<PAGE>
As filed with the Securities and Exchange Commission on October 19, 1999.
Registration No. 333-86937
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
METASOLV SOFTWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 7371 75-2476509
(Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction of Classification Code
Incorporation or Number)
Organization)
5560 Tennyson Parkway
Plano, Texas 75024
(972) 403-8300
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
----------------
GLENN A. ETHERINGTON
Chief Financial Officer
MetaSolv Software, Inc.
5560 Tennyson Parkway
Plano, Texas 75024
(972) 403-8300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
BRIAN K. BEARD ALAN DEAN
ANTHONY M. ALLEN Davis Polk & Wardwell
Gunderson Dettmer Stough 450 Lexington Avenue
Villeneuve Franklin & Hachigian, LLP New York, New York 10017
8911 Capital of Texas Highway, Suite (212) 450-4000
4240
Austin, Texas 78759
(512) 342-2300
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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, as amended, 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, 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(d)
under the Securities Act, 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 this 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
Maximum
Amount Offering Proposed Maximum Amount of
Title of Each Class of to be Price Per Aggregate Registration
Securities to be Registered Registered Share Offering Price Fee(1)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.... $5,750,000 $14.00 $80,500,000 $22,379
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</TABLE>
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(1) $16,680 of such fee has previously been paid.
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 Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 1999
5,000,000 Shares
[LOGO OF METASOLV SOFTWARE APPEARS HERE]
COMMON STOCK
-----------
MetaSolv Software, Inc. is offering 5,000,000 shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$12 and $14 per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "MSLV."
-----------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds to
Public Commissions MetaSolv
------ ------------- -----------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total.......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
MetaSolv Software, Inc. has granted the underwriters the right to purchase up
to an additional 750,000 shares of common stock to cover over-allotments.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 1999.
-----------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
JEFFERIES & COMPANY, INC.
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 47
Certain Transactions....................................................... 56
Principal Stockholders..................................................... 57
Description of Capital Stock............................................... 59
Shares Eligible for Future Sale............................................ 61
Underwriters............................................................... 63
Legal Matters.............................................................. 65
Change in Accountants...................................................... 65
Experts.................................................................... 65
Additional Information..................................................... 65
Index to Financial Statements.............................................. F-1
</TABLE>
Until , 1999, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information and
our financial statements and notes appearing elsewhere in this prospectus.
Unless otherwise indicated, all information in this prospectus gives effect to
the conversion of all outstanding shares of preferred stock into shares of
common stock effective upon the closing of the offering and assumes no exercise
of the underwriters' over-allotment option. All information in this prospectus
relating to the number of shares of our common stock or options is based upon
information as of September 30, 1999, assuming a 2 for 1 stock split before the
offering.
METASOLV SOFTWARE
We are a leading provider of order management and service provisioning, or
O&P, software solutions for next-generation telecommunications service
providers. Next-generation telecommunications service providers are
telecommunications providers that have emerged as a result of new technology
and industry deregulation and that offer a variety of traditional and new
services. Service providers use order management and service provisioning
systems to process a customer's order for telecommunications service, provision
and reserve the appropriate network resources to establish the requested
service, and detect and resolve any problems that may occur with that service.
Our Telecom Business Solution, or TBS, software is a comprehensive O&P
solution, designed to meet the needs of next-generation telecommunications
service providers. We derive substantially all of our revenue from the sale of
licenses, related professional services and maintenance and support for our TBS
software.
Traditional telecommunications service providers specialize in providing one
type of service, such as local or long distance telephone service. Now,
however, industry deregulation and technological advances make it possible for
a telecommunications service provider to offer a variety of services--such as
local, long-distance and Internet service--in a single bundled package to their
customers. Next-generation service providers offer these bundled packages of
telecommunications services and need O&P software that can handle the
enormously complex tasks involved in creating and delivering multiple services.
Based on recent industry reports, we estimate the worldwide spending on third-
party O&P solutions by these next-generation service providers will grow by
over 40% per year to $1.2 billion in 2001.
We developed our TBS software as a packaged software solution for licensing
to telecommunications service providers. Our business model is not based on the
development of software that is custom-designed to meet the needs of a single
customer. Founded in 1992, we began to build an O&P software system in early
1994 in conjunction with ALLTEL, an established service provider. The initial
O&P product developed by MetaSolv and ALLTEL focused on the tasks necessary to
connect local-exchange networks to those of the long-distance service
providers. After the Telecommunications Act of 1996 opened the local-exchange
market to competition, we expanded our product line to address the needs of
service providers involved in the resale and wholesale of local and long-
distance services. In early 1997, we expanded our TBS software to support the
creation and delivery of services on networks that combine voice and data
services. Throughout 1998 and 1999, we enhanced our TBS software to support the
creation and delivery of services that utilize the Internet as a communications
network.
We currently have over 50 customers representing all facets of the
telecommunications industry including established telecommunications service
providers, such as GTE and ALLTEL; new service providers competing in local-
service markets, such as Allegiance Telecom and GST Telecommunications;
operators of the large, high-speed networks that sell transmission capacity to
other service providers or sell services directly to customers, such as Qwest
Communications and Williams Communications; the emerging long-distance
operations of these companies, such as BellSouth and Ameritech; and new local
service providers that specialize in providing data-communications services,
such as HarvardNET and GTE Global Networks Infrastructure.
4
<PAGE>
MetaSolv Software, Inc. was originally incorporated as Omnicase, Inc. in
Delaware on July 6, 1992. Our principal executive offices are located at 5560
Tennyson Parkway, Plano, Texas 75024 and our telephone number is (972) 403-
8300. Our Web site is www.metasolv.com. The information on our Web site is not
incorporated by reference into this prospectus.
THE OFFERING
Common stock offered....................
Common stock to be outstanding after 5,000,000 shares
this offering..........................
Use of proceeds......................... 33,278,366
For general corporate purposes,
including working capital.
Proposed Nasdaq National Market MSLV
symbol.................................
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months
Year Ended December Ended
31, September 30,
---------------------- ----------------
1996 1997 1998 1998 1999
------- ------ ------- ------- -------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License.............................. $ 1,895 $5,262 $23,432 $13,225 $27,202
Service.............................. 1,927 4,037 19,144 12,645 23,783
------- ------ ------- ------- -------
Total revenues..................... 3,822 9,299 42,576 25,870 50,985
------- ------ ------- ------- -------
Cost of revenues:
License.............................. 69 223 1,298 842 1,262
Service.............................. 568 2,359 14,803 9,722 18,293
------- ------ ------- ------- -------
Total cost of revenues............. 637 2,582 16,101 10,564 19,555
------- ------ ------- ------- -------
Gross profit.......................... 3,185 6,717 26,475 15,306 31,430
Total operating expenses.............. 2,604 6,652 26,983 17,488 29,428
------- ------ ------- ------- -------
Income (loss) from operations......... $ 581 $ 65 $ (508) $(2,182) $ 2,002
======= ====== ======= ======= =======
Net income (loss)..................... $ 648 $ 120 $ (186) $(1,723) $ 1,199
======= ====== ======= ======= =======
Earnings (loss) per share:
Basic................................ $ 0.06 $ 0.01 $ 0.02 $ (0.15) $ 0.10
Diluted.............................. $ 0.03 $ 0.00 $ 0.02 $ (0.15) $ 0.04
Weighted-average shares outstanding:
Basic................................ 11,404 11,409 11,472 11,436 11,781
Diluted.............................. 22,440 24,943 11,472 11,436 31,446
</TABLE>
The following table presents our summary balance sheet at September 30, 1999.
The pro forma balance sheet data reflect the conversion of our preferred stock
outstanding as of September 30, 1999 into 16,245,306 shares of common stock and
the pro forma as adjusted data reflect our sale of 5,000,000 shares of our
common stock in this offering at an assumed initial public offering price of
$13.00 per share and the application of the estimated net proceeds.
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $12,404 $12,404 $71,654
Working capital................................... 10,531 10,531 69,781
Total current liabilities......................... 20,917 20,917 20,917
Redeemable convertible preferred stock............ 12,610 - -
Total stockholders' equity........................ 3,257 15,867 75,117
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. Any of the following risks could seriously harm our
business or adversely affect our financial condition or results of operations.
As a result, these risks could cause the decline in the trading price of our
common stock, and you may lose all or part of your investment. You should also
refer to the other information set forth in this prospectus, including our
financial statements and the related notes.
Risks Related to Our Business
We Have a Limited Operating History with Inconsistent Profitability, which
Makes our Future Operating Results Uncertain
We were founded in July 1992 and began development of an ordering and
provisioning solution in early 1994. Accordingly, our prospects must be
considered in light of the risks and difficulties frequently encountered by
companies in the early stage of development, particularly companies in new,
rapidly evolving and highly competitive markets. To address these risks, we
must respond effectively to competition, continue to attract, retain and
motivate qualified personnel and continue to improve our products. Although we
have achieved profitability in the most recent nine-month period ended
September 30, 1999, we had a net loss in the year ended December 31, 1998,
following three years of only limited profitability. Our operating losses and
marginal profitability have been due in part to the commitment of significant
resources to our research and development, sales and marketing and
professional services organizations. We expect to devote additional resources
to these areas and, as a result, will need to continue increasing our
quarterly revenues to maintain profitability. Although our revenues have
increased in recent periods, we cannot be certain that our revenues will grow
at past rates or that we will sustain profitability on a quarterly or annual
basis in the future.
We Have Relied and Expect to Continue to Rely on Sales of Our Telecom
Business Solution Product for Our Revenue
We currently derive all of our revenue from the licensing, related
professional services and maintenance and support of our Telecom Business
Solution software product. We expect that we will continue to depend on
revenue related to new and enhanced versions of our TBS software for the
foreseeable future. We cannot be certain that we will be successful in
upgrading and marketing our TBS software or that we will successfully develop
and market new products or services. Any failure to continue to increase
revenue related to our existing products or to generate revenue from new
products and services would adversely affect our operating results and
financial condition.
We Rely on a Limited Number of Customers for a Significant Portion of Our
Revenue
We currently derive, and we expect to continue to derive, a significant
portion of our revenue through large financial commitments by a limited number
of customers. For the nine months ended September 30, 1999, our ten largest
customers accounted for approximately 53% of our total revenue, with Qwest
Communications, Time Warner Communications and Allegiance Telecom accounting
for 13%, 7% and 6% of the total, respectively. The amount of revenue we derive
from a specific customer is likely to vary from period to period, and a major
customer in one period may not produce significant additional revenue in a
subsequent period. To the extent that any major customer terminates its
relationship with us, our revenue could decline significantly.
If We Fail to Accurately Estimate the Resources Necessary to Complete Any
Fixed-Price Contract, Or If We Fail to Meet Our Performance Obligations, We
May Be Required to Absorb Cost Overruns and We May Suffer Losses On Projects
In addition to time and materials contracts, we have periodically entered
into fixed-price contracts for software implementation, and we may do so in
the future. These fixed-price contracts involve risks because they require us
to absorb possible cost overruns. Our failure to accurately estimate the
resources required for a project or our failure to complete our contractual
obligations in a manner consistent with the project plan would likely cause us
to have lower margins or to suffer a loss on such a project, which would
negatively impact our operating
7
<PAGE>
results. On occasion we have been required to commit unanticipated additional
resources to complete projects. We may experience similar situations in the
future. In addition, for specific projects, we may fix the price before the
requirements are finalized. This could result in a fixed price that turns out
to be too low, which would cause us to suffer a loss on the project that would
negatively impact our operating results.
Our Quarterly Operating Results Have Varied Significantly and May Cause Our
Stock Price to Fluctuate
Our quarterly operating results have varied significantly and are difficult
to predict. As a result, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It
is likely that in some future quarter or quarters our operating results will
be below the expectations of public market analysts or investors. In such an
event, the market price of our common stock may decline significantly. A
number of factors are likely to cause our quarterly results to vary,
including:
. The overall level of demand for telecommunications services by consumers
and businesses and its effect on demand for product and services by our
customers;
. Our customers' willingness to buy, rather than build, order management
and provisioning solutions;
. The timing of individual software orders, particularly those of our
major customers involving large license fees that would materially
affect our revenue in a given quarter;
. The introduction of new telecommunications services and our ability to
react quickly compared to our competitors;
. Our ability to manage costs, including costs related to professional
services and support services costs;
. The utilization rate of our professional services employees and the
extent to which we use third party subcontractors to provide consulting
services;
. Costs related to possible acquisitions of other businesses;
. Our ability to collect outstanding accounts receivable from very large
product licenses;
. Innovation and introduction of new technologies, products and services
in the telecommunications and information technology industries; and
. Costs related to the expansion of our operations, including a large
expansion of our office space.
We forecast the volume and timing of orders for our operational planning,
but these forecasts are based on many factors and subjective judgments, and we
can not assure their accuracy. We have hired and trained a large number of
personnel in core areas, including product development and professional
services, based on our forecast of future revenues. As a result, a significant
portion of our operating expenses are fixed in the short term. Therefore,
failure to generate revenue according to our expectations in a particular
quarter could have an immediate negative effect on results for that quarter.
We operate with virtually no backlog because we ship software products and
perform services shortly after orders are received. As a result, our quarterly
revenue is largely dependent upon orders booked and delivered during that
quarter. We expect that our sales will continue to involve large financial
commitments from a relatively small number of customers. As a result, the
cancellation, deferral, or failure to complete the sale of even a small number
of licenses for our products and related services may cause our revenues to
fall below expectations. Also, we have often booked a large portion of our
quarterly sales in the last month of any given quarter, and often in the last
week of that month. This sales pattern is caused by our quarterly incentive
compensation programs and customer purchasing patterns driven by quarterly
capital expenditure budgets. Accordingly, delays in the completion of sales
near the end of a quarter could cause quarterly revenue to fall substantially
short of anticipated levels. Significant sales may also occur earlier than
expected, which could cause operating results for later quarters to compare
unfavorably with operating results from earlier quarters.
Some contracts for software licenses may not qualify for revenue recognition
upon product delivery. Revenue may be deferred when there are significant
elements required under the contract that have not been completed, there are
express conditions relating to product acceptance, or when collection is not
considered probable. With these uncertainties we may not be able to predict
accurately when revenue from these contracts will be recognized.
8
<PAGE>
In Order to Increase Market Awareness of Our Products and Generate Increased
Revenue, We Need to Expand Our Sales and Distribution Capabilities
We must expand our direct and indirect sales operations to increase market
awareness of our products and to generate increased revenue. We cannot be
certain that we will be successful in these efforts. Our products and services
require a sophisticated sales effort targeted at the senior management of our
prospective customers. New hires will require training and take time to
achieve full productivity. We cannot be certain that our recent hires will
become as productive as necessary or that we will be able to hire enough
qualified individuals in the future. We also plan to expand our relationships
with systems integrators and other third-party resellers to build an indirect
sales channel. Failure to expand these sales channels would adversely affect
our revenues and operating results. In addition, we will need to manage
potential conflicts between our direct sales force and third-party reselling
efforts.
We Depend on Certain Key Personnel, and the Loss of Any Key Personnel Could
Affect Our Ability to Compete
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining business contacts with our
customers. Our senior management team and key technical personnel would be
very difficult to replace and the loss of any of these key employees could
seriously harm our business. In addition, we currently do not have non-compete
agreements in place, and if any of these key employees joins a competitor or
forms a competing company, some of our customers might choose to use the
products or services of that competitor or of a new company instead of ours.
Our Ability to Attract, Train and Retain Qualified Employees is Crucial to
Results of Operations and Future Growth
As a company focused on the development, sale and delivery of software
products and related services, our personnel are our most valued assets. Our
future success depends in large part on our ability to hire, train and retain
software developers, systems architects, project managers, telecommunications
business process experts, systems analysts, trainers, writers, consultants and
sales and marketing professionals of various experience levels. Skilled
personnel are in short supply, and this shortage is likely to continue. As a
result, competition for these people is intense, and the industry turnover
rate for them is high. Any inability to hire, train and retain a sufficient
number of qualified employees could hinder the growth of our business. In
addition, we believe that the prospective employees that we target after the
offering may perceive that the stock option component of our compensation
packages is not as valuable as the component was prior to this offering.
