity since its
inception, income tax benefit would have been approximately $298,000 in 1996
compared to income tax expense in 1995 of $2.3 million, for an effective pro
forma income tax rate of 25% and 38%, respectively. The pro forma effective
rate for the year ended December 31, 1996 was lower than the federal statutory
rate primarily because of a permanent difference associated with cancellation
of indebtedness.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The Company has experienced quarterly fluctuations in its operating and
financial results, due to many factors, including fluctuating demand for
custom software development projects, the timing and magnitude of new
projects, cancellations or delays of projects, the timing of the introduction
and market acceptance of its LNP products and fluctuations in costs,
particularly personnel, equipment and facilities costs, associated with the
Company's infrastructure. The Company expects quarterly fluctuations to
continue as the Company introduces new software releases, new products and
continues its expansion. Quarterly fluctuations may also result from the
timing of introduction of products and services by the Company's competitors
and other market factors. See "Risk Factors--Fluctuations in Quarterly Results
of Operations".
The tables below present unaudited quarterly statement of operations data
for each of the eight quarters through December 31, 1997. This information has
been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements contained elsewhere in this
Prospectus and, in the opinion of the Company, includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the information. These unaudited
quarterly results should be read in conjunction with the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License fees and
related services...... $ 500 $ -- $ 335 $ 47 $ 2,200 $ 5,370 $ 6,912 $ 5,552
Other services......... 8,258 9,665 8,664 9,449 5,873 4,924 4,755 7,134
------- ------ ------ ------ ------- ------- ------- -------
Total revenue.......... 8,758 9,665 8,999 9,496 8,073 10,294 11,667 12,686
------- ------ ------ ------ ------- ------- ------- -------
Cost of revenue:
License fees and
related services...... 300 -- 150 -- 1,555 1,964 1,550 1,270
Other services......... 5,939 6,524 5,879 5,739 4,205 4,267 5,561 4,852
------- ------ ------ ------ ------- ------- ------- -------
Total cost of revenue.. 6,239 6,524 6,029 5,739 5,760 6,231 7,111 6,122
------- ------ ------ ------ ------- ------- ------- -------
Gross margin............ 2,519 3,141 2,970 3,757 2,313 4,063 4,556 6,564
Operating expenses:
Sales and marketing.... 690 512 718 993 618 977 1,396 2,074
General and
administrative........ 2,373 1,738 2,240 2,236 2,008 2,265 2,072 2,290
Research and
development........... 419 205 10 7 741 364 506 1,303
------- ------ ------ ------ ------- ------- ------- -------
Total operating
expenses.............. 3,482 2,455 2,968 3,236 3,367 3,606 3,974 5,667
------- ------ ------ ------ ------- ------- ------- -------
Operating income (loss). (963) 686 2 521 (1,054) 457 582 897
Other expense, net...... (290) (384) (455) (293) (365) (404) (310) (316)
------- ------ ------ ------ ------- ------- ------- -------
Income (loss) before
income taxes........... (1,253) 302 (453) 228 (1,419) 53 272 581
Provision for (benefit
from) income taxes..... (82) 117 (44) 90 (1,228) 46 234 157
------- ------ ------ ------ ------- ------- ------- -------
Net income (loss)....... $(1,171) $ 185 $ (409) $ 138 $ (191) $ 7 $ 38 $ 424
======= ====== ====== ====== ======= ======= ======= =======
Pro Forma:
Income (loss) before
income taxes.......... $(1,253) $ 302 $ (453) $ 228
Provision for (benefit
from) income taxes.... (318) 77 (115) 58
------- ------ ------ ------
Net income (loss)...... $ (935) $ 225 $ (338) $ 170
======= ====== ====== ======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENT OF TOTAL
REVENUE:
Revenue:
License fees and re-
lated services........ 5.7% --% 3.7% 0.5% 27.3% 52.2% 59.2% 43.8%
Other services......... 94.3 100.0 96.3 99.5 72.7 47.8 40.8 56.2
----- ----- ----- ----- ----- ----- ----- -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenue:
License fees and re-
lated services........ 3.4 -- 1.7 -- 19.2 19.1 13.3 10.0
Other services......... 67.8 67.5 65.3 60.4 52.1 41.4 47.6 38.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenue.. 71.2 67.5 67.0 60.4 71.3 60.5 60.9 48.2
----- ----- ----- ----- ----- ----- ----- -----
Gross margin............ 28.8 32.5 33.0 39.6 28.7 39.5 39.1 51.8
Operating expenses:
Sales and marketing.... 7.9 5.3 8.0 10.5 7.6 9.5 12.0 16.3
General and administra-
tive.................. 27.1 18.0 24.9 23.5 24.9 22.0 17.8 18.1
Research and develop-
ment.................. 4.8 2.1 0.1 0.1 9.2 3.5 4.3 10.3
----- ----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses................ 39.8 25.4 33.0 34.1 41.7 35.0 34.1 44.7
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss). (11.0) 7.1 -- 5.5 (13.0) 4.5 5.0 7.1
Other expense, net...... (3.3) (4.0) (5.1) (3.1) (4.5) (3.9) (2.7) (2.5)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... (14.3) 3.1 (5.1) 2.4 (17.5) 0.6 2.3 4.6
Provision for (benefit
from) income taxes..... (0.9) 1.2 (0.5) 0.9 (15.2) 0.4 2.0 1.2
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (13.4)% 1.9% (4.6)% 1.5% (2.3)% 0.2% 0.3% 3.4%
===== ===== ===== ===== ===== ===== ===== =====
Pro Forma:
Income (loss) before
income taxes.......... (14.3)% 3.1% (5.1)% 2.4%
Provision for (benefit
from) income taxes.... (3.6) 0.8 (1.3) 0.6
----- ----- ----- -----
Net income (loss)...... (10.7)% 2.3% (3.8)% 1.8%
===== ===== ===== =====
</TABLE>
During 1996, license fee revenue of approximately $882,000 reflected the
delivery of non-LNP products to a major customer primarily in the first and
third quarters. License fees and related services revenue significantly
increased in the quarters ended March 31, June 30, and September 30, 1997,
reflecting market acceptance of the Company's LNP products, rising to 59% of
total revenue in the quarter ended September 30, 1997 due to a high level of
activity generated by large ILEC customers' requirements to provide LNP
capability by October 1, 1997. The following quarter, ended December 31, 1997,
reflected a decline in license fees and related services revenue from this
exceptionally high level to approximate the second quarter 1997 level. Other
services revenue fluctuated during 1996 due to the timing and completion of
customer software development projects. In the fourth quarter of 1996,
significant services revenue resulted from the completion of a major custom
software development project at BellSouth, which did not continue into 1997.
Furthermore, other services revenue declined substantially in absolute dollar
terms in 1997 as a result of the Company's strategic shift to broaden its
business mix. Other services revenue was adversely impacted in the second and
third quarters of 1997 due to delays in signing contracts with two major
customers for which work had commenced. These contracts were signed in the
fourth quarter of 1997 and favorably impacted both revenue and gross margins
during that period. See "Risk Factors--Fluctuations in Quarterly Results of
Operations", "--Reliance on Significant Customers" and "--Expansion of
Strategic Focus".
Cost of revenue as a percentage of revenue has varied significantly from
quarter to quarter. Total cost of revenue in the quarter ended March 31, 1996
as a percentage of revenue was significantly higher than the three succeeding
quarters, a result of budget and schedule overruns on two projects completed
in that quarter. Total cost of revenue as a percentage of revenue in the
quarter ended December 31, 1996 declined from previous quarters as a result of
increased revenue associated with
28
<PAGE>
the completion of the BellSouth contract. In the first and second quarters of
1997, significant research and development expenses were charged to cost of
revenue. This resulted from the Company entering into a license with a major
customer prior to completion of the internal development effort. Total cost of
revenue in the quarters ended June 30 and September 30, 1997 as a percentage
of revenue declined significantly from the immediately preceding quarter, as
license fees and related services revenue, which has a lower cost,
significantly increased as percentage of total revenue. The fourth quarter of
1997 reflected a significant decline in cost of revenue attributable to the
transfer of certain personnel to research projects and increased efficiencies
in all areas. Cost of license fees and related services in the first three
quarters of 1997 reflect increasing productivity in the installation of LNP
software as well as license cost. Cost of other services in the third quarter
of 1997 was increased as a result of personnel costs incurred in anticipation
of the signing of customer contracts; as noted above, these contracts were
signed in the fourth quarter of 1997, favorably impacting margins.
Sales and marketing expense declined in absolute dollars and as a percentage
of revenue in the quarter ended June 30, 1996 as a result of staff reduction.
As the Company began to expand its strategic focus to include LNP products and
related services in late 1996, the Company reorganized its sales and marketing
organization to implement its new product strategy, resulting in the gradual
hiring of 16 individuals and the establishment of five sales offices.
Additionally, product launch expenses caused a higher than normal spending
level in the quarter ended December 31, 1996. Sales and marketing spending
remained relatively constant in absolute terms through 1997 with increases in
the second and fourth quarters attributable to one-time compensation charges.
In the quarter ended March 31, 1996, general and administrative expense
increased in part due to the Company increasing its bad debt reserve by
approximately $577,000. In the quarter ended September 30, 1996, the Company
increased its provision for pension plan liabilities by $430,000. Both of
these changes significantly impacted operating results in the respective
periods. In addition, general and administrative expenses increased in 1996
because of the allocation to general and administrative expense of the
salaries and other expenses associated with underutilized custom development
personnel. From the quarter ended March 31, 1997 through the quarter ended
September 30, 1997, general and administrative expense has declined as a
percentage of revenue, reflecting improved productivity, partially offset by
investments in management, financial and quality control systems to support
the Company's anticipated growth. Marginal increases in spending in the fourth
quarter of 1997 reflect one-time employee benefit plan changes and
compensation charges.
Research and development expense in quarters prior to June 30, 1996 was
related to non-LNP products. Following the strategic decision to invest in
standard software products, in late 1996, a software development laboratory
was established, personnel were hired, and overall spending increased
significantly. In the quarters ended September 30, 1996 and December 31, 1996,
the cost of certain development personnel was allocated from research and
development to the cost of performing a specific custom development project.
This caused abnormally low levels of research and development expense in
absolute terms and as a percentage of revenue in such periods. In addition,
significant research and development expenses were recorded as cost of revenue
in the first two quarters of 1997. Research and development expense in the
fourth quarter of 1997 reflects significant staff increases and spending on
MetOSS development efforts.
The Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Although the Company has recently
experienced revenue growth, in particular with respect to license fees and
related services revenue, such growth should not be considered indicative of
future revenue growth, if any, or of future operating results. Failure by the
Company, for any reason, to increase revenue would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Fluctuations in Quarterly Results of
Operations".
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through a combination
of cash flow from operations and borrowings. In addition, on May 31, 1996, the
Company completed a private placement of $6.5 million in subordinated debt. At
December 31, 1997, the Company's principal sources of liquidity included $1.3
million of cash and cash equivalents, a $10.0 million secured bank line of
credit and an equipment term loan agreement of $1.5 million, both of which
expire in September 1998. As of February 1, 1998, the Company had an
outstanding balance under the line of credit in the amount of approximately
$1.7 million and $664,000 outstanding with respect to a term loan agreement.
The Company intends to renew these credit facilities in 1998; however, there
can be no assurance that the Company will be able to obtain adequate credit
facilities on commercially reasonable terms or at all. The Company is required
under the credit line to comply with certain financial covenants regarding
tangible net worth, performance ratios relating to profitability, debt, asset
performance and working capital. At December 31, 1997, the Company was in
compliance with such covenants or had obtained waivers. The Company does not
anticipate that continuing to comply with these debt covenants will materially
affect its business.
The Company has senior subordinated promissory notes payable to stockholders
in the amount of $6.8 million bearing semi-annual interest payments at a rate
of 9% beginning April 1996, and principal repayments of $1.6 million due semi-
annually beginning in 2000. The Company also has notes payable to stockholders
in the amount of $5.1 million bearing annual interest payments of 7.25%, with
the principal due in 2006. The loan agreements contain covenants limiting the
Company's ability to incur indebtedness, make investments, dispose of assets,
pay dividends and enter into contracts with related parties. The Company
expects to use a portion of the proceeds of this offering to retire all of its
subordinated promissory and stockholder notes and related accrued interest.
See "Use of Proceeds".
Net cash provided by operating activities totaled $1.8 million in 1995, $1.5
million in 1996 and $3.7 million in 1997. Net cash provided by operations in
1995, 1996 and 1997 were substantially impacted by net income (loss) and non-
cash charges, particularly depreciation and amortization expense, which
totaled $2.5 million, $3.5 million and $4.0 million in the respective periods.
In 1995 and 1996, net contract receivables, unbilled work-in-progress,
unearned revenue and customer deposits used operating cash of $6.5 million and
$2.6 million in the respective periods. Such cash usage was higher in 1995 due
to several large contracts in the fourth quarter of 1995 which were billed and
not collected, or in certain cases, not yet billed because project milestones
had not been met. In 1997, the Company shifted predominantly to fixed-price
contracts from time-and-materials billings. Such contracts typically include
large milestone payments and initial down payments which may be billed and
collected prior to actual completion of the related integration and consulting
effort. As a result, unearned revenue and customer deposits provided $5.4
million in operating cash flow for 1997. Contract receivables and unbilled
work-in-progress at December 31, 1997 used $4.3 million in operating cash
flow. Gross contract receivables increased $4.0 million, or 41%, to $13.9
million as of December 31, 1997 from $9.9 million as of December 31, 1996,
while revenue only increased 34% in the fourth quarter of 1997 as compared to
the fourth quarter of 1996. This increase was primarily attributable to an
increase during late 1997 in progress billings made in advance of revenue
being recognizable on the percentage-of-completion method, as compared to the
latter part of 1996. Depending on the progress to completion on the related
contract milestone, contract billings result in either the recognition of
revenue or the recording of unearned revenue. The difference in the timing of
such fixed milestone billings in relation to the timing of revenue recognition
as of December 31, 1997 resulted in an increase in accounts receivable as well
as a corresponding increase in unearned revenue of $5.4 million, or 809%, to
$6.1 million as of December 31, 1997 from $666,000 as of December 31, 1996.
Revenue also increased during the fourth quarter of 1997 in comparison to the
same quarter in 1996, which also resulted in higher accounts receivable at the
end of 1997.
30
<PAGE>
Net cash used in investing activities totaled $1.9 million in 1995, $2.1
million in 1996 and $2.9 million in the year ended December 31, 1997. Net cash
used in each period related primarily to purchases of furniture, fixtures and
computer equipment.
Financing activities used $6.8 million in 1995, provided $2.6 million in
1996 and used $2.8 million in the year ended December 31, 1997. In 1995, as an
S corporation, the Company distributed $5.8 million to stockholders and had a
net repayment of long-term obligations totaling $1.0 million. In 1996, the
Company obtained aggregate financing of $10.8 million, of which $7.7 million
was used to repay long-term obligations. Financing activities in the year
ended December 31, 1997 were primarily repayments of capital lease obligations
totaling $3.0 million.
At December 31, 1997, the Company had $5.4 million in working capital. The
Company's principal commitments at December 31, 1997 were leases on its three
facilities in the Denver metropolitan area and other operating leases totaling
$23.3 million, net of sublease income, and capital lease obligations totaling
$4.3 million. There were no material commitments for future capital
expenditures at that date. The Company believes that the proceeds from the
sale of the Common Stock in the offering, combined with existing cash
balances, available credit facilities and funds generated by operations will
be sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that the adoption of the recently issued
Statement of Position 97-2, "Software Revenue Recognition" and Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", No.
129, "Disclosures of Information about Capital Structure", No. 130, "Reporting
Comprehensive Income", and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", will not have a material impact on the
timing of the Company's revenue recognition or its footnote disclosures.
Although the Company believes it is currently in compliance with Statement of
Position 97-2 ("SOP 97-2"), should the Company adopt new or change existing
licensing practices, such as entering into subscription licensing
arrangements, the Company's revenue recognition practices may be subject to
change to comply with the accounting guidance provided in SOP 97-2. SFAS No.
128 is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Accordingly, basic and diluted earnings per
share have been reflected in the Financial Statements included herein.
31
<PAGE>
BUSINESS
Evolving Systems is a leading provider of selected software solutions and
services that enable telecommunications carriers to address the technical
challenges to their operational support systems created by the industry's
rapidly changing competitive and regulatory environment. The Company's first-
to-market LNP software solution, which enables carriers to meet the
requirements that customers retain their local phone number when changing
service providers, has been selected for use by two of the five RBOCs and two
leading local and long distance carriers. The Company believes that the
implementation of LNP will require significant changes in a broad range of
carriers' software and systems that perform mission critical functions such as
ordering, provisioning, service assurance and billing, collectively known as
OSS.
Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of telecommunications solutions to satisfy
technically challenging OSS requirements to position itself as both a leading
custom software developer and a provider of next-generation OSS applications.
From its inception in 1985 through 1996, the Company focused on providing
custom software development services to a limited number of telecommunications
companies. Beginning in 1996, in order to capitalize on the market demand for
OSS solutions to implement LNP, the Company made a strategic decision to
expand its focus to include development of standard software products to
address a variety of needs created by LNP. In May 1996, the Company obtained
financing from new investors and reconstituted its Board of Directors. The new
Board of Directors replaced the Company's senior management team beginning in
July 1996.
INDUSTRY BACKGROUND
THE TELECOMMUNICATIONS INDUSTRY
Historically, telecommunications carriers operated in a highly regulated
environment, with both local and long distance telephone service providers
operating as monopolies with little competition. More recently, however, the
U.S. and many foreign governments have begun to deregulate the
telecommunications industry in order to reduce prices and improve
telecommunications services through increased competition. Deregulation and
the widespread adoption of new telecommunications technologies, such as fiber
optics, digital wireless telephony and Internet-based services, have
significantly increased the number of telecommunications carriers and created
an increasingly competitive market. New entrants to the telecommunications
service market include competitive local carriers, alternate access providers
and wireless operators. To be competitive in this new environment,
telecommunications service providers are seeking to rapidly enter new markets
by offering differentiated services in a cost-effective manner.
The U.S. long distance market was opened to competition beginning in the
early 1980s. More recently, the Act provides for the introduction of
competition in local telephone service, allowing long distance, wireless and
other carriers to enter local telephone markets. The Act, among other things,
requires RBOCs and other ILECs to offer LNP, which allows customers to retain
their local phone numbers regardless of the carrier providing local telephone
service. The Act also requires that carriers unbundle local services and
facilities, which requires that access to ILECs' ordering, service
provisioning and billing systems be made available to competing carriers.
Similar initiatives to deregulate local telephone service have been adopted
or are being considered in a number of foreign markets, including Australia,
Belgium, Canada, Germany, Holland, Hong Kong and the United Kingdom. Recent
adoption of the World Trade Organization agreement on basic telecommunications
services may accelerate this trend. For example, the Canadian Radio-Television
& Telecommunications Commission (the "CRTC") issued a report in 1995 in which
LNP was
32
<PAGE>
identified as the critical catalyst to encourage competition among local
telephone carriers. In 1997, the CRTC issued Decision 97-8, under which all
service providers would gain equal access to local markets, providing impetus
for the implementation of LNP throughout Canada.
These new competitive and regulatory pressures have created significant
technological challenges for both existing and new carriers. Existing carriers
must develop new systems that are interoperable with their legacy systems, not
only to support the LNP and unbundling requirements of the Act but also to
enable them to respond to increasing competitive challenges. In addition, new
entrants to local telephone markets require LNP solutions that do not depend
on an existing OSS infrastructure and that can be deployed quickly and cost-
effectively. Thus, the Company believes that carriers' OSS are evolving from
back-office legacy systems to strategic business systems that play an
increasingly important role in enhancing competitiveness as well as enabling
compliance with the requirements of the Act.
33
<PAGE>
OPERATIONAL SUPPORT SYSTEMS
OSS encompass a broad array of software and systems that perform critical
functions for telecommunications carriers, including ordering, provisioning,
service assurance and billing. Ordering systems allow carriers to collect
customer information, retrieve current service information, capture and
validate new service requests, verify the availability of selected services and
transmit completed orders to one or more provisioning OSS. Carriers use
provisioning systems to install services for new customers and to change or add
services for existing customers. Service assurance systems allow carriers to
perform the testing, monitoring and reporting necessary to maintain network
availability and feed operational data to other business systems. Billing
systems are used by carriers to collect, collate, manage and report billing
information. The following diagram depicts four areas of OSS and the key
functions they provide.
[ARTWORK OF KEY AREAS OF OSS APPEARS HERE]
Historically, as existing carriers have added new services, such as wireless
or Internet-based services, they have developed multiple, distinct OSS. These
legacy, proprietary OSS have typically been mainframe-based systems that in
many cases utilize incompatible software and technologies, making communication
among systems difficult. These OSS are further strained by the many incremental
changes that have been made in order to accommodate new technologies, such as
client/server technology and advancements in data networking, and the
proliferation of value-added services, such as call waiting, call forwarding
and voice mail. Despite these difficulties, carriers are unable to completely
replace existing OSS due to the large investments and vast amounts of
historical data contained in these systems. As a result, carriers continue to
make incremental modifications to these OSS, further increasing their
complexity and interoperability difficulties.
34
<PAGE>
LNP CHALLENGES TO CURRENT OSS
The LNP requirements of the Act pose significant technological challenges to
existing carriers' OSS, which are already strained by the changes caused by
increasing competition, new technologies and the introduction of value-added
services. LNP invalidates a fundamental design assumption of many existing
OSS, which is the association between a customer's telephone number and the
geographic location of a carrier's particular physical switch. Provisioning
systems now must be able to receive and distribute on a real-time basis
certain customer data in order to assure proper call handling, routing and
completion. If the LNP data from ported numbers are not properly distributed
to all carriers, calls to and from that number will not be routed correctly,
causing service problems for customers. Moreover, carriers that have not
implemented LNP may incur substantial call termination or "dip" charges if
they direct calls to regions where LNP has been mandated. After altering
provisioning systems, carriers must then implement changes throughout many of
their other OSS. These OSS are "hard-coded" in that each telephone number
corresponds to a physical switch for the ordering, service assurance and
billing systems. The implementation of LNP also requires new systems to pool,
allocate and assign telephone numbers. Changes will be required to existing
billing systems, which currently associate a telephone number with a fixed
geographic location. As a result of these challenges, the Company believes a
significant market opportunity exists for a range of LNP and OSS solutions
that address the following needs of existing and new carriers:
. ROBUST LNP PROVISIONING SOLUTION. Carriers require flexible, scalable LNP
provisioning solutions that allow them to cost-effectively support number
portability for customers, as well as to address regulatory requirements.
ILECs require LNP solutions that interface with regional number portability
databases operated by the Number Portability Administration Centers ("NPACs"),
which maintain and track data on ported telephone numbers, existing OSS,
network switches and components. New wireless or other competitive local
exchange carriers ("CLECs") require LNP solutions that do not depend on an
existing OSS infrastructure and that can be deployed quickly and cost-
effectively. These LNP solutions should be based on industry standards to
allow carriers flexibility with respect to subsequent OSS decisions and
implementation. Additionally, solutions should be based on standard software
products to minimize custom development efforts and deployment timeframes.
. INTEROPERABILITY AMONG CARRIERS. LNP and other requirements of the Act
give rise to a variety of inter-carrier transactions by which services and
access to facilities are bought and sold. When a customer ports a telephone
number to a new service provider, the new service provider typically needs to
provide, at a minimum, the range of services and facilities offered by the
previous service provider. These services may include, for example, voice
mail, call forwarding, directory assistance, calling card and operator
services. If the new service provider does not offer all of these services, it
may need to purchase certain services from the previous service provider.
Although inter-carrier transactions can be processed manually, the Company
believes that as the volume and complexity of inter-carrier transactions
increase, both existing and new carriers will seek new OSS to process such
transactions in order to reduce costs and minimize errors.
. SEAMLESS DATA DISSEMINATION THROUGHOUT CARRIERS' OSS. By introducing
fundamental changes in the relationships among carriers' various OSS, LNP
requires changes in how data are managed and disseminated within carriers. LNP
allows carriers or customers to initiate changes in data relating to a
customer or telephone number. Therefore, carriers must be able to disseminate
LNP-related data throughout their OSS on a real-time basis. Thus, LNP creates
the need for an OSS environment that supports multiple applications and that
provides carriers with a central database to which other OSS can interface to
obtain data on the carrier and the location of the switch servicing the
telephone number. These data also include billing addresses to be utilized for
rating purposes, and the facilities and value-added services now being
provided for customer service, network management and maintenance purposes.
Such an OSS environment should also contain standard legacy application
interfaces to minimize implementation time.
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. EXPERIENCED AND RELIABLE IMPLEMENTATION PROVIDER. To provide necessary
support services for these LNP and LNP-related solutions, carriers will need
vendors with significant telecommunications software and OSS-related domain
expertise. ILECs need such vendors in order to integrate LNP and LNP-related
solutions into their multiple legacy systems. CLECs that do not have personnel
with the required expertise will need vendors to provide such services and
expertise. These needs are further complicated by the fact that LNP
implementation only began to occur in 1997, and few solution providers have
experience in implementing LNP.
THE EVOLVING SYSTEMS SOLUTION
Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of solutions for satisfying technically
challenging OSS requirements to position itself as a provider of next-
generation OSS solutions while continuing to provide software development
services. The Company has initially focused on developing LNP products to
address the immediate needs of carriers, quickly establishing itself as a
leading supplier of LNP-based OSS solutions. The Company intends to leverage
its initial LNP success to address the evolving needs of telecommunications
service providers by developing and providing a family of innovative service
provisioning and OSS solutions. The Company's MetOSS family of product
offerings, including current LNP products and future LNP-related provisioning
and OSS platform products, is designed to provide comprehensive, flexible,
reliable and scalable solutions to meet carriers' needs in today's rapidly
changing multi-carrier market. The Company's approach seeks to offer carriers
time-to-market advantages, protection for legacy system investments, and cost-
effective OSS deployment, staffing, operation and maintenance.
The Company's LNP, OSS and custom software development solutions are
designed to offer the following benefits:
. LEADING LNP SOLUTIONS. The Company delivered the first-to-market LNP OSS
solution, which has been selected for use by two of the five RBOCs and two
leading local and long distance carriers. The Company's MetOSS LNP products,
OrderPath, NumberManager and NodeMaster, allow any telecommunications service
provider to meet the mandates of the Act by enabling LNP when a customer
changes carriers. The Company was a pioneer in developing standards and
interface requirements for carriers to communicate with the NPACs, regional
third-party clearinghouses required by the Act to oversee, mediate, track and
resolve LNP-related issues among U.S. carriers. The Company acted as the
primary software architect and developer for the systems software used by
Lockheed, one of two companies chosen as NPAC administrators. This enabled the
Company to gain considerable time-to-market advantages and comprehensive
knowledge of the operational and technical challenges facing the industry in
commercially developing and releasing an LNP solution for carriers. The
Company has developed an open, client/server based-LNP solution that allows
carriers significant flexibility and rapid LNP deployment. Additionally, the
Company's solutions comply with OSS interoperability standards governed by the
Telecommunications Management Network ("TMN"), a global standards body for
carriers, facilitating future changes to their OSS. The Company's solution
also allows carriers to avoid the potentially significant "dip" charges that
might otherwise be imposed based upon termination of calls in regions where
LNP has been mandated.
. LNP-RELATED APPLICATIONS TO PROVIDE INTEROPERABILITY AMONG CARRIERS. The
Company intends to release new OSS provisioning applications that are designed
to enable carriers to effectively perform LNP-related inter-carrier
provisioning transactions. Targeted for release by the end of 1998 or early
1999, the Company's new MetOSS provisioning applications, Local Service
Exchange and Number Exchange, are designed to facilitate interoperability
among carriers. Carriers utilizing Local Service Exchange will be able to
coordinate the provisioning of facilities and services for LNP customers who
wish to receive the same or similar services provided by their previous
service provider. Local Service Exchange will enable carriers to initiate and
process local service requests
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("LSRs"). Local Service Exchange will allow carriers to track service
provisioning response and turnaround times with other carriers and should
reduce the number of errors associated with the manual processing of LSRs.
Number Exchange will address the telephone number pooling, allocation and
assignment requirements brought about by LNP, as well as provide a database to
support call origination and termination identification thereby enabling
accurate rating and billing for calls to or from regions which have
implemented LNP.
. OSS PLATFORM TO FACILITATE DATA DISSEMINATION. The Company is developing
its MetOSS-Global Enterprise Management System ("GEM") platform, an OSS
environment that supports multiple applications and includes a scalable,
extensible database, APIs for third-party developers to write compatible
applications, business logic that governs the data dissemination throughout
other OSS platforms and standard legacy application interfaces to facilitate
rapid implementation. This platform is designed to provide a common,
enterprise-wide and standards-based data scheme so that all of carriers' OSS
can easily obtain data that has been affected by LNP. The GEM platform offers
a high degree of modularity, with the first modules targeted for release by
the end of 1998 or early 1999. The Company's platform is designed to provide
interoperability standards and interfaces, allowing customers to select OSS
applications developed by the Company or other third-party developers. The
Company believes that customers adopting the MetOSS-GEM platform will realize
savings on training, operations and maintenance due to the common user and
operational interfaces.
. COMPREHENSIVE RANGE OF SERVICES. The Company will continue to provide
custom software development services, while offering a comprehensive array of
product and system integration services for its clients. The Company's service
offerings build on more than a decade of experience with leading
telecommunications companies such as GTE and Lucent, which has enabled the
Company to develop significant expertise in implementing highly complex,
technically challenging OSS solutions. The Company also provides customer
support, including system installation, testing, training, enhancements and
upgrades, help desk support, user group seminars and software audits. The
Company believes that this full range of professional and customer support
services represents a source of competitive advantage.
THE EVOLVING SYSTEMS STRATEGY
The Company's objective is to become a leading provider of next-generation
OSS solutions to telecommunications companies. Key elements of the Company's
strategy include:
. MAINTAIN MARKET LEADERSHIP IN SERVICE PROVISIONING PRODUCTS. The Company
intends to continue leveraging its LNP market position to obtain leadership
positions in future provisioning applications and OSS products, as well as to
influence standards in these areas. By targeting OSS areas where the Company
possesses domain knowledge and expertise, the Company believes it can rapidly
capture market share. Lockheed has been selected as the operator of all of the
U.S. NPACs. The Company believes that its close relationship with Lockheed
will afford the Company industry foresight into the future direction and needs
of carriers' LNP-related provisioning and other OSS requirements. For example,
the Company's Local Service Exchange and Number Exchange provisioning
products, which are expected to be released by late 1998 or early 1999, are
designed to facilitate interoperability among carriers.
. DEVELOP NEXT-GENERATION OSS APPLICATIONS PLATFORM. The Company's MetOSS-
GEM platform is designed to offer carriers an OSS environment that supports
multiple applications developed by the Company or by third-party developers.
The Company plans to incorporate interoperability standards in its platform
architecture to allow service providers and third-party software developers to
design applications using the Company's development environment and APIs. The
Company believes that this platform product, slated for initial release by
late 1998 or early 1999, will enable carriers to effectively disseminate LNP-
related data throughout carriers' OSS infrastructures.