Consequently, we may have difficulty hiring our desired numbers of qualified
employees after this offering. Moreover, even if we are able to expand our
employee base, the resources required to attract and retain such employees may
adversely affect our operating margins.
Our Future Success Depends on Our Continued Use of Strategic Relationships
to Implement and Sell Our Products
We have entered into relationships with third-party systems integrators, as
well as with hardware platform and software applications developers. We rely
on these third parties to assist our customers and to lend expertise in large
scale, multi-system implementation and integration projects, including overall
program management and development of custom interfaces for our product.
Should these third parties go out of business or choose not to provide these
services, we may be forced to develop those capabilities internally, incurring
significant expense and adversely affecting our operating margins. In
addition, we have derived and anticipate that we will continue to derive, a
significant portion of our revenues from customers that have established
relationships with our marketing and platform partners. We could lose sales
opportunities if we fail to work effectively with these parties or fail to
grow our base of marketing and platform partners.
9
<PAGE>
If We Fail to Manage Our Growth, We May Face Increased Costs and Lower
Margins
We have grown rapidly and expect to continue to grow rapidly by hiring new
employees and by expanding our offering of products and services. For example,
our headcount has grown from 144 as of January 1, 1998 to 371 as of
September 30, 1999, and several members of our senior management team have
only recently joined us. Our growth has resulted in new and increased
responsibilities for management and will continue to place a significant
strain on our internal systems. In order to accommodate the increased number
of transactions and customers and the increased size of our operations, we
will need to hire, train and retain the appropriate personnel to manage our
operations. We will also need to improve our financial and management
controls, reporting systems and operating systems. We are currently
implementing new systems for our human resource and accounting functions. We
plan to redesign several internal control systems, including contract and
order management systems. We may encounter difficulties in transitioning to
the new systems, and even after we implement these systems, our personnel,
systems, procedures and controls may be inadequate to support our future
operations.
Our Planned International Operations May Be Difficult and Costly
To date, international revenues have been minimal. We intend, however, to
expand our operations in the future by opening more international offices and
will need to devote significant management and financial resources for our
international expansion. In particular, we will have to attract experienced
management, technical, sales, marketing and support personnel for our
international offices. Competition for these people is intense and we may be
unable to attract qualified staff. International expansion may be more
difficult or take longer than we anticipate, especially due to language
barriers, currency exchange risks and the fact that the telecommunications
infrastructure in foreign countries may be less advanced than the
telecommunications infrastructure in the United States. If we are unable to
expand our international operations successfully and in a timely manner, our
expenses could increase at a greater rate than our revenues, and our operating
results could be adversely affected.
Moreover, international operations are subject to a variety of additional
risks that could adversely affect our operating results and financial
condition. These risks include the following:
. Longer payment cycles;
. Problems in collecting accounts receivable;
. The impact of recessions in economies outside the United States;
. Unexpected changes in regulatory requirements;
. Higher levels of regulation specific to the telecommunications industry;
. Trade barriers and barriers to foreign investment, in some cases
specifically applicable to the telecommunications industry;
. Barriers to the repatriation of capital or profits;
. Fluctuations in currency exchange rates;
. Restrictions on the import and export of certain technologies;
. Lower protection for intellectual property rights;
. Seasonal reductions in business activity during the summer months,
particularly in Europe;
. Potentially adverse tax consequences;
. Increases in tariffs, duties, price controls or other restrictions on
foreign currencies; and
. Requirements of a locally domiciled business entity.
10
<PAGE>
Potential Future Acquisitions Could Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value and Adversely Affect Our Operating Results
We may acquire other businesses in the future, which would complicate our
management tasks. We may need to integrate widely dispersed operations that
have different and unfamiliar corporate cultures. These integration efforts
may not succeed or may distract management's attention from existing business
operations. Our failure to successfully manage future acquisitions could
seriously harm our business. Also, our existing stockholders would be diluted
if we financed the acquisitions by issuing equity securities.
Our Failure to Meet Customer Expectations or Deliver Error-Free Software
Could Result in Losses and Negative Publicity
The complexity of our products and the potential for undetected software
errors increase the risk of claims and claim-related costs. Due to the
mission-critical nature of order management and service provisioning systems,
undetected software errors are of particular concern. The implementation of
our products, which we accomplish through our professional services division
and with our partners, typically involves working with sophisticated software,
computing and communications systems. If we experience difficulties with an
implementation or do not meet project milestones in a timely manner, we could
be obligated to devote more customer support, engineering and other resources
to a particular project and to provide these services at reduced or no charge.
If our software contains undetected errors or we fail to meet our customers'
expectations or project milestones in a timely manner, we could experience:
. Delayed or lost revenues and market share due to adverse customer
reaction;
. Loss of existing customers;
. Negative publicity regarding us and our products, which could adversely
affect our ability to attract new customers;
. Expenses associated with providing additional products and services to a
customer at a reduced charge or at no charge;
. Claims for substantial damages against us, regardless of our
responsibility for any failure;
. Increased insurance costs; and
. Diversion of development and management time and resources.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. In
addition, our license agreements usually cap the amounts recoverable for
damages to the amounts paid by the licensee to us for the product or services
giving rise to the damages. However, we cannot be sure that these contractual
provisions will protect us from additional liability. Furthermore, our general
liability insurance coverage may not continue to be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or the
insurer may disclaim coverage as to any future claim. The successful assertion
of any large claim against us could adversely affect our operating results and
financial condition.
We May Face Litigation or Increased Costs If We or Our Customers Experience
Year 2000 Problems
Many currently installed computer systems and software products have been
designed to accommodate only two digit entries to represent the year in the
date field. As a result, these systems may be unable to determine whether the
designation "00" means the year 1900 or the year 2000. This may result in
system failures or the creation of erroneous results and is commonly known as
the Year 2000 problem.
11
<PAGE>
We must assess the impact of the Year 2000 problem on software sold to
customers, internal information systems, and the impact on significant vendors
of products and services. We have established a Year 2000 program management
office to ensure that we have adequately addressed exposures related to the
Year 2000 and are Year 2000 ready. "Year 2000 ready" means that the
performance or functionality of both our TBS software and our internal systems
will not be significantly affected by the dates prior to, during and after the
Year 2000, to include leap year calculations and specific day-of-the-week
calculations.
Our review of our TBS software for Year 2000 readiness is performed as part
of our normal quality assurance function. As of the date of this prospectus,
we have identified no material Year 2000 compliance issues with respect to any
TBS software that is currently being operated by our customers. However, our
TBS software operates in complex network environments and must interact with
many different hardware and software systems. We have not performed extensive
tests on all hardware and software that may operate in conjunction with our
TBS software. Accordingly, some customers may experience Year 2000 problems,
which may require our assistance to correct.
Through a risk analysis completed by our Year 2000 program management
office, we have identified the critical systems within our internal operations
that may be affected by Year 2000 issues. We believe we have identified
substantially all major computers, software applications and related equipment
used within our internal operations that must be upgraded or replaced to
minimize the possibility of a disruption to our business. The version of
accounting software we currently use is not Year 2000 ready. Rather than
upgrade to a new version of software, we have elected to replace this system
with a new management reporting system that will be much more flexible as we
grow. We expect this conversion to be completed during the fourth quarter of
1999. However, if we are not ready to convert, we believe that it would be
possible to upgrade to a Year 2000 ready version of our existing software, or
to process data manually until the new system is ready for conversion.
In addition to our accounting system, our business is also dependent upon
software to operate our e-mail system, software development and testing tools
and office software applications. We are unaware of any material costs or
operational issues associated with preparing these internal systems for the
year 2000.
Our business is also dependent upon computer controlled systems of third
parties such as vendors, customers and public service providers. The operation
of our office and facilities equipment, such as elevators, fax machines,
photocopiers, security systems and telephone switches may all be affected by
the Year 2000 problem. We have contacted each of our vendors to obtain
assurance that these systems are Year 2000 ready, however, not all vendors
have responded. In addition, we have not independently tested the claims of
our vendors who have responded. We believe that, absent a critical failure of
electrical, telephone or other public services beyond our control, Year 2000
problems experienced by third parties will not have a material impact on our
operations.
We are currently developing contingency plans to be implemented in the event
that we fail to identify all of the Year 2000 problems affecting our internal
systems. These plans could include accelerated replacement of equipment and
software, short-term use of back-up systems, manipulation of system dates or
manual workarounds until any problems are corrected.
Despite our efforts, there is no assurance that we will be able to identify
and correct all Year 2000 problems. Any failure to achieve Year 2000 readiness
could result in a decrease in revenues, an increase in resources required to
address the Year 2000 problems of our customers or an increase in litigation
costs relating to losses suffered by our customers as a result of the Year
2000 problem. The costs associated with remediating any Year 2000 problems
have not been material to date. Although we do not anticipate that these costs
will be material in the future, we cannot assure you that these future costs
will not be material.
12
<PAGE>
Our Limited Ability to Protect Our Proprietary Technology May Adversely
Affect Our Ability to Compete, and We May Be Found to Infringe on the
Proprietary Rights of Others
Our success depends in part on our proprietary software technology. We rely
on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our technology. We cannot guarantee that
the steps we have taken to protect our proprietary rights will be adequate to
deter misappropriation of our intellectual property, and we may not be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights. If third parties infringe or misappropriate our copyrights,
trademarks, trade secrets or other proprietary information, our business could
be seriously harmed. In addition, although we believe that our proprietary
rights do not infringe on the intellectual property rights of others, other
parties may assert infringement claims against us or claim that we have
violated their intellectual property rights. Claims against us, even if not
true, could result in significant legal and other costs and may be a
distraction to management. We currently focus on intellectual property
protection within the United States. Protection of intellectual property
outside of the United States will sometimes require additional filings with
local patent, trademark, or copyright offices, as well as the implementation
of contractual or license terms different from those used in the United
States. Protection of intellectual property in many foreign countries is
weaker and less reliable than in the United States. If our business expands
into foreign countries, costs and risks associated with protecting our
intellectual property abroad will increase.
Risks Related to This Offering
Our Stock Price May Be Volatile Because Our Shares Have Not Been Publicly
Traded Before this Offering
Prior to this offering, you could not buy or sell our common stock publicly.
Accordingly, we cannot assure you that an active public trading market for our
stock will develop or be sustained after this offering. The market price after
this offering may vary significantly from the initial offering price in
response to any of the following factors, some of which are beyond our
control:
. Variations in our quarterly operating results;
. Changes in financial estimates or investment recommendations by
securities analysts relating to our stock;
. Changes in market valuations of other telecommunications software
companies or telecommunications businesses in general;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major customer;
. Additions or departures of key personnel;
. The potential for future sales of our common stock; and
. Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector.
We Are at Risk of Securities Class Action Litigation Due to Our Expected
Stock Price Volatility
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Due to the potential volatility of our stock price, we may be the
target of similar litigation in the future. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could adversely affect our operating results and financial condition.
13
<PAGE>
Purchasers in this Offering Will Incur Immediate and Substantial Dilution
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock. As a
result, investors purchasing common stock in this offering will incur
immediate and substantial dilution.
We May Need to Raise Additional Capital that May Not Be Available
We expect that the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for at least the next
12 months. After that, we may need to raise additional funds, and we cannot be
certain that we will be able to obtain additional financing on favorable
terms, if at all. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to:
. Develop enhancements and additional features for our products;
. Develop new products and services;
. Hire, train and retain employees;
. Enhance our infrastructure;
. Respond to competitive pressures or unanticipated requirements;
. Pursue international expansion; or
. Pursue acquisition opportunities.
Concentration of Ownership May Have the Effect of Delaying or Preventing a
Change in Control
Upon completion of this offering, our directors, executive officers,
existing stockholders and each of their affiliates will beneficially own, in
the aggregate, approximately 85% of our outstanding common stock. This
percentage will be 83% if the underwriters exercise their over-allotment
option in full. 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.
We Have Various Mechanisms in Place to Discourage Takeover Attempts
Our certificate of incorporation and bylaws may discourage, delay or prevent
a change in control of MetaSolv that a stockholder may consider favorable. Our
charter and bylaws include provisions:
. Authorizing the issuance of "blank check" preferred stock;
. Providing for a classified board of directors with staggered, three-year
terms;
. Prohibiting cumulative voting in the election of directors;
. Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. Limiting the persons who may call special meetings of stockholders;
. Prohibiting stockholder action by written consent; and
. Establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon
by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
MetaSolv.
14
<PAGE>
Our Stock Price Could Be Affected by Shares Becoming Available for Sale
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of the common stock and could impair
our ability to raise capital through the sale of additional equity securities.
For a description of the shares of our common stock that are available for
future sale, see "Shares Eligible for Future Sale."
We Have Substantial Discretion as to How to Spend the Proceeds From this
Offering
Our management has broad discretion as to how to spend the proceeds from
this offering and may spend these proceeds in ways with which our stockholders
may not agree. We cannot predict that investment of the proceeds will yield a
favorable or any return.
Risks Related to Our Industry
The Telecommunications Market is Changing Rapidly, and Failure to Anticipate
and React to the Rapid Change Could Result in Loss of Customers or Wasteful
Spending
Over the last decade, the market for telecommunications products and
services has been characterized by rapid technological developments, evolving
industry standards, dramatic changes in the regulatory environment, emerging
companies and frequent new product and service introductions. Our future
success depends largely on our ability to enhance our existing products and
services and to introduce new products and services that are based on leading
technologies and that are capable of adapting to changing technologies,
industry standards and customer preferences. In addition, we must hire, train
and retain professionals who can fulfill the increasingly sophisticated needs
of our customers. If we are unable to successfully respond to these
technological developments or do not respond in a timely or cost-effective
way, our sales could decline and our costs for developing competitive products
could increase.
New technologies, services or standards could require significant changes in
our business model, development of new products or provision of additional
services. New products and services may be expensive to develop and may result
in the introduction of additional competitors into the marketplace.
Furthermore, if the overall market for order management and service
provisioning systems grows more slowly than we anticipate, or if our products
and services fail in any respect to achieve market acceptance, our revenues
would be lower than we anticipate and operating results and financial
condition could be materially adversely affected.
The Telecommunications Industry is Experiencing Consolidation, Which May
Reduce the Number of Potential Customers for Our Software
The telecommunications industry has experienced significant consolidation.
In the future, there may be fewer potential customers requiring operations
support systems and related services, increasing the level of competition in
the industry. In addition, larger, consolidated telecommunications companies
have strengthened their purchasing power, which could create pressure on the
prices and the margins we could realize. These companies are also striving to
streamline their operations by combining different telecommunications systems
and the related operations support systems into one system, reducing the
number of vendors needed. Although we have sought to address this situation by
continuing to market our products and services to new customers and by working
with existing customers to provide products and services that they need to
remain competitive, we cannot be certain that we will not lose customers as a
result of industry consolidation.
Competition from Larger, Better Capitalized or Emerging Competitors for the
Telecommunications Products and Services that We Offer Could Result in Price
Reductions, Reduced Gross Margins and Loss of Market Share
Competition in the telecommunications products market is intense. We compete
against other companies selling telecommunications software and services and
against the in-house development efforts of our customers. We expect
competition to persist and intensify in the future. We cannot be certain that
we will be able to compete successfully with existing or new competitors, and
increased competition could result in price reductions, reduced gross margins
and loss of market share.
15
<PAGE>
Our current competitors include, and may in the future include, other
providers of operations support systems, such as Telcordia Technologies
(formerly Bellcore), Lucent Technologies, Architel Systems and Eftia OSS
Solutions, large systems integrators such as the consulting arms of the "Big
Five" accounting firms, and outsourcing firms, such as Computer Sciences,
Electronic Data Systems and Perot Systems. In addition, some large information
technology consulting firms have announced that they will focus more resources
on telecommunications opportunities within our market.
Many of our current competitors have longer operating histories, a larger
customer base, greater brand recognition and greater financial, technical,
marketing and other resources than we do. This may place us at a disadvantage
in responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives. In
addition, many of our competitors have well-established relationships with our
current and potential customers and have extensive knowledge of our industry.
As a result, our competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. They may also be
able to devote more resources to the development, promotion and sale of their
products and services than we can. To the extent that our competitors offer
customized products that are competitive with our more standardized product
offerings, our competitors may have a substantial competitive advantage, which
may cause us to lower our prices and realize lower margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with others to increase their
ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
products and services that are superior to, or have greater market acceptance
than, the products and related services that we offer.
If the Internet and Internet-Based Services Cease Growing, Demand for Our
Products May Fall
Our success depends heavily on the Internet being accepted and widely used
as a medium of commerce and communication. The growth of the Internet has
driven changes in the public telecommunications network and has given rise to
the growth of the next-generation service providers who are our core
customers. Rapid growth in the use of the Internet and on-line services is a
recent phenomenon, and it may not continue. If use of the Internet does not
continue to grow or grows more slowly than expected, the market for software
that manages Internet protocol-based communications may not develop and our
sales would be adversely affected. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of
technologies or insufficient commercial support. The Internet infrastructure
may not be able to support the demands placed on it by increased Internet
usage and bandwidth requirements. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or increased government regulation could cause the Internet
to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols or complementary products, services or
facilities are developed, we may incur substantial expense adapting our
solutions to changing or emerging technologies.
Changes in Telecommunications Regulation Could Adversely Affect Our
Customers and May Lead to Lower Sales
Our customers are subject to extensive regulation as telecommunications
service providers. Changes in legislation or regulation that adversely affect
our existing and potential customers could lead them to spend less on order
management and provisioning solutions, which would reduce our revenues, which
could seriously affect our business and financial condition.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus constitute forward-
looking statements. These statements relate to future events or our future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from those
expressed or implied by any forward-looking statements. Some of these factors
are listed under "Risk Factors" and elsewhere in this prospectus. In some
cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of those
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform them to actual
results.
17
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 5,000,000 shares of common stock in this
offering are estimated to be $59,250,000, assuming an initial public offering
price of $13.00 per share, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. The net proceeds of
this offering are estimated to be $68,317,500 if the underwriters' over-
allotment option is exercised in full.
The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock and facilitate future
access to public markets. We are conducting the offering at this time to take
advantage of current market conditions for initial public offering. We expect
to use approximately $3 million of the proceeds to fund the expansion of our
Plano, Texas headquarters. We also expect to use a portion of the proceeds to
launch our international expansion, although we have not completed the work
necessary to state the priorities of our resource allocation. We expect to use
the balance of the proceeds for general corporate purposes, including working
capital. A portion of the net proceeds may also be used for the acquisition of
businesses that are complementary to ours. However, we have no current plans,
agreements or commitments and are not currently engaged in any negotiations
with respect to any acquisition transaction. Pending these uses, we will
invest the net proceeds of this offering in investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend to
pay any cash dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
and assumes a 2 for 1 stock split. The pro forma information reflects the
filing of an amended and restated certificate of incorporation to provide for
authorized capital stock of 100,000,000 shares of common stock and 10,000,000
shares of undesignated preferred stock and the conversion of all shares of
preferred stock outstanding as of September 30, 1999 into 16,245,306 shares of
common stock upon completion of this offering. The pro forma as adjusted
information reflects the receipt of the estimated net proceeds from the sale
by us of the shares of common stock in this offering at an assumed initial
offering price of $13.00 per share. The outstanding share information excludes
6,726,680 shares of common stock issuable on exercise of outstanding options
as of September 30, 1999 with a weighted average exercise price of $2.11 per
share and 1,959,060 shares of common stock reserved for issuance under our
stock plan as of September 30, 1999. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and accompanying notes.
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Redeemable convertible preferred stock,
9,595,306 shares authorized, issued and
outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro
forma as adjusted............................ $12,610 $ -- $ --
Stockholders' equity:
Convertible preferred stock, 6,650,000 shares
authorized, issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted..................................... 18 -- --
Preferred stock, $.005 par value, no shares
authorized, issued or outstanding, actual;
10,000,000 shares authorized, pro forma and
pro forma as adjusted, no shares issued or
outstanding, pro forma and pro forma as
adjusted..................................... -- -- --
Common stock, $.005 par value, 46,000,000
shares authorized, 12,057,060 shares issued,
actual; 100,000,000 shares authorized,
28,302,366 shares issued, pro forma;
100,000,000 shares authorized, 33,302,366
shares issued, pro forma as adjusted......... 60 141 166
Additional paid-in capital.................... 2,134 14,681 73,906
Treasury stock--at cost, 24,000 shares........ (14) (14) (14)
Retained earnings............................. 1,059 1,059 1,059
------- ------- -------
Total stockholders' equity.................. 3,257 15,867 75,117
------- ------- -------
Total capitalization........................ $15,867 $15,867 $75,117
======= ======= =======
</TABLE>
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999, giving
effect to the conversion of all shares of preferred stock outstanding as of
September 30, 1999 into common stock on the closing of this offering, was
$15,867,000, or approximately $0.56 per common share. Pro forma net tangible
book value per share represents the amount of our stockholders' equity,
divided by 28,278,366 shares of common stock outstanding, after giving effect
to the conversion of the preferred stock outstanding as of September 30, 1999
into shares of common stock.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
by us of the shares of common stock in this offering at an assumed initial
offering price of $13.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds from this offering, our pro forma
net tangible book value as of September 30, 1999, would have been $75,117,000,
or $2.26 per share. This represents an immediate increase in net tangible book
value of $1.70 per share to existing stockholders and an immediate dilution in
net tangible book value of $10.74 per share to purchasers of common stock in
this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value per share as of September 30,
1999........................................................... $0.56
Increase per share attributable to new investors................ 1.70
-----
Pro forma net tangible book value per share after this offering... 2.26
------
Dilution per share to new investors............................... $10.74
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1999, after giving effect to the conversion of all outstanding shares of
preferred stock into common stock upon completion of this offering, the
difference between the number of shares of common stock purchased from
MetaSolv, the total consideration paid to MetaSolv and the average price paid
by existing stockholders and by new investors, before deduction of estimated
discounts and commission and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 28,278,366 85.0% $14,808,000 18.6% $ 0.52
New investors.................. 5,000,000 15.0 65,000,000 81.4 13.00
---------- ----- ----------- -----
Total........................ 33,278,366 100.0% $79,808,000 100.0%
========== ===== =========== =====
</TABLE>
As of September 30, 1999, there were options outstanding to purchase a total
of 6,726,680 shares of common stock at a weighted average exercise price of
$2.11 per share under our 1992 Stock Option Plan. To the extent these
outstanding options are exercised, there will be further dilution to new
investors.
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 5,750,000 shares, or 16.9% of
the total number of shares of common stock outstanding after this offering.
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" appearing elsewhere in this prospectus. The selected statement of
operations data for the years ended December 31, 1996, 1997 and 1998 and the
selected balance sheet data at December 31, 1997 and 1998, are derived from,
and are qualified by reference to, the audited financial statements included
elsewhere in this prospectus. The selected statement of operations data for
the years ended December 31, 1994 and 1995, and the balance sheet data as of
December 31, 1994, 1995 and 1996 are derived from our audited financial
statements not included in this prospectus. The selected statement of
operations data for each of the nine-month periods ended September 30, 1998
and 1999, and the selected balance sheet data as of September 30, 1999 are
derived from, and are qualified by reference to, our unaudited interim
financial statements appearing elsewhere in this prospectus. The historical
results are not necessarily indicative of results to be expected in any future
period.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ $ 395 $ 1,582 $ 1,895 $ 5,262 $23,432 $ 13,225 $ 27,202
Service................ 653 637 1,927 4,037 19,144 12,645 23,783
------ ------- ------- ------- ------- -------- --------
Total revenues....... 1,048 2,219 3,822 9,299 42,576 25,870 50,985
------ ------- ------- ------- ------- -------- --------
Cost of revenues:
License................ 74 85 69 223 1,298 842 1,262
Service................ 561 181 568 2,359 14,803 9,722 18,293
------ ------- ------- ------- ------- -------- --------
Total cost of
revenues............ 635 266 637 2,582 16,101 10,564 19,555
------ ------- ------- ------- ------- -------- --------
Gross profit......... 413 1,953 3,185 6,717 26,475 15,306 31,430
------ ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development........... -- 931 945 2,367 10,170 7,272 12,017
Sales and marketing.... 315 505 1,006 2,996 11,634 7,098 9,940
General and
administrative........ 287 536 653 1,289 5,179 3,118 7,471
------ ------- ------- ------- ------- -------- --------
Total operating
expenses............ 602 1,972 2,604 6,652 26,983 17,488 29,428
------ ------- ------- ------- ------- -------- --------
Income (loss) from
operations............. (189) (19) 581 65 (508) (2,182) 2,002
Interest and other
income, net............ 30 28 67 115 298 236 87
------ ------- ------- ------- ------- -------- --------
Income (loss) before
taxes.................. (159) 9 648 180 (210) (1,946) 2,089
Income tax expense
(benefit).............. -- -- -- 60 (24) (223) 890
------ ------- ------- ------- ------- -------- --------
Net income (loss)....... $ (159) $ 9 $ 648 $ 120 $ (186) $ (1,723) $ 1,199
====== ======= ======= ======= ======= ======== ========
Earnings (loss) per
share of common stock:
Basic.................. $(0.01) $ 0.00 $ 0.06 $ 0.01 $ (0.02) $ (0.15) $ 0.10
====== ======= ======= ======= ======= ======== ========
Diluted................ $(0.01) $ 0.00 $ 0.03 $ 0.00 $ (0.02) $ (0.15) $ 0.04
====== ======= ======= ======= ======= ======== ========
Weighted-average common
shares outstanding..... 11,400 11,400 11,404 11,409 11,472 11,436 11,781
Weighted-average common
and common equivalent
shares outstanding..... 11,400 18,050 22,440 24,943 11,472 11,436 31,446
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
---------------------------------- -------------
1994 1995 1996 1997 1998 1999
----- ----- ------- ------- ------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............. $ 308 $ 334 $ 2,983 $ 3,639 $7,984 $12,404
Working capital.......... 1,030 918 3,482 2,393 9,761 10,531
Total current
liabilities............. 93 296 1,806 5,346 11,935 20,917
Redeemable convertible
preferred stock......... -- -- -- 2,610 12,610 12,610
Total stockholders'
equity.................. 1,179 1,189 4,314 1,939 1,826 3,257
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements."
Overview
We are a leading provider of order management and service provisioning, or
O&P, software solutions for next-generation telecommunications service
providers. Next-generation telecommunications service providers are new
telecommunications providers that have emerged as a result of new technology
and industry deregulation and that offer a variety of traditional and new
services. Service providers use order management and service provisioning
systems to create and deliver telecommunications services. These systems
process a customer's order for service, provision and reserve the appropriate
network resources to establish the requested service, and detect and resolve
any problems that may occur with that service. Our Telecom Business Solution,
or TBS, software is a comprehensive order management and service provisioning
solution, designed to meet the needs of next-generation telecommunications
service providers. We license our TBS software to a number of different types
of telecommunications providers, including established telecommunications
service providers, new service providers competing in local-service markets,
operators of the large, high-speed networks that sell transmission capacity to
other service providers or sell services directly to customers, long-distance
companies and new local service providers that specialize in providing data-
communications services.
Founded in 1992, we began development of an ordering and provisioning
solution in early 1994. We have continually upgraded and expanded our TBS
software product since that time, adding support for networks that combine
voice and data services in early 1997. Throughout 1998 and 1999, we expanded
our TBS software to support the creation and delivery of services that utilize
the Internet as a communications network. For the nine months ended September
30, 1998, our total revenues were $25.9 million with a loss from operations of
$2.2 million, compared to total revenues of $51.0 million and income from
operations of $2.0 million for the comparable period in 1999. For the year
ended December 31, 1998, we had an operating loss of $508,000 on total
revenues of $42.6 million. Since inception, and particularly in recent
periods, we have devoted significant resources to our research and
development, sales and marketing and professional services organizations. We
expect to continue to add resources to these areas and, as a result, will need
to continue to increase quarterly revenues to maintain profitability.
To date, we have derived substantially all of our revenues from the license
of our TBS software and the sale of related services, including training,
consulting and software maintenance. Licensing and service terms are typically
covered by a signed order that references our master agreement with the
customer. We generally recognize license revenues when our customer has signed
a license agreement, we have shipped the software product, product acceptance
is not subject to express conditions, the fees are fixed or determinable and
we consider collection to be probable. We allocate the agreed fees for
multiple products and services licensed or sold in a single transaction among
the products and services based on estimates of fair value. On occasion we may
enter into a license agreement with a customer requiring development of
additional software functions or services necessary for the software's
performance of specified functions. For those agreements, we recognize revenue
on a percentage-of-completion basis. We generally recognize service revenues
as the services are performed. We recognize revenues from maintenance
agreements ratably over the maintenance period, usually one year.
We operate with virtually no backlog because we ship our TBS software and
perform services shortly after we receive orders. As a result, our quarterly
revenues are largely dependent on orders booked and delivered during that
quarter. Our sales typically involve large financial commitments from a
relatively small number of customers, and we often book a large portion of our
sales in the last month or week of any given quarter. This sales pattern is
caused by our quarterly incentive compensation programs and customer
purchasing patterns
22
<PAGE>
which are driven by quarterly performance and our customer's capital
expenditure budgets. Accordingly, delays in the completion of sales near the
end of a quarter could negatively impact revenues in that quarter.
We have structured the pricing of our TBS software to meet the needs of each
of our target market segments, from start-up resellers to large, facility-
based incumbent service providers. We charge a base price for the core TBS
subsystems, coupled with additional license fees for add-on modules. In
addition, we charge a per-user license fee, with customary volume discounts on
purchases of large numbers of user licenses. We price annual maintenance and
support contracts as a percentage of the license fee that is current for the
product being maintained. For a new customer, our initial sale of licenses and
associated services, including maintenance and support, will generally range
from $750,000 to several millions of dollars.
Service revenues consist principally of software implementation consulting
and customer training, as well as software maintenance agreements that include
both customer support and the right to product updates and releases. We use
our own employees and subcontract with our alliance partners to provide
consulting services to our customers to install and implement our software. We
offer services on both an hourly and a fixed-price basis. We offer and expect
to continue to offer the majority of our services on an hourly basis.
We anticipate that future revenues will be generated from five principal
sources:
. License fees from new customers;
. License fees for additional products to existing customers;
. License fees for additional users in our existing customer base;
. Implementation service fees related to product license sales; and
. Maintenance fees from both existing and new customers.
Results of Operations
The following table sets forth our results of operations, expressed as a
percentage of total revenues. The historical results are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Percentage of Total Revenues:
Revenues:
License.......................... 50% 57% 55% 51% 53%
Service.......................... 50 43 45 49 47
--- --- --- -------- --------
Total revenues................. 100 100 100 100 100
--- --- --- -------- --------
Cost of revenues:
License.......................... 2 2 3 3 2
Service.......................... 15 26 35 38 36
--- --- --- -------- --------
Total cost of revenues......... 17 28 38 41 38
--- --- --- -------- --------
Gross profit................... 83 72 62 59 62
--- --- --- -------- --------
Operating expenses:
Research and development......... 25 25 24 28 24
Sales and marketing.............. 26 32 27 28 19
General and administrative....... 17 14 12 12 15
--- --- --- -------- --------
Total operating expenses....... 68 71 63 68 58
--- --- --- -------- --------
Income (loss) from operations..... 15 1 (1) (9) 4
Interest and other income, net.... 2 1 1 1 0
--- --- --- -------- --------
Income (loss) before taxes........ 17 2 0 (8) 4
Income tax expense (benefit)...... 0 1 0 (1) 2
--- --- --- -------- --------
Net income (loss)................. 17% 1% 0% (7)% 2%
=== === === ======== ========
</TABLE>
23
<PAGE>
Nine Months ended September 30, 1999 and 1998
Revenues
Total revenues increased by $25.1 million, or 97%, from $25.9 million for
the nine months ended September 30, 1998 to $51.0 million for the comparable
period in 1999 due to increases in both license and service revenues. License
revenues increased by $14.0 million, or 106%, from $13.2 million for the nine
months ended September 30, 1998 to $27.2 million for the comparable period in
1999. The increase in license revenues was due to an increase in market
acceptance and demand for our TBS software which resulted in an increase in
the number of customers. This market demand has allowed us to expand our sales
and customer service organizations, which we believe drives additional license
revenues. We also believe that changes in government regulation of the
telecommunications industry have contributed to the growth in both the numbers
of current and potential customers for our product. We cannot be certain,
however, that this trend will continue, and industry consolidation may reduce
the number of potential customers in the future.