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The Company's OSS platform is being designed to offer carriers an integrated
migration path to solve future OSS challenges, reduce training and staffing
costs and extend the life of OSS investments and technologies.
. LEVERAGE TELECOMMUNICATIONS DOMAIN EXPERTISE. The Company believes that
its experience with large telecommunications companies over the past decade in
developing pioneering solutions for critical needs in the areas of customer
provisioning, network management and wireless data has allowed it to develop
broad domain expertise and technical skills. The Company intends to
selectively maintain custom software development projects with leading
telecommunications companies in order to maintain its domain expertise. For
example, the Company continues to provide custom software solutions and
services for Lucent in areas such as cellular digital packet (CDPD), code
division multiple access (CDMA) and over-the-air activation. The Company also
intends to continue to provide custom software and services solutions to
companies such as Lucent, GTE and Lockheed. By maintaining these custom
software development services on a selective basis, the Company believes it is
able to gain insight on unique OSS products opportunities that are addressable
by standard software products, such as the Company's leading LNP products. In
addition, the Company intends to leverage this domain expertise to develop its
MetOSS product offerings, including the platform, provisioning and other OSS
products.
. MAINTAIN PROFESSIONAL SERVICE EXPERTISE. The Company intends to maintain a
strong focus on its professional services and systems integration business
activities in order to facilitate sales of software products and gain ongoing
insight into customer requirements. The Company will continue to perform
systems integration in key OSS domain areas and in implementation of its
MetOSS products. For example, the Company intends to provide product
integration and support services to customers who have licensed third-party
applications that support the Company's MetOSS platform products.
. EXPAND STRATEGIC PARTNERSHIPS. The Company intends to facilitate the
development of third- party software applications that are compatible with its
MetOSS-GEM platform by introducing in late 1998 or early 1999 a third-party
software application development environment and a set of application
specifications for its platform. By developing partnerships with leading
ordering, billing and service assurance application providers, the Company
believes carriers that adopt its OSS platform will be able to adopt point
applications from multiple vendors while maintaining data interoperability
across such applications. In order to broaden its sales presence and further
penetrate selected accounts and international markets, the Company plans to
complement its direct sales efforts through relationships with systems
integrators and services organizations.
METOSS APPLICATION AND PLATFORM ARCHITECTURE
The Company's existing LNP applications and future provisioning applications
are designed as open client/server applications, supporting Windows 95,
Windows NT, and Java-based clients, HP/UX-based server operating systems and
Oracle relational database software. The applications use object-oriented
application methodologies and afford users a modular, scalable solution. The
Company has a strong commitment to the Internet as all current and future
applications are being designed to incorporate the use of Java and Web
browsers. The Company's applications are designed to function either on a
standalone basis or concurrently with other applications on the Company's
MetOSS-GEM platform.
The Company's MetOSS-GEM platform is being designed and developed to support
multiple, interoperable OSS applications running concurrently in a
distributed, scalable network computing environment. The platform will support
the HP/UX-based server operating system and Oracle relational database
software, and incorporates selected components from third-party middleware
suppliers. The Company has published rules and standards on the use of the
platform for its internal, third-party and
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customer software developers, including user interface and API specifications,
as well as guidelines for data extensibility between OSS.
METOSS PRODUCTS
The Company's MetOSS product line is being designed to include its current
LNP-based service provisioning products, its future provisioning products,
which will address carrier requirements created as a result of LNP, and its
future OSS platform products.
LNP PRODUCTS
The Company's current LNP products enable carriers to accommodate customer
requests to change carriers while retaining the same phone number, and to
obtain and disseminate call routing data to carriers' networks. The Company
currently offers three LNP products, which were released in the first half of
1997. The Company's LNP products are licensed under perpetual licenses and may
be licensed separately or bundled as a complete solution. The prices for such
licenses are based upon modules selected by the customer and the number of
access lines or wireless subscribers serviced by the customer. Prices start at
approximately $200,000 for a limited-use license and are graduated in intervals
to over $1 million for unlimited access line/subscriber use. Customers
licensing an application on a limited usage basis pay additional license fees
as their number of access lines/subscribers increases. Customers typically
engage the Company to provide installation, integration and testing of the LNP
products in connection with these licenses. Such services are provided for
additional fees, depending upon the mix of products licensed and the complexity
of the customer's system. The Company provides a 90-day warranty against
defects, 24 hour per day help desk support and problem resolution as part of
the license and offers extended warranty support services on an optional annual
maintenance program. The Company is currently in the process of enhancing its
LNP products to address the marketplace requirements and standards being
developed for the wireless industry. General software upgrades and enhancements
for all products are planned. The following diagram depicts the Company's
current LNP products and how they are designed to interface to legacy and other
OSS applications and gateways.
[ARTWORK DEPICTING PRODUCT INTERFACE TO OSS APPLICATIONS APPEARS HERE]
ORDERPATH is currently in use and enables carriers to process requests by
customers for changing carriers while retaining the same telephone number.
OrderPath provides a direct link by the carrier to any of the NPACs. The
Company's products are also sold with a number of standard interfaces to
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legacy systems, such as Bellcore's SOAC system. Consistent with the Company's
standards-based approach, the product complies with North American Numbering
Council specifications, which specify carrier interoperability with the NPAC.
NUMBERMANAGER is currently in use and enables carriers to receive downloads
from NPACs, allowing carriers to update their network switches, provisioning
systems and other OSS on a real-time basis as numbers are ported. NumberManager
supports both Lockheed and Perot-operated NPACs, as well as a number of
standard interfaces to switching equipment from leading vendors, such as
Nortel, Ericsson, Lucent, and Bellcore.
NODEMASTER is currently in use and complements OrderPath and NumberManager by
providing an interface between NumberManager and the carriers' physical network
infrastructures. NodeMaster is also sold with standard interfaces to hardware
switches and equipment from leading vendors. NodeMaster was designed to provide
carriers with the flexibility to operate in a multi-vendor hardware
environment.
FUTURE SERVICE PROVISIONING PRODUCTS
The Company believes that as carriers implement LNP solutions they will see a
need for other OSS products that interface with these solutions. The Company
plans to extend its product family to include additional OSS products based
upon its MetOSS architecture that are planned to streamline customer
provisioning and support. The Company expects these additional service
provisioning products to be released by late 1998 or early 1999, and to be
licensed on a perpetual basis with pricing similar to the Company's current LNP
products. The following diagram illustrates how the Company's MetOSS-GEM
platform is designed to extend a carrier's OSS environment to support multiple
applications developed by the Company or third-party developers.
[ARTWORK OF SUPPORT FOR MULTIPLE APPLICATIONS APPEARS HERE]
The Company has the following MetOSS products under development.
LOCAL SERVICE EXCHANGE is being designed to automate the creation and
exchange of LSRs between carriers. LSRs contain the details of customers'
services such as call waiting, call forwarding and voice mail. This product
automates the LSR process, which is currently performed in a costly manual
fashion. The Company expects LSR processing volume to increase as a result of
deregulation
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and LNP. The product provides an interface between carriers and meets industry
standards, such as the Order and Billing Forum specifications, which define
interfaces and record formats for the electronic exchange of orders and
billing data.
NUMBER EXCHANGE is being designed to address the telephone number management
and allocation requirements of service providers that have implemented LNP
solutions. Upon the introduction of LNP, service providers will be required to
implement systems which provide more efficient and automated telephone number
pooling, number management, allocation and reservations, as well as interface
with the new third-party telephone number administrator. Number Exchange
provides carriers with interfaces to these telephone number administrators,
allowing carriers control of their number pooling, administration and
assignment, which were previously under the control of ILECs. NumberManager
also is being designed to track the coordinates of call origination and
termination in order to ensure accurate rating of calls for billing purposes.
FUTURE PLATFORM PRODUCTS
The Company is currently developing MetOSS-GEM, an OSS environment that
supports multiple applications, that is designed to enable carriers to
effectively disseminate LNP and other data throughout carriers' OSS
infrastructures. Carriers that adopt the Company's platform will be able to
choose among leading third-party applications in ordering, provisioning,
service assurance and billing, share data effectively among these applications
and rapidly implement multiple applications. The Company expects to sell the
modules both separately and as an integrated solution. The Company anticipates
the first release of the platform by late 1998 or early 1999.
The first release of the Company's MetOSS-GEM platform product is scheduled
to incorporate three functional modules. The specifications for the Shared
Services Module set forth standards for the design and development of both the
Company's and third parties' OSS applications written to the platform. The
Shared Services Module is intended to provide common services, such as
transaction processing, data sharing and security among all applications
operating on the platform. While the initial version of the Shared Services
Module will be comprised primarily of non-proprietary, commercially available
software products from third-party vendors, future versions of the Shared
Services Module are anticipated to add proprietary functionality, as well as
the rules and standards for use of third-party components. The Enterprise
Information Module is being designed to provide data warehousing and a single
enterprise data view across all applications. The data and information in the
Enterprise Information Module is intended to be accessed and utilized for a
wide range of applications and reporting, such as parity reporting and churn
analysis. The Development Environment Module will provide the rules and
programming interfaces to be used by internal, third-party, or customer
software application developers for compatibility with MetOSS.
The Company is developing two additional MetOSS modules for subsequent
release, the Gateway Module and the Extensibility Module. The Gateway Module
is being designed to provide the mechanism for integrating external systems
into the MetOSS environment, thus allowing carriers to benefit from rapid
implementation and data communication throughout their OSS. The Gateway Module
will be utilized for both inter- and intra-carrier systems and will support
the most common interface protocols and devices. The Extensibility Module will
define data formatting and user interfaces specifications for applications,
ensuring common user interfaces, data exchange and sharing among applications.
See "Risk Factors--Rapid Technological Change; Risks Associated With New
Versions and New Products; Risks of Software Defects".
SERVICES
The Company's professional services are focused primarily on providing
custom software development to leading telecommunications companies and
systems integration and customer support for its telecommunications customers.
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CUSTOM SOFTWARE. The Company provides custom software development services
spanning the complete system development life cycle from feasibility and
requirements planning through development and production rollout. By offering
these custom development services on a selective basis to leading
telecommunications service providers for over a decade, the Company has
developed a unique, broad-based telecommunications domain expertise that it
believes provides it with a competitive advantage.
PRODUCT INTEGRATION. The Company's proprietary Product Integration Review
("PIR") process defines customer requirements associated with the installation
and integration of the Company's software products. The Company's PIR produces
a set of documents that describe the project deliverables, installation
process, any legacy system interfaces and software development requirements,
as well as the project timeline and milestones. The Company believes its PIR
positions it for a successful customer relationship and creates opportunities
for additional product sales or services engagements.
SYSTEMS INTEGRATION. The Company provides a range of systems integration
services, including system design, database design, network design, network
configuration and other system-development areas of expertise. The Company
also provides systems integration services for third-party software products.
CUSTOMER SUPPORT. The Company provides a broad array of customer support
services, including 24 hour per day help desk support, problem resolution,
software maintenance and scheduled software upgrades, complete training and
documentation for products and services, and quality assurance. The Company's
typical software maintenance agreement has a 12-month term.
CUSTOMERS
The Company markets its products and services to a range of existing service
providers, including ILECs, CLECs, interexchange carriers and competitive
local exchange carriers. Historically, the Company's revenue has been
generated from sales to customers in the U.S. The Company's LNP and custom
software development customers by market are described below. See "Risk
Factors--Reliance on Significant Customers".
INCUMBENT LOCAL EXCHANGE CARRIERS. The Company's offerings to ILECs include
LNP solutions, OSS provisioning, order activation solutions, consulting and
custom software development. The Company's LNP customers include Ameritech and
Pacific Bell/Southwestern Bell, and the Company has also supplied custom
software development services for BellSouth, GTE and Pacific Bell/Southwestern
Bell.
WIRELESS SERVICE PROVIDERS. The Company provides wireless service providers
with over-the-air provisioning and service activation software, wireless data
applications and billing and cellular digital packet data ("CDPD") solutions.
The Company has supplied custom software and consulting services to AT&T
Wireless, Bell Atlantic Mobile, GTE Mobilenet and Sprint PCS.
INTEREXCHANGE SERVICE PROVIDERS. The Company has supplied LNP and custom
software for WorldCom and Sprint.
COMPETITIVE LOCAL EXCHANGE COMPANIES. The Company provides organizations
such as ICG Communications Inc., TCG and WorldCom with OSS provisioning, order
entry, order activation, billing and customer care solutions, as well as
professional services such as systems integration and custom software
development.
NETWORK EQUIPMENT SUPPLIERS. The Company provides software and services to
equipment suppliers such as Lucent, Nortel, Ericsson and Stratus Computer,
Inc., which is either integrated into
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hardware products or sold separately. The Company also works with these and
other network equipment vendors to develop interfaces between the Company's
MetOSS products and network switches and systems.
MARKETING AND SALES
The Company's marketing efforts include direct marketing to targeted
accounts, participation in selected trade shows, advertising in specific
industry trade journals, presentations at industry conferences and forums,
press releases to the industry and certain other marketing initiatives. The
primary objectives of the Company's marketing efforts are to generate market
awareness and qualified leads. The Company's sales activities are primarily
conducted through a direct sales and sales support organization, complemented
by other sales channels including strategic distribution partners who help to
identify and qualify leads. The Company assigns a dedicated account manager to
each major customer. As of December 31, 1997, the Company's direct sales force
consisted of 16 individuals, located in six cities in the U.S. Due to the
complex nature of the Company's products and services and to the procurement
processes of its customers, the sales cycle can range from 60 days to more
than a year.
The Company's marketing and sales efforts have been focused primarily on
facility-based local exchange, interexchange and wireless service providers in
the U.S., and substantially all of the Company's sales have been to U.S.
customers. The Company believes that significant demand exists for new OSS
products and services outside of the U.S. due to increased deregulation and
resulting competition. The Company intends to expand its sales and marketing
efforts outside of the U.S. through a combination of direct sales in selected
markets, partnering with specific third-party systems integrators and software
suppliers and the extension of its relationships with existing customers as
they expand into international markets. See "Risk Factors--Risk of Planned
International Expansion".
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily focused on
identifying market requirements and performing design and development
functions. These activities follow the Company's Product Development Process
("PDP") that governs the product lifecycle from concept through product launch
and subsequent retirement from the marketplace through the use of cross-
functional teams. The PDP provides the Company's senior management with a
series of decision milestones that allows management to consider ongoing
projects on a regular basis. The Company's research and development
expenditures for 1996 were $641,000, representing 2% of total revenue, and for
1997 were $2.9 million, representing 7% of total revenues. See "Risk Factors--
Rapid Technological Change; Risks Associated with New Versions and New
Products; Risks of Software Defects".
COMPETITION
The Company's primary markets are intensely competitive and are subject to
rapid technological change, evolving industry standards and regulatory
developments. The Company faces continuous demand for improved product
performance, new product features and reduced prices, as well as intense
pressure to accelerate the release of new products and product enhancements.
The Company's existing and potential competitors include many large domestic
and international companies, including certain of the Company's customers,
that have substantially greater financial, manufacturing, technological,
marketing, distribution and other resources, larger installed customer bases
and longer-standing relationships with customers than the Company. The
Company's principal competitors in the LNP market include Bellcore, Lucent,
Nortel and Tekelec. The Company believes that competitors of its MetOSS
products will include AG Communications, Bellcore, CBIS, Ericsson, and Lucent.
One of the Company's principal customers, Lucent, competes with the Company
with respect to certain of the Company's products and services, and there can
be no assurance that Lucent
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will not expand the range of products and services offered in competition with
the Company. In addition, Lockheed has retained rights to the NPAC software
developed for Lockheed by the Company, and Lockheed could potentially compete
with the Company with respect to LNP products and related services. There also
can be no assurance that other customers will not offer competitive products
or services in the future. The Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier
than the Company's solutions. Many telecommunications companies have large
internal development organizations which develop software solutions and
provide services similar to the Company's products and services. In addition,
customers who have purchased custom software solutions from the Company are
not precluded from competing with the Company. Additionally, although the
Company developed certain NPAC software for Lockheed, Lockheed is under no
obligation to utilize the Company as a vendor on future LNP-related projects.
The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside of its control, including
responsiveness to service providers' needs, relative quality and reliability
of the Company's and its competitors' products and services, price, project
management capabilities, technical subject matter expertise, quality of
customer service and support, the emergence of new industry standards, the
development of technical innovations, the attraction and retention of
qualified personnel, regulatory changes and general market and economic
conditions. A variety of potential actions by the Company's competitors,
including a reduction of product prices or increased promotion, announcement
or accelerated introduction of new or enhanced products, or cooperative
relationships among competitors, could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully with
existing or new competitors or will properly identify and address the demands
of new markets. The failure by the Company to adapt to emerging market
demands, respond to regulatory and technological changes or to compete
successfully with existing and new competitors would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Competition".
INTELLECTUAL PROPERTY
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect its
proprietary rights. The Company presently has no patents, but has patent
applications pending in the U.S. on elements of three of its LNP products,
NumberManager, OrderPath and NodeMaster. In addition, the Company has
registered or filed for registration of certain of its trademarks. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's products or technology without authorization, or
to develop similar technology independently through reverse engineering or
other means. In addition, the laws of some foreign countries do not adequately
protect the Company's proprietary rights. There can be no assurance that the
Company's means of protecting its proprietary rights in the U.S. or abroad
will be adequate or that others will not independently develop technologies
that are similar or superior to the Company's technology, duplicate the
Company's technology or design around any patent of the Company. Moreover,
litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
management time and resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Protection of Intellectual Property; Risks of Infringement".
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EMPLOYEES
As of December 31, 1997, the Company employed a total of 313 employees, of
which 61 are research and development staff, 167 professional services staff,
65 are general and administrative staff, and 20 are marketing and sales staff.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes that its relations with its
employees are good.
FACILITIES
The Company leases office space at three locations in the Denver, Colorado
metropolitan area, including two in the Englewood area (Meridian and
Southgate) and one in the Boulder area (Centennial Valley). The Company also
leases sales offices in Dallas, Chicago, Atlanta, San Francisco and
Washington, D.C. The Company's leases in the Denver, Colorado metropolitan
area are shown below:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
-------- -------------- ----------------
<S> <C> <C>
Meridian............................... 120,281 11/30/2016
Southgate.............................. 68,566 12/31/2000
Centennial Valley...................... 10,992 10/31/2002
</TABLE>
The Company intends to consolidate all of its activities presently conducted
in its Southgate facility at the Meridian location in the second quarter of
1998 and sublease the Southgate facility in its entirety. The Company believes
that its office space will be adequate to meet the Company's current needs
through approximately 1999.
LEGAL PROCEEDINGS
From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the ordinary course of business. As of
the date of this Prospectus, the Company is not a party to any legal
proceedings, the adverse outcome of which would, in management's opinion, have
a material adverse effect on the Company's business, financial condition and
results of operations.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George A.
Hallenbeck(1)(2)....... 55 Chairman of the Board of Directors
J. Richard Abramson..... 49 President, Chief Executive Officer and Director
Roger A. Barnes......... 49 Senior Vice President of Finance, Chief
Financial Officer, Treasurer and Assistant
Secretary
Jeffrey J. Finn......... 39 Senior Vice President and General Manager of
Product Development and Distribution
James M. Ross........... 55 Senior Vice President and General Manager of
Services
Marilu C. Crosby........ 50 Vice President of Human Resources
Robert M. Gahan......... 46 Vice President of Corporate Development
David J. Molny.......... 39 Vice President, Chief Technical Officer and
Director
Anita T. Moseley........ 45 Vice President of Legal Services, General
Counsel and Secretary
Terry C. Porter......... 45 Vice President of Sales and Sales Support
Harry B. Fair(1)(2)..... 47 Vice Chairman of the Board of Directors
Donald R. Dixon(2)...... 50 Director
Robert J. Loarie(1)..... 55 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
GEORGE A. HALLENBECK was a founder of the Company in June 1985 and has
served as Chairman and a member of the Board of Directors since that time. Mr.
Hallenbeck served as the Company's Chief Executive Officer from June 1985
until December 1996 and as its President from June 1985 until December 1988.
Mr. Hallenbeck currently provides independent consulting services to
technology companies. Mr. Hallenbeck received a B.A. from the University of
Colorado.
J. RICHARD ABRAMSON joined the Company as its President and Chief Operating
Officer in August 1996, serving in such capacities until December 1996 when he
became the President and Chief Executive Officer. Mr. Abramson has been a
member of the Company's Board of Directors since November 1996. From May 1990
through January 1996, Mr. Abramson served as the Chairman of the Board of
Directors, President and Chief Executive Officer of Prairie Systems, Inc., a
privately-held company which provides software products and services for the
telecommunications industry ("Prairie Systems"). Before 1990, Mr. Abramson
held various executive management positions with Applied Communications, Inc.
(which was acquired by U.S. West in 1986) and ACI Telecom, companies which
provide software and services for the banking and telecommunications industry,
and various sales and marketing management positions at First Data Resources
and IBM. Mr. Abramson holds a B.S. from the University of Nebraska.
ROGER A. BARNES joined the Company in November 1997 as Senior Vice President
of Finance, Chief Financial Officer, Treasurer and Assistant Secretary. From
February 1996 to June 1997, Mr. Barnes served as President, Chief Executive
Officer and Director of Formida Software Corporation, a privately-held company
which provides software products for the development of applications utilizing
advanced object relational database technology. From February 1995 to February
1996, Mr. Barnes held the position of Director, Technology Corporate Finance
at Arthur Andersen & Co., LLP, where he
46
<PAGE>
established the firm's technology corporate finance advisory practice. Between
1991 and 1994, Mr. Barnes served as President and Chief Executive Officer of
Centur Consulting Group, his own financial advisory consulting company.
Earlier in his career, Mr. Barnes held various executive management positions
at American President Companies, Ltd. and ROLM Corporation. Mr. Barnes holds a
B.S. from the University of Nebraska.
JEFFREY J. FINN joined the Company in July 1996 as Vice President of Sales
and Marketing and held that position until September 1997 when he assumed the
position of Senior Vice President and General Manager of Product Development
and Distribution. From 1990 until 1996, Mr. Finn served as the Senior Vice
President of Prairie Systems. Earlier in his career, Mr. Finn held various
positions at ACI Telecom and IBM. Mr. Finn holds a B.S. from the University of
Nebraska.
JAMES M. ROSS joined the Company in June 1997 as Vice President of
Integration Services and held that position until September 1997 when he
assumed the position of Senior Vice President and General Manager of Services.
Mr. Ross served as Senior Vice President of APAC Teleservices Inc., a customer
care outsourcing company, from June 1996 until May 1997, and as Senior Vice
President and General Manager of Cap Gemini Sogeti, an international
information technology and systems integration company, from December 1994
until May 1996. From August 1991 to June 1994, Mr. Ross served as Executive
Vice President - Managing Director, Worldwide Telecommunications of SHL
Systemhouse Inc., a global information technology and systems integration
company. Mr. Ross holds a B.A. from Rutgers University.
MARILU C. CROSBY joined the Company in December 1996 as Vice President of
Human Resources. From July 1996 to December 1996, she served as a principal
with Crosby, Bowen & McCoy, Inc., a benefits outsourcing company, and, from
December 1992 until June 1996, served as the Vice President of Human Resources
at Wadley Medical Center. Ms. Crosby holds a B.A. from Augusta College and an
M.A. from the University of South Carolina.
ROBERT M. GAHAN joined the Company in May 1997 as Director of Business
Development and held that position until August 1997 when he assumed the
position of Vice President of Corporate Development. From January 1993 until
December 1996, Mr. Gahan served as National Sales Director at Qwest
Communications, a Denver-based telecommunications company. Previously, Mr.
Gahan held the positions of General Manager at Bakersfield Cellular Telephone
Company, a business unit of BellSouth Cellular Corporation, a
telecommunications company, and Senior Sales Manager for U.S. West Cellular.
Mr. Gahan holds a B.A. from the University of Iowa.
DAVID J. MOLNY joined the Company in February 1987, serving as a system
architect and group manager on numerous development projects, until September
1997 when he assumed the positions of Vice President and Chief Technical
Officer of the Company. Mr. Molny has served as a member of the Company's
Board of Directors since November 1996. Previously, Mr. Molny held various
positions at AT&T Bell Laboratories and AT&T Network Systems, both
telecommunications companies. Mr. Molny holds a B.S. from the State University
of New York at Potsdam and an M.S. from the University of Southern California.
ANITA T. MOSELEY joined the Company in May 1994 as corporate counsel of the
Company and held that position until June 1997 when she assumed the positions
of Vice President of Legal Services, General Counsel and Secretary of the
Company. Between September 1991 and May 1994, she held an in-house corporate
counsel position with the Federal Deposit Insurance Corporation/Resolution
Trust Corporation. Ms. Moseley holds a B.A. from Syracuse University and a
J.D. from the University of Utah.
TERRY C. PORTER joined the Company in May 1997 as Director of Sales and
Sales Support and held that position until September 1997 when he assumed the
position of Vice President of Sales and Sales Support. From March 1996 until
May 1997, Mr. Porter was the Managing Director of U.S. Operations,
47
<PAGE>
responsible for middleware sales and support, at Siemens Nixdorf Information
Systems. Prior to 1996, Mr. Porter served in various executive management
positions at Covia Technologies, a company providing interoperable message-
based product groups. Mr. Porter holds a B.S. from Purdue University.
HARRY B. FAIR has served as Vice Chairman of the Board of Directors since
April 1996. Mr. Fair is one of the founders of the Company and has served on
the Company's Board of Directors since 1986. Mr. Fair served as President of
the Company between December 1988 and April 1996. Mr. Fair currently is the
General Manager of several privately-held companies that provide
infrastructure commercial data and voice communications, internet solutions
and technical solutions for credit unions. Mr. Fair holds a B.A. from the
University of Denver. Following this offering, it is anticipated that the Vice
Chairman of the Board of Directors position will be eliminated and Mr. Fair
will serve as a member of the Company's Board of Directors.
DONALD R. DIXON has served as a member of the Company's Board of Directors
since December 1997 and previously served as a member of the Company's Board
of Directors from May 1996 to November 1996. Since 1993, Mr. Dixon has been
associated with Trident Capital, L.P., a venture capital firm ("Trident"),
which he helped found. From 1988 to 1993, Mr. Dixon served as Co-President of
Partech International, a private equity fund manager associated with Banque
Paribas. Mr. Dixon serves as a director of Bank America Merchant Services,
Inc., Pegasus Systems, Inc., Platinum Software Corporation, as well as several
privately-held companies. Trident manages Information Associates L.P. and
Information Associates, C.V., both of which are stockholders of the Company.
Mr. Dixon holds a B.S. from Princeton University and an M.B.A. from Stanford
University.
ROBERT J. LOARIE has served as a member of the Company's Board of Directors
since May 1996. Since August 1992, Mr. Loarie has been a Principal of, and
since December 1997, a Managing Director of, Morgan Stanley & Co.
Incorporated, a diversified investment firm, and a general partner of Morgan
Stanley Venture Partners, L.P. and Morgan Stanley Venture Partners II, L.P.,
venture capital investment partnerships. Since November 1996, Mr. Loarie has
also served as a managing member of Morgan Stanley Venture Partners III,
L.L.C., a venture capital investment company. Mr. Loarie also serves as a
director of Adaptec, Inc., TelCom Semiconductor, Inc. and several privately-
held companies. Mr. Loarie holds a B.S. from the Illinois Institute of
Technology and an M.B.A. from the Harvard University Graduate School of
Business.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Fair, Hallenbeck and Loarie. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent certified public
accountants and reviews the Company's annual financial statements.
The Compensation Committee consists of Messrs. Dixon, Fair and Hallenbeck.
The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for officers and employees of
the Company and reviews the performance of the Chief Executive Officer.
DIRECTOR COMPENSATION
The Company's directors do not receive any compensation for serving on the
Board of Directors; however, directors are reimbursed for reasonable out-of-
pocket expenses incurred in connection with attending Board of Directors or
committee meetings.
48
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Dixon, Fair and Hallenbeck. Mr. Fair previously served as the
Company's President and currently serves as Vice Chairman of the Board of
Directors of the Company. Mr. Hallenbeck previously served as the Company's
President and Chief Executive Officer and currently serves as the Chairman of
the Board of Directors of the Company. Mr. Dixon was not at any time during
fiscal 1997, nor at any other time, an officer or employee of the Company. No
member of the Compensation Committee or executive officer of the Company has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1997 to the Company's Chief Executive
Officer and each of the Company's five other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company in all capacities during the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION(1)
- --------------------------- ---- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Richard Abramson..... 1997 $306,000 $112,094 427,500 $9,600
President, Chief
Executive Officer and
Director
Jeffrey J. Finn......... 1997 235,026(2) 54,297 240,750 9,600
Senior Vice President
and General Manager of
Product Development and
Distribution
Marilu C. Crosby........ 1997 102,000 18,682 50,000 4,500
Vice President of Human
Resources
David J. Molny.......... 1997 160,500 4,136 59,500 9,450
Vice President, Chief
Technical Officer and
Director
Anita T. Moseley........ 1997 112,882 11,610 59,929 6,656
Vice President of Legal
Services, General
Counsel and Secretary
Steven F. Langion(3).... 1997 81,169 25,685 23,867 4,017
Former Vice President
of Development
</TABLE>
- --------
(1) Represents contributions made by the Company on behalf of the individuals
which are currently managed under the Company's 401(k) Plan.
(2) Includes commission in the amount of $47,768 earned in 1997.
(3) Mr. Langion's employment with the Company was terminated on May 19, 1997.
49
<PAGE>
STOCK OPTIONS
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 by the Company to each of the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -----------------------
NAME GRANTED IN FISCAL YEAR(2) SHARE(3) DATE 5% 10%
---- ---------- ----------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Abramson..... 202,500 29.5% $ .80 2/18/07 $ 101,250 $ 257,175
225,000 -- 9.50 9/22/07 1,343,250 3,406,500
Jeffrey J. Finn......... 25,750 16.6 .80 2/18/07 12,875 32,703
215,000 -- 9.50 9/22/97 1,283,550 3,255,100
Marilu C. Crosby........ 20,000 3.4 .80 2/18/07 10,000 25,400
20,000 -- .80 6/17/07 10,000 25,400
10,000 -- 9.50 9/22/07 59,700 151,400
David J. Molny.......... 59,500 4.1 9.50 9/22/07 355,215 900,830
Anita T. Moseley........ 22,429 4.1 .80 6/17/07 11,215 28,485
37,500 -- 9.50 9/22/07 223,875 567,750
Steven F. Langion....... 23,867 1.6 .80 8/19/97(5) 11,934 30,311
</TABLE>
- --------
(1) Each of the options was granted pursuant to the Company's Stock Option
Plan and is subject to the terms of such plan as described herein.
(2) Based on 1,449,439 options granted to employees in 1997.
(3) The exercise price per share of options granted was equal to the fair
market value of the Common Stock on the date of grant as determined by the
Company's Board of Directors.
(4) The potential realizable value is calculated based on the term of the
option at the date of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price.
(5) This option expired three months after the termination of Mr. Langion's
employment with the Company.