Service revenues increased by $11.2 million, or 88%, from $12.6 million for
the nine months ended September 30, 1998 to $23.8 million for the comparable
period in 1999. The increase in service revenues resulted from an increase in
the number of license agreements that included related implementation
services, and from an expanding base of customers subscribing to maintenance
agreements. Service revenues as a percentage of total revenues were 49% for
the nine months ended September 30, 1998, compared to 47% for the comparable
period in 1999. The decrease in the proportion of service revenues to total
revenues was due to slower growth in implementation services relative to
software revenues. Service revenues may decrease as a percentage of total
revenues in future periods as third parties become more capable of providing
implementation-consulting services directly to our customers and as we
continue to improve our TBS software's ease of implementation.
Cost of Revenues
License Costs. License costs consist of royalties, packaging materials and
product documentation. Our royalty payments relate to additional features that
we originally developed for specific customers. We now include those features
in our TBS software and in some cases pay a royalty to the customers that
originally funded their development. These costs increased by $420,000, or
50%, from $842,000 for the nine months ended September 30, 1998 to $1,262,000
for the comparable period in 1999. The increase in costs was due to an
increase in license revenues upon which royalties are paid. License costs
represented 6% of license revenues for the nine months ended September 30,
1998 and 5% of license revenues for the comparable period in 1999. The
decrease as a percentage of license revenues was due to an increase in the
internally-funded development of our TBS software. As a further result, the
proportion of our TBS software that is subject to royalty payments has also
declined. We intend to further reduce our reliance on customer-funded
development to introduce new software functionality. Most of our royalty
agreements provide for payment caps or time limitations. Accordingly, we
expect that royalty costs, as a percentage of revenues, will decrease compared
to current levels.
Service Costs. Service costs consist primarily of compensation expense and
professional fees related to consulting, training and customer support. These
costs increased by $8.6 million, or 88%, from $9.7 million for the nine months
ended September 30, 1998 to $18.3 million for the comparable period in 1999.
Service costs represented 77% of service revenues in each period. The increase
in costs was due to significant expansion of our professional services
resources across all categories, including consulting, telephone support and
training, as a result of the strong demand for our professional services. We
anticipate that service costs will increase in future periods as demand for
consulting services increases. We are seeking to reduce our service costs as a
percentage of service revenues while increasing the availability of our
services in the marketplace. We plan to achieve these goals by training more
alliance partners to deliver services directly to our customers, by reducing
our reliance on third-party subcontractors to provide services to our
customers and by increasing our profit margins on services which we do
subcontract.
24
<PAGE>
Operating Expenses
Research and Development Expenses. Research and development expenses consist
of costs related to our staff of software developers and the associated
infrastructure costs required to support software product development
initiatives. Research and development expenses increased by $4.7 million, or
65%, from $7.3 million for the nine months ended September 30, 1998 to $12.0
million for the comparable period in 1999, representing 28% of total revenues
for the nine months ended September 30, 1998 and 24% of total revenues for the
comparable period in 1999. The increase in expenses was due to a rapid
increase in software development personnel required to develop the product
functionality that our market demands. The decline in research and development
expenses as a percentage of total revenues reflects the greater proportional
increase in total revenues. We intend to continue to invest significant
resources in new releases and product extensions and anticipate that software
product development expenditures will increase significantly in future
periods.
Generally accepted accounting principles require certain internal
development costs to be capitalized under Statement of Financial Accounting
Standards No. 86, Accounting for Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed ("SFAS No. 86"). Under SFAS No. 86, we are required to
capitalize the costs associated with software development after technological
feasibility has been established. Based upon our product development process,
we generally establish technological feasibility upon completion of a working
model. Accordingly, we have not capitalized any software development costs.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salary, commission, travel, trade show and other related expenses required
to sell our TBS software in our targeted markets. These expenses increased by
$2.8 million, or 40%, from $7.1 million for the nine months ended
September 30, 1998 to $9.9 million for the comparable period in 1999,
representing 28% of total revenues for the nine month period ended
September 30, 1998 and 19% of total revenues for the comparable period in
1999. The increase in sales and marketing expenses was primarily due to a 56%
expansion of our sales personnel in order to serve the growing demand for our
products. In addition, promotional expenses increased $800,000 or 297%, for
the first nine months of 1999 compared to the first nine months of 1998. The
decline in sales and marketing expenses as a percentage of revenues was due to
an increased revenue base over which to spread the fixed cost of sales and
marketing administration. We expect that our sales and marketing expenses will
continue to increase, particularly if we expand our sales strategy to pursue
international customers.
General and Administrative Expenses. General and administrative expenses
consist of costs related to professional staff, finance and accounting, legal,
human resources, facilities and information technologies, which have not been
allocated to other departments. These expenses increased by $4.4 million, or
140%, from $3.1 million for the nine months ended September 30, 1998 to $7.5
million for the comparable period in 1999, representing 12% of total revenues
for the nine months ended September 30, 1998 and 15% of total revenues for the
comparable period in 1999. These increases resulted from the growth in legal,
operations, and support personnel of 66%, an increase in bad debt expense of
$880,000, additional recruiting and relocation expenses of $279,000 and an
increase in legal expenses of $145,000 attributable to an arbitration hearing.
We expect that general and administrative expenses will continue to increase
due to the need to add additional staff to support growing operations, and
from costs related to being a public company.
Interest and Other Income, Net
Interest and other income, consists of interest income, interest expense and
other non-operating items. These items decreased from $236,000 for the nine
months ended September 30, 1998 to $87,000 for the comparable period in 1999,
primarily due to a $130,000 charge related to the disposal of fixed assets.
Income Tax Expense (Benefit)
We recorded an income tax benefit of $223,000 for the nine months ended
September 30, 1998 compared to income tax expense of $890,000 for the
comparable period in 1999. The variance in each period from the federal
25
<PAGE>
statutory income tax rate was due to state income taxes and expenses recorded
for financial reporting purposes that are not deductible for federal income
tax purposes.
Years Ended December 31, 1996, 1997 and 1998
Revenues
Total revenues increased by $5.5 million, or 143%, from $3.8 million in 1996
to $9.3 million in 1997 and increased by $33.3 million, or 358%, to $42.6
million in 1998. License revenues increased by $3.4 million, or 178%, from
$1.9 million in 1996 to $5.3 million in 1997 and increased by $18.1 million,
or 345%, to $23.4 million in 1998. The increase in license revenues during
1998 was due to the increase in the number of our customers driven by
increased market awareness and acceptance of our software and by expansion of
our sales organization.
Service revenues increased by $2.1 million, or 109%, from $1.9 million in
1996 to $4.0 million in 1997 and increased by $15.1 million, or 374%, to $19.1
million in 1998. The increase in service revenues resulted from an increase in
the number of license agreements that included related implementation
services, and from an expanding base of customers subscribing to maintenance
agreements, resulting in increases in maintenance revenue of 99% from 1996 to
1997, and 421% from 1997 to 1998. Service revenues as a percentage of total
revenues were 50%, 43% and 45% for the years ended December 31, 1996, 1997 and
1998, respectively.
The combination of increased license revenues, shortened implementation
times and a reduction in customized software development helped improve our
mix of total revenues from predominantly service revenues to predominantly
license revenues.
Cost of Revenues
License Costs. License costs increased by $154,000, or 223%, from $69,000 in
1996 to $223,000 in 1997 and by $1.1 million, or 482%, to $1.3 million in
1998, representing 4%, 4% and 6% of license revenues in each year,
respectively. These increases in license costs resulted from increases in
license revenue on which royalty calculations are based. The increase in
license costs as a percentage of license revenues in 1998 was due to the
completion of customer-funded development projects in 1997, which resulted in
royalty payments on the new customer-funded software modules.
Service Costs. Service costs increased by $1.8 million, or 315%, from $0.6
million in 1996 to $2.4 million in 1997 and by $12.4 million, or 528%, to
$14.8 million in 1998, representing 29%, 58% and 77% of service revenues in
each year, respectively. These increases in service costs resulted from the
significant expansion of our professional services resources across all
categories, including professional services, training and customer support, as
a result of the strong demand for our implementation services. These increases
in service costs as a percentage of service revenues were due to the increased
use of third-party subcontractors to provide consulting services to meet
customer demand for software implementation.
Operating Expenses
Research and Development Expenses. Our research and development expenses
increased by $1.4 million, or 150%, from $0.9 million in 1996, to $2.4 million
in 1997 and by $7.8 million, or 330%, to $10.2 million in 1998, representing
25%, 25% and 24% of total revenues in each year, respectively. The increases
in these expenses were due to a rapid increase in research and development
personnel to meet customer and market demand for new features and
functionality. During 1996, we entered into customer-funded development
arrangements with two customers in order to expedite the development of
planned enhancements to our software. The proceeds from these arrangements,
$1,200,000 in 1996 and $2,200,000 in 1997, were recorded as an offset against
our research and development expenses.
Sales and Marketing Expenses. Sales and marketing expenses increased by $2.0
million, or 198%, from $1.0 million in 1996 to $3.0 million in 1997 and by
$8.6 million, or 288%, to $11.6 million in 1998, representing 26%, 32% and 27%
of total revenues in each year, respectively. We attribute the increase in
sales and marketing
26
<PAGE>
expenses primarily to the expansion of our sales and marketing staff in
response to the increased demand for our product. Our staffing increased from
7 people at the end of 1996 to 23 at the end of 1997 and to 53 as of December
31, 1998. Additionally, commission expense increased 449% from 1996 to 1997,
and 537% from 1997 to 1998 due to higher revenues on which commissions are
based. Sales and marketing expenses increased as a percentage of revenue, as a
result of the significant increase in the sales and marketing staff during
1997 and 1998.
General and Administrative Expenses. General and administrative expenses
increased by $636,000, or 97%, from $653,000 in 1996 to $1.3 million in 1997
and by $3.9 million, or 302%, to $5.2 million in 1998, representing 17%, 14%
and 12% of total revenues in each year, respectively. These increases in
general and administrative expenses resulted primarily from increases in
executive, finance and administrative personnel to support the increased scale
of our operations. In addition, the increase in 1998 included approximately
$565,000 in severance obligations to executives whose employment was
terminated during 1998.
Interest and Other Income, Net
Interest and other income consisting of interest income, interest expense,
and gains and losses on disposition of assets, was $67,000 in 1996, $115,000
in 1997 and $298,000 in 1998. These increases were the result of interest
earned on higher cash balances resulting from the sale of Class B and Class C
preferred stock in 1996, 1997 and 1998.
Income Tax Expense (Benefit)
Our income tax expense was minimal in each of the three years ended December
31, 1998. During 1996 and 1997 our tax expense decreased due to the
utilization of previously unrecognized net operating loss carryforwards. Other
variances from the federal statutory income tax rate were due to expenses
recorded for financial reporting purposes that were not deductible for federal
income tax purposes.
27
<PAGE>
Quarterly Results of Operations
The following table presents our quarterly operating results for each of the
eight quarters in the period ended September 30, 1999. We prepared this
information based on the audited financial statements contained elsewhere in
this prospectus. We believe this unaudited financial information accurately
reflects our operating results during these periods when read in conjunction
with the audited financial statements and related footnotes. Historical
results are not necessarily indicative of results in any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- ------- -------- ------- ------- ------- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License ............... $ 1,963 $ 2,406 $ 4,142 $ 6,677 $10,207 $ 7,274 $ 9,891 $10,038
Service................ 1,220 2,250 4,525 5,872 6,497 7,497 7,475 8,811
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 3,183 4,656 8,667 12,549 16,704 14,771 17,366 18,849
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 102 161 262 419 456 502 398 362
Service................ 585 1,561 3,166 4,994 5,082 5,593 6,097 6,600
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 687 1,722 3,428 5,413 5,538 6,095 6,495 6,962
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 2,496 2,934 5,239 7,136 11,166 8,676 10,871 11,887
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 1,550 2,001 2,509 2,761 2,899 3,483 3,859 4,675
Sales and marketing.... 1,243 1,543 2,189 3,367 4,535 2,632 3,368 3,940
General and
administrative........ 410 639 871 1,609 2,060 2,102 3,000 2,369
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,203 4,183 5,569 7,737 9,494 8,217 10,227 10,984
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (707) (1,249) (330) (601) 1,672 459 644 903
Interest and other
income, net............ 12 45 53 137 63 82 54 (49)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (695) (1,204) (277) (464) 1,735 541 698 854
Income tax expense
(benefit).............. (234) (137) (32) (53) 198 184 339 366
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (461) $(1,067) $ (245) $ (411) $ 1,537 $ 357 $ 359 $ 488
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License................ 62% 52% 48% 53% 61% 49% 57% 53%
Service................ 38 48 52 47 39 51 43 47
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 3 3 3 3 3 3 2 2
Service................ 19 34 37 40 30 38 35 35
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 22 37 40 43 33 41 37 37
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 78 63 60 57 67 59 63 63
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 48 43 29 22 17 24 23 25
Sales and marketing.... 39 33 25 27 27 18 19 21
General and
administrative........ 13 14 10 13 13 14 17 12
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 100 90 64 62 57 56 59 58
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (22) (27) (4) (5) 10 3 4 5
Other income (expense),
net.................... -- 1 1 1 -- 1 -- 0
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (22) (26) (3) (4) 10 4 4 5
Income tax expense
(benefit).............. (7) (3) -- (1) 1 2 2 2
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (15)% (23)% (3)% (3)% 9% 2% 2% 3%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Quarter-to-quarter revenue growth reflects the increasing acceptance of our
TBS software. Revenues during the fourth quarter of 1998 were higher than
normal due to two large sales totaling $3.5 million. We recognized these sales
in conjunction with the release of version 3.2.2 of our software in the fourth
quarter of 1998.
28
<PAGE>
Quarter-to-quarter growth in service revenues is a result of the increased
volume of software sales in preceding periods and our increased capacity to
deliver consulting services. In addition, during the most recent two-year
period, maintenance has become an increasingly significant component of
service revenues.
Cost of revenues as a percentage of total revenues were higher in each
quarter in 1998 and 1999 compared to the fourth quarter of 1997 due to an
increased use of third-party subcontractors to provide implementation services
for our customers. While the use of third-party subcontractors allowed us to
meet higher demand for consulting services without adding significantly to our
staff, we received a lower margin on the related service revenues than if we
had internally staffed implementation services.
Research and development spending has increased in each quarter but has
declined as a percentage of total revenues during the past two years. The
increases reflect the rapid addition of professional staff to meet the demands
of our customers and the general product requirements of the O&P market. The
decrease as a percentage of total revenues reflects our product's evolution to
a more standard, modular solution that allows us to leverage our product
development spending across more customers.
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It
is likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may fall significantly.
Liquidity and Capital Resources
Our operating activities used $5.4 million in cash during the nine months
ended September 30, 1998, compared to generating cash of $4.3 million for the
comparable period in 1999. In 1998, cash used in operating activities was
primarily due to our operating loss and increases in accounts receivable,
other assets and deferred taxes, which were partially offset by increases in
accounts payable and deferred revenues. Accounts receivable increased from
$2.0 million to $11.1 million as of December 31, 1997 and 1998, respectively,
and to $13.4 million at September 30, 1999. These increases in accounts
receivable resulted from higher revenues, a significant portion of which were
generated during the last month of each quarter. Deferred revenues were $2.9
million, $2.6 million, and $8.7 million as of December 31, 1997 and 1998, and
September 30, 1999, respectively. Our expanded installed base of customers and
emphasis on selling prepaid maintenance has resulted in a significant increase
in deferred revenues related to ongoing maintenance. Increases in payables and
other assets were due to general growth in our operations.