50
<PAGE>
The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1997, (ii) the number of securities underlying unexercised
options held by the Named Executive Officers as of December 31, 1997 and (iii)
the value of unexercised in-the-money options (i.e., options for which the
fair market value of the Common Stock ($9.50 at December 31, 1997) exceeds the
exercise price) as of December 31, 1997:
OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
ACQUIRED END (#) FISCAL YEAR-END (#) (1)
ON VALUE -------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Richard Abramson..... -- -- 83,125 441,875 $723,188 $1,886,813
Jeffrey J. Finn......... -- -- 31,187 283,813 271,327 598,673
Marilu C. Crosby........ -- -- 5,000 45,000 43,500 304,500
David J. Molny.......... -- -- 750 61,750 6,525 19,575
Anita T. Moseley........ -- -- 1,297 61,203 11,284 206,216
Steven F. Langion....... 11,698 -- -- (2) -- (2) -- --
</TABLE>
- --------
(1) Based on the estimated fair market value of the Common Stock as of
December 31, 1997, $9.50 per share (as determined by the Board of
Directors), minus the per share exercise price, multiplied by the number
of shares underlying the option.
(2) On August 19, 1997, Mr. Langion exercised the portions of his stock
options that had vested through the date of termination of his employment
with the Company. The remaining portions of the options expired upon such
termination.
EMPLOYEE BENEFIT PLANS
AMENDED AND RESTATED STOCK OPTION PLAN
The Company's Amended and Restated Stock Option Plan was adopted by the
Board of Directors on January 19, 1996 and most recently amended on December
16, 1997. There are currently 3,150,000 shares of Common Stock authorized for
issuance under the Option Plan. At December 31, 1997, the Company had granted
options to purchase an aggregate of approximately 2,346,665 shares of Common
Stock, of which options to purchase approximately 86,989 shares had been
exercised, options to purchase approximately 372,275 shares had been canceled
(due to expiration or otherwise) and options to purchase approximately
1,887,401 shares at a weighted average exercise price of approximately $4.92
remained outstanding. Additionally, an aggregate of approximately 1,175,610
shares were available for future grant. The Option Plan will terminate in
January 2006 unless terminated sooner by the Board of Directors.
The Option Plan provides for the grant of incentive stock options under the
Code to employees and nonstatutory stock options, stock appreciation rights,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Option Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award and the exercisability thereof.
The terms of stock options granted under the Option Plan generally may not
exceed ten years. The exercise price of options granted under the Option Plan
is determined by the Board of Directors, provided that the exercise price of
an incentive stock option cannot be less than 100% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Option Plan vest at the rate specified in the option agreement. No stock
option may be transferred by the
51
<PAGE>
optionee other than by will or the laws of descent or distribution or, in
certain limited instances, pursuant to a qualified domestic relations order,
provided that an optionee whose relationship with the Company or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise options in the three-month period following such
cessation (unless such options terminate or expire sooner by their terms) or
in such longer period as may be determined by the Board of Directors. Options
may be exercised for up to 12 months and 18 months after an optionee's
relationship with the Company and related corporations ceases due to death or
disability, respectively.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000. Options may be
immediately exercisable, at the discretion of the Company, whether vested or
not, subject to repurchase by the Company of any unvested shares.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full become available again for the grant of
awards under the Option Plan. Shares with respect to which stock appreciation
rights have been exercised are not available for the grant of new awards or
stock options.
The Board of Directors has the authority to reprice outstanding options and
stock appreciation rights and to offer optionees and holders of stock
appreciation rights the opportunity to replace outstanding options and stock
appreciation rights with new options or stock appreciation rights for the same
or a different number of shares.
Restricted stock purchase awards granted under the Option Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded
in consideration of past services without a purchase payment. Rights under a
stock bonus or restricted stock bonus agreement may not be transferred other
than by will, the laws of descent and distribution or a qualified domestic
relations order while the stock awarded pursuant to such an agreement remains
subject to the agreement. Stock appreciation rights granted under the Option
Plan may be tandem rights, concurrent rights or independent rights.
Upon certain changes in control of the Company, each outstanding option
shall be assumed or an equivalent option substituted by the successor
corporation or, if the successor corporation refuses to assume or substitute
for outstanding options, such options shall become fully vested and
exercisable for a period of 15 days after notice from the Company, or
thereafter terminate.
EMPLOYEE STOCK PURCHASE PLAN
On December 16, 1997, the Company's Board of Directors adopted an Employee
Stock Purchase Plan covering an aggregate of 250,000 shares of Common Stock.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the
Purchase Plan. The Board of Directors currently plans that the offering period
for any offering will be six months.
Employees are eligible to participate in the first offering commencing
following the date they are employed by the Company or an affiliate of the
Company. Employees who participate in an offering may have up to 15% of their
earnings (provided that such amount does not exceed $25,000 in value
52
<PAGE>
per calendar year) withheld pursuant to the Purchase Plan and applied at the
end of each offering period to the purchase of shares of Common Stock. The
price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock on the commencement
date of each offering period or the purchase date. Employees may end their
participation in the offering at the end of the offering period, and
participation ends automatically upon termination of employment with the
Company.
In the event of certain changes of control, the Company and the Board of
Directors have discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor
corporation, or the Board of Directors may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to the change in control. The Purchase Plan will
terminate at the direction of the Board of Directors.
401(K) PLAN
The Company maintains a 401(k) profit sharing and retirement plan (the
"401(k) Plan"). All employees who have reached 21 years of age and have
completed 30 continuous days of employment are eligible to participate in the
401(k) Plan. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by 15%, up to the annual limit prescribed by statute
($9,500 in 1997), and to contribute the amount of such reduction to the 401(k)
Plan. The Company makes nonelective contributions in the amount of 4% of each
participant's annual compensation and matches 100% of each participant's
eligible contributions up to 2% of each participant's annual compensation. The
401(k) Plan also provides for discretionary contributions and qualified
nonelective contributions to the 401(k) Plan by the Company. Employee
participants may direct the trustee with respect to the investment of the
assets of the 401(k) Plan only if the trustee consents to such direction in
writing. Prior to the adoption of the 401(k) Plan, the Company maintained a
defined contribution retirement plan, which was available to all employees 21
years of age or older with one year of service to the Company. Effective
December 31, 1996, the accrual of benefits under such retirement plan ceased
and the retirement plan was merged into the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Bylaws (the "Bylaws") provide that the
Company will indemnify its directors and executive officers and may indemnify
its other officers, employees and other agents to the fullest extent permitted
by Delaware law. The Company is also empowered under its Bylaws to enter into
indemnification agreements, as the Company has done, with its directors and
executive officers. See "Certain Transactions". The Company's Bylaws also
allow the Company to purchase insurance on behalf of any person it is required
or permitted to indemnify.
In addition, the Company's Restated Certificate of Incorporation (the
"Certificate") provides that the Company's directors shall not be liable for
monetary damages for breach of fiduciary duty to the Company and its
stockholders as a director, except for liability (i) for breach of their duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law; (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit. The Certificate further provides that no amendment or repeal
of this provision shall apply to or have any effect on the liability or
alleged liability of any director of the Company for or with respect to any
acts or omissions of such director occurring prior to such amendment or
repeal. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, the liability of directors will then be eliminated or limited to
the fullest extent permitted by Delaware law, as so amended. This provision
does not affect a director's responsibilities under any other laws, such as
the federal securities laws or state or federal environmental laws.
53
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to authority granted by the Company's Bylaws, the Company has
entered into indemnification agreements (the "Indemnification Agreements")
with each of its directors and executive officers. Subject to the provisions
of the Indemnification Agreements, the Company shall indemnify and advance
expenses to such directors and executive officers in connection with their
involvement in any event or occurrence which arises in their capacity as, or
as a result of, their position with the Company. See "Management--Limitation
of Liability and Indemnification of Officers and Directors".
During 1997, the Company paid Vail Technologies, Inc. approximately $146,000
for certain consulting services provided in connection with the Company's
agreement with Lockheed. George A. Hallenbeck, Chairman of the Board and
holder of more than 5% of the Company's Common Stock, is the sole owner of
Vail Technologies, Inc. Mr. Hallenbeck is currently not providing any
consulting services to the Company.
On November 25, 1996, the Company entered into a termination agreement with
George A. Hallenbeck in connection with the termination of his services as
Chief Executive Officer of the Company, pursuant to which the Company paid Mr.
Hallenbeck a total of $120,000 in six monthly installments commencing January
1, 1997.
In September 1996, in connection with the deferral of interest due on the
Subordinated Notes (as defined below), the Company issued warrants to purchase
an aggregate of 96,962 shares of Non-voting Common Stock (which, upon
completion of this offering, will convert into warrants to purchase shares of
Common Stock) at an exercise price of $.80 per share to Morgan Stanley Venture
Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II, C.V. and Morgan
Stanley Venture Investors, L.P. (the "Morgan Stanley Funds") and warrants to
purchase an aggregate of 85,673 shares of Non-voting Common Stock (which, upon
completion of this offering, will convert into warrants to purchase shares of
Common Stock) at an exercise price of $.80 per share to Information
Associates, C.V. and Information Associates, L.P (the "Information Associates
Funds"). The warrants expire in May 2003. Robert J. Loarie, a director of the
Company, is a General Partner of Morgan Stanley Venture Partners II, L.P., the
General Partner of the Morgan Stanley Funds. He is also a Vice President of
Morgan Stanley Venture Capital II, Inc., the Managing General Partner of
Morgan Stanley Venture Partners II, L.P. Donald R. Dixon, a director of the
Company, is President of Trident Capital Management, L.L.C., the Investment
General Partner of Information Associates, C.V. and the General Partner of
Information Associates, L.P. The shares of Non-voting Common Stock issuable
upon conversion of such warrants are entitled to certain registration rights.
See "Description of Capital Stock--Registration Rights".
On May 31, 1996, the Company issued senior subordinated promissory notes
(the "Subordinated Notes") in the aggregate principal amount of $6,500,000 and
warrants to purchase an aggregate of 727,998 shares of Non-voting Common Stock
(which, upon completion of this offering, will convert into warrants to
purchase shares of Common Stock) at an exercise price of $.80 per share (the
"Warrants"), which expire in May 2003, to the Morgan Stanley Funds and
Information Associates Funds. The Subordinated Notes accrue interest at the
rate of 9% and are payable in four annual installments commencing June 1,
2000. The principal amount of the Subordinated Notes, together with interest,
are fully due and payable upon the consummation of this offering. The shares
of Common Stock issuable upon exercise of the Warrants are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights".
On April 1, 1996, the Company entered into a consulting services agreement
with Harry B. Fair, pursuant to which the Company paid Mr. Fair a total of
$106,000. Mr. Fair is currently not providing any consulting services to the
Company.
54
<PAGE>
During the fiscal years ended December 31, 1994 and December 31, 1995, the
Company was treated as an S corporation under the Code and made distributions
to its stockholders. See "Dividend Policy and S Corporation Status". The
Company deferred making distributions at the end of fiscal 1995 to its
stockholders. On January 2, 1996, the Company issued promissory notes bearing
interest at the rate of 7.25% to the following directors, executive officers
and holders of more than 5% of the Company's Common Stock in the following
principal amounts equal to the amount of each stockholder's deferred
distribution for the year ended December 31, 1995: John A. Elmgren, Harry B.
Fair, George A. Hallenbeck, David J. Molny and Wayne A. Pulick in the amounts
of $655,257, $2,293,401, $2,293,401, $65,526 and $655,257, respectively (the
"Stockholder Notes"). The Stockholder Notes contain prepayment penalties and
are due on January 2, 2006, with interest payable on each December 31. On May
24, 1996, each holder executed an Acknowledgment and Confirmation of
Subordination, agreeing to subordinate the repayment of the principal of their
Stockholder Notes to the Subordinated Notes. Further, in September 1996, each
holder agreed to forgive interest payable on the Stockholder Notes as of
September 30, 1996 in exchange for the Company's agreement to amend the
Stockholder Notes to contain prepayment penalties.
In January 1995, the Company made a loan to George A. Hallenbeck in the
principal amount of $137,400, bearing interest at the rate of 6.5% per annum
and payable in monthly installments through December 1995. Such loan was
repaid in full.
The Company believes that the terms of the transactions described above were
no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any
of its officers, directors, or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the independent and
disinterested members of the Board of Directors.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1997,
and as adjusted to reflect (a) the sale of the Common Stock being offered
hereby (assuming no exercise of the Underwriters' over-allotment option) and
(b) to give effect to the conversion of all outstanding shares of Non-voting
Common Stock and Preferred Stock into shares of Common Stock for (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's current stockholders who is expected to
sell shares in this offering (the "Selling Stockholders"), (iv) each of the
Named Executive Officers and (v) all directors and current executive officers
of the Company as a group. Except as otherwise noted, the persons or entities
in this table have sole voting and investing power with respect to all the
shares of Common Stock owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OF OFFERING(1)(2)
----------------------- SHARES -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ ------------ ------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
George A. Hallenbeck.... 2,625,000 33.9% 383,600(3) 2,241,400 20.7%
c/o Evolving Systems,
Inc.
9777 Mt. Pyramid Court
Englewood, CO 80112
Harry B. Fair........... 2,175,000 28.1 318,377(4) 1,856,623 17.1
c/o Evolving Systems,
Inc.
9777 Mt. Pyramid Court
Englewood, CO 80112
Morgan Stanley Venture
Partners(5)............. 1,015,210 12.3 -- 1,215,210 10.7
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Trident Capital(6)...... 898,173 11.0 -- 1,098,173 9.8
2480 Sand Hill Road
Menlo Park, CA 94025
John A. Elmgren(7)...... 713,250 9.2 104,210(8) 609,040 5.6
1518 Cottonwood Lane
Littleton, CO 80121
Wayne A. Pulick......... 600,750 7.8 87,904(9) 512,846 4.7
147 Alpine Avenue
Golden, CO 80401
J. Richard Abramson(10). 89,218 1.1 -- 89,218 *
Marilu C. Crosby(10).... 5,000 * -- 5,000 *
Donald R. Dixon(11)..... 898,173 11.0 -- 1,098,173 9.8
Jeffrey J. Finn(10)..... 35,827 * -- 35,827 *
Steven F. Langion....... 11,698 * -- 11,699 *
Robert J. Loarie(12).... 1,015,210 12.3 -- 1,215,210 10.7
David J. Molny.......... 83,250 1.1 10,000 73,250 *
Anita T. Moseley(10).... 1,780 * -- 1,780 *
All directors and
current executive
officers as a group (13
persons)(13)........... 6,928,458 78.9 711,977 6,616,481 55.7
Additional Selling
Stockholder:
Timothy J. Drummond..... 77,625 1.0 5,000 72,625 *
</TABLE>
56
<PAGE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
issuable upon exercise of stock options and warrants that are currently
exercisable or exercisable within 60 days of December 31, 1997 are deemed
outstanding for computing the percentage of the person or entity holding
such securities but are not outstanding for computing the percentage of
any other person or entity. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the
table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Percentage of ownership is based on 7,740,747 shares of Common Stock
outstanding before this offering and 10,831,656 shares of Common Stock
outstanding after this offering.
(3) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Hallenbeck will sell an aggregate of 500,000 shares in the offering and
will beneficially own 2,125,000 shares, or 19.3%, after the offering.
(4) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Fair will sell an aggregate of 500,000 shares in the offering and will
beneficially own 1,675,000 shares, or 15.2%, after the offering.
(5) Includes 87,750 shares owned by Morgan Stanley Venture Capital Fund II,
C.V., 352,500 shares owned by Morgan Stanley Venture Capital Fund II, L.P.
and 91,500 shares owned by Morgan Stanley Venture Investors, L.P. Also
includes warrants to purchase an aggregate of 483,460 shares of Common
Stock, 79,838 of which are owned by Morgan Stanley Venture Capital Fund
II, C.V., 320,453 of which are owned by Morgan Stanley Venture Capital
Fund II, L.P. and 83,169 of which are owned by Morgan Stanley Venture
Investors, L.P. The percent beneficially owned after the offering includes
200,000 shares that the Morgan Stanley Funds may purchase in the offering.
(6) Includes 12,750 shares owned by Information Associates, C.V. and 458,250
shares owned by Information Associates, L.P. Also includes warrants to
purchase an aggregate of 427,173 shares of Common Stock, 11,597 of which
are owned by Information Associates, C.V. and 415,576 of which are owned
by Information Associates, L.P. The percent beneficially owned after the
offering includes 200,000 shares that the Information Associates Funds may
purchase in the offering.
(7) Includes 750 shares subject to stock options exercisable within 60 days of
December 31, 1997.
(8) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Elmgren will sell an aggregate of 150,000 shares in the offering and will
beneficially own 563,250 shares, or 5.1%, after the offering.
(9) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
Pulick will sell an aggregate of 150,000 shares in the offering and will
beneficially own 450,750 shares, or 4.1%, after the offering.
(10) Consists solely of shares subject to stock options exercisable within 60
days of December 31, 1997.
(11) Consists solely of shares owned by investment funds managed by Trident
Capital (see Note 6 above). Mr. Dixon is President of Trident Capital
Management, L.L.C., the Investment General Partner of Information
Associates, C.V. and the General Partner of Information Associates, L.P.
The percent beneficially owned after the offering includes 200,000 shares
that the Information Associates Funds may purchase in the offering.
(12) Consists solely of shares owned by investment funds managed by Morgan
Stanley Venture Partners (see Note 5 above). Mr. Loarie is a General
Partner of Morgan Stanley Venture Partners II, L.P., the General Partner
of each of the funds. He is also a Vice President of Morgan Stanley
Venture Capital II, Inc., the Managing General Partner of Morgan Stanley
Venture Partners II, L.P. Mr. Loarie disclaims beneficial ownership of
such shares. The percent beneficially owned after the offering includes
200,000 shares that the Morgan Stanley Funds may purchase in the
offering.
(13) Includes 131,825 shares subject to stock options exercisable within 60
days of December 31, 1997. Also includes warrants to purchase an
aggregate of 910,633 shares of Common Stock. Also see Notes 11 and 12
above.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate and Bylaws is a summary and is
qualified in its entirety by the provisions of the Certificate and Bylaws,
which have been filed as exhibits to the Company's Registration Statement, of
which this Prospectus is a part.
Effective upon completion of this offering, the Company's authorized capital
stock shall consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 2,000,000 shares of Preferred Stock, $.001 per share. As of
December 31, 1997, there were approximately 60 record holders of the Company's
Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy". In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further vote or action by
the stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including any dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. An
effect of the existence of unissued and unreserved Common Stock and Preferred
Stock may be to enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of the
Company's management. Such additional shares also could be used to dilute the
stock ownership of persons seeking to obtain control of the Company.
Additionally, the issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. No shares of
Preferred Stock will be outstanding as of the closing of this offering.
WARRANTS
As of December 31, 1997, the Company had outstanding warrants to purchase an
aggregate of 910,633 shares of Non-voting Common Stock at an exercise price of
$.80 per share (the "Common Stock Warrants"). The Common Stock Warrants
contain provisions for the adjustment of the exercise price upon the
occurrence of certain events, including a stock dividend, stock split or
recapitalization. The Common Stock Warrants terminate on May 31, 2003. The
holders of the Common Stock Warrants are entitled to certain registration
rights set forth in the Registration Rights Agreement. See "--Registration
Rights".
58
<PAGE>
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with the holders (or their permitted
transferees) of approximately 6,740,909 shares of the Company's Common Stock
(the "Holders"). Additionally, holders of the Company's Common Stock Warrants
are entitled to registration rights upon the exercise of such Common Stock
Warrants. See "--Warrants". If the Company proposes to register any of its
securities under the Securities Act, the Holders are entitled to notice of
such registration and are entitled to include, at the Company's expense, their
shares therein. In addition, the Holders may require the Company at its
expense on not more than two occasions to use its best efforts to effect the
registration, subject to certain conditions and limitations. Further, subject
to certain limitations, the Holders may require the Company at its expense to
register their shares on Form S-3 when such form becomes available.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or at any time
during the prior three years has owned) 15% or more of the corporation's
voting stock.
The Company's Certificate and Bylaws also require that, effective upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may
be called only by the Board of Directors, the Chairman of the Board of
Directors, the Chief Executive Officer or by holders of at least two-thirds of
the shares of voting stock of the Company. The Company's Certificate also
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Individual directors may only be removed
from the Board of Directors without cause by the affirmative vote of the
holders of at least 66 2/3% of the voting power of all then-outstanding shares
of voting stock. In addition, the Company's Certificate provides for the
classification of the Board of Directors into three classes, only one of which
shall be elected at any given annual meeting. These provisions may have the
effect of delaying, deterring or preventing a change in control of the Company
or depressing the market price of Common Stock or discouraging hostile
takeover bids in which stockholders of the Company could receive a premium for
their shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, assuming no exercise of outstanding
options or warrants, the Company will have outstanding an aggregate 10,837,909
shares of Common Stock (11,032,000 shares if the Underwriters' over-allotment
is exercised in full). Of these shares, the 4,000,000 shares of Common Stock
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Affiliates"). The remaining 6,837,909 shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rules 144 and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
DAYS AFTER DATE OF THIS SHARES ELIGIBLE FOR
PROSPECTUS FUTURE SALE COMMENT
----------------------- ------------------- -------
<S> <C> <C>
Upon effectiveness...... 4,000,000 Freely tradable, shares sold in offering.
Upon effectiveness...... 0 Rule 144(k) (shares not subject to 180-day
lock-up).
90 days................. 28,744 Rule 144 and Rule 701 (outstanding shares
not subject to 180-day lock-up).
180 days................ 6,809,165 Lock-up released. Outstanding shares
salable under Rule 144, Rule 144(k) and
Rule 701.
</TABLE>
Upon completion of this offering, the holders of approximately 6,740,909
shares of Common Stock, or their transferees, will be entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Additionally, holders of the Company's outstanding warrants to purchase
910,633 shares of Common Stock are entitled to registration rights upon the
exercise of such warrants. Registration of such shares under the Securities
Act would result in such shares becoming freely tradable without restriction
under the Securities Act (except for shares purchased by Affiliates)
immediately upon the effectiveness of such registration.
The Company's officers, directors and certain stockholders and optionees
have agreed that they will not, without the prior written consent of Goldman,
Sachs & Co., directly or indirectly offer, sell, contract to sell or otherwise
dispose of approximately 6,809,165 shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock during the
180-day period commencing on the date of this Prospectus (the "Lock-up
Agreements"). Goldman, Sachs & Co., on behalf of the Underwriters, may, in its
sole discretion and at any time without notice, release any or all holders of
securities of the Company subject to Lock-up Agreements from any or all of
their obligations under their respective Lock-up Agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year will be entitled to sell in any three-month
period a number of shares that does not exceed greater of (i) one percent of
the then outstanding
60
<PAGE>
shares of the Company's Common Stock or (ii) the average weekly trading volume
of the Company's Common Stock in the Nasdaq National Market during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Option Plan and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at December 31, 1997, such
registration statement would cover approximately 3,313,011 shares. Such
registration statement is expected to be filed as soon as practicable after
the date hereof and will become effective immediately upon filing. Shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, unless such shares are subject to vesting restrictions with the
Company or the Lock-up Agreements described above. See "Management".
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and certain of the Selling Stockholders by its counsel,
Cooley Godward LLP, Boulder, Colorado. Certain legal matters in connection
with the offering will be passed upon for the Underwriters by Brobeck, Phleger
& Harrison LLP, Denver, Colorado.
EXPERTS
The financial statements as of December 31, 1997 and for the year ended
December 31, 1997, included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements as of December 31, 1996 and for each of the two
years in the period then ended included in this Prospectus and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
61
<PAGE>
CHANGE IN ACCOUNTANTS
Effective August 1997, Price Waterhouse LLP was engaged as the Company's
independent accountants and replaced Deloitte & Touche LLP who was dismissed
as the Company's independent accountants. The decision to change independent
accountants was approved by the Company's Board of Directors. The reports of
Deloitte & Touche LLP on the Company's financial statements for the two years
ended December 31, 1996 did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. There were no disagreements with Deloitte & Touche LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures during the two years ended
December 31, 1996 and through the date of their dismissal. Deloitte & Touche
LLP has not audited or reported on any financial statements subsequent to
December 31, 1996. Prior to August 1997, the Company had not consulted with
Price Waterhouse LLP on items which involved the Company's accounting
principles or the form of audit opinion to be issued on the Company's
financial statements.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or document filed as an
exhibit to the Registration Statement is qualified by reference to such
exhibit as filed. A copy of the Registration Statement, and the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's World Wide Web site is
http://www.sec.gov.
62
<PAGE>
EVOLVING SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Price Waterhouse LLP............................................. F-2
Report of Deloitte & Touche LLP............................................ F-3
Balance Sheets............................................................. F-4
Statements of Operations................................................... F-5
Statements of Changes in Stockholders' Equity.............................. F-6
Statements of Cash Flows................................................... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Evolving Systems, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Evolving Systems,
Inc. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boulder, Colorado
February 24, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Evolving Systems, Inc.:
We have audited the accompanying balance sheet of Evolving Systems, Inc. as
of December 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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, such financial statements present fairly, in all material
respects, the financial position of Evolving Systems, Inc. as of December 31,
1996 and the results of its operations and its cash flows for each of the two
years in the period then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 4, 1997, except for Note 7,
as to which the date is February 10, 1998
F-3
<PAGE>
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997
------------ ------------ -------------
(NOTE 1)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 3,184,116 $ 1,170,659
Certificates of deposit............... 155,181 130,987
Contract receivables, net of
allowance of $298,000 and $520,000
at December 31, 1996 and 1997,
respectively......................... 9,562,506 13,343,939
Unbilled work in-progress............. 767,856 840,992
Deferred tax assets................... 160,733 1,276,282
Prepaid and other current assets...... 375,447 1,077,374
----------- -----------
Total current assets................ 14,205,839 17,840,233
Property and equipment, net........... 9,840,518 9,802,630
Other assets, net of amortization of
$28,141 and $0 at December 31, 1996
and 1997, respectively............... 309,549 216,636
----------- -----------
$24,355,906 $27,859,499
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations.......................... $ 2,794,359 $ 3,177,637
Accounts payable...................... 2,168,668 2,047,340
Accrued liabilities................... 2,187,139 1,195,019
Unearned revenue and customer
deposits............................. 665,837 6,054,421
----------- -----------
Total current liabilities........... 7,816,003 12,474,417
Long-term obligations, including
related parties....................... 15,302,068 13,287,012
Deferred income taxes.................. 242,082 400,493
Commitments and contingencies (Note 3).
Stockholders' equity:
Preferred stock, $.001 par value;
1,500,000 shares authorized; no
shares issued........................ -- -- $ --
Series A preferred stock, $.001 par
value; 8,160 shares authorized,
issued and outstanding at December
31, 1996 and 1997 (liquidation
preference $6,250 per share); none
outstanding pro forma................ 8 8 --
Common stock, $.001 par value;
4,930,000 non-voting shares
authorized; 1,535,786 and 1,620,760
non-voting issued and outstanding as
of December 31, 1996 and 1997,
respectively; 10,070,000 voting
shares authorized, no voting shares
issued, or outstanding as of
December 31, 1996 and 1997,
respectively; 7,740,747 voting
issued and outstanding at December
31, 1997 pro forma................... 1,536 1,621 7,741
Common stock, $.01 par value; 12,500
voting shares authorized; none
issued and outstanding at December
31, 1996 and 1997.................... -- -- --
Additional paid-in capital............ 1,007,632 2,423,060 2,416,948
Deferred compensation................. -- (992,188) (992,188)
Retained earnings (accumulated
deficit)............................. (13,423) 265,076 265,076
----------- ----------- ---------
Total stockholders' equity.......... 995,753 1,697,577 1,697,577
----------- ----------- ---------
$24,355,906 $27,859,499
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
License fees and related services...... $ -- $ 882,500 $20,033,964
Other services......................... 45,354,661 36,035,564 22,686,329
----------- ----------- -----------
Total revenue........................ 45,354,661 36,918,064 42,720,293
----------- ----------- -----------
Cost of revenue:
License fees and related services...... -- 450,000 6,338,475
Other services......................... 26,588,928 24,081,340 18,885,428
----------- ----------- -----------
Total cost of revenue................ 26,588,928 24,531,340 25,223,903
----------- ----------- -----------
Gross margin........................... 18,765,733 12,386,724 17,496,390
Operating expenses:
Sales and marketing.................... 3,404,638 2,912,720 5,064,654
General and administrative............. 7,725,268 8,587,126 8,635,424
Research and development............... 820,949 641,114 2,914,312
----------- ----------- -----------
Total operating expenses............. 11,950,855 12,140,960 16,614,390
----------- ----------- -----------
Income from operations.................. 6,814,878 245,764 882,000
Other income (expense):
Interest income........................ 73,477 77,778 175,384
Interest expense, including related
party interest of $669,440, $523,189,
$989,378 for the year ended December
31, 1995, 1996 and 1997............... (762,344) (1,499,534) (1,570,535)
----------- ----------- -----------
Total................................ (688,867) (1,421,756) (1,395,151)
----------- ----------- -----------
Income (loss) before income taxes....... 6,126,011 (1,175,992) (513,151)
Provision for (benefit from) income
taxes.................................. -- 81,349 (791,650)
----------- ----------- -----------
Net income (loss)....................... $ 6,126,011 $(1,257,341) $ 278,499
=========== =========== ===========
Net Income (loss) per common share...... $ 4.00 $ (.82) $ .18
Weighted avarge common shares
outstanding............................ 1,530,000 1,533,004 1,557,236
Diluted net income (loss) per common
share.................................. $ 4.00 $ (.82) $ .03
Diluted weighted avarage common shares
outstanding............................ 1,530,000 1,533,004 8,222,312
Pro forma (unaudited) (Note 5):
Income (loss) before income taxes...... $ 6,126,011 $(1,175,992)
Provision for (benefit from) income
taxes................................. 2,300,578 (297,886)
----------- -----------
Net income (loss).................... $ 3,825,433 $ (878,106)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EVOLVING SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
$.001 PAR
SERIES A $.01 PAR VOTING NON-VOTING
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------- ----------------- ---------------- PAID-IN DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) EQUITY
-------- ------- -------- ------- --------- ------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994. -- -- 10,200 102 8,859,128 8,859,230
Distributions to
stockholders...... (5,811,810) (5,811,810)
Net income........ 6,126,011 6,126,011
-------- ------ -------- ------ --------- ------ ---------- ---------- ---------- ----------
Balance,
December 31, 1995. -- -- 10,200 102 9,173,329 9,173,431
Distributions to
stockholders...... (7,257,623) (7,257,623)
Reclassification
of undistributed
earnings upon
conversion from
non-taxable to
taxable status.... 670,862 (670,862)
Recapitalization.. 8,160 8 (10,200) (102) 1,530,000 1,530 (510) (926)
Other............. 5,786 6 10,693 10,699
Forgiveness of
shareholder
interest.......... 326,587 326,587
Net loss.......... (1,257,341) (1,257,341)
-------- ------ -------- ------ --------- ------ ---------- ---------- ---------- ----------
Balance,
December 31, 1996. 8,160 8 -- -- 1,535,786 1,536 1,007,632 (13,423) 995,753
Stock option
exercises......... 84,974 85 67,894 67,979
Deferred
compensation
related to stock
options........... 1,347,534 (1,347,534)
Amortization of
deferred
compensation...... 355,346 355,346
Net Income........ 278,499 278,499
-------- ------ -------- ------ --------- ------ ---------- ---------- ---------- ----------
Balance,
December 31, 1997. 8,160 $ 8 -- $ -- 1,620,760 $1,621 $2,423,060 $ (992,188) $ 265,076 $1,697,577
======== ====== ======== ====== ========= ====== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EVOLVING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................... $ 6,126,011 $(1,257,341) $ 278,499
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provision for uncollectible contract
receivables........................... -- 577,000 456,600
Amortization of deferred compensation.. -- -- 355,346
Depreciation and amortization.......... 2,447,762 3,527,436 4,004,225
Loss on disposal of property and
equipment............................. 27,810 121,166 159,304
Non-cash interest expense.............. -- 668,222 --
Provision for deferred income taxes.... -- 81,349 (957,138)
Change in operating assets and
liabilities:
Contract receivables................... (3,189,157) (3,832,181) (4,237,934)
Unbilled work-in-progress.............. (1,046,855) 770,027 (73,135)
Prepaid and other assets............... (81,951) (235,609) (609,014)
Accounts payable....................... (366,953) 481,091 (121,327)
Accrued liabilities.................... 183,699 398,874 (992,121)
Unearned revenue and customer
deposits.............................. (2,277,379) 170,544 5,388,594
----------- ----------- -----------
Net cash provided by operating
activities.......................... 1,822,987 1,470,578 3,651,899
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment..... (2,026,253) (3,106,525) (2,966,966)
Proceeds from sale of property and
equipment.............................. 12,453 936,858 45,346
Change in certificates of deposit....... (2,976) 52,860 25,688
Change in stockholder notes receivable.. 79,026 -- --
----------- ----------- -----------
Net cash used in investing
activities.......................... (1,937,750) (2,116,807) (2,895,932)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term obligations..... 1,071,624 10,811,904 200,000
Repayments of long-term obligations..... (2,062,052) (7,686,322) (3,037,403)
Distributions to stockholders........... (5,811,810) (573,998)
Proceeds from exercise of options....... -- 4,671 67,979
Warrants issued......................... -- 4,853 --
Repurchase of common stock.............. -- (43) --
----------- ----------- -----------
Net cash provided by (used in)
financing activities................ (6,802,238) 2,561,065 (2,769,424)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (6,917,001) 1,914,836 (2,013,457)
Cash and cash equivalents at beginning
of period.............................. 8,186,281 1,269,280 3,184,116
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 1,269,280 $ 3,184,116 $ 1,170,659
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH
AND NON-CASH INVESTING AND FINANCING
TRANSACTIONS
Interest paid.......................... $ 762,342 $ 805,707 $ 1,566,184
Income taxes paid...................... $ 65,471 $ 289,867
Assets acquired under capital lease.... $ 4,439,482 $ 1,946,597 $ 1,205,714
Distribution to stockholders in form
of notes payable...................... $ 6,683,625
Constructive dividend to stockholders
and related contribution to capital... $ 670,862
Accrued interest payable converted
into note payable..................... $ 341,635
Accrued interest payable contributed
to equity............................. $ 326,587
Collection of stockholder note
receivable through reduction of
stockholder note payable.............. $ 58,374
Warrants issued as consideration for
accrued interest payable converted to
stockholder notes payable............. $ 1,218
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Evolving Systems, Inc. ("Evolving Systems" or the "Company") provides
Operational Support Systems ("OSS") software solutions to telecommunications
companies. The Company's software products and professional services are
designed to address the increasingly complex operational support system
requirements of telecommunications companies in areas such as customer care,
service provisioning, network management and billing. Evolving Systems
combines pre-sales consulting with standard product software and post-sales
systems integration to create solutions to its customers' specific
requirements. This provides customers with a tailored solution, together with
the time-to-market advantages of software products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Significant estimates have been made by management with
respect to the collectibility of accounts receivable and the estimates to
complete long-term contracts. Actual results could differ from these
estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition". The Company
derives revenue from license fees and services under the terms of both fixed
price and time and materials contracts. License fees and related services
revenue during 1996 consisted of fees from non-LNP software products.