During 1996, 1997 and 1998, we supplemented our operating activities through
the sale of preferred stock. We raised $2.5 million in 1996 and $110,000 in
1997 through the sale of Class B preferred stock, and raised $10.0 million in
1998 though the sale of Class C preferred stock.
In January 1999, we entered into a $6.0 million revolving bank line of
credit agreement that expires in July 2002. The agreement also provides for an
equipment term loan facility of up to $4.0 million for capital expansion. The
facility is secured by substantially all of our tangible assets. Interest on
borrowings accrues at the bank's prime rate of interest. We had borrowed $1.8
million on this line at September 30, 1999, primarily due to the purchase of
capital equipment. In addition, at September 30, 1999 we had a standby letter
of credit outstanding for $1.3 million in lieu of a security deposit for our
facility expansion lease, which reduces the borrowing availability under the
line of credit.
Historically, our principal use of cash for investing activities was the
purchase of computer and networking equipment and furniture to accommodate
growth in the number of employees. In 1998, we committed to an expansion of
our leased facility in Plano, Texas. Completion of the facility is expected in
the fourth quarter of 1999. The lease expires in 2010. We expect to spend
approximately $3.0 million on leasehold improvements, furniture and fixtures
and networking equipment in connection with this expansion. We have no other
significant capital commitments.
29
<PAGE>
As of September 30, 1999, we had $12.4 million in cash and cash equivalents
and $10.5 million in working capital. We believe that the net proceeds from
this offering, together with existing cash balances, available borrowing
capacity and cash flow from operations will be sufficient to meet our capital
requirements for the next twelve months. Thereafter, we may require additional
funds to support our working capital requirements or for other purposes, and
we may seek to raise additional funds through public or private equity
financing. There can be no assurance that additional financing will be
available on commercially reasonable terms, or that such financing will be
available at all.
Year 2000 Compliance
Many currently installed computer systems and software products have been
designed to accommodate only two digit entries to represent the year in the
date field. As a result, these systems may be unable to determine whether the
designation "00" means the year 1900 or the year 2000. This may result in
system failures or the creation of erroneous results and is commonly known as
the Year 2000 problem.
We must assess the impact of the Year 2000 on software sold to customers,
internal information systems, and significant vendors of our products and
services. We have established a Year 2000 program management office to ensure
that we have adequately addressed exposures related to the Year 2000 and are
Year 2000 ready. "Year 2000 ready" means that the performance or functionality
of both our TBS software and our internal systems will not be significantly
affected by the dates prior to, during and after the Year 2000, to include
leap year calculations and specific day-of-the-week calculations.
Our review of our TBS software for Year 2000 readiness is performed as part
of our normal quality assurance function. As of the date of this prospectus,
we have identified no material Year 2000 compliance issues with respect to any
TBS software that our customers are currently operating. However, our TBS
software operates in complex network environments and must interact with many
different hardware and software systems. We have not performed extensive tests
on all hardware and software that may operate in conjunction with our TBS
software. Accordingly, some customers may experience Year 2000 problems, which
may require our assistance to correct.
Through a risk analysis completed by our Year 2000 program management
office, we have identified the critical systems within our internal operations
that may be affected by Year 2000 issues. We believe we have identified
substantially all major computers, software applications and related equipment
used within our internal operations that must be upgraded or replaced to
minimize the possibility of a disruption to our business. The version of
accounting software we currently use is not Year 2000 ready. Rather than
upgrade to a new version of software, we have elected to replace this system
with a new management reporting system that will be much more flexible as we
grow. We expect this conversion to be complete during the fourth quarter of
1999. However, if we are not ready to convert, we believe that it would be
possible to upgrade to a Year 2000-ready version of our existing software, or
to process data manually until the new system is ready for conversion.
In addition to our accounting system, our business is also dependent upon
software to operate our e-mail system, software development and testing tools
and office software applications. We are unaware of any material costs or
operational issues associated with preparing these internal systems for the
year 2000.
Our business is also dependent upon computer controlled systems of third
parties such as vendors, customers and public service providers. The operation
of our office and facilities equipment, such as elevators, fax machines,
photocopiers, security systems and telephone switches may all be affected by
the Year 2000 problem. We have contacted each of our vendors to obtain
assurance that these systems are Year 2000 ready, however, not all vendors
have responded. In addition, we have not independently tested the claims of
our vendors who have responded. We believe that, absent a critical failure of
electrical, telephone or other public services beyond our control, Year 2000
problems experienced by third parties will not have a material impact on our
operations.
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We are currently developing contingency plans to be implemented in the event
that we fail to identify all of the Year 2000 problems affecting our internal
systems. These plans could include accelerated replacement of equipment and
software, short-term use of back-up systems, manipulation of system dates or
manual workarounds until any problems are corrected.
Despite our efforts, there is no assurance that we will be able to identify
and correct all Year 2000 problems. Any failure to achieve Year 2000 readiness
could result in a decrease in revenues, an increase in resources required to
address the Year 2000 problems of our customers, or an increase in litigation
costs relating to losses suffered by our customers as a result of the Year
2000 problem. The costs associated with remediating any Year 2000 problems
have not been material to date. Although we do not anticipate that these costs
will be material in the future, we cannot assure you that these future costs
will not be material.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because we do not currently
hold any derivative instruments and do not engage in hedging activities, we do
not believe the adoption of SFAS No. 133 will have a material impact on our
financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9
amends SOP 98-4 to extend the deferral of the application of certain
requirements of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective
for transactions entered into in fiscal years beginning after March 15, 1999.
We have not yet determined the effect of the final adoption of SOP 98-9 on our
future revenues and results of operations.
Quantitative and Qualitative Disclosures about Market Risk
Our financial instruments consist of cash that is invested in short-term,
risk free investments. At September 30, 1999 the carrying value of our
financial instruments approximated their fair values based on current market
prices and rates. We do not use derivative financial instruments in our
operations or investments and do not have significant operations subject to
fluctuations in commodity prices or foreign currency exchange rates.
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BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements."
MetaSolv Software, Inc.
We are a leading provider of order management and service provisioning, or
O&P, software solutions for next-generation telecommunications service
providers. Next-generation telecommunications service providers are
telecommunications providers that have emerged as a result of new technology
and industry deregulation and that offer a variety of traditional and new
services. Service providers use order management and service provisioning
systems to process a customer's order for telecommunications service,
provision and reserve the appropriate network resources to establish the
requested service, and detect and resolve any problems that may occur with
that service. Our Telecom Business Solution, or TBS, software is a
comprehensive order management and service provisioning solution, designed to
meet the needs of next-generation telecommunications service providers.
Traditional telecommunications service providers specialize in providing one
type of service, such as local or long distance telephone service. Now,
however, industry deregulation and technological advances make it possible for
a telecommunications service provider to offer a variety of services--such as
local, long-distance and Internet service--in a single bundled package to
their customers. Next-generation service providers offer these bundled
packages of telecommunications services and need O&P software that can handle
the enormously complex tasks involved in creating and delivering multiple
services. Based on recent industry reports, we estimate the worldwide spending
on third-party O&P solutions by these next-generation service providers will
grow by over 40% per year to $1.2 billion in 2001.
We developed our TBS software as a packaged software solution for licensing
to telecommunications service providers. Our business model is not based on
the development of software that is custom-designed to meet the needs of a
single customer. Founded in 1992, we began to build an O&P software system in
early 1994 in conjunction with ALLTEL, an established service provider. The
initial O&P product developed by MetaSolv and ALLTEL focused on the tasks
necessary to connect local-exchange networks to those of the long-distance
service providers. After the Telecommunications Act of 1996 opened the local-
exchange market to competition, we expanded our product line to address the
needs of service providers involved in the resale and wholesale of local and
long-distance services. In early 1997, we expanded our TBS software to support
the creation and delivery of services on networks that combine voice and data
services. Throughout 1998 and 1999, we enhanced our TBS software to support
the creation and delivery of services that utilize the Internet as a
communications network.
We currently have over 50 customers representing all facets of the
telecommunications industry including established telecommunications service
providers, such as GTE and ALLTEL; new service providers competing in local-
service markets, such as Allegiance Telecom and GST Telecommunications;
operators of the large, high-speed networks that sell transmission capacity to
other service providers or sell services directly to customers, such as Qwest
Communications and Williams Communications; the emerging long-distance
operations of these companies, such as BellSouth and Ameritech; and new local
service providers that specialize in providing data-communications services,
such as HarvardNET and GTE Global Networks Infrastructure.
Industry Background
The Telecommunications Industry
Today's telecommunications service providers operate in an increasingly
competitive and complex marketplace. Several trends are transforming the
global telecommunications industry, including ongoing deregulation and
privatization; proliferation of new service providers competing for market
share; growing customer demand for high-speed data services; and unprecedented
growth of the Internet as a worldwide communications medium.
The breakup of the AT&T monopoly in the early 1980s fostered competition in
the U.S. long-distance industry. Even so, the seven local telephone companies
created by the AT&T breakup known as the Regional Bell Operating Companies or
RBOCs, continued to operate as regional monopolies, with little competition in
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their local-exchange markets. The Telecommunications Act of 1996, however,
opened those markets to competition. The Telecommunications Act of 1996
requires the RBOCs and other traditional local service providers, such as GTE,
to give new competitors access to their local networks. With such access,
these new competitors, called competitive local-exchange carriers, or CLECs,
can provide local services to customers. Prompted by the competitive need to
distinguish themselves in a more crowded market, both traditional service
providers and CLECs seek to offer more than just local voice services. Many
also are positioning themselves to provide long-distance voice communications
and high-speed data services, such as Internet access.
The privatization of government-owned service providers and the opening of
previously-closed markets are current trends within the international
telecommunications arena. As a result, an increasing number of competitive
exchange carriers are seeking to provide telecommunications services outside
of the United States, and many of them are building their own
telecommunications networks.
The dramatic increase in the number of new telecommunications service
providers, domestically and internationally, stems not just from regulatory
changes but also from the emergence of new telecommunications technologies.
These innovations include:
. digital and high-speed or "broadband" wireless systems;
. digital-subscriber-line (DSL) technology, which increases the
information-carrying capacity of existing telephone wires; and
. devices, such as cable-TV modems, that give customers access to multiple
types of service.
Individually and collectively, these innovations give new competitors
alternate means of reaching homes and businesses. Consequently, CLECs can
bypass the traditional service providers to provide not only local and long
distance phone service but also high-speed data services.
The demand by business and residential customers for high-speed data
services has increased primarily because of an increase in the volume of
customers' data traffic. The main reason that customers are sending more and
more data traffic is the unprecedented growth of the Internet as a
communications medium. International Data Corporation estimates that there
were 142 million Internet users worldwide at the end of 1998. This number is
expected to climb to 502 million users by the end of 2003. Not surprisingly,
therefore, research by The Yankee Group shows that data traffic is growing
five times faster than voice traffic. By 2003, the total volume of data
traffic is expected to exceed the total volume of voice traffic.
The Internet is changing the way businesses and individuals use the
telecommunications network. For example, Internet-based electronic commerce
has expanded the role of the telecommunications network from a transportation
system for communications traffic to a medium for conducting business
transactions. This bigger role for the network creates new business
opportunities for both established and new telecommunications service
providers. As a result, more and more competitors are entering the
telecommunications market, including:
. companies that build and operate major segments of the Internet;
. companies that provide access to the Internet and the services running
on it;
. companies that offer voice-telephone service over the Internet;
. Internet-based divisions of traditional telecommunications companies;
and
. companies that provide application software as a service available to
users over the Internet.
The demand for and use of the Internet as a new communications medium are
also bringing about changes in the design of the traditional public telephone
network. Service providers use a combination of networks to give their
customers access to the Internet. This combination involves the public
telephone network, with its traditional switching and routing technology, and
new high-speed data networks that use a new kind of switching and routing
technology, first used in the Internet. This new switching and routing
technology is based on the ability to separate voice and data messages into
packets of information. This combination of traditional switched and new
packet-based network technologies is driving the development of a whole new
kind of network: one that is more complex, that is based on Internet
switching-and-routing technology and that transports both voice
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and data traffic, as well as more advanced services such as electronic-
business applications. Service providers now want to provide voice and data
services over these so-called converged networks, as shown in the diagram
below.
[Diagram showing two circles, labeled "Public Switched Network" and "Public
Data Network," respectively. Arrows from each circle converge and point to a
larger circle labeled "Converged Network." Inside the circle labeled "Public
Switched Network" appear the phrases "Circuit-Switched Networks," "Primarily
Voice Services" and "Low-Speed Network Access." Inside the circle labeled
"Public Data Network" appear the phrases "Packet-Switched Network," "Data
Services" and "High-Speed Internet Access." Inside the circle labeled
"Converged Network" appear the phrases, "Packet-Switched Core," "Data and
Voice Services" and "Advanced Services." To the left of the circles, the
phrases "Traditional Service Providers" appears on the same level as the
smaller circles. An arrow points down to the phrase "Next-Generation Service
Providers," which appears on the same level as the larger circle.]
Because of the increasingly competitive and complex telecommunications
marketplace, service providers continually look for ways to introduce and
connect customers to new services more rapidly and efficiently than before.
This emphasis on prompt, cost-effective service fulfillment means that O&P
systems are becoming more important as a tool that enables a given service
provider to distinguish itself from its competitors.
The Order Management and Service Provisioning Market
O&P software systems perform all the tasks necessary for a service provider
to process a customer's order and deliver a specific telecommunications
service. The diagram below shows the functions of O&P and other software
programs used by service providers; together, these programs comprise a
complete system that supports the service provider's operations.
[Diagram showing a rectangle separated into five smaller rectangles. The
rectangle in the top and center is raised above the rest and bears the
heading, "Order Management & Service Provisioning." Below the heading appears
the phrases, "Order processing and management," "Product/service planning,"
"Network planning, design and optimization," "Network inventory management,"
"Provisioning/circuit assignment" and "Trouble handling and resolution
coordination." To the upper left appears a rectangle bearing the heading
"Customer Care" and the phrases "Customer service," "Marketing support" and
"Fraud protection." To the lower left appears a rectangle bearing the heading
"Interconnection" and the phrases "Service/Address validation," "Number
Portability" and "Electronic information exchange." To the lower right appears
a rectangle bearing the heading "Network Management" and the phrases "Service
activation," "Fault & performance monitoring" and "Network element
configuration." To the upper right appears a rectangle bearing the heading
"Billing" and the phrases "Transaction rating," "Switch mediation" and
"Invoice generation."]
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Traditional telecommunications service providers either build their own O&P
systems or obtain them from communications equipment manufacturers, from
providers of traditional operations support systems, such as Telcordia
Technologies (formerly Bellcore) and Bell Sygma, or from systems integrators.
Typically, these O&P systems are proprietary and support only a limited number
of services, primarily voice.
By contrast, next generation telecommunications service providers need O&P
systems that enable them to respond to customer demands for a bundle of
services. Such a bundle can include local-exchange phone service; private or
dedicated line service which connects, for example, a company's headquarters
with its branch offices; domestic and international long-distance voice and
data services; and a full suite of Internet services. Further, these service
providers need O&P systems that allow them to design and provision this mix of
services over complex, converged networks that are designed to carry both
voice and data traffic.
O&P systems used by traditional service providers do not generally meet the
requirements of the new next-generation service providers for several reasons:
. They do not integrate different functions associated with different
types of service; thus, a service provider must use separate O&P systems
to create and deliver each type of service that the service provider
offers.
. Traditional software system designs are based on centralized mainframe
computers; therefore, they are cumbersome and do not give the service
provider the flexibility to add new services easily and cost-
effectively.
. The proprietary nature of traditional O&P systems makes it very
difficult to get them to work with other systems.
. Existing systems often rely on manual processes, rather than more cost-
effective automated tasks.
To overcome these limitations, next-generation service providers need a
flexible, adaptable O&P system that can meet the service requirements of
converged networks. To launch their businesses and provide a single, unified
O&P system that accommodates packages of services, an increasing number of
these service providers are turning to commercially available, third-party
packaged software solutions. We estimate, based on recent industry reports,
that the global market for such third-party O&P systems will be $1.2 billion
in 2001, compared to $0.6 billion in 1999, for a compound annual growth rate
of 40%.