Subsequent to 1996, license fees and related services revenue consists of
revenue from contracts involving the Company's LNP software products and
related services. Other services revenue consists of custom programming,
systems integration of third-party products, maintenance and training.
License fees and related services revenue is generated from fixed-price
contracts that provide for both licenses and services and is generally
recognized using the percentage-of-completion method of accounting. The
percentage-of-completion for each contract is determined based on the ratio of
direct labor hours incurred to total estimated direct labor hours. Amounts
billed in advance of services being performed are recorded as unearned
revenue. Unbilled work in-progress represents revenue earned but not yet
billable under the terms of the fixed price contracts and all such amounts are
expected to be billed and collected during the succeeding 12 months.
Services revenue provided under fixed price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed.
Maintenance revenue is recorded as deferred revenue and is recognized
ratably over the service period, which is generally 12 months. Revenue from
training services is recognized as the training services are performed. When
maintenance or training services are bundled with the original license fee
arrangement, their fair value is deferred and recognized during the period
such services are provided.
F-8
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company may encounter budget and schedule overruns on fixed-price
contracts caused by increased material, labor, or overhead costs. Adjustments
to cost estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded in the period
in which current estimates of total contract revenue and contract cost
indicate a loss. The Company does not anticipate a change in the timing of
revenue recognition upon adoption of Statement of Position 97-2, "Software
Revenue Recognition".
SOFTWARE RESEARCH AND DEVELOPMENT COSTS
Expenditures for software research and development are expensed as incurred.
Such costs are required to be expensed until the point that technological
feasibility of the product is established after which time such costs are
capitalized until general availability of the product. The period between
achieving technological feasibility and the general availability of such
software has historically been short. Consequently, costs otherwise
capitalizable after technological feasibility is achieved are expensed because
they are insignificant.
CASH AND CASH EQUIVALENTS
All highly liquid investments and investments with a maturity of three
months or less when purchased are considered to be cash equivalents. All cash
equivalents are carried at cost, which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company has cash
investment policies that limit investments to repurchase agreements and
certificates of deposit. The Company performs ongoing evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. During the years ended December 31, 1995, 1996 and 1997, the
Company recognized approximately 78%, 73%, and 89% of total revenue from two,
five, and six customers, respectively, all in the telecommunications industry.
As of December 31, 1996 and 1997, these customers accounted for 75%, and 85%
of contract receivables, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, certificates of deposit, contract receivables, accounts payable
and accrued expenses, management believes that the carrying amounts
approximate fair value due to their short maturities. Additionally, based upon
the borrowing rates currently available to the Company for debt agreements
with similar terms and average maturities, management believes the carrying
amount of the notes payable to the bank approximates fair market value. For
the notes payable to stockholders and the senior subordinated promissory
notes, the Company estimated the fair value below using rates offered for
similar instruments with similar maturities.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Carrying amount.......................... $11,962,058 $11,885,744
Estimated fair value..................... $11,424,840 $11,403,514
</TABLE>
F-9
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally four to seven years or the lease term if
shorter, using the straight-line method.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), to account for
stock-based compensation arrangements. Companies that elect to use the method
provided in APB No. 25 are required to disclose the pro forma net income and
earnings per share that would have resulted from the use of the fair value
based method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB No. 25, and
accordingly, it has included the pro forma disclosures required under SFAS No.
123 in Note 4.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying balance sheets, as well
as operating loss and tax credit carryforwards. Deferred tax assets may be
reduced by a valuation allowance if based on the weight of available evidence
it is more likely than not that these benefits will not be realized.
EARNINGS PER COMMON SHARE
The FASB issued SFAS No. 128 in February of 1997. This pronouncement
establishes new standards for computing and presenting earnings per share
("EPS") on a basis that is more comparable to international standards and
provides for the presentation of basic and diluted EPS. Basic EPS is computed
by dividing net income by the weighted average number of shares outstanding
during the period. Diluted EPS is computed using the weighted average number
of shares outstanding plus all dilutive potential common shares outstanding.
Prior period EPS have been restated to conform with the new statement.
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ---------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C>
Net income (loss)........................... $6,126,011 ($1,257,341) $ 278,499
========== =========== =========
Basic weighted average common shares
outstanding................................ 1,530,000 1,533,004 1,557,236
========== =========== =========
Basic earnings per common share: $ 4.00 $ (.82) $ .18
========== =========== =========
<CAPTION>
DILUTED EARNINGS PER SHARE
<S> <C> <C> <C>
Net income (loss)........................... $6,126,011 $(1,257,341) $ 278,499
---------- ----------- ---------
Basic weighted average number of common
shares outstanding ........................ 1,530,000 1,533,004 1,557,236
<CAPTION>
EFFECT OF DILUTIVE SECURITIES
<S> <C> <C> <C>
Options and warrants........................ -- -- 545,076
Conversion of preferred shares.............. -- -- 6,120,000
---------- ----------- ---------
Diluted weighted average common shares
outstanding................................ 1,530,000 1,533,004 8,222,312
========== =========== =========
Diluted earnings per common share: $ 4.00 $ (.82) $ .03
========== =========== =========
</TABLE>
F-10
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Options and warrants to purchase 1,735,585 shares of common stock at $.80 per
share were outstanding at December 31, 1996 but were not included in the
computation of 1996 diluted EPS because they were anti-dilutive due to the net
loss for 1996. Of those options and warrants, 1,400,852 were still outstanding
at December 31, 1997.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Board of Directors has authorized management of the Company to file a
registration statement with the SEC permitting the Company to sell shares of
its common stock to the public. If the
Company's IPO is consummated under the terms presently anticipated, all of the
convertible preferred stock outstanding will automatically convert into
6,120,000 shares of common stock. Unaudited pro forma stockholders' equity as
of December 31, 1997, as set forth on the accompanying balance sheets, is
adjusted for the anticipated conversion of such preferred stock based on an
assumed public offering price.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
2. BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Computer equipment and
purchased software...................................... $13,650,128 $ 17,372,371
Furniture, fixtures and
leasehold improvements.................................. 3,825,438 3,861,952
----------- ------------
17,475,566 21,234,323
Less accumulated depreciation............................ (7,635,048) (11,431,693)
----------- ------------
$ 9,840,518 $ 9,802,630
=========== ============
</TABLE>
Included in property and equipment at December 31, 1996 and 1997 are assets
under capital lease of $9,799,108 and $10,564,928, respectively. Related
accumulated depreciation is $3,979,232 and $6,243,846, as of December 31, 1996
and 1997, respectively.
<TABLE>
<S> <C> <C>
ACCRUED LIABILITIES:
Accrued compensation and related expenses........... $ 581,427 $ 943,591
Benefit plan contributions payable (Note 6)......... 1,020,712 88,620
Sublessee deposits.................................. 585,000 52,595
Other............................................... -- 110,212
---------- ----------
$2,187,139 $1,195,018
========== ==========
</TABLE>
F-11
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM OBLIGATIONS, INCLUDING RELATED PARTY OBLIGATIONS AND COMMITMENTS
Long-term obligations, including capitalized lease obligations, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Notes payable to a bank under line of credit and
term debt facility............................... $ 916,667 $ 783,333
Note payable to bank, variable interest at the
financial institution's prime rate plus 1.5% (10%
at December 31, 1996)............................ 64,643 --
Notes payable to stockholders..................... 5,120,423 5,092,859
Senior subordinated promissory notes payable to
stockholders..................................... 6,841,635 6,792,885
Capital lease obligations......................... 5,153,059 3,795,572
----------- -----------
Total........................................... 18,096,427 16,464,649
Less current portion.............................. (2,794,359) (3,177,637)
----------- -----------
Long-term portion................................. $15,302,068 $13,287,012
=========== ===========
</TABLE>
Line of Credit and Notes Payable to Bank
Under a borrowing arrangement with a bank, the Company has a revolving line
of credit with $10,000,000 of maximum available credit at December 31, 1997
(limited to 80% of the balance of certain qualifying assets) which bears
interest at prime plus .75%, (9.25% at December 31, 1997) unless the Company
has been profitable for two quarters, at which time the interest rate will be
prime plus .25%. The arrangement is collateralized by substantially all assets
of the Company. Borrowings outstanding under the line of credit at December
31, 1996 and 1997 were $0 and $200,000, respectively. Letters of credit under
the agreement totaling $746,323 and $664,216 were outstanding at December 31,
1996 and 1997, respectively.
The Company also has a term debt facility under the borrowing arrangement.
Under the term debt facility, which expires September 16, 1998, the Company
can draw up to a maximum of $1,500,000, subject to certain terms and
conditions. Each borrowing under the term debt facility is repayable in 36
monthly installments. The term debt facility bears interest at a rate equal to
prime plus 1.25%, (9.75% at December 31, 1997) unless the Company has been
profitable for two quarters, at which time the interest rate will be prime
plus .75%. The term debt facility is collateralized by accounts receivable and
property and equipment.
Under the borrowing arrangement, the Company is limited in its ability to
pay dividends, make investments, incur other indebtedness, or enter into a
business merger. Additionally, the Company must maintain certain financial
covenants, in addition to other restrictive covenants, with which it is in
compliance as of December 31, 1997.
Notes Payable to Stockholders
On January 2, 1996, the Company distributed substantially all previously
undistributed earnings on which stockholders had been taxed in the form of
stockholder notes payable (the Notes), aggregating $6,683,625. These Notes are
unsecured and are due January 2, 2006, with interest payable annually on
December 31 at 7.25% per annum, and contain prepayment penalties. The payment
of principal under the Notes is subordinated to all financial institution debt
arising from
F-12
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
agreements currently in existence, as amended, and all other indebtedness of
the Company to third party commercial lenders and banks. Interest payable as
of September 30, 1996, in the amount of $326,587, was forgiven by the Note
holders and has been accounted for as a capital contribution.
Senior Subordinated Promissory Notes Payable to Stockholders
In May 1996, the Company issued Senior Subordinated Promissory Notes to
certain stockholders (the Promissory Notes) for a total of $6,500,000. The
Promissory Notes are unsecured, and the principal is due in four equal annual
payments beginning on June 1, 2000. Interest is payable semiannually on
December 1 and June 1 at 9% per annum. The payment of principal under the
Promissory Notes is subordinated to all financial institution debt arising
from agreements currently in existence, as amended, and all other indebtedness
of the Company to third party commercial lenders and banks, except the Notes
Payable to Stockholders. The Promissory Notes limit the Company's ability to
incur other indebtedness, pay dividends, make investments or sell its assets.
In connection with the issuance of the Promissory Notes, warrants to purchase
727,998 of the Company's Non-Voting Common stock at $.80 per share were issued
to the Promissory Note holders. The warrants expire May 31, 2003.
In September 1996, the Company and the Promissory Note holders entered into
an agreement to defer all interest incurred to date and to be incurred through
November 30, 1996, aggregating $341,635, by adding such amount to the
principal of the Promissory Notes. The deferred interest is payable on or
before December 1, 1998 and accrues interest at 12% per annum. In connection
with the deferral of interest, the Company issued to the Promissory Note
holders additional warrants to purchase 182,635 shares of the Company's Non-
Voting Common stock at $.80 per share which expire May 31, 2003.
Costs associated with the origination of the Promissory Note aggregating
$337,690 ($261,308 remaining at December 31, 1997), included within other
assets, are being amortized over the life of the Promissory Notes.
Scheduled maturities of debt obligations for the periods ending December 31
are as follows:
<TABLE>
<CAPTION>
NOTES SHAREHOLDER NOTES CAPITAL LEASE
PAYABLE PAYABLE OBLIGATIONS TOTAL
--------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
1998.................... 533,333 292,885 2,415,717 3,241,935
1999.................... 250,000 -- 1,076,724 1,326,724
2000.................... -- 3,250,000 692,805 3,942,805
2001.................... -- 3,250,000 142,180 3,392,180
2002.................... -- -- -- --
Thereafter.............. -- 5,092,859 -- 5,092,859
--------- ----------- ----------- -----------
783,333 11,885,744 4,327,426 16,996,503
Less amounts
representing interest.. -- -- (531,854) (531,854)
--------- ----------- ----------- -----------
783,333 11,885,744 3,795,572 16,464,649
Less current maturities. (533,333) (292,885) (2,351,419) (3,177,637)
--------- ----------- ----------- -----------
$ 250,000 $11,592,859 $ 1,444,153 $13,287,012
========= =========== =========== ===========
</TABLE>
F-13
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Operating Lease Commitments
The Company leases its office and operating facilities and various equipment
under non-cancelable operating leases. Rent expense was $2,789,032,
$4,156,863, and $3,746,954 for the years ended December 31, 1995, 1996, and
1997, respectively. Rent expense for the year ended December 31, 1996 and 1997
is net of $341,862 and $1,276,419, respectively in sublease rental income. As
of December 31, 1996 and 1997 certificates of deposit totalling $155,181 and
$130,987, respectively, are pledged as collateral on an office space lease.
During 1996, the Company entered into a lease obligation on a new corporate
campus of approximately 120,281 square feet located in Englewood, Colorado.
The Company has subleased a portion of this campus. In connection with its
obligations under certain of its office facility leases, the Company has
letters of credit totaling $746,323 and $664,216 outstanding at December 31,
1996 and 1997, respectively.
Future minimum non-cancelable commitments under these leases as of December
31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 3,652,070
1999............................................................. 2,838,548
2000............................................................. 2,560,407
2001............................................................. 1,446,420
2002............................................................. 1,420,506
Thereafter....................................................... 11,510,846
-----------
23,428,797
Less: sublease income............................................ 167,630
-----------
$23,261,167
===========
</TABLE>
4. RECAPITALIZATION, CAPITAL STOCK AND STOCK OPTIONS
Recapitalization
Effective January 1996, Evolving Systems, Inc. ("Old ESI") merged into ESI
Merger Corporation (the "Merger"), a Delaware corporation, which previously
had no operations. Simultaneously, ESI Merger Corporation changed its name to
Evolving Systems, Inc. Pursuant to the Merger agreement, each share of the Old
ESI common stock outstanding as of January 10, 1996 was converted into .8
shares of the Company's Series A Preferred Stock and 100 shares of the
Company's non-voting common stock. As part of the recapitalization, the
Company became a taxable entity and as of that date had $670,862 of earnings
which had not been distributed to its shareholders. Consequently, for
financial statement purposes, these undistributed earnings have been
reclassified to additional paid-in capital under the assumption of a
constructive dividend to the shareholders followed by a contribution to the
Company's capital (see Note 5).
Series A Preferred Stock
Each share of Series A Preferred Stock is convertible at the option of the
holder into 750 shares of non-voting common stock, subject to antidilution
provisions, has voting rights on an as-converted to voting common stock basis
and has preference in liquidation equal to $6,250 (aggregate liquidation
preference as of December 31, 1997 is equal to $51 million). If the Company
enters into a transaction whereby it sells substantially all of its assets or
agrees to merge into or with another entity, a liquidation
F-14
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
is considered to have occurred. Additionally, if the Company completes an
Initial Public Offering (IPO) of its common stock in which the price is at
least $5 per share and gross proceeds exceed $10,000,000, the Series A
preferred shares shall automatically convert into shares of common stock.
Common Stock
Each share of non-voting common stock outstanding shall automatically
convert into one share of voting common stock immediately prior to the closing
of an IPO.
Stock Options
On January 19, 1996, the Company's board of directors approved a stock
option plan. Under the stock option plan, 3,150,000 shares of the Company's
non-voting common stock are reserved for issuance, of which 1,175,610 shares
are available for grant as of December 31, 1997. The Company has also reserved
910,633 shares of non-voting common stock for the issuance of warrants.
Options issued under the stock option plan shall be at the discretion of the
Board of Directors, including the provisions of each stock option granted,
which need not be identical. Options generally vest over four years and expire
no more than ten years from the date of grant. Certain options will
automatically vest upon the effectiveness of the IPO. On December 30, 1997 the
Board of Directors approved the repricing of all options granted from
September 1, 1997 through December 30, 1997 to a new exercise price of $9.50.
No compensation expense was recorded as the options were repriced to an
exercise price equal to fair market value.
Generally, stock options are granted with an exercise price not less than
the fair value of non-voting common stock as determined by the Board of
Directors at the date of grant, and accordingly no compensation cost was
recognized during 1995 and 1996. During the year ended December 31, 1997, the
Company recorded $1,347,534 as deferred compensation, representing the excess
of the deemed fair value of the Company's common stock over the exercise price
of options granted during 1997. Such deferred compensation cost is being
amortized over the vesting period of the options. Of the total amount,
$355,346 was recognized as expense during the year ended December 31, 1997.
Based on calculations using the minimum value option-pricing model, the
weighted average grant date fair value of options and warrants was $0 and
$1.29 in 1996 and 1997, respectively. The fair value has been estimated using
the minimum value option-pricing model with the following assumptions used for
grants in 1996 and 1997, respectively: no dividend yield for both periods; an
expected life of 3 years for both periods; no volatility; and weighted average
risk free interest rates of 6.5% and 6.3% for 1996 and 1997, respectively.
The pro forma impact on the Company's net income and net income per share
had compensation cost been recorded at the date of grant based on the minimum
value method prescribed by SFAS No. 123 is shown below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Net income:
As reported.............................................. $278,499
SFAS No. 123 Pro forma................................... $ 89,891
Net income per common share:
As reported.............................................. $ .18
SFAS No. 123 Pro forma................................... $ .06
Diluted net income per common share:
As reported.............................................. $ .03
SFAS No. 123 Pro forma................................... $ .01
</TABLE>
F-15
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The status of total stock options and warrants outstanding and exercisable
under the Plan as of December 31, 1997 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS AND
STOCK OPTIONS AND WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------------- ------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES LIFE (YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options................. $0.80 993,647 8.92 $0.80 339,261 $0.80
$9.50 893,754 9.76 $9.50 -- $9.50
--------- ---- ----- ------- -----
1,887,401 9.32 $4.92 339,261 $0.80
========= ==== ===== ======= =====
Warrants................ $0.80 910,633 5.40 $0.80 910,633 $0.80
========= ==== ===== ======= =====
</TABLE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF SHARES AVERAGE OPTIONS AND AVERAGE
------------------- EXERCISE WARRANTS EXERCISE
OPTIONS WARRANTS PRICE EXERCISABLE PRICE
--------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Options and warrants
outstanding, January 1,
1996..................... -- -- $ -- -- $
Options and warrants
granted................ 897,226 910,633 0.80
Less options forfeited.. (70,279) -- 0.80
Less options exercised.. (2,015) -- 0.80
--------- --------
Options and warrants
outstanding, December 31,
1996..................... 824,932 910,633 0.80 1,016,482 0.80
Options granted......... 1,449,439 -- 6.19
Less options forfeited.. (301,996) -- 0.93
Less options exercised.. (84,974) -- 0.80
--------- --------
Options and warrants
outstanding, December 31,
1997..................... 1,887,401 910,633 3.58 1,249,894 0.80
========= ========
</TABLE>
Included in total options and warrants exercisable at December 31, 1996 and
December 31, 1997 are 910,633 warrants issued in connection with debt
financings (see Note 3). Subsequent to December 31, 1997, the Company granted
options to purchase 19,073 shares of common stock at an exercise price of
$10.00 per share. No compensation was recorded as the options were granted
with an exercise price equal to fair market value.
5. INCOME TAXES
Prior to January 6, 1996, the Company elected to be taxed under Subchapter S
of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly,
the shareholders were responsible for payment of taxes on income earned by the
Company and the Company distributed to shareholders annually an amount equal
to the estimated tax liability arising from operations. On January 6, 1996,
the Company revoked its election to be taxed under Subchapter S of the Code
and elected to be taxed under Subchapter C of the Code. In connection with the
change in status, the Company recorded a deferred tax liability and tax
expense of $379,235. For comparative purposes, a pro forma tax provision
(benefit) has been calculated and presented in the statements of operations as
if the Company had been a taxable entity since its inception.
F-16
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
Current:
Federal.......................................... $ -- $ 165,758
State............................................ -- (270)
Deferred:
Federal.......................................... 74,152 (953,612)
State............................................ 7,197 (3,526)
----------- ------------
Total.......................................... $ 81,349 $ (791,650)
=========== ============
</TABLE>
Components of the Company's deferred tax assets and liabilities are as
follows as of December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred revenue..................................... $ -- $ 164,995
Research and development credit carryforwards........ -- 750,000
Minimum tax credit carryforwards..................... -- 167,279
Allowance for doubtful accounts...................... -- 194,008
Net operating loss carryforwards..................... 328,028 --
Reserves against contract receivables................ 111,324 --
Other................................................ 15,698 59,680
--------- ---------
Total deferred tax assets.......................... 455,050 1,335,962
--------- ---------
Deferred tax liabilities:
Accumulated depreciation............................. (532,810) (460,173)
Miscellaneous accruals and reserves.................. (3,589) --
--------- ---------
Total deferred tax liabilities......................... (536,399) (460,173)
--------- ---------
Net deferred tax asset (liability)..................... $ (81,349) $ 875,789
========= =========
</TABLE>
The provision for (benefit from) income taxes are different from the amounts
computed by applying the federal statutory rate to income before income taxes.
The amounts are reconciled as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Federal income taxes (benefit) at statutory rate...... $(395,458) $(174,471)
State income tax, net of federal benefit.............. (26,036) (3,704)
Effect of conversion to C Corporation................. 379,235 --
Cancellation of indebtedness.......................... 109,914 --
Research and development tax credits.................. -- (750,000)
Amortization of deferred compensation................. 120,818
Other................................................. 13,694 15,707
--------- ---------
Provision for (benefit from) income taxes............. $ 81,349 $(791,650)
========= =========
</TABLE>
As of December 31, 1997 the Company has research and development tax credit
carryforwards for federal income tax purposes of $750,000, which will begin to
expire in 2011.
F-17
<PAGE>
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. BENEFIT PLANS
The Company has established a 401(k) Plan which is available to all
employees 21 years of age or older with one year of service to the Company.
Employees may contribute up to 15% of gross compensation not to exceed the
maximum statutory contribution amount. The Company may make discretionary
matching contributions. All employee contributions are fully vested
immediately and employer contributions vest 100% after completion of three
years of service. During 1995, 1996, and 1997, the Company contributed
$586,257, $0 and $1,017,896, respectively, under the 401(k) Plan.
The Company also had a defined contribution retirement plan, which was
available to all employees 21 years of age or older with one year of service
to the Company. Company contributions to the defined contribution retirement
plan were made annually at 7.4% of the eligible employees' salary and vest
after completion of three years of service. During 1995 and 1996, the Company
contributed $703,983, and $965,198, respectively, under the defined
contribution retirement plan. Effective December 31, 1996 the accrual of
benefits under the retirement plan ceased and the retirement plan was merged
into the 401(k) Plan.
7. SUBSEQUENT EVENTS
In connection with its proposed initial public offering, a one-for-two
reverse stock split of the Company's stock was effected on February 10, 1998.
All common stock share and per share information and all preferred stock
conversion rates presented in these financial statements have been restated
for all periods presented to reflect the reverse stock split.
Effective upon completion of this offering, the Company's authorized capital
stock shall consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 2,000,000 shares of Preferred Stock, $.001 par value per share.
F-18
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co., Hambrecht & Quist LLC and UBS Securities LLC are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the following respective numbers of shares of Common
Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co................................................
Hambrecht & Quist LLC..............................................
UBS Securities LLC.................................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, this offering price and other selling terms may from time
to time be varied by the representatives.
The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 600,000 additional shares of Common Stock to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
4,000,000 shares of Common Stock offered.
The Company and its officers, directors and certain stockholders have agreed
that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of the
Prospectus, they will not, subject to certain exceptions, offer, sell,
contract to sell, grant an option to sell, transfer or otherwise dispose of
any securities of the Company without the prior written consent of the
representatives of the Underwriters.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the
Company and the representatives of the Underwriters. Among the factors to be
considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, will be the Company's
historical performance,
U-1
<PAGE>
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuations of companies in related businesses.
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EVOL". The Company and the Selling
Stockholders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with this offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock; and
syndicate short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in this offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the shares of Common Stock sold
in this offering for their account may be reclaimed by the syndicate if such
shares are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that
might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise.
An aggregate of 600,000 shares of the Common Stock offered hereby have been
reserved for purchase from the Underwriters through a directed share program
by the Morgan Stanley Funds, the Information Associates Funds and friends of
the Company. Such sales will be at the initial public offering price. The
number of shares of Common Stock available for sale to the general public in
the offering will be reduced to the extent such persons purchase the reserved
shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same terms as the other shares
offered hereby.
U-2
<PAGE>
GLOSSARY OF TERMS
"API"--Application Programming Interface. Application programs invoke APIs
to request lower-level services that are performed by the platform software,
computer, or operating system. An API incorporates a set of standard software
interrupts, calls and data formats that application programs use to initiate
contact with network services, communications programs, or other systems.
"cellular"--Term used for Cellular Mobile Telephone System (or CMTS). A
wireless telephone system based on a grid of cell sites. Each cell site serves
a limited geographic area and contains transmitters, receivers and antennae.
Each cell site is connected to centrally-located switching gear and control
equipment. Each cellular telephone has a unique identification number which
allows the central switch to track and coordinate all mobile phones in the
service area, including the hand-offs from one cell site to another.
"CDPD"--Cellular Digital Packet Data. A method of sending and receiving data
over the existing analog cellular network. The data are structured in
"packets" which are transmitted over cellular frequencies that are not being
used in phone conversations, thereby avoiding the need to develop an overlay
cellular network exclusively for data communications. Targeted at telemetry
applications and highly mobile users, packets are sent and received via CDPD
modems, which can be connected to cellular telephones, personal computers or
specialized devices.
"client"--Clients are devices and software which request information from
other sources and provide the end user interface. Typically, the client is a
PC or workstation attached to a local area network.
"client/server"--A computer system architecture in which the "client" is a
desktop computing device which is "served" by another networked computer.
Computers are integrated over the network by an application, which provides a
single system image. The server may be a mainframe, minicomputer, or
workstation with attached storage devices.
"database"--A collection of information organized in such a way that a
computer program can quickly insert, retrieve and update application data.
"digital"--A method of storing, processing and transmitting information by
representing information with combinations of the binary digits 0 and 1.
"HP/UX"--Brand name of Hewlett Packard's Unix operating system product line.
"ILECs"--Incumbent Local Exchange Carriers. ILECs are local exchange
carriers who were formerly part of the Bell System. Through divestiture and
recent consolidation, these companies now include Ameritech, Bell Atlantic,
BellSouth, GTE, Southwestern Bell and U.S. West.
"Java"--A high-level object-oriented programming language developed by Sun
Microsystems, Inc. which facilitates the creation of platform-independent
applications and software components. It was designed primarily for writing
software for World Wide Web sites, although the use of Java is expanding for
other commercial purposes.
"LNP"--Local Number Portability. LNP, which enables customers to retain
their local phone number when changing service providers, was mandated by the
Telecommunications Act of 1996 and regulations promulgated thereunder in order
to facilitate a level playing field for local telephone service competition.
The implementation of LNP utilizes a new ten-digit telephone number, known as
the Location Routing Number, or LRN. The LRN is used by the originating
carrier to determine the identity and location of the terminating carrier's
switch.
G-1
<PAGE>
"LSR"--Local Service Request. LSRs are 22-page forms which are used by
competing carriers to place wholesale orders with ILECs. The competing
carriers utilize the LSRs to place orders for unbundled facilities and
services provided by ILECs, and support retail orders associated with new
customers captured by the competing carriers. LSRs today are primarily
processed in a costly manual fashion due to the relative lack of inter-carrier
transactions. However, with the introduction of LNP, the volume of LSRs is
expected to increase dramatically, creating the need to exchange LSRs by
facsimile, e-mail, the Internet and through electronic document interchange
(EDI) interfaces.
"NPACs"--Number Portability Administration Centers. These are the regional
third-party clearinghouses established by state and federal regulators in
order to oversee, mediate, track and resolve all customer LNP-related issues
among U.S. carriers. In the U.S., there are seven NPACs, which are
administered by Lockheed Martin IMS and Perot Systems.
"OSS"--Operational Support Systems. OSS are the systems and procedures which
directly support the daily operation of the telecommunications infrastructure.
The average local exchange carrier has hundreds of OSS, which are typically
categorized into ordering, provisioning, service assurance and billing.
"PCS"--Personal Communication Services. PCS is a new, lower-powered, higher
frequency technology that is competitive to cellular. Operating at frequencies
between 1800 MHz and 2000 MHz, PCS provides certain cost advantages over
cellular, offers digital communications and improved security.
"RBOCs"--Regional Bell Operating Companies. The local exchange carriers
formerly part of the Bell System. See ILECs.
"server"--The server component of a client/server system. The server
operates on the local area network and may be a mainframe, minicomputer, or
workstation with attached storage devices.
"switch"--A central facility capable of establishing, routing and releasing
connections on a per call basis between two or more circuits, services or
systems. Switches are used for both wireline and wireless communications
networks.
"Unix"--A powerful multi-user, multi-tasking computer operating system
widely adopted in the telecommunications industry. Unix is available on a wide
range of computers, from personal computers to minicomputers to mainframes.
G-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Dividend Policy and S Corporation Status.................................. 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 32
Management................................................................ 46
Certain Transactions...................................................... 54
Principal and Selling Stockholders........................................ 56
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 60
Legal Matters............................................................. 61
Experts................................................................... 61
Change in Accountants..................................................... 62
Additional Information.................................................... 62
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
Glossary of Terms......................................................... G-1
</TABLE>
----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 SHARES
EVOLVING SYSTEMS, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------
[LOGO OF EVOLVING SYSTEMS APPEARS HERE]
----------------
GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST
UBS SECURITIES
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 16,284
NASD filing fee................................................. 6,020
Nasdaq Stock Market Listing Application fee..................... 44,578
Blue sky qualification fees and expenses........................ 7,500
Printing and engraving expenses................................. 150,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 270,000
Transfer agent and registrar fees............................... 7,500
Custodian fees.................................................. 2,500
Miscellaneous................................................... 120,618
--------
Total....................................................... $875,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Restated Certificate of Incorporation and Amended and
Restated By-laws include provisions to (i) eliminate the personal liability of
its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by the General Corporation Law of Delaware and
(ii) require the Registrant to indemnify its directors and executive officers
to the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they
are or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from
which the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or
its stockholders when the director was aware or should have been aware of a
risk of serious injury to the Registrant or its stockholders, for acts or
omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Registrant or its stockholders,
for improper transactions between the director and the Registrant and for
improper distributions to stockholders and loans to directors and officers.
The provision also does not affect a director's responsibilities under any
other law, such as the federal securities law or state or federal
environmental laws. See "Management--Limitation of Liability and
Indemnification of Officers and Directors" and "Certain Transactions".
II-1
<PAGE>
The Registrant has entered into indemnification agreements with each of its
directors and executive officers requiring the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made
a party by reason of the fact that such person is or was a director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. The indemnification agreements also
set forth certain procedures that will apply in the event of a claim for
indemnification thereunder. See "Certain Transactions".
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Registrant has issued and/or sold the following
unregistered securities:
(1) On January 2, 1996, the Registrant issued an aggregate principal amount
of $5,092,859 of promissory notes to its stockholders in connection
with the stockholders' deferred receipt of their 1995 S Corporation
distributions.
(2) On January 10, 1996, in connection with the Registrant's
reincorporation from Colorado to Delaware, the Registrant issued an
aggregate of 510,000 shares of its Non-voting Common Stock and an
aggregate of 8,160 shares of its Series A Preferred Stock in exchange
for cancellation of the issued and outstanding shares of capital stock
of its Colorado predecessor.
(3) From January 19, 1996 to January 2, 1998, options granted to employees,
directors and consultants of the Registrant to purchase an aggregate of
85,051 shares of the Registrant's Non-voting Common Stock under its
Stock Option Plan at a weighted average exercise price of $.80 per
share have been exercised.
(4) On June 7, 1996, Thomas Konchan, a former employee of the Registrant,
exercised a nonstatutory stock option to purchase 3,825 shares of the
Registrant's Non-voting Common Stock at an exercise price of $.80 per
share.
(5) On May 31, 1996, the Registrant issued and sold an aggregate principal
amount of $6,500,000 of its Senior Subordinated Promissory Notes, along
with warrants to purchase an aggregate of 727,998 shares of its Non-
voting Common Stock at an exercise price of $.80 per share, to five
accredited investors. The aggregate purchase price of the warrants was
$4,853.33. On September 30, 1996, in connection with amendment of the
terms of the Senior Subordinated Promissory Notes, the Registrant
issued and sold additional warrants to purchase an aggregate of 182,635
shares of its Non-voting Common Stock at an exercise price of $.80 per
share to such investors at an aggregate purchase price of $1,217.58.
The issuance of the promissory notes described in paragraph (1) above did
not involve any public offering and therefore was exempt from registration
under the Securities Act by virtue of Section 4(2) thereof.
The issuance of the securities described in paragraph (2) above was exempt
from registration under the Securities Act by virtue of Section 3(a)(9)
thereof in that the securities were issued in an exchange transaction with the
Registrant's existing stockholders solely for the purpose of changing the
Registrant's domicile within the United States.
The stock option exercises described in paragraphs (3) and (4) above were
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were
II-2
<PAGE>
issued and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation.
The issuance and sale of the securities described in paragraph (5) above
were exempt from registration under the Securities Act by virtue of Section
4(2) thereof. The purchasers of the securities were either accredited
investors, as defined in Section 2(15)(ii) of the Securities Act, or
experienced venture capital investors. Each purchaser represented to the
Registrant its intention to acquire the securities for investment and not for
distribution, and appropriate restrictive legends are affixed to the
certificates representing the securities. In addition, each purchaser received
adequate information about the Registrant in connection with making its
investment decision.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3(i).1* Amended and Restated Certificate of Incorporation, as amended.
3(i).2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation, as amended.
3(i).3* Form of Restated Certificate of Incorporation to be effective upon
the closing of the offering to which this Registration Statement
relates.
3(ii).1* Amended and Restated By-laws of the Registrant.
3(ii).2* Form of Amended and Restated By-laws to be effective upon the
closing of the offering to which this Registration Statement
relates.
4.1* Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2 Specimen stock certificate representing shares of Common Stock.
5.1 Opinion of Cooley Godward LLP.
10.1* Indemnification Agreement, entered into by the Registrant and each
of its directors and executive officers, dated as of January 1,
1998.
10.2 Amended and Restated Stock Option Plan.
10.3* Employee Stock Purchase Plan to be effective upon the closing of
this offering.
10.4* Note and Warrant Purchase Agreement, between the Registrant and
the parties named therein, dated as of May 31, 1996.
10.5* Form of Senior Subordinated Promissory Note, as amended.
10.6* Form of Warrant to Purchase Shares of Common Stock.
10.7* Registration Rights Agreement, dated as of May 31, 1996.
10.8 Loan and Security Agreement, by and between the Registrant and
Silicon Valley Bank, dated as of September 18, 1996, as amended.
10.9 Collateral Assignment, Patent Mortgage and Security Agreement, by
and between the Registrant and Silicon Valley Bank, dated as of
September 18, 1996, as amended.
11.1* Statement regarding computation of earnings per share.
16.1* Letter regarding change in certifying accountant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors, and Report
on Schedule.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* Power of Attorney. Reference is made to page II-5.
27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denomination and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Englewood, State of Colorado on the 6th day of March, 1998.
EVOLVING SYSTEMS, INC.
/s/ J. RICHARD ABRAMSON
By: __________________________________________
J. Richard Abramson
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEORGE A. HALLENBEC Chairman of the Board of Directors March 6, 1998
- -----------------------------
George A. Hallenbeck
/s/ J. RICHARD ABRAMSON President, Chief Executive Officer March 6, 1998
- ----------------------------- and Director
J. Richard Abramson (Principal Executive Officer)
/s/ ROGER A. BARNES* Senior Vice President of Finance, March 6, 1998
- ----------------------------- Chief Financial Officer, Treasurer
Roger A. Barnes and Assistant Secretary
(Principal Financial and Accounting
Officer)
/s/ DAVID J. MOLNY* Vice-President, Chief Technical March 6, 1998
- ----------------------------- Officer and Director
David J. Molny
/s/ HARRY B. FAIR* Vice Chairman of the Board of March 6, 1998
- ----------------------------- Directors
Harry B. Fair
/s/ DONALD R. DIXON* Director March 6, 1998
- -----------------------------
Donald R. Dixon
/s/ ROBERT J. LOARIE* Director March 6, 1998
- -----------------------------
Robert J. Loarie
</TABLE>
/s/ J. RICHARD ABRAMSON
*By:_________________
J. Richard Abramson
Attorney-In-Fact
II-5
<PAGE>
SCHEDULE II
EVOLVING SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO WRITE- END
OF PERIOD OPERATIONS OFFS OF PERIOD
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended:
December 31, 1996............... $ -- $577,000 $279,000 $298,000
-------- -------- -------- --------
December 31, 1997............... $298,000 $456,500 $234,500 $520,000
-------- -------- -------- --------
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3(i).1* Amended and Restated Certificate of Incorporation, as amended.
3(i).2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation, as amended.
3(i).3* Form of Restated Certificate of Incorporation to be effective upon
the closing of the offering to which this Registration Statement
relates.
3(ii).1* Amended and Restated By-laws of the Registrant.
3(ii).2* Form of Amended and Restated By-laws to be effective upon the
closing of the offering to which this Registration Statement
relates.
4.1* Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2 Specimen stock certificate representing shares of Common Stock.
5.1 Opinion of Cooley Godward LLP.
10.1* Indemnification Agreement, entered into by the Registrant and each
of its directors and executive officers, dated as of January 1,
1998.
10.2 Amended and Restated Stock Option Plan.
10.3* Employee Stock Purchase Plan to be effective upon the closing of
this offering.
10.4* Note and Warrant Purchase Agreement, between the Registrant and the
parties named therein, dated as of May 31, 1996.
10.5* Form of Senior Subordinated Promissory Note, as amended.
10.6* Form of Warrant to Purchase Shares of Common Stock.
10.7* Registration Rights Agreement, dated as of May 31, 1996.
10.8 Loan and Security Agreement, by and between the Registrant and
Silicon Valley Bank, dated as of September 18, 1996, as amended.
10.9 Collateral Assignment, Patent Mortgage and Security Agreement, by
and between the Registrant and Silicon Valley Bank, dated as of
September 18, 1996, as amended.
11.1* Statement regarding computation of earnings per share.
16.1* Letter regarding change in certifying accountant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors, and Report
on Schedule.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* Power of Attorney. Reference is made to page II-5.
27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
EVOLVING SYSTEMS, INC.
COMMON STOCK, PAR VALUE $.001
UNDERWRITING AGREEMENT
----------------------
....................., 1998
Goldman, Sachs & Co.,
Hambrecht & Quist LLC
UBS Securities LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Evolving Systems, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of . .
. . . . .shares of Common Stock, par value $.001 per share ("Stock"), of the
Company and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of . . . . . . . shares and, at
the election of the Underwriters, up to . . . . . . . additional shares of
Stock. The aggregate of . . . . shares to be sold by the Company and the
Selling Stockholders is herein called the "Firm Shares" and the aggregate of . .
. . . additional shares to be sold by the Selling Stockholders is herein called
the "Optional Shares". The Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-43973) in respect
of the Shares has been filed with the Securities and Exchange Commission
(the "Commission"); such registration statement and any post-effective
amendment thereto, each in the form heretofore delivered to you, and,
excluding exhibits thereto, to you for each of the other Underwriters, have
been declared effective by the Commission in such form; no other document
with respect to such registration statement has heretofore been filed with
the Commission; and no stop order suspending the effectiveness of such
registration statement has been issued and no proceeding
1
<PAGE>
for that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in such registration statement or filed
with the Commission pursuant to Rule 424(a) of the rules and regulations of
the Commission under the Securities Act of 1933, as amended (the "Act"), is
hereinafter called a "Preliminary Prospectus"; the various parts of such
registration statement, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with Section
5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of
the registration statement at the time it was declared effective, each as
amended at the time such part of the registration statement became
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to Items 7 and
11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by a Selling Stockholder expressly for use in the preparation of the
answers therein to Items 7 and 11(l) of Form S-1;
(iv) The Company has not sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term
debt of the Company or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus;
2
<PAGE>
(v) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned
by them, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company and any real
property and buildings held under lease by the Company are held by it under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company;
(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of the States of California, Colorado,
Georgia, Illinois, Texas and Virginia, which States comprise all of the
jurisdictions where the Company is required to be qualified to do business,
and the Company is not subject to any material liability or disability by
reason of its failure to be qualified in any other jurisdiction; and the
Company does not own or hold, beneficially or of record, any stock or other
securities in any other corporation, limited liability company, partnership
or other entity;
(vii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Stock contained in the
Prospectus;
(viii) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company
hereunder and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company is a party or by which the Company is bound or to which
any of the property or assets of the Company is subject, nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or Bylaws of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company or any of its properties; and no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale of
the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of
the Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of the Shares by the
Underwriters;
(x) The Company is not in violation of its Certificate of
Incorporation or Bylaws or in default in the performance or observance of
any material obligation, agreement, covenant or
3
<PAGE>
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties may be bound;
(xi) Except as disclosed in the Prospectus, the Company owns or
possesses the licenses or other rights to use all patents, trademarks,
service marks, trade names, copyrights, mask work rights, technology, know-
how and trade secrets necessary to conduct the business now or proposed to
be conducted by the Company as described in the Prospectus, and except as
disclosed in the Prospectus, the Company has not received any notice of
infringement of or conflict with (or knows of such infringement or conflict
with) asserted rights of others with respect to any patents, trademarks,
service marks, trade names, mask work rights, technology, know-how or trade
secrets, which, singly or in the aggregate, if the subject of any
unfavorable decision, ruling or finding, would have a material adverse
effect on the current or future financial position, stockholders' equity or
results of operations of the Company, considered as one enterprise; and,
except as disclosed in the Prospectus, to the best of the Company's
knowledge, the discoveries, inventions, products or processes of the
Company referred to in the Prospectus do not infringe or conflict with any
right or patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third
party;
(xii) The Company has obtained any permits, consents and authorizations
required to be obtained by them under applicable federal, state, local or
foreign laws or regulations in order to conduct its business as described
in the Prospectus, including, but not limited to, those under laws or
regulations relating to the protection of the environment or concerning the
handling, storage, disposal or discharge of toxic materials, and any such
permits, consents and authorizations remain in full force and effect;
(xiii) In connection with the filing of the Registration Statement, the
Company has complied with all agreements which grant any rights to require
registration of any shares of capital stock of the Company;
(xiv) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(xv) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of
which any property of the Company is the subject which, if determined
adversely to the Company, would individually or in the aggregate have a
material adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xvi) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(xvii) Neither the Company nor any of its affiliates does business with
the government of
4
<PAGE>
Cuba or with any person or affiliate located in Cuba within the meaning of
Section 517.075, Florida Statutes; and
(xviii) Price Waterhouse LLP, who have certified certain financial
statements of the Company, and Deloitte & Touche LLP, whose reports appear
in the Registration Statement and Prospectus, are each independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) Each of the Selling Stockholders severally represents and warrants to, and
agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement
and the Power of Attorney and the Custody Agreement hereinafter referred
to, and for the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder has
full right, power and authority to enter into this Agreement, the Power of
Attorney and the Custody Agreement and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject, nor will such action result
in any violation of the provisions of any statute or any order, rule or
regulation applicable to such Selling Stockholder of any court or
governmental agency or body having jurisdiction over such Selling
Stockholder or the property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each Time
of Delivery (as defined in Section 4 hereof) such Selling Stockholder will
have, good and valid title to the Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances, equities
or claims; and, upon delivery of such Shares and payment therefor pursuant
hereto, good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, such
Selling Stockholder has not taken and will not take, directly or
indirectly, any action to offer, sell, contract to sell, grant any option
to purchase, make any short sale or otherwise dispose of any shares of
Stock or any other securities of the Company that are substantially similar
to the shares of Stock, including, but not limited to, any securities of
the Company that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such similar securities,
whether now owned or hereafter acquired, owned directly by the undersigned
or with respect to which the undersigned has beneficial ownership within
the rules and regulations of the Commission; provided, that notwithstanding
the foregoing, (x) if such Selling Stockholder is an individual, he or she
may
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transfer shares of Stock either during his or her lifetime or on death
by gift, will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively such Selling Stockholder and/or
members of his or her immediate family; (y) if such Selling Stockholder is
a partnership, the partnership may transfer shares of Stock to a general
partner of such partnership as of the date of this Agreement or a retired
partner of such partnership who retires after the date hereof, to the
estate of any such partner or retired partner, and any general partner who
is an individual may transfer any such shares of Stock by gift, will or
intestacy to his or her immediate family or to a trust the beneficiaries of
which are exclusively such general partner and/or members of his or her
immediate family; and (z) if such Selling Stockholder is a trust, the trust
may transfer shares of Stock to any beneficiary of such trust as of the
date of this Agreement or to the estate of any such beneficiary, and any
beneficiary who is an individual may transfer any such shares of Stock by
gift, will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively such beneficiary and/or members of
his or her immediate family, provided however, that in any such case
described in clauses (x), (y) and/or (z), it shall be a condition to the
transfer that the transferee execute an agreement stating that the
transferee is receiving and holding the shares of Stock so transferred
subject to the provisions of this Subsection 1(b)(iv), and there shall be
no further transfer of such shares of Stock except in accordance with the
provisions of this Subsection 1(b)(iv), and that for the purposes of the
foregoing, "immediate family" shall mean spouse, lineal descendant, father,
mother, brother or sister of the transferor; and provided, further, that in
addition to and notwithstanding the foregoing, the Selling Stockholder may
transfer shares of the Stock to the extent set forth in this Agreement or
with the prior written consent of Goldman, Sachs & Co., on behalf of the
Representatives;
(v) Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
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(viii) Certificates in negotiable form representing all of the Shares to
be sold by such Selling Stockholder hereunder have been placed in custody
under a Custody Agreement, in the form heretofore furnished to you (the
"Custody Agreement"), duly executed and delivered by such Selling
Stockholder to [NAME OF CUSTODIAN], as custodian (the "Custodian"), and
such Selling Stockholder has duly executed and delivered a Power of
Attorney, in the form heretofore furnished to you (the "Power of
Attorney"), appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Stockholder, to determine the purchase price to
be paid by the Underwriters to the Selling Stockholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by
such Selling Stockholder hereunder and otherwise to act on behalf of such
Selling Stockholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for
such Selling Stockholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
Selling Stockholder for such custody, and the appointment by such Selling
Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable; the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Stockholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by
the occurrence of any other event; if any individual Selling Stockholder or
any such executor or trustee should die or become incapacitated, or if any
such estate or trust should be terminated, or if any such partnership or
corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this Agreement and of the
Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to
the Powers of Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of
whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termination, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Stockholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the Selling Stockholders,
at a purchase price per share of $.............., the number of Firm Shares (to
be adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Firm Shares to be sold by the Company and
each of the Selling Stockholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling Stockholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, each of the Selling Stockholders
agrees severally and not jointly, to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to
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purchase from each of the Selling Stockholders, at the purchase price per share
set forth in clause (a) of this Section 2, that portion of the number of
Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to purchase
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
The Selling Stockholders, as and to the extent indicated in Schedule II
hereto, hereby grant, severally and not jointly, to the Underwriters the right
to purchase at their election up to ................... Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole purpose
of covering overallotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares shall be made in proportion to the maximum number of
Optional Shares to be sold by each Selling Stockholder as set forth in Schedule
II hereto. Any such election to purchase Optional Shares may be exercised only
by written notice from you to the Attorneys-in-Fact, given within a period of 30
calendar days after the date of this Agreement and setting forth the aggregate
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 4 hereof) or, unless you and
the Attorneys-in-Fact otherwise agree in writing, earlier than two or later than
ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
[through the facilities of the Depository Trust Company ("DTC"),] for the
account of such Underwriter, against payment by or on behalf of such Underwriter
of the purchase price therefor by certified or official bank check or checks,
payable to the order of the Company and the Custodian, as their interests may
appear, in Federal (same day) funds or by wire transfer of Federal (same day)
funds to the account or accounts specified by the Company and the Custodian, as
specified at least 24 hours prior to the Time of Delivery (as defined below) by
the Company or the Custodian, as the case may be. The Company will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery with respect
thereto at the office of Goldman, Sachs & Co., 85 Broad Street, New York, New
York 10004 (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on
............., 1998 or such other time and date as Goldman, Sachs & Co., the
Company and the Selling Stockholders may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Selling Stockholders may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called
the "First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
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(b) The documents to be delivered at each Time of Delivery by or on behalf of
the parties hereto pursuant to Section 7 hereof, including the cross receipt for
the Shares and any additional documents requested by the Underwriters pursuant
to Section 7(k) hereof, will be delivered at the offices of Brobeck, Phleger &
Harrison LLP, 1125 Seventeenth Street, Suite 2525, Denver, Colorado 80202 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
3:00 p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities
laws of such jurisdictions as you may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution
of the Shares, provided that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Prior to 12:00 p.m., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may from time to time reasonably request, and, if
the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such time any
events shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the
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light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in order
to comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company (which need not be
audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the option of the
Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell (except through a Registration Statement on
Form S-8 or any successor form) or otherwise dispose of, except as provided
hereunder, any shares of Stock or securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities
(other than pursuant to employee stock option plans existing on, or upon
the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement), without the prior written
consent of Goldman, Sachs & Co., on behalf of the Representatives;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries (if any) certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries (if any) for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and any subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this
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Agreement in the manner specified in the Prospectus under the caption "Use
of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ"); and
(j) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the Blue
Sky Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section; and
(b) such Selling Stockholder will pay or cause to be paid all costs and expenses
incident to the performance of such Selling Stockholder's obligations hereunder
which are not otherwise specifically provided for in this Section, including (i)
any fees and expenses of counsel for such Selling Stockholder, (ii) such Selling
Stockholder's pro rata share of the fees and expenses of the Attorneys-in-Fact
and the Custodian, and (iii) all expenses and taxes incident to the sale and
delivery of the Shares to be sold by such Selling Stockholder to the
Underwriters hereunder. It is understood, however, that except as provided in
this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of
their own costs and expenses, including the fees of their counsel, stock
transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make; provided, that this Section 6
shall not be construed as to require any Selling Stockholder to incur liability
under subsection (a) above.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for
that
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purpose shall have been initiated or threatened by the Commission; and
all requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, shall
have furnished to you such opinion or opinions, dated such Time of
Delivery, with respect to the matters covered in paragraphs (i), (ii),
(vii), (xi) and (xiii) of subsection (c) below as well as such other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(c) Cooley Godward LLP, counsel for the Company, shall have furnished to
you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus;
(ii) The Company had an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization" as of the date set forth
therein, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery) have been
duly and validly authorized and issued and are, or with respect to the
Shares being delivered at the Time of Delivery when issued and paid for
in accordance with the terms of this Agreement will be, fully paid and
non-assessable; and the Shares conform to the description of the Stock in
the Prospectus under the caption "Description of Capital Stock";
(iii) The Company has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
California, Colorado, Georgia, Illinois, Texas and Virginia and, to the
best of such counsel's knowledge, is not required to be so qualified in
any other state in the United States by reason of the ownership or lease
of its properties or the conduct of its business;
(iv) Each of the leases for the real property and buildings used in
the Company's business that are included as Exhibits to the Registration
Statement is valid, subsisting and enforceable, assuming that the
applicable lessor under such lease had and has full right, power and
authority to enter into and to perform its obligations under such lease,
with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the
Company, but subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
of general applicability affecting creditors' rights and to general
equity principles and to limitations on availability of equitable relief,
including specific performance;
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending or overtly threatened to which the Company is a party or of which
any property of the Company is the subject which, if determined adversely
to the Company, would individually or in the aggregate have
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a material adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company;
(vi) This Agreement has been duly authorized, executed and delivered
by the Company;
(vii) The issue and sale of the Shares to be sold by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the consummation of the sale of the Shares will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument filed as
an Exhibit to the Registration Statement, nor will such action result in
any violation of the provisions of the Restated Certificate of
Incorporation of the Company or its Amended and Restated Bylaws or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
properties (except with respect to state securities and Blue Sky laws, as
to which such counsel need express no opinion);
(viii) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is
required for the issuance and sale of the Shares, except the registration
under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(ix) To the best of such counsel's knowledge, the Company is not in
violation of its Restated Certificate of Incorporation or Amended and
Restated Bylaws;
(x) To the best of such counsel's knowledge, there is no action,
proceeding or investigation pending or overtly threatened against the
Company before any court or administrative agency that is required under
the Act and the rules and regulations promulgated thereunder to be
described in the Registration Statement or Prospectus that is not so
described;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting",
insofar as they purport to describe pertinent provisions of this
Agreement and of the lock-up agreements entered into by securities
holders of the Company and the Representatives, fairly summarize such
matters to the extent required by the Act and the rules and regulations
promulgated thereunder;
(xii) The Company is not an "investment company", as such term is
defined in the Investment Company Act, nor required to register as an
"investment company" under the Investment Company Act;
(xiii) The Registration Statement and the Prospectus and any further
amendments or supplements thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act and the
rules and regulations thereunder. In addition, such counsel does not know
of any
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amendment to the Registration Statement required to be filed or of
any contracts or other documents of a character required to be filed as
an Exhibit to the Registration Statement or required to be described in
the Registration Statement or the Prospectus which are not filed or
described as required.
In addition, such counsel shall also state:
During the course of the preparation of the Registration Statement and
the Prospectus, such counsel participated in conferences with you and
with officers and other representatives of the Company, its counsel and
its independent public accountants at which the contents of the
Registration Statement and Prospectus were discussed. While such counsel
has not independently verified and is not passing upon the accuracy,
completeness or fairness of the statements made in the Registration
Statement and Prospectus, except as set forth in paragraphs (ii) and (xi)
above, on the basis of the foregoing, no facts have come to such
counsel's attention that have caused such counsel to believe that the
Registration Statement, as of the time it became effective, or any
further amendment thereto made by the Company prior to such Time of
Delivery contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, as of its
date or the date of the Time of Delivery, including any further amendment
or supplement thereto made by the Company prior to such Time of Delivery
contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that such counsel need not express any comments with
respect to the financial statements and schedules, related notes and
other financial and accounting data derived therefrom included in the
Registration Statement and Prospectus;
(d) Each of the Selling Stockholders shall have furnished to you a
written opinion of counsel, in form and substance satisfactory to you, to
the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and constitute valid
and binding agreements of such Selling Stockholder in accordance with
their terms, subject as to enforcement to applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
of general applicability affecting creditors' rights and to general
equity principles and to limitations on availability of equitable relief,
including specific performance;
(ii) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder; and the sale of the Shares to be sold
by such Selling Stockholder hereunder and the compliance by such Selling
Stockholder with all of the provisions of this Agreement, the Power of
Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not result in any
violation of the provisions of any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder, except with respect to state securities and Blue Sky
laws, as to which such counsel need express no opinion;
(iii) No consent, approval, authorization or order of any court or
governmental
14
<PAGE>
agency or body is required for the consummation of the transactions
contemplated by this Agreement in connection with the Shares to be sold
by such Selling Stockholder hereunder, except such as may be required
under the Act and state securities or Blue Sky laws in connection with
the purchase and distribution of such Shares by the Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling
Stockholder had good and valid title to the Shares to be sold at such
Time of Delivery by such Selling Stockholder under this Agreement, free
and clear of all liens, encumbrances, equities or claims, and full right,
power and authority to sell, assign, transfer and deliver the Shares to
be sold by such Selling Stockholder hereunder; and
(v) Upon delivery to the Underwriters of certificates representing
the Shares duly endorsed for transfer and against payment therefor in
accordance with the terms of this Agreement, the Shares will have been
transferred free and clear of adverse claims to each of the several
Underwriters who have purchased such Shares without notice of any adverse
claims within the meaning of the Colorado Uniform Commercial Code.
In rendering the opinion in paragraphs (iv) and (v), such counsel may rely
upon a certificate of such Selling Stockholder in respect of matters of fact as
to title to the Shares sold by such Selling Stockholder, and liens,
encumbrances, equities or claims on, the Shares sold by such Selling
Stockholder;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery, Price
Waterhouse LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to
you, to the effect set forth in Annex I(a) hereto, and Deloitte & Touche
LLP shall have furnished you a letter or letters, dated the respective
dates of delivery thereof, in form and substance satisfactory to you, to
the effect set forth in Annex I(b) hereto;
(f)(i) The Company shall not have sustained since the date of the latest
audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been
any change in the capital stock, stock options or long-term debt of the
Company or any change, or any development involving a prospective change,
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, otherwise
than as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in Clause (i) or (ii), is in the judgment of the
representatives of the Underwriters (the "Representatives") so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock
15
<PAGE>
Exchange or on NASDAQ; (ii) a suspension or material limitation in trading
in the Company's securities on NASDAQ; (iii) a general moratorium on
commercial banking activities declared by either Federal, New York or
Colorado State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United
States of a national emergency or war, if the effect of any such event
specified in this Clause (iv) in the judgment of the Representatives makes
it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(h) The Shares at such Time of Delivery shall have been duly listed for
quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from each stockholder of _________ shares of Stock
or any other class of stock of the Company substantially similar to the
Stock (including securities exercisable for or convertible into shares of
Stock), substantially to the effect set forth in Subsection 1(b)(iv) hereof
in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Stockholders, respectively,
satisfactory to you as to the accuracy of the representations and
warranties of the Company and the Selling Stockholders, respectively,
herein at and as of such Time of Delivery, as to the performance by the
Company and the Selling Stockholders of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to
such other matters as you may reasonably request, and the Company shall
have furnished or caused to be furnished certificates as to the matters set
forth in subsections (a) and (f) of this Section and as to such other
matters as you may reasonably request.
8. (a) The Company and each of the Selling Stockholders listed in Part A
of Schedule II hereto, jointly and severally, will indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company and the Selling
Stockholders listed in part A of Schedule II hereto shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for
16
<PAGE>
use therein; provided, further, that the liability of a Selling Stockholder
pursuant to this subsection 8(a) shall not exceed the product of the number of
Shares sold by such Selling Stockholder, including any Optional Shares, and the
initial public offering price of the Shares as set forth in the Prospectus.