The MetaSolv Software Solution
We develop, market and support O&P software specifically designed to meet
the complex business needs of next-generation telecommunications service
providers. Our Telecom Business Solution, or TBS, software is a comprehensive
O&P system that integrates information across all areas of operations,
including customer information, order information, product and service
information, network inventory, and workflow information. We believe that our
TBS software is a unique solution in that it integrates these capabilities
while also providing a flexible, open platform for the ordering and
provisioning of existing telecommunications services with the rapid
development and deployment of new services.
We believe our solution provides the following benefits to our customers:
Integration Drives Opportunities to Increase Revenues. We believe our
software's primary advantage is its ability to integrate information across
the service provider's entire operation, including customer information, order
information, product and service information, network inventory and workflow
information. Our TBS software is designed to enable a service provider to
offer a variety of services more quickly and to package and price its services
by integrating them with available network capacity and resources. Our
integrated workflow technology automatically guides a customer's request for
service through the entire fulfillment process, up to and including routing
the request for automatic activation and billing. This integration and
automated flow-through of information shortens the elapsed time between a
customer's order and the activation of service; as a result, service providers
can bill for services more accurately and quickly.
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Automation Increases Productivity and Streamlines Operations. We designed
our TBS software to eliminate manual processes and to automate otherwise
labor-intensive tasks, thus improving operating efficiencies and reducing
costs. The following are examples of these automated and streamlined
operations:
. Process automation tools, or "wizards," are embedded in the software to
guide the user through time-consuming tasks, such as entering complex
order information or designing an optical fiber network.
. Information required for complex orders is transmitted automatically
between service providers, which reduces costly errors.
. A common database reduces the costs of maintaining information in
multiple systems and the need to enter data manually more than once.
. Service providers can determine their network capacity requirements
before committing to equipment purchases or network configurations; as a
result, they have more control over capital outlays for network
facilities.
Open Design Enables Best-of-Breed Operations Support Solutions. We have
built our TBS software using an open design with fully-documented interfaces,
commonly referred to as application programming interfaces or APIs. These APIs
make it easier for our customers, partners, and other third parties to
integrate the TBS software and integrate it with other software applications.
Our customers can also use the API architecture to build Web-based
applications that expose our software functionality to their end consumers.
Through our open design and alliance program, we provide our customers with
superior software solutions that combine best-of-breed applications with the
efficiency and cost-effectiveness of commercial, packaged interfaces. Our
partners provide operations support systems solutions for the functions
outside the scope of our TBS software. These functions include customer care
and billing; network management; and service provider-to-service provider
electronic exchange of information. In addition, we have alliances with
software vendors such as Nortel Networks and Siebel Systems that provide
commercial interfaces between our TBS software and other third-party software
products and traditional software systems.
System Grows Along with the Business Operations. We designed our software by
using both programming and database techniques that ensure high-quality system
performance for on-line transaction processing. These techniques also allow
the software to be used by an increasing number of users to process an
expanding volume of transactions without performance degradation, making it
useful for a wide range of customers, from small start-up service providers to
large global telecommunications providers. This ability to grow in step with
expanding operations without the need for re-design or large-scale system
replacements enables a service provider to maximize the return on its
investment in TBS software. Our software runs on a variety of hardware and
software platforms, from a laptop computer running Windows NT and Personal
Oracle, to a large cluster of UNIX-based servers.
The MetaSolv Software Strategy
Our strategy is to solidify our position as a leader in the O&P market by
establishing our TBS software as the platform of choice for providers of next-
generation communications services. Key elements of this strategy are:
Continue to Enhance Our Packaged Software Business Model. Our business model
is based on what we believe is a significant market demand by next-generation
service providers for comprehensive O&P functionality from a packaged software
solution, rather than from a customized solution built internally or by some
of our competitors. This packaged software model enables us to grow our
revenues more quickly by shortening sales cycles, reducing implementation
timeframes and taking advantage of our partners' capabilities. By building and
supporting packaged software, we are able to leverage our research and
development, implementation and product support resources over a larger
customer base, thereby reducing our product costs and increasing our margins.
Combined with our strategic partnerships, our strategy is to offer packaged
software products to achieve and maintain a high-margin, software-driven
business model.
Target Leading Next-Generation Telecommunications Service Providers
Worldwide. The unique capabilities of the TBS software product line enable us
to address the market for converged telecommunications
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services. Many of our current customers are market leaders in their respective
segments and are expanding globally. We believe our products enable our
customers to bring new telecommunications services to market more quickly,
resulting in increased use of TBS software throughout their organization. Our
targeted market segments and representative existing next-generation service
provider customers include:
. market-leading CLECs, both wireline and wireless, that operate their own
networks, including Allegiance Telecom, Electric Lightwave, GST
Telecommunications, Teligent and Winstar Wireless;
. owners/operators of national and international high-speed
telecommunications networks, including Qwest Communications and Williams
Communications;
. new business ventures of such established service providers as GTE
Global Networks Infrastructure, BellSouth and Ameritech; and
. CLECs that focus on providing data services, including HarvardNET and
DSLnet.
Leverage Software Development Expertise and Market Experience. Our product
and service offerings are the result of our seven-year history as a leading
provider of commercial O&P software to telecommunications service providers.
Our professionals have extensive experience in developing, marketing and
supporting large-scale software applications that run across an entire
business operation. In addition, we have accumulated considerable experience
within the telecommunications industry. By combining our software expertise
and telecommunications experience, we have developed successful O&P solutions
for numerous telecommunications service providers. Our relationships with
leading service providers enable us to gain insights into their future product
and service requirements. We intend to continue to leverage our experience and
expertise to create additional software products required by existing and
potential customers.
Expand Strategic Partnerships. We have established several partnerships and
alliances that effectively give our organization a global reach. These
relationships extend our sales organization by providing a source of leads and
referrals. They extend our professional services organization by increasing
our capacity to implement TBS software. Finally, they extend our software
capabilities beyond O&P via their expertise with other operations support
system applications. Our partnership strategy is unique in its approach and
breadth, and, as such, we believe it provides us with a competitive advantage.
Our partnerships and alliances include systems integrators such as Ernst &
Young; ADC; American Management Systems; DMR Consulting Group; Andersen
Consulting; Arthur Andersen; and Cap Gemini. They also include complementary
software application vendors such as ADC/Saville Systems; Portal; Daleen;
Syndesis; Harris; and DSET, as well as hardware/software platform vendors such
as Microsoft and Oracle. Taking advantage of this network of partners enables
us to focus on developing and maintaining O&P software while offering a
complete solution to the customer. In addition, our systems integration
partners are certified in TBS software implementations and the use of our
programming interfaces.
Introduce New e.Business Applications. We currently are developing
electronic business-to-business, or "e.Business," solutions that permit
service providers and their customers to use TBS software over the Internet to
handle such functions as service inquiries and adjustments via Web browsers.
Our goal is to make it possible for service providers to use the TBS Internet-
application components either "out of the box" or as the basis for creating
new components that reflect a service provider's individual brand and
services. Service providers can deploy these components via the Internet to
customers and partners, via extranets to their suppliers and agents and via
intranets to remote offices and telecommuting employees. TBS Internet
applications may include the ability to:
. place orders for residential and business voice services, Internet
services and Web-hosting services;
. establish e-mail accounts;
. change existing service requirements;
. monitor the status of pending orders; and
. inquire about service availability and capabilities, enter a repair
request or check the status of a reported problem.
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Expand Into New Geographic Markets and Industry Segments. Our current
customers operate primarily in North America, including a customer in Mexico
using a Spanish version of our product. We intend to target and penetrate new
geographic markets within the next two years, particularly Europe and South
America, as these markets experience similar trends to those that have driven
growth in North America. We intend to roll out our international product in
2000, with selected modules of the TBS software product that are suited to
international business practices. Our strategy is to capitalize on the
international practices of our systems integrator partners and, as business
opportunities arise, to augment these efforts with local professional service
personnel. Further, we intend to penetrate additional market segments, such as
cable television, direct satellite broadcast and application service providers
by developing additional software modules targeted at those specific segments.
Products and Services
We are a leader in providing integrated and comprehensive O&P solutions for
next-generation telecommunications service providers. Our software is designed
to allow our customers to respond to market demand quickly and efficiently, to
optimize service fulfillment and to build stronger relationships with their
customers. In addition to providing maintenance and technical support for our
TBS software, we provide, through our professional services organization,
implementation planning and management as well as training.
Telecom Business Solution
Our TBS software addresses a service provider's needs and requirements with
a flexible design which can scale, or grow along with their expanding business
operations. Our TBS software consists of a set of integrated subsystems: order
management, service provisioning, network inventory and design, customer care,
trouble management, data management and application programming interface and
gateway management. These subsystems are coordinated by a common workflow
engine and database. As shown in the diagram below, each subsystem supports a
critical aspect of a service provider's business from order management and
customer care to service provisioning, network inventory and design and
trouble management:
[Diagram labeled "Telecom Business Solution" consisting of a center sphere
labeled "Work Management" and "Data Management" which is surrounded by
triangles labeled, "Customer Care," "Trouble Management," "Order Management,"
"Service Provisioning" and "Network Design." A large box labeled "API &
Gateway Management" appears below all of the figures.]
Telecom Business Solution
A telecommunications service provider can extend each subsystem by using
add-on software modules to tailor the TBS software to support unique products
and services. These modules support a variety of telecommunications services
including resale or wholesale voice, data or Internet services, as well as
network technologies, such as broadband wireless, optical networks or digital
subscriber lines.
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One critical function provided by our TBS software design is information
management. By making information more accessible and useful, our TBS software
enables a service provider to manage its business more efficiently, to provide
more services with the highest possible quality, and to deliver superior
customer care. The work management design integrates the subsystems, allowing
work to flow electronically across the service provider's organization while
providing ready access to performance and resource usage information. Our
integrated approach provides comprehensive support for current and emerging
services, network technologies and evolving business processes.
Order Management
TBS software's order management subsystem enables the service provider to
manage the complete service delivery process, which often involves several
kinds of orders or transactions within a service provider's own organization,
as well as between different service providers. Our order management subsystem
supports resale, retail or wholesale orders for local or long-distance voice,
data and Internet services. The order management subsystem reduces the
complexity of dealing with a variety of disjointed and non-integrated systems.
Service Provisioning
The service provisioning subsystem helps the service provider design,
configure and assign inventory to fulfill even the most complex services. It
includes automated circuit-design capabilities to ensure the fulfillment of
services according to the service provider's specifications. Through the
service provisioning subsystem, the service provider can deliver the wide
range of services that today's sophisticated customer requires, from
traditional voice to high-speed data and Internet-based technologies.
Service provisioning is the term for the complex process by which engineers
determine how a given service is to be delivered, whether through owned,
leased or future telecommunications network facilities. Our service
provisioning subsystem automates these complex processes. For example,
engineers might specify the use of off-network facilities if portions of
another service provider's network are needed to fulfill the service order.
That specification then triggers additional service requests, such as an order
for the long-distance portion of a circuit from that other service provider,
or a request within the service provider's own organization to order a new
piece of equipment or build additional facilities. The service provisioning
process links these service requests with the original customer order and,
through the work management process, manages the steps to complete all of the
order. By supporting end-to-end service design, our TBS software gives the
customer service representative the information he or she needs to handle
reports of trouble from customers. For example, our TBS software identifies
whether the service problem stems from the service provider's own network or
from another service provider's network.
Network Inventory and Design
The network inventory and design subsystem enables service providers to
manage large telecommunications networks, while also giving them the
flexibility to manage new as well as traditional technologies. This subsystem
presents the geographical, electrical, physical and logical dimensions of the
network in a single, cohesive view for service providers.
A set of administration and design modules work together to present this
view, and these modules provide an integrated tool for building and managing
today's complex networks. A core design principle implemented in each of these
modules is the support for the logical view of the network. In today's
environment, the network components used to provide services to the service
provider's customers may come from a variety of sources within and outside the
service provider's own organization. Traditional network management systems
often limit the service provider's ability to plan and manage service
delivery. Such traditional systems reveal only those network components the
service provider owns and has installed, or only those network components that
the software can physically detect. By contrast, TBS software's network
inventory and design subsystem encompasses network design and service
fulfillment across multiple service providers and technologies.
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Customer Care
One of the key aspects of our design is tightly-integrated customer
information. We design our TBS software to provide a view of the customer from
numerous perspectives, all of which are important to managing and
strengthening the service provider's relationship with that customer. For
instance, bills are more accurate because the information passed to the
billing system is tightly integrated with information about other tasks
associated with the customer's service order. As each task is completed, the
relevant information goes automatically to the billing system. Because all
aspects of customer information are available in a single design, the people
who interact with the customer, such as the customer-service representative,
sales person, or repair technician, are able to see the entire customer
service history.
Trouble Management
In today's converged network, the issue of trouble management is becoming
more complicated. It no longer is enough to open and track trouble tickets.
Effective trouble management now requires integrated information: information
about the service provider's network, about its customers and about the
services that the network delivers. By linking TBS software's trouble
management subsystem with the order management, service provisioning and
network design subsystems, our software gives the service provider a single
comprehensive view of its customers, the services that each receives and the
way those services are provided. For example, when dealing with trouble
incidents, the customer service representative can see immediately a
customer's past and current services, as well as services that are in the
process of being installed, along with the relevant technical design details
and trouble history.
Work Management
The work management subsystem brings all the TBS software subsystems
together, enabling work to flow electronically across the service provider's
organization. This flow makes it possible for managers to analyze how various
business processes are performing and how they are using resources. The
foundation of workflow management is the ability to design customized service
fulfillment plans which list in detail all the tasks that go into satisfying
the customer's request for service. These fulfillment plans organize and
manage the flow of tasks, both electronic and manual, according to the service
provider's business processes. The work management subsystem coordinates
service requests that are related, to achieve the most efficient completion of
the tasks across the multiple plans for fulfillment of those requests. By
providing a comprehensive look at where the customer's request for service is
in the process, the subsystem enables customer service representatives to
deliver exceptional customer care and service.
Data Management
The data management subsystem makes the information the service provider
needs to manage its entire operation more accessible and useful. It maintains
in a central repository all industry, corporate and other reference data
required to ensure quality and integrity throughout the business processes.
Central data management means that service provider personnel enter
information only once and that such information is accessible from all
appropriate areas of the TBS software application, including gateways (see
next section) and interfaces with third-party systems.
Application Programming Interface (API) and Gateway Management
The TBS software is based on an open design that allows the electronic
exchange of information within a large array of systems, such as the service
provider's network, other systems within the service provider's organization
and external trading or service partners and the systems that support their
operations. This electronic exchange of information occurs through our
interfaces, commonly referred to as application programming interfaces or
APIs. These APIs make it easy for our customers, partners, and other third
parties to customize the TBS software and integrate it with other software
applications.
In addition to open interfaces, we also offer gateways. These gateways are
interfaces that have been extended and customized to perform a specific
function such as pass information to a billing system.
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Professional Services and Support
We believe that our ability to provide high-quality customer service and
support is critical to ensuring long-term customer satisfaction. We have
developed a broad array of service offerings to assist our diverse customer
base:
Professional Services
Our professional services organization assists customers in the program
management, project planning, installation and implementation of our TBS
software solution. As of September 30, 1999, that organization consisted of 85
people located in several cities in the United States and in London.
Our professional services organization primarily provides the expertise
necessary to install the TBS software and to get it up and running. We
supplement our expertise with that of our systems integration partners. Our
systems integration partners provide expertise on large projects typically
involving multiple systems, extensive program management and the development
of custom interfaces. Together with our systems integration partners, we
currently have more than 275 consultants trained in the installation and
operation of TBS software.
Our professional services organization and systems integration partners
assess the size and complexity of a service provider's specific implementation
needs with a custom implementation profile. This profile is based on the
characteristics of the service provider's operations and the objectives to be
satisfied by a TBS software implementation. It focuses on business-related
activities, such as business processes and data migration, and on technology-
related activities, such as selecting software, gateways and platforms. Based
on the information in the profile, the team produces a program summary, which
provides the starting point for installing the TBS software.