(b) Each of the Selling Stockholders named in Part B of Schedule II hereto
will indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use therein;
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that such
Selling Stockholder shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; provided, further, that the liability of a
Selling Stockholder pursuant to this subsection 8(b) shall not exceed the
product of the number of Shares sold by such Selling Stockholder, including any
Optional Shares, and the initial public offering price of the Shares as set
forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company and each Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or such Selling Stockholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a), (b)
or (c) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it
17
<PAGE>
from any liability which it may have to any indemnified party otherwise than
under such subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and, after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability arising out of
such action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(e) If the indemnification provided for in this Section 8 is unavailable to or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (d) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, each of the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (e). The amount
paid or payable by an
18
<PAGE>
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under this
Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act. The Company
and the Selling Stockholders named in part A of Schedule II may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible, including, without limitation, allocating between the
Company and the Selling Stockholders named in part A of Schedule II the
liability resulting from a breach of the representations and warranties of the
Company and the Selling Stockholders hereunder.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Stockholders shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the Shares
of a defaulting Underwriter or Underwriters by you and the Company and the
Selling Stockholders as provided in
19
<PAGE>
subsection (a) above, the aggregate number of such Shares which remains
unpurchased does not exceed one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, then the Company and the
Selling Stockholders shall have the right to require each non-defaulting
Underwriter to purchase the number of Shares which such Underwriter agreed to
purchase hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the Shares
of a defaulting Underwriter or Underwriters by you and the Company and the
Selling Stockholders as provided in subsection (a) above, the aggregate number
of such Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of all of the Shares to be purchased at such Time of Delivery, or if the
Company and the Selling Stockholders shall not exercise the right described in
subsection (b) above to require non-defaulting Underwriters to purchase Shares
of a defaulting Underwriter or Underwriters, then this Agreement (or, with
respect to the Second Time of Delivery, the obligations of the Underwriters to
purchase and of the Selling Stockholders to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses
to be borne by the Company and the Selling Stockholders and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company and each of
the Selling Stockholders pro rata (based on the number of Shares to be sold by
the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall then
be under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
Representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company
20
<PAGE>
shall be entitled to act and rely upon any statement, request, notice or
agreement on behalf of such Selling Stockholder made or given by any or all of
the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the Representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us eight counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and each of the Selling Stockholders. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
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Any person executing and delivering this Agreement as Attorney-in-Fact for a
Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
EVOLVING SYSTEMS, INC.
By:_______________________________
Name:
Title:
[NAMES OF SELLING STOCKHOLDERS]
By:_______________________________
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Stockholders named in
Schedule II to this Agreement.
Accepted as of the date hereof at
San Francisco, California:
Goldman, Sachs & Co.
Hambrecht & Quist LLC
UBS Securities LLC
By:_______________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
22
<PAGE>
SCHEDULE I
NUMBER OF
OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
- -------------- ------------------- ---------------
Goldman, Sachs & Co.
Hambrecht & Quist LLC
UBS Securities LLC ----------- ----------
Total........................ ----------- ----------
1
<PAGE>
SCHEDULE II
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE SOLD EXERCISED
- -------------- ------------------- ---------------
The Company............................
The Selling Stockholder(s):............
Part A
Harry B. Fair (a)..........
George A. Hallenbeck (a)...
Part B
John A. Elmgren(b).........
Wayne A. Pulick(b).........
David J. Molny(b)..........
Timothy J. Drummond(b).....
Total..............................
===================
(a) This Selling Stockholder is represented by Cooley Godward LLP, 2595 Canyon
Boulevard, Suite 250, Boulder, Colorado 80302 and has appointed [NAMES OF
ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-
in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by Bearman Talesnick & Clowdus,
Professional Corporation, 1200 Seventeenth Street, Suite 2600, Denver
Colorado 80202 and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS
THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling
Stockholder.
3
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ANNEX I(a)
Pursuant to Section 7(d) of the Underwriting Agreement, Price Waterhouse LLP
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable published
rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited interim financial statements, selected financial data, pro
forma financial information, financial forecasts and/or condensed financial
statements derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports thereon,
copies of which have been furnished to the representatives of the
Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed statements of income, balance sheets and statements of cash flows
included in the Prospectus as indicated in their reports thereon copies of
which are attached hereto and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
financial statements referred to in paragraph (vi)(A)(i) below comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published rules and regulations, nothing came to
their attention that caused them to believe that the unaudited condensed
financial statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to the
results of operations and financial position of the Company for the five
most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
financial statements for such five fiscal years which were included for
such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination
in accordance
1
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with generally accepted auditing standards, consisting of a reading of the
unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the
Company, inspection of the minute books of the Company since the date of
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited statements of income, balance sheets and
statements of cash flows included in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published rules and regulations, or (ii) any
material modifications should be made to the unaudited condensed
statements of income, balance sheets and statements of cash flows
included in the Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in
the unaudited financial statements from which such data and items were
derived, and any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the corresponding
amounts in the audited financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to
in Clause (B) were not determined on a basis substantially consistent
with the basis for the audited financial statements included in the
Prospectus;
(D) any unaudited pro forma condensed financial statements included in
the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the capital stock (other
than issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements included in
the Prospectus) or any increase in the long-term debt of the Company, or
any decreases in net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus, except in
each case for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in such
letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause
(E) there were any decreases in net revenues or operating profit or the
total or per share amounts of net income or other items
2
<PAGE>
specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of corresponding
length specified by the Representatives, except in each case for
decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company, which appear in the Prospectus,
or in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain of
such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
3
<PAGE>
ANNEX I(b)
Pursuant to Section 7(d) of the Underwriting Agreement, Deloitte & Touche LLP
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable published
rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, pro forma
financial information) examined by them and included in the Prospectus or
the Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American Institute
of Certified Public Accountants of the unaudited interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in
such letter, as indicated in their reports thereon, copies of which have
been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) The unaudited selected financial information with respect to the
results of operations and financial position of the Company for the five
most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
financial statements for such five fiscal years which were included for
such fiscal years; and
(iv) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K.
4
<PAGE>
EXHIBIT 3(i).2
CERTIFICATE OF AMENDMENT
OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
EVOLVING SYSTEMS, INC.
Evolving Systems, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: The name of the Corporation is Evolving Systems, Inc.
SECOND: Article IV of the Amended and Restated Certificate of
Incorporation of the Corporation is hereby amended to add the following sentence
to the beginning thereof:
"UPON THE EFFECTIVENESS OF THIS CERTIFICATE OF AMENDMENT, EVERY TWO (2)
OUTSTANDING SHARES OF COMMON STOCK OR NON-VOTING COMMON STOCK OF THE
CORPORATION SHALL BE COMBINED INTO ONE SHARE OF COMMON STOCK OR NON-VOTING
COMMON STOCK, RESPECTIVELY. NO FRACTIONAL SHARES SHALL BE ISSUED IN
CONNECTION THEREWITH, AND EACH STOCKHOLDER OTHERWISE ENTITLED TO RECEIVE A
FRACTIONAL SHARE SHALL RECEIVE THE NEXT LOWER WHOLE NUMBER OF SHARES OF
COMMON STOCK OR NON-VOTING COMMON STOCK."
THIRD: The foregoing amendment to the Certificate of Incorporation of the
Corporation has been duly adopted by the directors and stockholders of the
Corporation in accordance with the provisions of Sections 141, 228 and 242 of
the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has executed this Certificate of
Amendment on the _____ day of January, 1998.
EVOLVING SYSTEMS, INC.
By:
--------------------------------------
Name: J. Richard Abramson
Title: President and Chief Executive
Officer
<PAGE>
EXHIBIT 4.2
[LOGO OF EVOLVING SYSTEMS]
EVOLVING SYSTEMS
NUMBER
SHARES
ES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 30049R 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR
VALUE, OF
EVOLVING SYSTEMS, Inc.
transferable only on the books of the Corporation by the holder
hereof in person or by duly authorized Attorney upon surrender of
this certificate properly endorsed. This certificate is not valid
until countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[Anita T. Moseley]
Corporate Secretary
[Seal]
[J. Richard Abramson]
President and Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
(New York, N.Y.)
Transfer Agent
AND REGISTRAR
By
Authorized Officer
The Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each
class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Any such request should be directed to the Corporation, attention
of its Secretary, at the Corporation's principal executive
offices.
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with the right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT ___Custodian_____
(Cust) (Minor)
under Uniform Gifts to Minors
<PAGE>
Act_________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ______hereby sell, assign, and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF
ASSIGNEE
shares of common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint_______Attorney,
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular, without alteration
or enlargement or any change whatever. Signature must be guaranteed.
Signature(s) Guaranteed
By
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKER, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad.15.
<PAGE>
EXHIBIT 5.1
COOLEY GODWARD LLP ATTORNEYS AT LAW San Francisco, CA
415 693-2000
Palo Alto, CA
2595 Canyon Boulevard 650 843-5000
Suite 250
Boulder, CO Menlo Park, CA
80302-6737 650 843-5000
MAIN: 303 546-4000
FAX: 303 546-4099 San Diego, CA
619 550-6000
Denver, CO
www.cooley.com 303 606-4800
JAMES C. T. LINFIELD
Direct: (303) 546-4010
Internet: [email protected]
March 5, 1998
Evolving Systems, Inc.
6892 South Yosemite
Englewood, Colorado 80112
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Evolving Systems, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission"), including a prospectus to be filed with
the Commission pursuant to Rule 424(b) of Regulation C promulgated under the
Securities Act of 1933, as amended, and the underwritten public offering of up
to 4,600,000 shares of the Company's Common Stock, including 1,315,000 shares to
be sold by certain stockholders of the Company (the "Selling Stockholder
Shares", the 3,285,000 shares to be sold by the Company being hereinafter
referred to as the "Company Shares").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement, and (ii) reviewed the Company's Certificate of
Incorporation and Bylaws, as amended and as proposed to be amended prior to the
closing of the public offering, and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment were necessary or appropriate to enable us to
render the opinion expressed below.
On the basis of the foregoing and in reliance thereon, we are of the opinion
that the Selling Stockholder Shares are, and the Company Shares (when issued and
paid for in accordance with the underwriting agreement filed as an exhibit to
the Registration Statement) will be, validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By:/s/ James C. T. Linfield
------------------------
James C. T. Linfield
JCTL:rmz
<PAGE>
EXHIBIT 10.2
EVOLVING SYSTEMS, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON DECEMBER 16, 1997
APPROVED BY THE STOCKHOLDERS ON JANUARY 28, 1998
1. INTRODUCTION; PURPOSES.
(a) On January 19, 1996, the Board of Directors adopted the Company's Stock
Option Plan, amended on October 24, 1996 and December 17, 1996 (collectively,
the "Prior Plans"). The Board of Directors desires to amend and restate the
Prior Plans in the form of this Amended and Restated Stock Option Plan. Shares
reserved for issuance under the Prior Plans shall hereafter be reserved for
issuance, and issued, under the terms of this Plan in the form below.
(b) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates may
be given an opportunity to benefit from increases in value of the common stock
of the Company ("Common Stock") through the granting of (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to
purchase restricted stock, all as defined below.
(c) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(d) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and a separate certificate or certificates will be
issued for shares purchased on exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance with
subsection 3(c) of the Plan.
(e) "COMPANY" means Evolving Systems, Inc., a Delaware corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
1.
<PAGE>
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that
the service of an individual to the Company, whether as an Employee, Director or
Consultant, is not interrupted or terminated. The Board or the Chief Executive
Officer of the Company may determine, in that party's sole discretion, whether
Continuous Status as an Employee, Director or Consultant shall be considered
interrupted in the case of: (i) any leave of absence approved by the Company,
including sick leave, military leave, or any other personal leave; or (ii)
transfers between the Company, Affiliates or their successors.
(h) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(i) "DIRECTOR" means a member of the Board.
(j) "EMPLOYEE" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock exchange,
or traded on the Nasdaq National Market or The Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in Common Stock) on the last market trading day prior to determination,
as reported in The Wall Street Journal or such other source as the Board deems
reliable;
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(n) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K"), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-
employee director" for purposes of Rule 16b-3.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
2.
<PAGE>
(r) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. Each
Option Agreement shall be subject to the terms and conditions of the Plan.
(s) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(u) "PLAN" means this 1997 Equity Incentive Plan.
(v) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(x) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
(y) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall be
granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory
Stock Option, a stock bonus, a right to purchase restricted stock, or a
combination of the foregoing; the provisions of each Stock Award granted (which
need not be identical), including the time or times when a person shall be
permitted to receive stock pursuant to a Stock Award; and the number of shares
with respect to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 13.
3.
<PAGE>
(iv) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of not fewer than two (2) members (the "Committee"), all of
the members of which Committee shall be, in the discretion of the Board, Non-
Employee Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything to the contrary contained
herein, the Board may delegate administration of the Plan to any person or
persons and the term "Committee" shall apply to any person or persons to whom
such authority has been delegated. In addition, and notwithstanding anything in
this Section 3 to the contrary, the Board or the Committee may delegate to a
committee of one or more members of the Board the authority to grant Options to
eligible persons who (1) are not then subject to Section 16 of the Exchange Act
and/or (2) are either (i) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such
Option, or (ii) not persons with respect to whom the Company wishes to comply
with Section 162(m) of the Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate SIX MILLION THREE HUNDRED THOUSAND (6,300,000)
shares of Common Stock (which includes shares remaining for future issuance and
shares subject to unvested options under the Prior Plans, as of the date of
adoption of the amended and restated Plan). In the event an option or right to
purchase restricted stock granted pursuant to the Prior Plans or a Stock Award
granted pursuant to the Plan shall for any reason expire or otherwise terminate
after the date of grant, in whole or in part, without having been exercised in
full, the stock not acquired under such option, right to purchase restricted
stock or Stock Award shall revert to and again become available for issuance
under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Stock
Awards other than Incentive Stock Options may be granted only to Employees,
Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
(c) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options covering
more than one million two hundred sixty thousand (1,260,000) shares of the
Company's common stock in any calendar year. This subsection 5(c) shall not
apply until (i) the earliest of: (A) the first material modification of the Plan
(including any increase to the
4.
<PAGE>
number of shares reserved for issuance under the Plan in accordance with Section
4); (B) the issuance of all of the shares of common stock reserved for issuance
under the Plan; (C) the expiration of the Plan; or (D) the first meeting of
stockholders at which directors are to be elected that occurs after the close of
the third calendar year following the calendar year in which occurred the first
registration of an equity security under Section 12 of the Exchange Act; or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, and the exercise price
of each Nonstatutory Stock Option shall be not less than fifty percent (50%) of
the Fair Market Value of the stock subject to the Option on the date the Option
is granted. Notwithstanding the foregoing, an Option may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or Committee, at the time of the grant of the
Option, according to a deferred payment arrangement, except that payment of the
common stock's "par value" (as defined in the Delaware General Corporation Law)
shall not be made by deferred payment, or (C) in any other form of legal
consideration that may be acceptable to the Board. In the case of any deferred
payment arrangement, interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option may be transferred
to the extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock Option,
the Nonstatutory Stock Option shall not be transferable except by will, by the
laws of descent and distribution or pursuant to a domestic relations order, and
shall be exercisable during the lifetime of the person to whom the Option is
granted only by such person or any transferee pursuant to a domestic relations
order. Notwithstanding the foregoing, the person to whom the Option is granted
may, by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the Optionee,
shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that from time to time during each of
such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the
5.
<PAGE>
Board may deem appropriate. The provisions of this subsection 6(e) are subject
to any Option provisions governing the minimum number of shares as to which an
Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it as of the date of termination) but only within such
period of time ending on the earlier of (i) the date three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement), or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or
within a period specified in the Option Agreement after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
as of the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of such Option as
set forth in the Option Agreement. If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or Committee shall
deem appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock
6.
<PAGE>
purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock purchase
agreement shall be such amount as the Board or Committee shall determine and
designate in such agreement but in no event shall the purchase price be less
than eighty-five percent (85%) of the stock's Fair Market Value on the date such
award is made. Notwithstanding the foregoing, the Board or Committee may
determine that eligible participants in the Plan may be awarded stock pursuant
to a stock bonus agreement in consideration for past services actually rendered
to the Company for its benefit.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order, so long as stock awarded under such agreement remains subject
to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock
purchase agreement shall be paid either: (i) in cash at the time of purchase;
(ii) at the discretion of the Board or Committee, according to a deferred
payment or other arrangement with the person to whom the stock is sold, except
that payment of the common stock's "par value" (as defined in the Delaware
General Corporation Law) shall not be made by deferred payment; or (iii) in any
other form of legal consideration that may be acceptable to the Board or
Committee in its discretion. Notwithstanding the foregoing, the Board or
Committee to which administration of the Plan has been delegated may award stock
pursuant to a stock bonus agreement in consideration for past services actually
rendered to the Company for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or Committee.
(e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
8. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at any
time and from time to time (i) the repricing of any outstanding Options under
the Plan and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options and the grant in substitution therefor
of new Options under the Plan covering the same or different numbers of shares
of common stock, but having an exercise price per share not less than fifty
percent (50%) of the Fair Market Value (one hundred percent (100%) of the Fair
Market Value in the case of an Incentive Stock Option or, in the case of a ten
percent (10%) stockholder (as defined in subsection 5(b)), not less than one
hundred and ten percent (110%) of the Fair Market Value) per share of common
stock on the new grant date.
(b) Shares subject to an Option canceled under this Section 8 shall
continue to be counted against the maximum award of Options permitted to be
granted pursuant to the Plan. The repricing of an Option hereunder resulting in
a reduction of the exercise price, shall be deemed to be a cancellation of the
original Option and the grant of a substitute Option; in the event of such
repricing, both the original and the substituted Options shall be counted
against the maximum awards of Options permitted to be granted pursuant to the
Plan, to the extent required by Section 162(m) of the Code.
7.
<PAGE>
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
either the Plan, any Stock Award or any stock issued or issuable pursuant to
any such Stock Award. If, after reasonable efforts, the Company is unable to
obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Stock Awards unless and
until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director nor a Consultant nor any person to whom a
Stock Award is transferred in accordance with the Plan shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
subject to such Stock Award unless and until such person has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
(c) Nothing in the Plan nor any instrument executed nor Stock Award granted
pursuant hereto shall confer upon any Employee, Director, Consultant or Optionee
any right to continue in the employ of the Company or any Affiliate (or to
continue acting as a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee, with or
without cause, to remove any Director as provided in the Company's By-Laws and
the provisions of the General Corporation Law of the State of Delaware, or to
terminate the relationship of any Consultant in accordance with the terms of
that Consultant's agreement with the Company or Affiliate to which such
Consultant is providing services.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
this Plan and all other plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonstatutory Stock Options.
(e) The Company may require any person to whom a Stock Award is granted, or
any person to whom a Stock Award is transferred in accordance with the Plan, as
a condition of exercising or acquiring stock under any Stock Award, (1) to give
written assurances satisfactory to the Company as to such person's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the stock
subject to the
8.
<PAGE>
Stock Award for such person's own account and not with any present intention of
selling or otherwise distributing the stock. The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the shares upon the exercise or acquisition of stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act, or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the Common Stock
of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the maximum number of shares subject to
award to any person during any calendar year, and the outstanding Stock Awards
will be appropriately adjusted in the class(es) and number of shares and price
per share of stock subject to such outstanding Stock Awards. Such adjustments
shall be made by the Board or Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(b) In the event of: (1) a sale of substantially all of the assets of the
Company; (2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Common Stock outstanding immediately preceding
the merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise; or (4) the acquisition by any person,
entity or group within the meaning of Section 13(d) or 14(d) of the Exchange
Act, or any comparable successor provisions (excluding any employee benefit
plan, or related trust, sponsored or maintained by the Company or any Affiliate
of the Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of securities
of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors, then to the extent
permitted by applicable law: (i) any surviving corporation (or an Affiliate
thereof), shall assume any Stock Awards outstanding under the Plan or shall
substitute similar Stock Awards for those outstanding under the Plan and such
Stock Awards shall continue in full force an effect. In the event any surviving
corporation (or an Affiliate) refuses to assume or continue such Stock Awards,
or to substitute similar Stock Awards for those outstanding under the Plan, then
vesting (or release from the repurchase option) shall accelerate such that such
Stock Awards are fully vested at such event and shall be exercisable for a
period of 15 days after notice from the Company. If not so exercised with the 15
day period, then such Stock Awards shall be terminated.
9.
<PAGE>
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain
executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees,
Directors or Consultants with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate ten (10) years from the date the Plan is
adopted by the Board or approved by the stockholders of the Company, whichever
is earlier. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.
15. EFFECTIVE DATE OF PLAN.
This amendment and restatement of the Plan shall become effective on the
effective date of the registration statement with respect to the Company's
initial public offering of shares of Common Stock, but no Stock Awards granted
under the Plan shall be exercised unless and until the Plan has been approved by
the stockholders of the Company, which approval shall be within twelve (12)
months before or after the date the Plan is adopted by the Board.
10.
<PAGE>
EXHIBIT 10.8
- --------------------------------------------------------------------------------
EVOLVING SYSTEMS, INC.
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
1. DEFINITIONS AND CONSTRUCTION .................................... 1
1.1 Definitions .............................................. 1
1.2 Accounting Terms ......................................... 7
2. LOAN AND TERMS OF PAYMENT ....................................... 7
2.1 Advances ................................................. 7
2.2 Overadvances ............................................. 9
2.3 Interest Rates, Payments, and Calculations................ 9
2.4 Crediting Payments........................................ 10
2.5 Fees ..................................................... 10
2.6 Additional Costs ......................................... 10
2.7 Term ..................................................... 11
3. CONDITIONS OF LOANS ............................................. 11
3.1 Conditions Precedent to Initial Advance .................. 11
3.2 Conditions Precedent to all Advances ..................... 11
4. CREATION OF SECURITY INTEREST.................................... 12
4.1 Grant of Security Interest................................ 12
4.2 Delivery of Additional Documentation Required ............ 12
4.3 Right to Inspect.......................................... 12
5. REPRESENTATIONS AND WARRANTIES................................... 12
5.1 Due Organization and Qualification........................ 12
5.2 Due Authorization; No Conflict ........................... 12
5.3 No Prior Encumbrances..................................... 12
5.4 Bona Fide Eligible Accounts............................... 12
5.5 Merchantable Inventory.................................... 13
5.6 Name; Location of Chief Executive Office.................. 13
5.7 Litigation................................................ 13
5.8 No Material Adverse Change in Financial Statements........ 13
5.9 Solvency.................................................. 13
5.10 Regulatory Compliance..................................... 13
5.11 Environmental Condition................................... 13
5.12 Taxes..................................................... 14
5.13 Subsidiaries.............................................. 14
5.14 Government Consents ...................................... 14
5.15 Full Disclosure........................................... 14
6. AFFIRMATIVE COVENANTS ........................................... 14
6.1 Good Standing ............................................ 14
6.2 Government Compliance .................................... 14
6.3 Financial Statements, Reports, Certificates .............. 14
6.4 Inventory; Returns ....................................... 15
6.5 Taxes .................................................... 15
6.7 Principal Depository ..................................... 15
6.8 Quick Ratio .............................................. 16
6.9 Debt-Net Worth Ratio ..................................... 16
</TABLE>
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<TABLE>
<S> <C>
6.10 Tangible Net Worth........................................ 16
6.11 Profitability............................................. 16
6.12 Debt Service Coverage..................................... 16
6.13 Registration of Intellectual Property Rights ............. 16
6.14 Further Assurances........................................ 16
7. NEGATIVE COVENANTS............................................... 16
7.1 Dispositions.............................................. 17
7.2 Change in Business........................................ 17
7.3 Mergers or Acquisitions................................... 17
7.4 Indebtedness.............................................. 17
7.5 Encumbrances.............................................. 17
7.6 Distributions............................................. 17
7.7 Investments............................................... 17
7.8 Transactions with Affiliates.............................. 17
7.9 Subordinated Debt......................................... 17
7.10 Inventory ................................................ 17
7.11 Compliance................................................ 18
8. EVENTS OF DEFAULT................................................ 18
8.1 Payment Default........................................... 18
8.2 Covenant Default.......................................... 18
8.3 Material Adverse Change................................... 18
8.4 Attachment................................................ 18
8.5 Insolvency................................................ 19
8.6 Other Agreements.......................................... 19
8.7 Subordinated Debt......................................... 19
8.8 Judgments................................................. 19
8.9 Misrepresentations........................................ 19
9. BANK'S RIGHTS AND REMEDIES ...................................... 19
9.1 Rights and Remedies....................................... 19
9.2 Power of Attorney......................................... 20
9.3 Accounts Collection....................................... 20
9.4 Bank Expenses............................................. 21
9.5 Bank's Liability for Collateral........................... 21
9.6 Remedies Cumulative....................................... 21
9.7 Demand; Protest........................................... 21
10. NOTICES.......................................................... 21
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER ...................... 22
12. GENERAL PROVISIONS .............................................. 22
12.1 Successors and Assigns.................................... 22
12.2 Indemnification........................................... 22
12.3 Time of Essence........................................... 22
12.4 Severability of Provisions................................ 22
12.5 Amendments in Writing, Integration........................ 22
12.6 Counterparts.............................................. 23
12.7 Survival.................................................. 23
12.8 Confidentiality........................................... 23
12.9 Mandatory Prepayment...................................... 23
</TABLE>
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<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of September 18,1996,
by and between SILICON VALLEY BANK ("Bank") and EVOLVING SYSTEMS, INC.
("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions As used in this Agreement, the following terms shall
-----------
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means cash advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents (including fees and expenses
of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
1
<PAGE>
"Committed Line" means Seven Million Dollars ($7,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable Upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt and interest accrued thereon.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
--------
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon sixty (60) days' notification thereof to
Borrower in accordance with the provisions hereof. Unless otherwise agreed to by
Bank, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
2
<PAGE>
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-
five percent (25%) of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank, provided that
the concentration limit shall be forty percent (40%) for each of AT&T, Lucent,
Lockheed Martin, GTE, Sprint and Bell-South.
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank reasonably
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank reasonably determines
after reasonable inquiry and reasonable consultation with Borrower to be
doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor does not have its principal place of business in the United
States or Canada and that are: (1) covered by credit insurance in form and
amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit in favor of Bank as beneficiary, in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank; or (3) that
Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended,.or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
3
<PAGE>
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower in connection with this Agreement, and any other
agreement entered into between Borrower and Bank in connection with this
Agreement, all as amended or extended from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the fourth anniversary of the date of this
Agreement.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
4
<PAGE>
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
(e) Other Indebtedness of Borrower, not exceeding One Hundred
Thousand Dollars ($100,000) in the aggregate outstanding at any time;
(f) Contingent obligations of Borrower consisting of guarantees
(and other credit support) of the obligations of vendors and suppliers of
Borrower in respect of transactions entered into in the ordinary course of
business;
(g) Indebtedness with respect to capital lease obligations and
Indebtedness secured by Permitted Liens; and
(h) Extensions, renewals, refundings, refinancings,
modifications, amendments and restatements of any of the items of Permitted
Indebtedness (a) through (g) above, provided, that the principal amount thereof
--------
is not increased or the terms thereof are not modified to impose more burdensome
terms upon Borrower.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank
(c) Extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business;
(d) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
(e) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(f) Investments consisting of (i) compensation of employees,
officers and directors of Borrower so long as the Board or executive officers of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower
not to exceed in the aggregate One Hundred Thousand Dollars ($100,000), (iv)
other loans to officers and employees approved by the Board of Directors;
(g) Other Investments aggregating not in excess of Fifty Thousand
Dollars ($50,000) at any time.
"Permitted Liens" means the following:
5
<PAGE>
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
--------
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens securing capital lease obligations on assets subject
to such capital leases;
(e) Liens arising from judgments, decrees or attachments to the
extent and only so long as such judgment, decree or attachment has not caused or
resulted in an Event of Default;
(f) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties in connection with the
importation of goods;
(g) Liens not prior to the Lien of Bank arising solely by virtue
of any statutory or common law provision relating to banker's liens, rights of
setoff or similar rights and remedies as to deposit accounts or other funds
maintained with a creditor depository institution;
(h) Liens, not otherwise permitted, which Liens do not in the
aggregate exceed Fifty Thousand Dollars ($50,000) at any time;
(i) Liens securing Permitted Indebtedness; and
(j) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c) and (i) above, provided that any extension, renewal or
---------
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer, the Chief Operating Officer and the Controller of
Borrower or such other person or
6
<PAGE>
persons expressly authorized by Borrower if designated in the Corporate
Resolutions to Borrower executed herewith.
"Revolving Facility" means the facility under which Borrower may
request Bank to issue cash advances, as specified in Section 2.1 hereof.
"Revolving Maturity Date" means the day before the first
anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (i) the sum of any amounts attributable
-----
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
---
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Advances. Subject to and upon the terms and conditions of this
---------
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the lesser of the Committed Line minus the face amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) or the Borrowing Base minus the face amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit). For purposes of
this Agreement, "Borrowing Base" shall mean an amount equal to eighty percent
(80%) of Eligible Accounts. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time prior to the Revolving Maturity Date.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer, or without
instructions if in
7
<PAGE>
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
The Revolving Facility shall terminate on the Revolving Maturity Date, at
which time all Advances under this Section 2.1 shall be immediately due and
payable.
2.1.1 Letters of Credit.
------------------
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit for the
account of Borrower in an aggregate face amount not to exceed (i) the lesser of
the Committed Line or the Borrowing Base minus (ii) the then outstanding
principal balance of the Advances provided that the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit) shall not
in any case exceed One Million Dollars ($1,000,000). Each such letter of credit
shall have an expiry date no later than 180 days after the Revolving Maturity
Date provided that Borrower's letter of credit reimbursement obligation shall be
secured by cash on terms acceptable to Bank at any time after the Revolving
Maturity Date if the term of this Agreement is not extended by Bank. All such
letters of credit shall be, in form and substance, acceptable to Bank in its
sole discretion and shall be subject to the terms and conditions of Bank's form
of application and letter of credit agreement. All amounts actually paid by Bank
in respect of a letter of credit shall, when paid, constitute an Advance under
this Agreement.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any letters of credit.
2.1.2 Letter of Credit Reimbursement; Reserve.
---------------------------------------
(a) Borrower may request that Bank issue a letter of
credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such letter of credit, Bank shall treat such demand as
an advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(b) Upon the issuance of any letter of credit payable in
a currency other than United States Dollars, Bank shall create a reserve under
the Committed Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to twenty percent (20%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Line shall be reduced by the amount of such reserve
for so long as such letter of credit remains outstanding.
2.1.3 Equipment Advances.
-------------------
(a) At any time from the date hereof through September
18,1997 (the "Equipment Availability Date"), Borrower may from time to time
request advances (each an "Equipment Advance" and, collectively, the "Equipment
Advances") from Bank in an aggregate
8
<PAGE>
principal amount of up to One Million Five Hundred Thousand Dollars
($1,500,000). The Equipment Advances shall be in addition to funds available
under the Committed Line. The initial Equipment Advance shall be One Million
Dollars ($1,000,000) and shall be used to repay in full certain indebtedness
owing to Merrill Lynch and to refinance existing Equipment. Such initial
Equipment Advance shall be repaid in thirty-six equal monthly installments of
principal, plus accrued interest, beginning October 17,1996. The entire
principal balance of such initial Equipment Advance shall be due and payable on
the third anniversary of the Closing Date. Subsequent Equipment Advances shall
be used to purchase Equipment approved from time to time by Bank and shall not
exceed one hundred percent (100%) of the cost of such Equipment, excluding
installation expense, freight discounts, warranty charges and taxes.