Among the specific services available from our professional services
organization are:
Framework for Success is a set of tools and processes designed to ensure a
successful implementation of TBS software and can be targeted to a specific
customer's needs. These tools and processes incorporate industry best
practices and techniques specific to MetaSolv's expertise and experience.
These tools and processes can be tailored, on an ongoing basis, as a
customer's requirements change. By shortening our customer's learning curve
and streamlining the TBS implementation cycle, Framework for Success saves
time and money.
QuickStart is a program designed to simplify and speed up the installation
of TBS software. It consists of a TBS software database pre-loaded with data
and workflow engine, along with a defined training curriculum for the end
user. As a result, TBS can be up and running in fewer than 90 days. Built from
knowledge acquired in previous TBS software implementations, the QuickStart
program makes maximum use of a customer's resources and shortens service-
delivery intervals.
Rapid Results is a workshop designed a) to improve the skills of the
individuals on the customer implementation team and b) to streamline the TBS
software implementation, primarily by improving business methods and
processes. The workshop provides in-depth exposure to TBS software concepts
and implementation requirements. Team members learn how and where information
is loaded in the TBS software database, and they see demonstrations of best
practices for setting up and maintaining TBS software.
Educational Offerings
We provide a comprehensive series of classes to our customers, employees and
partners so they acquire the knowledge and skills necessary to deploy, use and
maintain our software solutions. These classes focus on the technical aspects
of our products and on real-world business issues and processes. All classes
include lectures, demonstrations, discussions and hands-on use of our
solutions. Classes are held regularly at our training centers in our Plano,
Texas headquarters and in our Englewood, Colorado and McLean, Virginia
facilities. We also offer Train-the-Trainer programs that enable our customers
to conduct their own internal end-user training.
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Maintenance and Technical Support
Our maintenance and technical support services include help desk support,
problem resolution, software maintenance and scheduled software upgrades. Via
the Web, telephone, and/or electronic mail, we answer customers' technical
questions promptly and thoroughly. Our automated customer service system
tracks each customer's inquiry through complete resolution. We provide
technical support for our products from our headquarters location and, in
response to customer needs, we plan to establish additional customer support
sites domestically and internationally. With our TBS software, we provide
complete documentation, including system administration guides and programming
interface-integration guides, as well as online help. Our typical software
maintenance agreement has a 12-month renewable term.
Alliances and Partnerships
To ensure delivery of a comprehensive end-to-end solution for our customers,
we have established strategic relationships with organizations in three
general categories: systems integrators, complementary software application
vendors and hardware/software platform vendors.
Systems Integrators. We use systems-integration partners to provide, jointly
or separately, a range of services to our customers. Among our partners are
Ernst & Young; ADC Telecommunications; American Management Systems; DMR
Consulting Group; Andersen Consulting; Arthur Andersen; and Cap Gemini. They
install our product at the customer location and often assist us in generating
sales leads. Using our Framework for Success tools and processes mentioned
above, we have certified and trained more than 200 consultants in these
organizations in the implementation and operation of our TBS software.
Complementary Software Application Vendors. We have joint marketing
relationships with several software vendors which offer products and services
that complement our TBS software solution. Together with these partners, we
provide our customers with superior software solutions that combine best-of-
breed applications and the efficiency/cost-effectiveness of commercial, off-
the-shelf interfaces. Our software partners provide solutions for the
operations-support functions which our TBS software does not address; these
include customer care and billing, network management and electronic exchange
of information between service providers. In addition, we have alliances with
other software-integration vendors that provide commercial interfaces between
our TBS software and other third-party software systems. Our partners in this
area include:
.Customer Care and Billing--Siebel Systems, Saville Systems, Daleen and
Portal Software;
.Network Management--Harris, Nortel Networks and Syndesis;
.Interconnection Gateways--DSET and Quintessent Technologies; and
.Software Integration--Vitria Technology and Crossworlds Software.
Hardware/Software Platform Vendors. Our technology strategy is to focus
exclusively on our core O&P solution, TBS software. Accordingly, we have
formed partnerships and alliances with leading hardware and software vendors,
including Microsoft, Oracle, Iona, Merant and ESRI. We intend to establish
additional alliances to support new platforms and functions.
Customers
Our typical customers are providers of telecommunications services, from
traditional local and long-distance services to Internet-based services, that
benefit from an integrated, flexible O&P solution. As of September 30, 1999,
we had licensed TBS to more than 50 customers worldwide, including:
<TABLE>
<CAPTION>
<S> <C>
.Allegiance Telecom .Cox Communications
.Ameritech .GTE
.Bell Atlantic .GTE Global Networks
.BellSouth .Infrastructure
.Birch Telecom .Electric Lightwave
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
.GST Communications .Time Warner Telecom
.HarvardNET .Qwest Communications
.MaxCom .International
.Net2000 Communications .US Xchange
.NorthwesTel .Williams Communications
.Telergy .Winstar Wireless
.Teligent
</TABLE>
Technology
We have developed the TBS software on a tiered client/server platform
designed to be reliable and to scale along with a service provider's expanding
operations. The diagram below illustrates the three tiers of our TBS software
design.
[Diagram labeled "Telecom Business Solution Technology Architecture"
consisting of three shaded areas. The first shaded area, labeled "User
Interface Tier," consists of three computer screens labeled "Windows Desktop,"
"Intranet" and "Internet" with connections from the computers to the second
shaded area. The second shaded area, labeled "Application Server Tier,"
consists of three connected depictions of servers labeled "API Server," "Web
Server" and "Transaction Server" and is connected by a single line to the
third shaded area. The third shaded area, labeled "Data Tier," consists of a
cylinder labeled "Database."]
Telecom Business Solution (TBS) Technology Design
. User Interface Tier: includes the client-based graphical user interface
(GUI) presentation services, which run on a browser or Windows, Windows
NT, or Windows 95/98. Some client-side application logic also resides on
this tier.
. Application Server Tier: includes the business logic in components
running on Microsoft Transaction Server. These business logic and
database access objects enable us to build different GUIs with the same
business logic code. In addition, application programming interfaces
give our customers and partners access to these components. Open and
fully-documented APIs make it possible to customize and integrate the
TBS software with existing customer, partner and third-party software
applications. We plan to introduce the Web Server, which will allow our
customers to offer self-service application interfaces via the Internet,
in the fourth quarter of 1999.
. Data Tier: includes an Oracle relational database management system
where all TBS data is stored. We leverage the Oracle database features
and support operations on any platform supported by Oracle.
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This three-tier technology design provides the following benefits to our
customers:
. Flexibility: Multiple GUIs enable our customers to select the
presentation platform of their choice, as well as to manage the upgrade
and internal distribution f the software.
. Scalability: The TBS software grows easily, from dozens to thousands of
users, while simultaneously maintaining high performance levels. Our
customers can add multiple servers as needed to any level of the system,
generally without service interruption.
. Data Integrity: The database design preserves data integrity while
ensuring fast, efficient transaction-oriented data retrieval methods. As
a demonstration of resilience, the database design has remained constant
during the life and evolution of other components of the software. This
stability provides reusability of the business functionality as new,
updated GUIs are developed.
. Open Design: Our open, fully-documented APIs allow our customers and
partners to integrate our TBS software with existing internal and
external software systems.
Sales and Marketing
Sales
We market and sell our software directly through our sales force and
indirectly through our partners. To date, we have concentrated our sales
efforts on a range of service providers, from small start-ups to large
established telecommunications service providers that offer both voice and data
services, including Internet-based services.
Our direct sales force, which consists of 16 employees, is organized into
two-person account teams, each with an account executive and a sales analyst.
After each sale, we assign account managers to provide ongoing support and to
identify additional sales opportunities. We generate leads from contacts made
through trade shows, seminars, conferences, market research, our Web site,
customers, partners and our ongoing public relations program. We qualify the
lead and assign an account team to prospective customers. The account team
initiates the sales process, which generally involves multiple presentations
and software demonstrations to information technology and business users within
the prospective customer's organization. We also have established an effective
"corporate visit program" for the prospective customer to meet with our
executive management, product managers and software architects at our corporate
headquarters. Such a meeting centers on a comprehensive sales effort that
includes in-depth software and business discussions.
We complement our direct sales force with alliances with systems integrators,
complementary software application vendors and hardware/software platform
vendors. These partners give our direct sales force a global reach and provide
significant leads and referrals. We also believe these relationships lend
credibility to our technology and help to gain market acceptance of our
software and services.
For our typical customer, the elapsed time between initial contact and
execution of a license agreement ranges from four to nine months.
Telecommunications service providers usually go through lengthy bidding
processes before purchasing software applications such as ours.
Most of our sales thus far have been to North American customers. However,
because of ongoing privatization and the resulting competition, we believe
there is significant demand for new O&P products and services outside of North
America. We intend to expand our sales and marketing efforts accordingly,
through a combination of direct sales in selected markets; continued
partnerships; and the extension of our relationships with existing customers as
they expand into international markets.
Marketing
We focus our marketing efforts on developing market strategies and product
plans, creating awareness of our O&P solutions and generating new sales
opportunities. Our product management organization provides direction on target
markets and their O&P requirements. We base our product strategy on an analysis
of market
44
<PAGE>
requirements, competitive offerings and projected return on investment. Our
product managers are active in numerous technology and industry forums.
Through these domestic and international forums, we participate in various
projects that demonstrate our capability to support world-class, commercial,
off-the-shelf O&P solutions.
In addition, we rely on several marketing activities to create awareness of
our TBS software solution and to generate sales opportunities. Through our
product marketing and marketing communications functions, we manage and
maintain our Web site, publish product-related communications and educational
white papers and conduct seminars and user-group conferences. We also have an
aggressive public-relations program and maintain relationships with recognized
industry analysts; both are part of an ongoing effort to create awareness of
O&P solutions and our TBS software in particular. We are an active sponsor of
technology-related conferences and demonstrate our product at trade shows
targeted at providers of telecommunications services. We also focus on a range
of joint marketing strategies and programs with our partners in order to
leverage their respective market relationships and resources.
Competition
Competition in our markets is intense and involves rapidly-changing
technologies and customer requirements, as well as evolving industry standards
and frequent product introductions. We believe several factors make MetaSolv a
strong competitor, including:
.the breadth and depth of our solution;
.the quality and performance of our product;
.our high-quality customer service;
.our ability to implement and integrate solutions;
.the overall value of our solution; and
.the references of our customers.
Competitors vary in size and scope, in terms of products and services
offered. We encounter competition from several vendors, including Telcordia
Technology (formerly Bellcore), Lucent Technologies, Architel Systems, and
Eftia OSS Solutions. We also compete with systems integrators and with the
information-technology departments of large telecommunications service
providers. We are aware of numerous other telecommunications service
providers, software developers, and smaller entrepreneurial companies that are
focusing significant resources on developing and marketing products and
services that will compete with our TBS software. We anticipate continued
growth in the telecommunications industry and the entrance of new competitors
in the O&P software market and that the market for our products and services
will remain intensely competitive.
Research and Development
Teams of development engineers, software architects and product managers are
responsible for our research and development efforts. The organization uses a
software development process that includes planning and documenting
deliverables in advance; rigorously adhering to coding standards; and
performing significant performance and function tests. Involving all
functional groups at various levels within MetaSolv, this process provides a
framework for all the steps necessary to turn concepts into products and to
market those products cost-effectively and successfully. In addition, we have
recruited development engineers, architects and product managers with
experience in O&P solutions and other facets of software, along with senior
managers experienced in software used by telecommunications service providers.
We enhance our software in partnership with our customers, leveraging their
telecommunications experience with our commercial software-development
expertise. As part of our emphasis on the importance of customer feedback, we
provide upgrades of and enhancements to the TBS software on a regular basis.
Our customer User Group maintains an active enhancement-ranking process, by
which members continually establish priorities for software improvements and
evaluate the enhancements we deliver.
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Our research and development expenditures totaled approximately:
.$12.0 million for the nine months ended September 30, 1999;
.$10.2 million for the fiscal year ended December 31, 1998;
.$2.4 million for the fiscal year ended December 31, 1997; and
.$0.9 million for the fiscal year ended December 31, 1996.
As of September 30, 1999, 175 employees were engaged in research and
development activities.
Intellectual Property
To establish and protect our intellectual property, we rely on a combination
of patent, copyright, trade secret and trademark laws, as well as
confidentiality procedures and contractual restrictions. MetaSolv Software,
the MetaSolv logo, Telecom Business Solution, TBS, TBS QuickStart, PowerFrame
and Rapid Results are trademarks, and MetaSolv is a registered trademark of
MetaSolv Software, Inc. To maximize protection of our technology, we have set
up a patent-protection program. We have filed for patent protection on certain
aspects of our software, and we will continue to file patent applications to
establish exclusive rights to certain technology we have developed. While we
rely on patent, copyright, trade secret and trademark law to protect our
technology, we believe that such factors as the technical and creative skills
of our employees, frequent product enhancements and improved product quality
are essential to maintaining a technology-leadership position. We cannot be
certain that others will not develop technologies that are similar or superior
to our technology.
We generally enter into confidentiality and license agreements with our
employees, alliance partners and customers, and generally control access to
and distribution of our software, documentation and other proprietary
information. We license, rather than sell, our TBS software and require our
customers to enter into license agreements that restrict their ability to use
the software.
Despite our efforts to protect proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology to
develop products with the same or similar functions as our products. Policing
unauthorized use of our products is difficult, and we cannot be certain that
the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect proprietary
rights as fully as they do in the United States. In addition, certain of our
license agreements require us to place the source code for TBS in escrow. Such
agreements generally provide that these parties will have a limited, non-
exclusive right to use this code if:
.there is a bankruptcy proceeding by or against us;
.we cease to do business without a successor; or
.we discontinue providing maintenance and support.
For information concerning risks associated with intellectual property
rights, see "Risk Factors." If we cannot protect or enforce our intellectual
property rights, which currently consist primarily of TBS software and
Framework for Success technologies, our competitors may be able to introduce
competing products that are similar to ours, which would hurt our ability to
compete. In addition, we may become involved in costly and time-consuming
litigation.
Employees
We believe that our growth and success is attributable in large part to our
high-caliber employees and an experienced management team, many members of
which have years of industry experience in building, implementing, marketing
and selling software applications critical to business operations. We maintain
a strong corporate culture and reinforce it by requiring employees to attend
an extensive 80-hour orientation program to learn our technology, the industry
we serve and our company values. We intend to continue teaching and
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<PAGE>
promoting our culture and believe such efforts provide us with a sustainable
competitive advantage. We offer a work environment that enables employees to
make meaningful contributions, as well as incentive programs to continue to
motivate and reward our employees.
As of September 30, 1999, we had 371 full-time employees of whom:
.85 were in professional services;
.58 were in sales and marketing;
.175 were in research and development; and
.53 were in finance, administration and operations.
Our future performance depends significantly on the continued services of our
key technical, sales and senior-management personnel, none of whom is bound by
an employment agreement requiring service for any defined period of time. The
loss of the services of one or more of our key employees could harm our
business. Our future success also depends on our continuing ability to attract,
train and retain highly-qualified technical, sales and managerial personnel.
Competition for personnel is intense, particularly in the Dallas area where we
are headquartered Because of the limited number of available people with the
necessary technical skills and understanding of the telecommunications industry
and Internet services business, we cannot be certain that we can retain or
attract key personnel in the future. None of our employees is represented by a
labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.
Facilities
We lease a building, which measures approximately 60,000 square feet, in an
office park, along with another 12,900 square feet of temporary office space in
Plano, Texas. In addition to our current building, we will occupy an additional
building, measuring 100,000 square feet, which now is under construction on an
adjacent lot. We plan to expand into that building in November 1999, under a
lease that expires in 2010. In addition to our principal office space in Plano,
Texas, we lease facilities and offices in Englewood, Colorado; Chicago,
Illinois; McLean, Virginia; San Francisco, California; Atlanta, Georgia; and
London, England. Lease terms for these locations expire between September 1999
and July 2006. We believe that the facilities we now lease are sufficient to
meet our needs through at least the next 12 months. However, we may require
additional office space after that time, and we now are evaluating expansion
possibilities.