(b) Interest shall accrue from the date of each Equipment
Advance at the rate specified in Section 2.3(a), and shall be payable monthly on
the seventeenth day of each month for each month through the Equipment
Availability Date. The Equipment Advance or Equipment Advances that are
outstanding on the Equipment Availability Date will be payable monthly on the
seventeenth day of each month in thirty-six (36) equal installments of
principal, plus accrued interest, beginning on October 17,1997, and continuing
through the Maturity Date, when the entire principal amount and all unpaid
interest shall be due and payable.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1) Business
Day before the day on which the Equipment Advance is to be made. Such notice
shall be in substantially the form of Exhibit B. The notice shall be signed by a
---------
Responsible Officer and include a copy of the invoice for the Equipment to be
financed.
2.2 Overadvances. If, at any time or for any reason, the amount of
--------------
Obligations owed by Borrower to Bank pursuant to Section 2.1 and Section 2.1.1
of this Agreement is greater than the lesser of (i) the Committed Line or (ii)
the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount
of such excess.
2.3 Interest Rates, Payments, and Calculations.
-------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), any
-------------
Advances shall bear interest, on the average Daily Balance, at a rate equal to
three-quarters of one percent (0.75%) above the Prime Rate, provided the rate
shall be one-quarter of one percent (0.25%) above the Prime Rate upon Bank's
receipt of evidence that Borrower has been profitable for two (2) quarters,
beginning the quarter ending September 30, 1996. Except as set forth in Section
2.3(b), any Equipment Advances shall bear interest, on the average Daily
Balance, at a rate equal to one and one-quarter percent (1.25%) points above the
Prime Rate, provided the rate shall be three-quarters of one percent (0.75%)
above the Prime Rate upon Bank's receipt of evidence that Borrower has been
profitable for two (2) quarters, beginning the quarter ending September 30,
1996.
(b) Default Rate. All Obligations shall bear interest, after the
------------
occurrence and during the continuance of an Event of Default, at a rate equal to
five (5) percentage points above the interest rate applicable immediately prior
to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on
--------
the seventeenth calendar day of each month during the term hereof. Bank shall,
at its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Line, in which case those amounts shall thereafter accrue interest at the rate
then applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
9
<PAGE>
(d) Computation. In the event the Prime Rate is changed from
-----------
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
------------------
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to Forty Thousand
------------
Dollars ($40,000), which fee shall be due on the Closing Date and shall be fully
earned and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's customary
----------------------------------------
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts
provided that fees and expenses for each audit shall not exceed Two Thousand
Dollars ($2,000), and for each appraisal of Collateral and financial analysis
and examination of Borrower performed from time to time by Bank or its agents,
provided that Borrower shall not be responsible for more than Four Thousand
Dollars ($4,000) of fees under this subsection (b) in any twelve (12) month
period;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses
-------------
incurred through the Closing Date, including reasonable attorneys' fees and
expenses up to Four Thousand Dollars ($4,000), and, after the date hereof, all
Bank Expenses, including reasonable attorneys' fees and expenses, as and when
they become due.
2.6 Additional Costs. In case any change in any law, regulation,
----------------
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
10
<PAGE>
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower shall have the option to
pay off all amounts due under this Agreement or to pay to Bank the amount of
such increase in cost, reduction in income or additional expense as and when
such cost, reduction or expense is incurred or determined, upon presentation by
Bank of a statement of the amount and setting forth Bank's calculation thereof,
all in reasonable detail, which statement shall be deemed true and correct
absent manifest error. Notwithstanding anything to the contrary contained in
this Section 2.6, Borrower shall not be obligated to indemnify or reimburse Bank
for any reduction in Bank's rate of return on its capital as a consequence of
Bank's obligations hereunder which arose or was incurred during or is otherwise
attributable to any period of time more than 180 days prior to the date on which
Bank delivered its written statement for indemnification or reimbursement for
such reduction.
2.7 Term. This Agreement shall become effective on the Closing Date
----
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank
---------------------------------------
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in for substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a collateral assignment and patent mortgage;
(d) financing statement (Form UCC-1);
(e) subordination agreements from certain Persons;
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof; and
(h) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
11
<PAGE>
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. Except as otherwise disclosed to
Bank in writing, the making of each Advance shall be deemed to be a
representation and warranty by Borrower on the date of such Advance as to the
accuracy of the facts referred to in this Section 3.2(b), provided that nothing
in the foregoing shall be construed to release the Borrower from any obligation
to immediately notify Bank of any disclosures at any time.
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank
--------------------------
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall
---------------------------------------------
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
----------------
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
----------------------------------
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified and where failure to qualify would
have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default is reasonably likely to have a Material Adverse Effect.
5.3 No Prior Encumbrances. Other than as disclosed on the Schedule,
---------------------
Borrower has good and indefeasible title to the Collateral, free and clear of
Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
---------------------------
existing obligations. The property or services giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance
12
<PAGE>
by the account debtor or as otherwise instructed by the account debtor. Borrower
has not received notice of actual or imminent Insolvency Proceeding of any
account debtor that is included in any Borrowing Base Certificate as an Eligible
Account.
5.5 Merchantable Inventory. All Inventory is in all material
----------------------
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except as disclosed in
----------------------------------------
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
----------
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision is reasonably
likely to have a Material Adverse Effect or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral. Borrower does
not have knowledge of any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
13
<PAGE>
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
-----
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock, partnership
------------
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary has obtained
-------------------
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other statement
---------------
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which is reasonably likely to
have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which is reasonably likely to have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 Financial Statements; Reports Certificates. Borrower shall
------------------------------------------
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month, a company prepared consolidated balance sheet
and income statement covering Borrower's consolidated operations during such
period, certified by a Responsible Officer; (b) as soon as available, but in any
event within ninety (90) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank; (c) within ten (10) days upon becoming available, copies of
all material financial statements, financial reports and financial notices sent
or made available generally by Borrower to its security holders or to any
holders of Subordinated Debt (excluding packages for Board of Directors
meetings) and all reports on Form 10-K and 10-Q filed with the Securities and
Exchange Commission; (d) promptly upon receipt of notice thereof, a report of
any legal actions filed or threatened in writing against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of One Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
14
<PAGE>
Within twenty (20) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
-------
accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
--------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
------------------
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
-----
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and other property
hazards and risks for which insurance is customarily obtained in Borrower's
industry, and in such amounts, as ordinarily insured against by other owners in
similar businesses conducted in the locations where Borrower's business is
conducted on the date hereof. Borrower shall also maintain insurance relating to
Borrower's ownership and use of the Collateral in amounts and of a type that are
customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
15
<PAGE>
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
calendar month, a ratio of Quick Assets (excluding unbilled accounts receivable)
to Current Liabilities of at least 0.95 to 1.0.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last day
--------------------
of each calendar month, a ratio of Total Liabilities less Subordinated Debt to
Tangible Net Worth plus Subordinated Debt of not more than 1.5 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the last day
------------------
of each calendar month, a Tangible Net Worth of not less than Eleven Million
Dollars ($11,000,000) plus seventy five percent (75%) of the net proceeds
received by Borrower after the Closing Date from the sale of its equity
securities.
6.11 Profitability. Borrower shall be Profitable for each fiscal
-------------
quarter, except Borrower may suffer a loss not to exceed Five Hundred Thousand
Dollars ($500,000) in each of two (2) fiscal quarters in any fiscal year.
6.12 Debt Service Coverage. Borrower shall maintain a Debt Service
---------------------
Coverage of at least 1.25 to 1.00 for the fiscal quarter ending on September 30,
1996, and at least 1.35 to 1.00 for the fiscal quarter ending December 31, 1996.
Borrower shall maintain, as of the last day of each fiscal quarter thereafter, a
Debt Service Coverage of at least 1.50 to 1.00. "Debt Service Coverage" means,
as measured quarterly as of the last day of each fiscal quarter of Borrower, on
a consolidated basis determined in accordance with GAAP, the ratio of (a) an
amount equal to the sum of (i) net income plus (ii) depreciation, amortization
----
of intangible assets and other non-cash charges to income and forgiveness of
interest on any Subordinated Debt to (b) an amount equal to the sum of all
scheduled repayments for next 12 months (or month, as applicable) and mandatory
prepayments of principal on account of long-term debt.
6.13 Registration of Intellectual Property Rights. Borrower shall
--------------------------------------------
register or cause to be registered (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on Exhibits A,
B and C to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by Borrower in connection with this Agreement within ninety
(90) days of the date of this Agreement. Borrower shall register or cause to be
registered with the United States Patent and Trademark Office or the United
States Copyright Office, as applicable, those additional intellectual property
rights developed or acquired by Borrower from time to time in connection with
any product projected to generate ten percent (10%) or more of Borrower's
revenue within forty-five (45) days after shipment of such product, including
material revisions or additions to the intellectual property listed on such
Exhibits A, B and C. Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request to
perfect Bank's security interest in such intellectual property rights. Bank
acknowledges that Borrower currently does not own any registered copyrights or
patents and that Borrower is not obligated to obtain registered copyrights or
patents for any presently existing intellectual property rights except as
provided in this Section 6.13.
6.14 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:
16
<PAGE>
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
------------
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries within certain
geographic regions; (iv) Transfers of worn-out or obsolete Equipment; (v)
assignments or subleases of real property; (vi) assignments of intellectual
property rights in connection with works for hire and other contractual
engagements in which the customer acquires the rights to intellectual property
produced by Borrower; or (vii) other Transfers not in excess of One Hundred
Thousand Dollars ($100,000) per fiscal year in the aggregate during the term of
this Agreement.
7.2 Change in Business. Other than as described on the Schedule,
------------------
engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a material change in Borrower's ownership. Borrower will not, without
thirty (30) days prior written notification to Bank, relocate its chief
executive office.
7.3 Mergers or Acquisitions. Other than as described on the
-----------------------
Schedule, merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with or into any other business organization, or acquire, or permit
any of its Subsidiaries to acquire, all or substantially all of the capital
stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock; provided, that Borrower may redeem or repurchase its securities in an
--------
amount in any fiscal year not exceeding Two Hundred Thousand Dollars ($200,000)
in connection with any agreement between Borrower and any officer, director or
employee of Borrower wherein Borrower is obligated or entitled to repurchase
from such officer, director or employee shares of equity securities of Borrower
upon such person's termination of employment or services or other event.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
----------------------------
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may
17
<PAGE>
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10 hereof and such other locations of which Borrower gives Bank
prior written notice and as to which Borrower signs and files a financing
statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
----------
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the principal of, or
---------------
any interest on, any Advances when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
----------------
under Sections 6.3, 6.7, 6.8, 6.9, 6.10, 6.11 or 6.12 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such obligation, term or other term, provision,
condition, covenant or agreement that can be cured, has failed to cure such
default within ten business (10) days after Borrower receives notice thereof or
a Responsible Officer becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) business day period or
cannot after diligent attempts by Borrower be cured within such ten business
(10) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default "provided that no Advances will be required to be
made during such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
-----------------------
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an
18
<PAGE>
Event of Default where such action or event is stayed or an adequate bond has
been posted pending a good faith contest by Borrower (provided that no Advances
will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within sixty (60) days (provided
that no Advances will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
----------------
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that is reasonably likely to have a Material Adverse
Effect; provided that a default under any agreement for any Indebtedness that
has been cured or waived by the holder of such Indebtedness within thirty (30)
days of the occurrence thereof shall not be an Event of Default hereunder;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Seventy Five
Thousand Dollars ($75,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If, as of the date or period of time for
------------------
which such representation or warranty is made, any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may, at its election, without demand
and with prompt subsequent notice do any one or more of the following, all of
----------
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
19
<PAGE>
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank (provided Bank will give Borrower prompt notice that it
has set off after taking such action);
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral, and Bank shall have a right, solely pursuant to the
provisions of this Section 9.1, to use, without charge, Borrower's labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section 9.1, Borrower's rights under all
licenses and all franchise agreements shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account; Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
<PAGE>
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
-------------
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Facility as Bank deems necessary to protect Bank from the exposure
created by such failure; or (c) obtain and maintain insurance policies of the
type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liabilitv for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
Notwithstanding the foregoing, Bank shall be responsible for its own gross
negligence or willful misconduct.
9.6 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Evolving Systems, Inc.
8000 E. Maplewood Ave.
Englewood, CO 80111
Attn: Douglas Kelsall
FAX: (303) 689-1399
21
<PAGE>
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Greg Becker
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the non-exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLATM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLATMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that, other than to the surviving entity in the
-----------------
reincorporation described on the Schedule, neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
----------------------------------
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations
22
<PAGE>
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
--------
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information Bank
---------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
(which degree of care shall in no event be less than reasonable care for the
type of information in question) except that disclosure of such information may
be made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank, and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder; provided with respect to clause (v) that Bank shall act in all cases
in good faith and in a commercially reasonable manner. Confidential information
hereunder shall not include information that either: (a) is in the public domain
or in the knowledge or possession of Bank when disclosed to Bank, or becomes
part of the public domain after disclosure to Bank through no fault of Bank; or
(b) is disclosed to Bank by a third party, provided Bank does not have actual
knowledge that such third party is prohibited from disclosing such information.
12.9 Mandatory Prepayment. All Obligations owing to Bank shall
--------------------
immediately be due and payable upon the occurrence of any one or more of the
following: (i) the closing of an initial public offering of Borrower's common
stock, or (ii) a merger in which Borrower's shareholders holding voting rights
immediately prior to the merger do not hold greater than fifty percent (50%) of
the voting rights after the merger, or (iii) sale of all or substantially all of
Borrower's assets.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
EVOLVING SYSTEMS, INC.
By: ___________________________________
Title: ________________________________
SILICON VALLEY BANK
By: ___________________________________
Title: ________________________________
24
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
25
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M. PACIFIC TIME
TO: CENTRAL CLIENT SERVICE DIVISION DATE: __________________
FAX#: (408) 496-2426 TIME: __________________
FROM: Evolving Systems, Inc.
------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:___________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:___________________________________________________
PHONE NUMBER:___________________________________________________________
FROM ACCOUNT #____________________ TO ACCOUNT #______________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- ----------------------------------------------------------------------------
PRINCIPAL INCREASE (ADVANCE) $_________________________________
PRINCIPAL PAYMENT (ONLY) $_________________________________
INTEREST PAYMENT (ONLY) $_________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_________________________________
OTHER INSTRUCTIONS:_____________________________________________________
________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
26
<PAGE>
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
__________________________________________ ________________________________
Authorized Requester Phone #
__________________________________________ ________________________________
Received By (Bank) Phone #
_______________________________
Authorized Signature (Bank)
27
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: Evolving Systems, Inc. Lender: Silicon Valley Bank
Commitment Account; $7,000,000
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ______ $______________
2. Additions (please explain on reverse) $______________
3. TOTAL ACCOUNTS RECEIVABLE $______________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $________________
5. Balance of 50% over 90 day accounts $________________
6. Concentration Limits $________________
7. Foreign Accounts $________________
8. Governmental Accounts $________________
9. Contra Accounts $________________
10. Promotion or Demo Accounts $________________
11. Intercompany/Employee Accounts $________________
12. Other (please explain on reverse) $________________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $______________
14. Eligible Accounts (#3 minus #13) $______________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $______________
BALANCES
16. Maximum Loan Amount $______________
17. Total Funds Available [Lesser of #16 or #15] $______________
18. Present balance owing on Line of Credit $______________
19. RESERVE POSITION (#17 minus #18 and #19) $______________
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS: BANK USE ONLY
-------------
Rec'd By:_________
____________________________________
Auth. Signer
Date:_____________
By: ________________________________
Authorized Signer
Verified__________
Auth. Signer
Date:_____________
28
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: EVOLVING SYSTEMS, INC.
The undersigned authorized officer of Evolving Systems, Inc. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the"Agreement"), (i) Borrower is
in complete compliance for the period ending _________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- --------------------------------------------------------------------------------
<S> <C> <C>
Monthly financial statements Monthly within30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 20 days Yes No
A/R Audit Initial and Semi-Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Quick Ratio' 0.95:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $11,000,000 $______ Yes No
Maximum Debt/Tangible Net Worth 1.5:1.0 _____:1.0 Yes No
Debt Service Coverage 1.5:1.0 _____:1.0 Yes No
Profitability: Quarterly $1 $____ Yes No
</TABLE>
/1/ Excludes unbilled A/R.
/2/ Plus 75% of equity.
/3/ 1.25 :1.0 for 9/30/96; 1.35:1.0 for 12/31/96.
/4/ Two quarterly losses of up to $500,000 per quarter permitted.
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Received by:__________________
Sincerely, Authorized Signer
Date:_________________________
____________________________________________
SIGNATURE Verified:_____________________
____________________________________________
Authorized Signer
____________________________________________
TITLE Date:________________________
____________________________________________
DATE Compliance Status: Yes No
29
<PAGE>
SCHEDULE OF EXCEPTIONS
----------------------
LOAN AND SECURITY AGREEMENT
---------------------------
DATED SEPTEMBER 13, 1996 BETWEEN
--------------------------------
SILICON VALLEY BANK AND EVOLVING SYSTEMS. INC.
----------------------------------------------
Existing Indebtedness
Disclosed pursuant to subpart (b) of the definition of "Permitted Indebtedness"
contained in Section 1.1 of the Loan Agreement.
A. Credit and Loan Agreements
1. Merrill Lynch Business Financial Services Inc. Term WCMA Loan and Security
Agreement No. 9404340302, dated as of March 28, 1995. Outstanding principal
balance
$711,666 as of July 31, 1996. This loan will be paid off with the proceeds
of the Silicon
equipment loan.
2. Merrill Lynch Business Financial Services, Inc. WCMA Note, Loan and
Security Agreement No. 431-07K36, dated October 26, 1992. Outstanding
principal balance $1,649,370 as of July 31, 1996. This loan will be paid
off at closing of the Silicon line. Borrower may borrow up to the lesser of
the borrowing base or $8,000,000 under this facility.
The following letters of credit have been issued under the Merril1 Lynch
credit facilities:
1. Irrevocable Standby Letter of Credit No. C7269677 dated March 1, 1995
issued by Bank of America Illinois in the amount of $246,323.00 for
the benefit of One Southgate Corporation at the request of Evolving
Systems, Inc. as applicant.
2. Irrevocable Standby Letter of Credit No. C7262868 dated November 18,
1994 issued by Bank of America Illinois in the amount of $500,000.00
for the benefit of Meridian Associates West at the request of Evolving
Systems, Inc. as applicant.
These letters of credit will be replaced by letters of credit issued under
the Silicon line.
3. Norwest Bank Colorado, National Association Loan Agreement, dated May 20,
1994. Outstanding principal balance $102,635 as of July 31, 1996.
4. Advance of tenant finish costs pursuant to the terms of the Sublease
Agreement dated March 29, 1996 between Evolving Systems, Inc., as landlord,
and IntelCom Group (U.S.A.), Inc., as subtenant for certain premises in the
building located at 9777 Pyramid Court, Englewood, Colorado. The original
amount advanced by ICG to pay for part of the costs of completing the
tenant finish for the subleased premises was $850,000 (the "TF Deposit").
Over the term of the Sublease, the TF Deposit accrues interest at the rate
of
30
<PAGE>
8% per annum. At the conclusion of the term of the Sublease Agreement,
which is scheduled for December 31, 1997, ESI is obligated to repay to ICG
the TF Deposit, plus accrued interest, less (i) ICG's amortized share of
the tenant finish costs for the Subleased Premises (based on a 72-month
expected life for such tenant finish) and (ii) ICG's share of the operating
expenses for the Subleased Premises over the term of the Sublease
Agreement. Evolving Systems and ICG are in the process of negotiating an
amendment to the Sublease Agreement, to reflect the parties' agreement
regarding the repayment of the $850,000 as described above.
5. Senior Subordinated Notes in the aggregate principal amount of $6,500,000,
dated May 31, 1996, payable to Morgan Stanley Venture Investors, L.P.,
Morgan Stanley Venture Capital Fund II, C.V., Morgan Stanley Venture
Capital II, L.P., Information Associates, L.P., and Information Associates,
C.V.
6. Owner Subordinated Notes in the aggregate outstanding principal amount of
$5,183,625, payable to Tim Drummond, John Elmgren, Harry Fair, Wes Folsom,
George Hallenbeck, David J. Molny, and Wayne Pulick.
7. Premium Finance Agreement with AICCO Inc. to finance premium payments for
Borrower's property and liability insurance. The outstanding principal
balance of the loan is $115,822.53 payable in nine monthly installments of
$13,203.27
8. Premium Finance Agreement with AICCO Inc. to finance premium payments for
Borrower's directors and officers liability insurance. The outstanding
principal balance of the loan is $46,691.20 payable in nine monthly
installments of $5,358.34 (including interest at an annual percentage rate
of 7.82%).
B. Capital Equipment Lease Agreements:
1. AT&T Credit Corporation Master Equipment Lease Agreement No. J017742, dated
December 16, 1994. This equipment lease is for telephone switches and
related telephone and data network equipment. The outstanding principal
balance of equipment financed under this lease was $1,754,350 as of July
31, 1996.
2. Anixer, Inc. Master Lease Agreement No. 0701 dated June 12, 1995. This
equipment lease is for telephone and data network cabling and related
equipment installed in leashold property. The outstanding balance of
equipment financed under this lease was $551,651 as of July 31, 1996.
3. Colorado National Leasing, Inc. Equipment Lease No. 272900, dated November
30, 1994. This equipment lease is for office furniture and computer
equipment and related software.
The outstanding principle balance of equipment financed under this lease
was $2,787,191 as of July 31, 1996.
2
<PAGE>
4. Norwest Equipment Finance, Inc. Master Lease, dated February 23, 1993. This
equipment lease is for computer equipment and related software. The
outstanding principal balance of equipment financed under this lease was
$98,431 as of July 31, 1996.
5. IBM Credit Corporation Installment Payment Master Agreement No. HQ12291,
dated March 2, 1992. This equipment lease is for computer equipment and
related software. The outstanding principal balance of equipment financed
under this lease was $882,305 as of July 31, 1996.
6. Bankers Leasing Associates Master Lease Agreement dated November 17, 1995.
This equipment lease is for telephone and data network cabling and related
equipment installed in leasehold property. The outstanding principal
balance of equipment financed under this lease was $39,078 as of July 31,
1996.
7. Colorado Business Leasing Inc. Equipment Lease Agreement No. 000006-100
dated July 11, 1996. This equipment lease is for furniture and other
equipment. The outstanding principal balance financed under this lease is
$44,000 as of August 31, 1996. Borrower may borrow up to $250,000 under
this facility.
C. Operating Leases
1. Seven (7) Order Agreements with Xerox Corporation for an aggregate of seven
(7) copier machines. The current aggregate monthly payment under these
Order Agreements is $6,599.
2. Two (2) Equipment Leases with Canon Financial Services for an aggregate of
three (3) Canon copier machines. The current aggregate monthly payments
under these Equipment Leases is $1,751.
3. Alco Capital Equipment Lease for one (1) Canon Copier. The current monthly
payment under this Equipment Lease is $516.
4. Sun Microsystems Finance Master Lease Agreement for various computer
equipment including a SPARC classic workstation and a storage array and
adaptor. The currently aggregate monthly payment under this Lease Agreement
is $16,801.
5. Two (2) General Electric Capital Corporation Equipment Lease Agreements for
an aggregate of 5 facsimile machines. The current aggregate monthly payment
under this Equipment Lease is $762.
6. Ford Motor Credit Corporation Net (Closed End) Lease dated February 22,
1996 for a 1994 Ford E250 Van. The current monthly payment under this Lease
is $433.
3
<PAGE>
7. Technology Credit Corporation Master Lease Agreement, dated March 11, 1995
for various computer equipment and related software. The current aggregate
monthly payment under this Lease Agreement is $37,718.
8. Hewlett-Packard Company Financing Agreement No. 4124-29759, dated July 1,
1994, Schedules 1-14 and 16-18 (as of December 31, 1995) for various
computer equipment and related software. The current aggregate monthly
payment under this Financing Agreement is $40,758.
D. Real Estate Leases
1. Premises Lease for 6285 Lookout Road, Suite 2000, Boulder, CO: Lease
Agreement dated April 1, 1993 (the "Original Lease") between Neodata
Services, Inc. ("Neodata"), as tenant, and Travelers Insurance Company
("Travelers") as Landlord. The Original Lease was supplemented by a Work
Letter Agreement dated April 6, 1993 between Neodata and Travelers, and
amended on November 29, 1993, by a First Amendment to Lease and Settlement
Agreement entered into between Neodata and Travelers and an Agreement Re:
Commencement and Expiration Dates entered into between Neodata and
Travelers (the "Neodata Amendments"). On December 7, 1994, KC Gunbarrel
Place II LLC, a Colorado limited liability company, succeeded Travelers as
Landlord under the Lease. Pursuant to the terms of an Assignment of Lease
and Consent of Landlord dated April 7, 1995, Neodata assigned its interest
in the Original Lease to ESI, and Landlord consented to the assignment.
Thereafter, ESI and Landlord entered into a Second Amendment to Lease dated
as of April 7, 1995. On April 8, 1996, ESI entered into a Sublease
Agreement with SCC, Inc., pursuant to which ESI subleased to SCC
approximately 50% of the leased premises at 6285 Lookout Road.
2. Premises Lease for 9777 Pyramid Court, Englewood, CO ("Meridian Property"):
Office Building Lease Agreement dated March 30, 1995 between the Company as
tenant and Meridian Associates West, a Colorado general partnership as
Landlord. On March 29, 1996, ESI entered into a Sublease Agreement with
IntelCom Group (U.S.A.), Inc., pursuant to which ESI subleased to SCC
approximately 38% of the leased premises at 9777 Pyramid Court.
3. Premises Lease for 8000 E. Maplewood Ave., Englewood, CO ("OP6 Property"):
Office Building Lease dated September 11, 1992, between the Company as
tenant and CBIF VI, NO. 1, Co., a Colorado limited partnership, as
landlord, as amended by a First Amendment to Office Lease dated March 4,
1993, a Second Amendment to Office Lease dated November 15, 1993, and a
Waiver of Right of First Refusal dated May 5, 1993. On or about January 24,
1994, LAFP Denver, Inc. succeeded CBIF as landlord under the lease.
4. Premises Lease for 6892 S. Yosemite, Englewood, CO ("Southgate Property"):
One Southgate Office Building Lease dated February 16, 1995 between the
Company as tenant
4
<PAGE>
and One Southgate Corp., as landlord, as amended and supplemented by Estoppel
and Commencement Date Certificate dated March 23, 1995.
E. Benefit Plans
1. Group Medical Expense Insurance (Policies 2173257-03 and 2173257-04) and
Group Dental Insurance (Policy 2173257-01) included in Group Insurance
Account No. 2173257 with Connecticut General Life Insurance Company dba
CIGNA HealthCare, with an effective date of January 1, 1996, pursuant to
which the Company is obligated to pay a monthly administrative charge in
the approximate amount of $20,000 (based upon the number of employees
enrolled) plus a payment on our maximum claim liability of approximately
$62,000 per month (also based upon the number of employees enrolled).
2. The Company's outstanding obligation to fund the Company's 1995
contributions in the aggregate amount of $703,983, and to fund the
Company's current and future contributions in accordance with terms of the
Evolving Systems, Inc. Pension Plan and Trust Agreement effective May 1,
1996. This payment was made on September 15, 1996.
3. The Company's outstanding obligation to fund the Company's 1995
contributions in the aggregate amount of $586,257, and to fund future
contributions in accordance with the terms of the Evolving Systems, Inc.
401(k) Plan and Trust Agreement effective May 1, 1996. (The Company is not
contractually obligated to fund future contributions.) This payment was
made on September 15, 1996.
F. Construction Contracts
1. Contract between Evolving Systems, Inc. and MacGregor/Wathen Construction
Co., dated April 4, 1996, as amended, in the aggregate principal amount of
$936,631.31 for 2nd Floor, Wings A & C tenant finish at the Meridian
Property. Outstanding balance is $55,772.03 as of September 13, 1996.
2. Contract between Evolving Systems, Inc. and MacGregor/Wathen Construction
Co., dated April 11, 1996, as amended, in the principal amount of
$554,504.73 for 1st Floor, Wing A tenant finish at the Meridian Property.
Outstanding balance is $135,519.73 as of September 13, 1996.
EXISTING INVESTMENTS
Disclosed pursuant to subpart (a) of the definition of "Permitted Investments"
contained in Section 1.1 of the Loan Agreement.
None.
5
<PAGE>
EXISTING LIENS
Disclosed pursuant to subpart (a) of the definition of "Permitted Liens"
contained in Section 1.1 of the Loan Agreement.
A. Credit and Loan Agreements
The Company is a party to the following loan agreements, pursuant to which
the Company has granted the lender(s) security interests in some or all of
the assets of the Company:
1. Merrill Lynch Business Financial Services Inc. Term WCMA Loan and Security
Agreement No. 9404340302, dated as of March 28, 1995. This loan is secured
by a lien on the accounts receivable of the Company as well as a lien on
all of the assets of the Company, which lien is subordinate to any purchase
money security interests as well as security interests in any equipment
and/or fixtures that are subject to a lease agreement.
2. Merrill Lynch Business Financial Services, Inc. WCMA Note, Loan and
Security Agreement No. 431-07K36, dated October 26, 1992. This loan is
secured by a lien on the accounts receivable of the Company as well as a
lien on all of the assets of the Company, which lien is subordinate to any
purchase money security interests as well as security interests in any
equipment and/or fixtures that are subject to a lease agreement.
3. Norwest Bank Colorado, National Association Loan Agreement, dated May 20,
1994. This loan is secured by a lien on all assets purchased with the
proceeds of the loan.
SCHEDULE 4.1 (GRANT OF SECURITY INTEREST)
The representation in Section 4.1 regarding the creation of a valid first
priority lien in the Collateral is conditioned on the assumption that,
concurrent with the Closing, Bank takes all of the actions legally necessary
(including, without limitation, all filings) to perfect its security interest in
Collateral.
The security interest referred to in Section 4.1 of the Loan Agreement is
subordinate to the following:
1. All Existing Liens listed above.
2. All liens of the nature described in subparts (b), (c), and (d) of the
definition of "Permitted Liens" set forth in Section 1.1 of the Loan Agreement.
3. The rights of IntelCom Group (U.S.A.), Inc. in and to the furniture and
equipment leased to ICG pursuant to that certain Personal Property Lease
Agreement dated as of March 29, 1996 between Evolving Systems, Inc. and ICG. The
furniture and equipment was leased to ICG in connection with its sublease of
space in the 9777 Pyramid Court building leased
6
<PAGE>
by Evolving Systems, and such furniture and equipment may only be used in that
subleased space.
SCHEDULE 5.3 (PRIOR ENCUMBRANCES)
1. Borrower possesses certain real and personal property pursuant to the terms
of real estate, operating and capital leases. Borrower's representation and
warranty under Section 5.3 with respect to this property is limited to
Borrower's leasehold interest in the property, and is subject to the
subleases described in the Existing Indebtedness section of this Schedule.
2. Borrower obtained registered trademarks on the letters "ESI" and its
original logo. These trademarks do not guaranty Borrower's exclusive rights
to the marks. It is possible that another party has common law rights to
the marks that precede the rights of Borrow. Borrower's executive officers
are not presently aware of any party claiming a prior interest in the
marks.
SCHEDULE 5.6 (NAME)
None.
SCHEDULE 5.7 (LITIGATION)
Cable Placement Services, Inc. ("CPSI"), a former customer, filed a complaint in
the District Court for the City and County of Denver in December of 1995. The
suit alleged breach of contract, breach of warranty, negligence, fraud and
negligent misrepresentation in connection with a $206,000 outbound dialer
software system delivered by the Company. CPSI seeks an unspecified amount of
direct and consequential damages in the suit.
The Company's errors and omissions insurance carrier accepted defense of the
claims, subject to a reservation of rights as to the negligence, fraud and
negligent misrepresentation claims. The insurance carrier retained counsel to
represent the Company. The errors and omissions policy and an umbrella policy
provide up to $5 million in coverage for applicable claims. The Company filed an
answer denying all claims.
In April of this year, the District Court dismissed CPSI's fraud and negligent
misrepresentation claims with prejudice. It dismissed the negligence claim
without prejudice. The Company has fled a motion to eliminate CPSI's request for
consequential damages and limiting the dollar amount of CPSI's claim to the
contractual amount of $206,000.00. The court has delayed ruling on this motion
until the completion of discovery.
7
<PAGE>
The court set a trial for March of 1997. However, CPSI amended its complaint in
September of 1996 to add Aspect Telecommunications, Inc. as a defendant to the
action. This amendment will likely delay the trial date.
SCHEDULE 7.2 (CHANGE IN BUSINESS)
ESI is planning to discontinue its in house wiring services group. The wiring
services group was responsible for installing voice and data wire in ESI
facilities. Because ESI has no immediate plans to expand its facilities, the
wiring group was no longer needed.
It appears that approximately a half dozen employees in the group are going to
be hired by a new organization being formed by Harry Fair, a director and
shareholder of ESI. Mr. Fair also plans to hire three or four other ESI
administrative employees for the business. ESI will sell tools and supplies to
Mr. Fair related to the wiring services to Mr. Fair's organization. The tools
have a current value of approximately $50,000.
ESI will also enter into a services agreement with Mr. Fair's entity for the
provision of wiring services to ESI on an as-needed basis.
SCHEDULE 7.3 (MERGERS OR ACQUISITIONS)
None.
SCHEDULE 12.1 (SUCCESSORS AND ASSIGNS)
None.
8
<PAGE>
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment No. 1 to Loan and Security Agreement (the "Amendment") is
entered into as of April 28, 1997, by and between Silicon Valley Bank ("Bank")
and Evolving Systems, Inc. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of September 18, 1996, (the "Agreement"). The parties desire to amend
the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Section 2.1.3(a) of the Agreement is amended in its entirety to read as
follows:
"At any time from the date hereof through September 18, 1997 (the "Equipment
Availability Date"), Borrower may from time to time request advances (each an
"Equipment Advance" and, collectively, the "Equipment Advances") from Bank in an
aggregate principal amount of up to Two Million Five Hundred Thousand Dollars
($2,500,000). The Equipment Advances shall be in addition to funds available
under the Committed Line. The initial Equipment Advance shall be One Million
Dollars ($1,000,000) and shall be used to repay in full certain indebtedness
owing to Merrill Lynch and to refinance existing Equipment. Such initial
Equipment Advance shall be repaid in thirty-six equal monthly installments of
principal, plus accrued interest, beginning October 17, 1996. The entire
principal balance of such initial Equipment Advance shall be due and payable on
the third anniversary of the Closing Date. Borrower may request additional
Equipment Advances, provided that on the date of each Equipment Advance,
Borrower shall provide invoices and other documents as requested by Bank, in
form and content satisfactory to Bank, demonstrating that the requested
Equipment Advances (A) shall be used to finance or refinance, as the case may
be, Equipment, approved from time to time by Bank, and (B) shall not exceed one
hundred percent (100%) of the cost of such Equipment, excluding any and all
installation, freight or warranty expenses or sales taxes, and (C) that no more
than $250,000 of the aggregate Equipment Advances may finance soft costs, such
as costs for the licensing of software or leasehold improvements."
2. Conditions Precedent to Effectiveness. The effectiveness of this
---------------------------------------
Amendment is subject to the further conditions precedent that:
(a) Borrower shall have paid to Bank an amendment fee in an amount of Five
Thousand Dollars ($5,000), payable upon the date hereof, plus all Bank Expenses
incurred in connection with the preparation of this Amendment.
(b) Bank shall have received, in form and substance satisfactory to Bank:
(i) proof, in form and substance satisfactory to Bank, that as of
March 31, 1997, Borrower is in compliance with Sections 6.8,
6.9, 6.10, 6.11, and 6.12 of the Agreement;
<PAGE>
(ii) a certificate of the secretary of Borrower with respect to
incumbency and resolutions authorizing the execution, delivery
and performance of this Amendment, and confirming that copies
of the Articles of Incorporation and ByLaws previously
delivered to Bank have not been amended and remain in full
force and effect; and
(iii) a copy of this Amendment duly executed by Borrower.
3. Borrower agrees, as of this date, that it has no defenses against the
obligations to pay any amounts under the Indebtedness.
4. The address for notices to Borrower is as follows:
6892 South Yosemite Street
Englewood, CO 80112
5. Unless otherwise defined, all capitalized terms in this Amendment shall be
as defined in the Agreement. Except as amended, the Agreement remains in full
force and effect.
6. Borrower represents and warrants that the Representations and Warranties
contained in the Agreement are true and correct as of the date of this Amendment
(except such representations and warranties to be expressly true as of a
specific date), and that no Event of Default has occurred and is continuing. The
parties confirm that the Agreement remains in full force and effect,
notwithstanding that no Advances are outstanding as of the date of this
Amendment.
7. This Amendment may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
EVOLVING SYSTEMS, INC.
By: ________________________________
Title: _____________________________
SILICON VALLEY
By: ________________________________
Title: _____________________________
<PAGE>
AMENDMENT NO. 2
TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment No. 2 to Loan and Security Agreement (the "Amendment") is
entered into as of September 17, 1997, by and between Silicon Valley Bank
("Bank") and Evolving Systems, inc. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of September 18, 1996, as amended by that certain Amendment No. 1 to
Loan and Security Agreement dated as of April 28, 1997 (the "Agreement"). The
parties desire to amend the Agreement in accordance with the terms of this
Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Amendments.
----------
(a) The definition of Revolving Maturity Date is amended in its entirety
to read as follows:
"Revolving Maturity Date means September 16, 1998."
(b) Section 2.1.3(a) of the Agreement is amended in its entirety to read
as follows:
"At any time from the date hereof through September 17, 1998 (the "Equipment
Availability Date"), Borrower may from time to time request advances (each an
"Equipment Advance" and, collectively, the "Equipment Advances") from Bank in an
aggregate principal amount of up to One Million Five Hundred Thousand Dollars
($1,500,000). The Equipment Advances shall be in addition to funds available
under the Committed Line. The Equipment Advance shall be repaid in thirty-six
equal monthly installments of principal, plus accrued interest, beginning
October 17, 1998. The entire principal balance of such initial Equipment Advance
shall be due and payable on September 17, 2000. As a condition to each Equipment
Advance, Borrower shall provide invoices and other documents as requested by
Bank, in form and content satisfactory to Bank, demonstrating that the requested
Equipment Advances (A) shall be used to finance or refinance, as the case may
be, Equipment, approved from time to time by Bank, and (B) shall not exceed one
hundred percent (100%) of the cost of such Equipment, excluding any and all
installation, freight or warranty expenses or sales taxes, and (C) that no more
than twenty-five percent (25%) of the aggregate Equipment Advances may finance
soft costs, such as costs for the licensing of software or leasehold
improvements."
(c) Section 2.3(a) of the Agreement is amended in its entirety as follows:
"(a) Interest Rate. Except as set forth in Section 2.3(b), any
--------------
Advances shall bear interest, on the average Daily Balance, at a
rate equal to one-quarter of one percent (0.25%) above the
Primate Rate. Except as set forth in Section 2.3(b), any
Equipment Advances shall bear interest, on the average Daily
Balance, at a rate equal to three-quarters of one percent (0.75)
above the Prime Rate."
1
<PAGE>
(d) Section 6.3(b) of the Agreement is amended in part to read as follows:
"(b) as soon as available, but in any event within one hundred twenty
(120) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance
with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public
accounting firm reasonably acceptable to Bank;"
(e) Section 6.3 is further amended by replacing "six (6)" in the last
sentence with "twelve (12)".
(f) Section 6.8 of the Agreement is amended in its entirety as follows:
"6.8 Ouick Ratio. Borrower shall maintain, as of the last day of
-----------
each calendar month, a ratio of Quick Assets (excluding unbilled
accounts receivable) to Current Liabilities of at least 1.05 to 1.00."
(g) Section 6.12 of the Agreement is amended in its entirety as follows:
"6.12 Debt Service Coverage. Borrower shall maintain, as of the last
----------------------
day of each fiscal quarter, a Debt Service Coverage of at least 1.50
to 1.00. "Debt Service Coverage" means, as measured quarterly as of
the last day of each fiscal quarter of Borrower, on a consolidated
basis determined in accordance with GAAP, the ratio of (a) an amount
equal to the sum of (i) net income, plus (ii) depreciation,
----
amortization of intangible assets and other non-cash charges to income
and forgiveness of interest on any Subordinated Debt annualized for
the preceding two quarters to (b) an amount equal to the sum of all
mandatory repayments of principal on account of total long-term debt
for the next twelve (12) months."
(h) The Compliance Certificate, attached to the Agreement as Exhibit D, is
hereby replaced in its entirety with Exhibit D attached hereto.
2. Conditions Precedent to Effectiveness. The effectiveness of this Amendment
---------------------------------------
is subject to the further conditions precedent that:
(a) Borrower shall have paid to Bank a loan fee payment in an amount of
Twenty-Five Thousand Dollars ($25,000), payable upon the date hereof.
(b) Bank shall have received, in form and substance satisfactory to Bank:
(i) a certificate of the secretary of Borrower with respect to
incumbency and resolutions authorizing the execution, delivery
and performance of this Amendment, and confirming that copies
of the Articles of Incorporation and ByLaws previously
delivered to Bank have not been amended and remain in full
force and effect; and
(ii) a copy of this Amendment duly executed by Borrower.
3. Borrower agrees, as of this date, that it has no defenses against the
obligations to pay any amounts under the Indebtedness.
2
<PAGE>
4. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
5. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment (except such representations and warranties to be expressly true
as of a specific date), and that no Event of Default has occurred and is
continuing. The parties confirm that the Agreement remains in full force and
effect, notwithstanding that no Advances are outstanding as of the date of this
Amendment.
6. This Amendment may be executed in two or more counterparts each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
EVOLVING SYSTEMS, INC.
By:__________________________________________
Title:_______________________________________
SILICON VALLEY BANK
By:__________________________________________
Title:_______________________________________
3
<PAGE>
AMENDMENT NO. 3
TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment No. 3 to Loan and Security Agreement (the "Amendment") is
entered into as of December 16, 1997, by and between Silicon Valley Bank
("Bank") and Evolving Systems, Inc. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of September 18, 1996, as amended by that certain Amendment No. 1 to
Loan and Security Agreement dated as of April 28, 1997, and as amended by that
certain Amendment No. 2 to Loan and Security Agreement dated as of September 17,
1997 (the "Agreement"). The parties desire to amend the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Bank waives Borrower's obligations to comply with sections 6.11 and
6.12 of the Agreement as of March 31, 1997 as well as section 6.12 of the
Agreement as of June 30, 1997. Such waiver does not constitute a waiver of (i)
of compliance with those sections as of any other date, (ii) of any other
failure by Borrower to comply with the Agreement or any other Events of Default,
now existing or hereafter arising, or (iii) Bank's right to require compliance
at all times with the terms and conditions of the Agreement. Bank reserves all
rights under the Agreement and under applicable law.
2. Amendments.
-----------
(a) The definition of Committed Line is amended in its entirety to
read as follows:
"Committed Line" means Ten Million Dollars ($10,000,000).
(b) Subsection (i) of the definition of "Eligible Accounts" is
amended in its entirety to read as follows:
"(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent
such obligations exceed the aforementioned percentage, except as
approved in writing by Bank, provided that the concentration
limit shall be forty percent (40%) for each of AT&T, Lucent,
Lockheed Martin, GTE, Sprint, Bell-South, Pacific Bell and
Southwesten Bell."
(c) Section 7.9 is hereby amended in its entirety to read as follows:
7.9 Subordinated Debt. Make any payment in respect of any
-------------------
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated
Debt, or amend any provision contained in any documentation relating
to the Subordinated Debt without Bank's prior written consent. If Bank
receives evidence that Borrower has received net equity proceeds in a
minimum amount of Twenty Million Dollars ($20,000,000) then Borrower
may thereafter make payments in respect of any Subordinated Debt."
3. Conditions Precedent to Effectiveness. The effectiveness of this
--------------------------------------
Amendment is subject
1
<PAGE>
to the further conditions precedent that:
(a) Borrower shall have paid to Bank a loan fee payment in an amount
of Ten Thousand Dollars ($10,000) and an amount equal to the Bank
Expenses incurred in the preparation of this Amendment, payable
upon the date hereof.
(b) Bank shall have received, in form and substance satisfactory to
Bank:
(i) a certificate of the secretary of Borrower with respect to
incumbency and resolutions authorizing the execution,
delivery and performance of this Amendment, and confirming
that copies of the Articles of Incorporation and ByLaws
previously delivered to Bank have not been amended and
remain in full force and effect; and
(ii) a copy of this Amendment duly executed by Borrower.
(c) Bank, in its sole discretion, shall have approved the form and
substance of this Amendment.
4. Borrower agrees, as of this date, that it has no defenses against the
obligations to pay any amounts under the Indebtedness.
5. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
6. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment (except such representations and warranties to be expressly true
as of a specific date), and that no Event of Default has occurred and is
continuing. The parties confirm that the Agreement remains in full force and
effect, notwithstanding that no Advances are outstanding as of the date of this
Amendment.
7. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
EVOLVING SYSTEMS, INC.
By:_________________________________
Title:______________________________
SILICON VALLEY BANK
By:_________________________________
Title:______________________________
2
<PAGE>
EXHIBIT 10.9
COLLATERAL ASSIGNMENT PATENT MORTGAGE
-------------------------------------
AND SECURITY AGREEMENT
----------------------
This Collateral Assignment, Patent Mortgage and Security Agreement is made
as of September 18, 1996, by and between Evolving Systems, Inc. ("Assignor") and
SILICON VALLEY BANK, ("Assignee").
RECITALS
--------
A. Assignee has agreed to lend to Assignor certain funds (the "Loan"),
and Assignor desires to borrow such funds from Assignee pursuant to the terms of
a Loan and Security Agreement of even date herewith (the "Loan Agreement").
B. In order to induce Assignee to make the Loan, Assignor has agreed to
assign certain intangible property to Assignee for purposes of securing the
obligations of Assignor to Assignee
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Assignment, Patent Mortgage and Grant of Security Interest. As
-----------------------------------------------------------
collateral security for the prompt and complete payment and performance of all
of Assignor's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, in and to Assignor's entire
right, title and interest in, to and under the following (all of which shall
collectively be called the "Collateral"):
(a) Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or
held, including without limitation those set forth on Exhibit A attached hereto
---------
(collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(c) Any and all design rights which may be available to Assignor now
or hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without limitation
the patents and patent applications set forth on Exhibit B attached hereto
---------
(collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Assignor connected with and symbolized by
such trademarks, including without limitation those set forth on Exhibit C
---------
attached hereto (collectively, the "Trademarks");
(f) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
1
<PAGE>
(g) All licenses or other rights to use any of the Copyrights, Patents
or Trademarks, and all license fees and royalties arising from
such use to the extent permitted by such license or rights and;
(h) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and
(i) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing.
Assignee acknowledges that Assignor may create works for hire or assign the
intellectual property rights to certain software created by Assignor to its
customers. Nothing in this Agreement shall prevent Assignor from producing
software owned by its customers. In no event shall Assignee own any security
interest, mortgage, or other interest in or to any intellectual property rights
created by Borrower which contractually or legally are or will become the
property of a customer of Borrower.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE
CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE
ASSIGNOR'S OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. Authorization and Request. Assignor authorizes and requests that the
-------------------------
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. Covenants and Warranties. Assignor represents, warrants, covenants
-------------------------
and agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for non-
exclusive licenses granted by Assignor to its customers and agreements with
customers to share royalties in the ordinary course of business;
(b) Performance of this Assignment does not conflict with or result in
a breach of any agreement to which Assignor is party or by which Assignor is
bound, except to the extent that certain intellectual property agreements
prohibit the assignment of the rights thereunder to a third party without the
licensor's or other party's consent and this Assignment constitutes an
assignment;
(c) During the term of this Assignment, Assignor will not transfer or
otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(d) To its knowledge, each of the Patents is valid and enforceable,
and no part of the Collateral has been judged invalid or unenforceable, in whole
or in part, and no claim has been made that any part of the Collateral violates
the rights of any third party;
(e) Assignor shall promptly advise Assignee of any material adverse
change in the composition of the Collateral, including but not limited to any
subsequent ownership right of the Assignor in or to any Trademark, Patent or
Copyright not specified in this Assignment;
(f) Assignor shall not allow any Trademarks, Patents or Copyrights to
be abandoned, forfeited or dedicated to the public without the written consent
of Assignee, which shall not be unreasonably withheld, unless Assignor
determines that reasonable business practices suggest that abandonment is
appropriate;
2
<PAGE>
(g) To the extent required in the Loan Agreement, Assignor shall
promptly register the most recent version of any of Assignor's Copyrights, if
not so already registered, and shall, from time to time, execute and file such
other instruments, and take such further actions as Assignee may reasonably
request from time to time to perfect or continue the perfection of Assignee's
interest in the Collateral;
(h) None of the Collateral is presently subject to any security
interest or mortgage
granted by Borrower;
(i) To its knowledge, no authorization, approval or other action by,
and no notice to or filing with, any U.S. governmental authority or U.S.
regulatory body is required for the grant by Assignor of the security interest
granted hereby or for the execution, delivery or performance of this Assignment
by Assignor in the U.S.
(j) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(k) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent, which consent shall not be unreasonably withheld.
Assignee agrees that non-exclusive licenses of the Collateral and royalty
sharing agreements with customers of Assignor shall not be deemed to materially
impair or conflict with Assignor's obligations under this Agreement. Assignor
shall not permit the inclusion in any material contract to which it becomes a
party of any provisions that could or might in any way prevent the creation of a
security interest in Assignor's rights and interests in any property included
within the definition of the Collateral acquired under such contracts, except
that certain contracts may contain anti-assignment provisions that could in
effect prohibit the creation of a security interest in such contracts.
(l) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any Collateral, the ability of
Assignor to dispose of any Collateral or the rights and remedies of Assignee in
relation thereto, including the levy of any legal process against any of the
Collateral.
4. Assignee's Rights. Assignee shall have the right, but not the
------------------
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor and only if the value of the Collateral
taken as a whole would be materially adversely affected in the absence of such
action. Assignor shall reimburse and indemnify Assignee for all reasonable costs
and reasonable expenses incurred in the reasonable exercise of its rights under
this section 4.
5. Inspection Rights. Assignor hereby grants to Assignee and its
------------------
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, any of Assignor's plants
and facilities that manufacture, install or store products (or that have done so
during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested.
6. Further Assurances; Attorney in Fact.
------------------------------------
(a) On a continuing basis, Assignor will make, execute, acknowledge
and deliver, and file and record in the proper filing and recording places in
the United States, all such instruments, including appropriate financing and
continuation statements and collateral agreements and filings with the United
States Patent and Trademark Office and the Register of Copyrights as Assignor
deems to
3
<PAGE>
be necessary and advisable to protect ownership of the Collateral, and take all
such action as may reasonably be deemed necessary or advisable, or as requested
by Assignee, to perfect Assignee's security interest in all Copyrights, Patents
and Trademarks and otherwise to carry out the intent and purposes of this
Collateral Assignment, or for assuring and confirming to Assignee the grant or
perfection of a security interest in all Collateral.
(b) Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and in
the name of Assignor, from time to time in Assignee's discretion, to take the
following actions and to execute the following instruments as Assignee may deem
necessary or advisable to accomplish the purposes of this Collateral Assignment,
(i) to modify, in its sole discretion, this Collateral Assignment without first
obtaining Assignor's approval of or signature to such modification by amending
Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to include
reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Assignor after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents or
Trademarks in which Assignor no longer has or claims any right, title or
interest, (ii) to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law and (iii)
after the occurrence of an Event of Default, to transfer the Collateral into the
name of Bank or a third party to the extent permitted under the California
Uniform Commercial Code.
7. Events of Default. The occurrence of any of the following shall
------------------
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor in
this Assignment and fails to cure such breach within thirty (30) days of the
occurrence of such breach.
8. Remedies. Upon the occurrence and continuance of an Event of Default,
---------
Assignee shall have the right to exercise all the remedies of a secured party
under the California Uniform Commercial Code, including without limitation the
right to require Assignor to assemble the Collateral and any tangible property
in which Assignee has a security interest and to make it available to Assignee
at a place designated by Assignee. Assignee shall have a nonexclusive, royalty
free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to exercise its rights and remedies upon
the occurrence of an Event of Default. Assignor will pay any expenses (including
reasonable attorneys' fees) incurred by Assignee in connection with the exercise
of any of Assignee's rights hereunder, including without limitation any expense
incurred in disposing of the Collateral. All of Assignee's rights and remedies
with respect to the Collateral shall be cumulative.
9. Indemnity. Assignor agrees to defend, indemnify and hold harmless
----------
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation reasonable attorneys' fees and
reasonable expenses), except for losses arising from or out of Assignee's
negligence or misconduct.
10. Reassignment. At such time as Assignor shall completely repay all
------------
amounts due under the Loan Agreement, Assignee shall execute and deliver to
Assignor all deeds, assignments and other instruments as may be necessary or
proper to revest in Assignor full title to the property assigned hereunder,
subject to any disposition thereof which may have been made by Assignee pursuant
hereto.
4
<PAGE>
11. Course of Dealing. No course of dealing, nor any failure to exercise,
-----------------
nor any delay in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
12. Attorneys' Fees. If any action relating to this Assignment is brought
---------------
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements.
13. Amendments. Assignment may be amended only by a written instrument
----------
signed by both parties hereto.
14. Counterparts. This Assignment may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. California Law and Jurisdiction: Jury Waiver. This Assignment shall
--------------------------------------------
be governed by the laws of the State of California, without regard for choice of
law provisions. Assignor and Assignee consent to the non-exclusive jurisdiction
of any state or federal court located in Santa Clara County, California.
ASSIGNOR AND ASSIGNEE EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LOAN AGREEMENT, THIS
ASSIGNMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS.
16. Confidentiality. In handling any confidential information, Assignee
---------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Assignment
(which degree of care shall in no event be less than reasonable care for the
type of information in question) except that disclosure of such information may
be made (i) to the affiliates of Assignee, (ii) to prospective transferees or
purchasers of an interest in the obligations secured hereby, provided that they
have entered into a comparable confidentiality agreement in favor of Assignor
and have delivered a copy to Assignor, (iii) as required by law, regulation,
rule or order, subpoena, judicial order or similar order, (iv) as may be
required in connection with the examination, audit or similar investigation of
Assignee and (v) as Bank may determine in connection with the enforcement of any
remedies hereunder in accordance with standards specified in the Loan Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the
day and year first above written.
Address of Assignor:
ASSIGNOR:
6892 S. Yosemite Street EVOLVING SYSTEMS, INC.
Englewood, CO 80112
Attn: Chief Financial Office By:
Title:
Address of Assignee: ASSIGNEE:
1731 Embarcadero Road, Suite 220 SILICON VALLEY BANK
Palo Alto, CA 94303
Attn: Greg Becker By:
Title:
<PAGE>
EXHIBIT A
---------
Copyrights
Registration/ Registration
Application Application
Description Number Date
- ----------- ------ ----
None registered
<PAGE>
EXHIBIT B
---------
Patents
Registration/ Registration
Application Application
Description Number Date
- ----------- ------ ----
None registered
<PAGE>
EXHIBIT C
---------
Trademarks/Servicemarks
<TABLE>
<CAPTION>
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------ ----
<S> <C> <C>
ESI logo (SM) 1,848,371 Aug. 2, 1994
ESI initials (SM) 1,848,372 Aug. 2, 1994
ESI Environment Not registered
VDIS Not registered
Checker Not registered
Checknet Not registered
Pilot Plus Not registered
BACE Not registered
</TABLE>
<PAGE>
AMENDMENT NO. I
TO
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
----------------------
This Amendment No. 1 to Collateral Assignment, Patent Mortgage and Security
Agreement (the "Amendment") is entered into as of December 16, 1997, by and
between Silicon Valley Bank ("Bank") and Evolving Systems, Inc. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of September 18, 1996, as amended from time to time (the "Loan
Agreement"). Borrower and Bank propose to enter into an Amendment to Loan and
Security Agreement dated as of the date hereof (the "Loan Amendment"). Borrower
previously executed for the benefit of Bank a Collateral Assignment, Patent
Mortgage and Security Agreement (the "Collateral Assignment").
AGREEMENT
---------
NOW, THEREFORE, the parties agree as follows:
1. As of the date of this Amendment, Exhibits A, B and C to the
Collateral Assignment hereby deleted in their entirety and replaced with
Exhibits A, B and C attached to this Amendment.
2. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Collateral Assignment. Except as amended, the
Collateral Assignment remains in full force and effect.
3. This Amendment may be executed in two or more counterparts, each of
which, deemed an original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first
date above written.
EVOLVING SYSTEMS, INC.
BY:_____________________________
Title:__________________________
SILICON VALLEY BANK
BY:_____________________________
Title:__________________________
<PAGE>
EXHIBIT A
---------
Copyrights
<TABLE>
<CAPTION>
Registration/ Registration
Application Application
Description Number Date
- ----------- ------ ----
<S> <C> <C>
None registered
</TABLE>
<PAGE>
EXHIBIT B
---------
Patents
<TABLE>
<CAPTION>
Registration/ Registration
Application Application
Description Number Date
- ----------- ------ ----
<S> <C> <C>
Predictive Dialer Pacing System 04/26/94
Systems and Methods for Providing Service
Mediation Between Regional Service Management
Systems and Local Element Management Systems
For Number Portability (Provisional Application 60/033,422
for NumberManager) (Provisional) 12/24/96
Systems and Methods for Providing Order Mediation
Between Existing Information Systems and Regional
Service Management Systems for Number Portability 60/033,423
(Provisional Application for OrderPath) (Provisional) 12/24/96
Systems and Methods for Providing Network Element
Management Functionality for Managing and
Provisioining Network Elements Associated with
Number Portability 60/033,421
(Provisional Application for Nodemaster) (Provisional) 12/24/96
Systems and Methods for Providing Order and Service
Mediation for Telecommunications Systems
(Application for NumberManager and OrderPath
combined) 08/906,751 08/06/97
Systems and Methods for Providing Network Element
Management Functionality for Managing and Provisioning
Network Elements
(Application for NodeMaster) 08/907,323 08/06/97
Inproved Telecommuncations Systems and Methods 60/046,240
(Provisional Application for 21st Century Operational (Provisional) 05/12/97
Support Systems or OSS)
</TABLE>
<PAGE>
EXHIBIT C
---------
Trademarks
<TABLE>
<CAPTION>
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------ ----
<S> <C> <C>
ESI Environment Not registered
VDIS Not registered
Checker Not registered
Checknet Not registered
Pilot Plus Not registered
BACE Not registered
APEX Environment Not registered
US FILINGS
ESI "Bullet" Logo (SM) 1,848,371 08/02/94
ESI initials (SM) 1,848,372 08/02/94
Evolving Systems, Inc. Trade Name Registration
(State of Colorado) L22-77953-000 01/01/96
Evolving Systems (Class 9) 75/193,976 11/06/96
Evolving Systems and Design (bullet and block) 75/193,977 11/06/96
(subsequently abandoned)
Bullet and Block Design 75/194,261 11/06/96
(subsequently abandoned)
OrderPath 75/217,683 12/23/96
NumberManager 75/217,681 12/23/96
NodeMaster 75/217,682 12/23/96
Evolving Systems (Class 42) 75/292,405 05/15/97
Evolving Systems and Design (evolving triangle) 75,284,808 05/01/97
Evolving Systems CTM 75,217,682
What Your World Is Coming To 75/264,673 03/25/97
What The World Of Telecom Is Coming To 75/264,673 05/16/97
</TABLE>
<PAGE>
FOREIGN FILINGS
<TABLE>
<S> <C> <C>
Evolving Systems European
Economic Community
No. 00385856 12/16/96
Evolving Systems Canada
No. 848669 06/20/97
Evolving Systems and Design (evolving triangle) Canada
No. 848668 06/20/97
What The World Of Telecom Is Coming To Canada
No. 848673 06/20/97
OrderPath Canada
No. 848670 06/20/97
NumberManager Canada
No. 848672 06/20/97
NodeMaster Canada
No. 848671 06/20/97
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 24, 1998
relating to the financial statements of Evolving Systems, Inc. as of and for the
year ended December 31, 1997, which appears in such Prospectus. We also consent
to the application of such report to the Financial Statement Schedule for the
year ended December 31, 1997 listed under Item 16(b) of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audit referred to in such report also
included this schedule. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boulder, Colorado
March 5, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-
43973 of Evolving Systems, Inc. of our report dated March 4, 1997, except for
Note 7, as to which the date is February 10, 1998, appearing in the Prospectus,
which is part of this Registration Statement, and to the reference to us under
the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Evolving Systems, Inc., listed
in Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
March 5, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVOLVING
SYSTEMS, INC. REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 3,184 1,171
<SECURITIES> 155 131
<RECEIVABLES> 10,628 14,705
<ALLOWANCES> 298 520
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,206 17,840
<PP&E> 17,476 21,234
<DEPRECIATION> 7,635 11,432
<TOTAL-ASSETS> 24,356 27,859
<CURRENT-LIABILITIES> 7,816 12,474
<BONDS> 18,096 16,465
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 994 1,696
<TOTAL-LIABILITY-AND-EQUITY> 24,356 27,859
<SALES> 0 0
<TOTAL-REVENUES> 36,918 42,720
<CGS> 0 0
<TOTAL-COSTS> 24,531 25,224
<OTHER-EXPENSES> 12,141 16,614
<LOSS-PROVISION> 577 457
<INTEREST-EXPENSE> 1,500 1,571
<INCOME-PRETAX> (1,176) (513)
<INCOME-TAX> 81 (792)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,257) (278)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