Legal Proceedings
We are not a party to any material legal proceedings.
47
<PAGE>
MANAGEMENT
Officers and Directors
The executive officers and directors of MetaSolv and their ages as of
September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
James P. Janicki........ 44 President and Chief Executive Officer
Sidney V. Sack.......... 54 Chief Operating Officer
Glenn A. Etherington.... 44 Chief Financial Officer
Jonathan K. Hustis...... 43 Vice President -- Business Services, General
Counsel and Corporate Secretary
Joseph W. Pollard....... 43 Vice President -- Sales
Dana R. Brown........... 34 Vice President -- Marketing
Eleanor M. Luce......... 56 Vice President -- Services
Glenda J. Akers......... 46 Vice President -- Engineering
John W. White........... 60 Chairman of the Board of Directors
David R. Semmel......... 43 Director
William N. Sick(1)...... 64 Director
Adam Solomon............ 46 Director
John D. Thornton(1)(2).. 34 Director
Barry F. Eggers(2)...... 36 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
James P. Janicki co-founded MetaSolv in July 1992 and since such time has
served in various capacities. Mr. Janicki was appointed Chief Executive
Officer in May 1999. He has served as President and a director of MetaSolv
since April 1994. From June 1982 to July 1992, Mr. Janicki was at Texas
Instruments where he served in many capacities, including as the manager of
the Texas Instruments' CASE consulting practice from July 1987 to August 1990
and as the manager of the Template software business from August 1990 until
July 1992. Texas Instruments develops and manufactures semiconductors and
other products in the electrical and electronics industry. Prior to June 1982,
Mr. Janicki was a co-founder and Vice President of VEDA Systems, a custom
software and consulting services firm. Mr. Janicki is the husband of Ms.
Brown, our Vice President--Marketing.
Sidney V. Sack has served as Chief Operating Officer of MetaSolv since March
1999. Mr. Sack also acted as MetaSolv's interim chief financial officer from
March 1999 until May 1999. From November 1998 until March 1999, Mr. Sack
provided financial and operational consulting services to MetaSolv. From
September 1990 to July 1997, Mr. Sack was the Chief Financial Officer of
XcelleNet, a developer of remote and mobile communications management
software. In addition, from September 1996 until July 1997, Mr. Sack was the
Executive Vice President and Chief Operating Officer of XcelleNet.
Glenn A. Etherington has served as Chief Financial Officer of MetaSolv since
May 1999. Mr. Etherington held various senior management positions at Brite
Voice Systems, a leading provider of enhanced telecommunications products and
interactive information systems, from August 1988 to May 1999. He was Chief
Financial Officer from August 1988 to May 1999, Treasurer from August 1988 to
May 1993 and Secretary from May 1993 to May 1999. From March 1984 to August
1988, Mr. Etherington held various accounting and financial positions,
including Chief Financial Officer, with American City Business Journals a
publisher of weekly business newspapers.
Jonathan K. Hustis has served as General Counsel and Corporate Secretary of
MetaSolv since April 1997. He was appointed Vice President--Business Services
of MetaSolv in August 1998. Mr. Hustis was at Texas Instruments where he
worked in its Corporate Finance Group from November 1995 until April 1997 and
as Manager--Business Services in its Information Technology Group (Advanced
Information Management and Enterprise Solutions divisions) during September
1989 to November 1995. Mr. Hustis was with FoxMeyer Corporation as associate
general counsel from August 1987 until September 1989. He was in private law
practice in Dallas, Texas from November 1980 until August 1987.
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Joseph W. Pollard has served as Vice President-Sales of MetaSolv since
February 1997. From July 1992 to February 1997, Mr. Pollard was the Director
of Sales, South-Central Region and Director of Sales, International for Tivoli
Systems, a provider of systems management software and Manager, International
Sales and National Accounts, for Visual Information Technologies, a commercial
Internet service provider.
Dana R. Brown joined MetaSolv at its founding in July 1992 and since such
time has served in various capacities. She has served as Vice President-
Marketing of MetaSolv since August 1997. Ms. Brown was the business unit
manager of MetaSolv's object-oriented component software group from August
1992 to March 1996 and the Director of Marketing from April 1996 to August
1997. From April 1989 to July 1992, Ms. Brown held various consulting
positions with Texas Instruments, Advanced Information Management software
division. From May 1987 to April 1989, Ms. Brown was a Management Information
Systems Consultant with Arthur Andersen, a public accounting firm. Ms. Brown
is the wife of Mr. Janicki, our President and Chief Executive Officer.
Eleanor M. Luce has served as Vice President-Services of MetaSolv since
February 1999. From February 1996 to February 1999, Ms. Luce was a Vice
President of Professional Services at Sybase, a database software company.
From June 1990 to February 1996, Ms. Luce was a Vice President at MCI Network
Systems, a developer of network management systems.
Glenda J. Akers has served as Vice President-Engineering of MetaSolv since
March 1999. From September 1998 to March 1999, Ms. Akers was the Vice
President of Engineering for WarpSpeed Communications, a developer of high-
speed networking products. From March 1996 to March 1998, she was the Vice
President of Server Engineering for Sybase, Inc., where she managed the
engineering development for Sybase's core product, SQL Server. From February
1990 to March 1996, Ms. Akers was Director-Engineering for Network and
Provisioning Systems at MCI Network Systems.
John W. White been a member of MetaSolv's Board of Directors since December,
1998 and Chairman of the Board of Directors since August 1999. Mr. White was
Vice President and Chief Information Officer for Compaq Computer, a developer
and marketer of computer hardware and software, from February 1994 to October
1998, where he served as a member of the executive management team for Compaq,
overseeing their worldwide information systems activities. Prior to February
1994, Mr. White was President of the Information Technology Group and Chief
Information Officer for Texas Instruments. Mr. White serves as a director of
Citrix, a provider of server-based computing solutions.
David R. Semmel has been a member of MetaSolv's Board of Directors since
January 1994. Mr. Semmel has been a member of the general partner of Kettle
Partners, LP, a venture capital fund focusing on Internet and
telecommunications investments since its inception in 1997. Mr. Semmel has
been a principal of the general partner of Pangaea, LP, an equity hedge fund,
since its inception in 1993. He has been the general partner of Pangaea
Partners, LP, an investment partnership, since 1988.
William N. Sick, Jr. co-founded MetaSolv and has been a member of MetaSolv's
Board of Directors since July 1992. Mr. Sick is co-manager of the manager of
Signature Capital, a venture capital firm, and Chairman, President and Chief
Executive Officer of Business Resources International, Inc., a business
services firm. He has held these positions since April 1997 and September
1989, respectively. He formerly was Chairman of Aware, Chief Executive Officer
of American National Can Company and President of Texas Instruments
Semiconductor Group.
Adam Solomon has been a member of MetaSolv's Board of Directors since
January 1994. Mr. Solomon has been Chairman of Shaker Investments, an
investment management company, since October 1994. Mr. Solomon is also
Chairman of Signature International, a specialized real estate investment
fund. He is a former president and current board member of the New York
Venture Capital Forum. Mr. Solomon is also a member of the Board of Directors
of Global TeleSystems, a telecommunications company.
John D. Thornton has been a member of MetaSolv's Board of Directors since
June 1996. Mr. Thornton is a General Partner of Austin Ventures, a venture
capital firm, where he has been employed since 1991. Mr. Thornton
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serves as a director of Vignette, a developer of Internet relationship
management software, and Mission Critical Software, a developer of enterprise-
scale Windows NT systems administration and management software products.
Barry F. Eggers has been a member of MetaSolv's Board of Directors since
June 1998. Mr. Eggers has been a general partner of Weiss, Peck & Greer
Venture Partners since February 1997. Prior to joining Weiss, Peck & Greer
Venture Partners, a venture capital firm, he served in several capacities at
Cisco Systems, a worldwide leader in networking for the Internet, including
Director of Business Development and Director of Field Operations for the
company's ATM Business Unit.
Board of Directors
We currently have authorized seven directors. Upon the completion of the
offering, the terms of the office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
the stockholders to be held in 2000; Class II, whose term will expire at the
annual meeting of stockholders to be held in 2001; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2002. The
Class I directors are Mr. Solomon and Mr. Semmel, the Class II directors are
Mr. Sick and Mr. Eggers and the Class III directors are Mr. White, Mr. Janicki
and Mr. Thornton. At each annual meeting of stockholders after the initial
classification, the successors to directors whose term will then expire will
be elected to serve from the time of election and qualification until the
third annual meeting following election. This classification of the Board of
Directors may have the effect of delaying or preventing changes in control or
management of MetaSolv. The officers serve at the discretion of the Board.
Except for Ms. Brown and Mr. Janicki, there are no family relationships among
the directors and officers of MetaSolv.
Board Committees. The Compensation Committee consists of Messrs. Sick and
Thornton. The Compensation Committee administers our stock plans and makes
decisions concerning salaries and incentive compensation for our employees.
The Audit Committee consists of Messrs. Thornton and Eggers. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent accountants, reviews the results and scope of audit
and other services provided by our independent accountants and reviews and
evaluates our audit and control functions.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee is currently or has been,
at any time since the formation of MetaSolv, an officer or employee of
MetaSolv. No member of our Compensation Committee serves as a member of the
board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
Compensation Committee.
Director Compensation
Non-employee directors receive $1,500 per meeting attended in person, and
$200 per meeting attended in tele-conference. All directors are reimbursed for
reasonable expenses incurred by them in attending board and committee
meetings. In recognition for his services, we granted John W. White during
1998 an option to purchase 100,000 shares of our common stock at fair market
value as of the date of the grant.
Each non-employee director (other than venture capital investors and
founders who hold our stock) who is or becomes a member of the board on or
after the date of this offering will be granted an option to purchase up to
30,000 shares of our common stock (up to 10,000 shares for each year of his or
her term) under the Long-Term Incentive Plan on the first annual meeting after
this offering or, if later, on the date he or she is elected to the board.
Each option will have an exercise price equal to the fair market value of our
common stock on the date of grant and will have a term to be determined by the
Compensation Committee and will generally terminate within a specified time,
as defined in the Long-Term Incentive Plan, following the date the
optionholder ceases to be a director. Each continuing non-employee director
will receive an additional award of a formula option of up to 30,000 shares,
upon each subsequent election to the board. Each option award will vest in
equal annual installments over the term of the director.
50
<PAGE>
Indemnification
In June 1998, the board of directors, and in September 1999 the
shareholders, authorized MetaSolv to enter into indemnification agreements
with each of our directors and executive officers. The form of indemnity
agreement provides that we will indemnify against any and all expenses of the
director or executive officer who incurred such expenses because of his or her
status as a director or executive officer, to the fullest extent permitted by
Delaware law, our certificate of incorporation and our bylaws.
Our certificate of incorporation and bylaws contain certain provisions
relating to the limitation of liability and indemnification of directors and
officers. The certificate of incorporation provides that our directors shall
not be personally liable to MetaSolv or its stockholders for monetary damages
for any breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to MetaSolv or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. in respect of certain unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
. for any transaction from which the director derives any improper
personal benefit.
The certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
certificate of incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law. The foregoing provisions of the
certificate of incorporation are not intended to limit the liability of
directors or officers for any violation of applicable federal securities laws.
In addition, as permitted by Section 145 of the Delaware General Corporation
Law, our bylaws provide that
. we are required to indemnify our directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law;
. we may, in our discretion, indemnify other officers, employees and
agents as provided by the Delaware General Corporation Law;
. to the fullest extent permitted by the Delaware General Corporation Law,
we are required to advance all expenses incurred by our directors and
executive officers in connection with a legal proceeding (subject to
certain exceptions);
. the rights conferred in the bylaws are not exclusive;
. we are authorized to enter into indemnification agreements with our
directors, officers, employees and agents; and
. we may not retroactively amend the bylaws provisions relating to
indemnity.
51
<PAGE>
Executive Compensation
The following table sets forth information with respect to compensation
earned during 1998 by our current and former Chief Executive Officers and our
three other highest-paid executive officers, collectively referred to as the
Named Executive Officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- ------------
Number of
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation (1)(2)
- --------------------------- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
James P. Janicki......... $ 139,375 $ 86,610 200,000 $9,390
President and Chief
Executive Officer
Michael J. Watters....... 116,041 -- -- 380,633
Former Chief Executive
Officer
Jonathan K. Hustis....... 121,125 17,914 100,000 5,086
Vice President --
Business Services,
General Counsel and
Corporate Secretary
Dana R. Brown............ 118,185 20,703 100,000 4,797
Vice President --
Marketing
Joseph W. Pollard........ 110,000 82,516 -- 7,484
Vice President -- Sales
</TABLE>
- --------
(1) Represents contributions made by us to all of our Named Executive Officers
(except for Michael J. Watters) under our 401(k)/profit sharing plan.
(2) Michael J. Watters resigned on November 2, 1998. All other compensation
includes $160,000 in two lump sum severance payments and $10,633 in
accrued vacation. In addition, under a severance agreement, we are paying
Mr. Watters a continued salary of up to $210,000 for an 18-month period
beginning November 1998, in monthly installments of $11,666.67. The full
amount of these installment payments is included in this column.
52
<PAGE>
The following table sets forth each grant of stock options in 1998 to each
of the Named Executive Officers. No stock appreciation rights were granted
during such period.
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------------ Annual Rates of
Number of Stock Price
Securities Percent of Total Appreciation for
Underlying Options Granted Option Term (4)
Options to Employees in Exercise Price Expiration --------------------
Name Granted (1) 1998(2) (per share)(3) Date 5% 10%
- ---- ----------- ---------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
James P. Janicki........ 200,000 11.8% $0.60 3/20/08 $ 75,467 $ 191,249
Michael J. Watters...... -- -- -- -- -- --
Jonathan K. Hustis...... 100,000 5.9 0.60 3/20/08 37,734 95,625
Dana R. Brown........... 100,000 5.9 0.60 3/20/08 37,734 95,625
Joseph W. Pollard....... -- -- -- -- -- --
</TABLE>
Option Grants in Last Fiscal Year
- --------
(1) Generally, most of the shares under the options listed in the table are
immediately exercisable, but are subject to repurchase by us at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. Typically, the repurchase right
lapses and the optionee vests in 20% of the option shares upon completion
of 12 months of service from the vesting start date, and in the balance in
a series of equal annual installments over the next four years of service.
Any option shares that are not immediately exercisable will vest and
become exercisable 20% upon completion of 12 months of service from the
vesting start date, with the balance vesting in a series of equal annual
installments over the next four years of service. The option shares will
vest upon the dissolution or liquidation of MetaSolv, or on certain
reorganizations where there is no plan to convert or exchange the options
into option shares of the surviving entity, unless our repurchase right
with respect to the unvested option shares is transferred to the acquiring
entity. Each of the options has a ten-year term, subject to earlier
termination in the event of the optionee's cessation of service with us.
(2) Based upon options to purchase an aggregate of 1,698,300 shares of common
stock granted to employees of MetaSolv in 1998 under the 1992 Stock Option
Plan.
(3) The exercise price was equal to the fair market value of our common stock
as valued by the board of directors on the date of grant. The fair market
value of our common stock was estimated by the board of directors on the
basis of the purchase price paid by investors for shares of our preferred
stock (taking into account the liquidation preferences and other rights,
privileges and preferences associated with the preferred stock) and an
evaluation by the board of our revenues, operating history and prospects.
(4) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years). Stock price appreciation of 5%
and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent our prediction of our stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the estimated fair market
value on the date of grant appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price. (See
footnote (3) for information on how the fair market value of our common
stock was estimated.)
53
<PAGE>
The following table sets forth for each of the Named Executive Officers
options exercised during 1998 and the number and value of securities
underlying unexercised options that are held by the Named Executive Officers
as of December 31, 1998.
Aggregated Option Exercises in 1998 and Year-End 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-
Unexercised Options at Money Options at
December 31, 1998(2) December 31, 1998(3)
------------------------ ---------------------
Shares
Acquired Value
Name on Exercise Realized(1) Vested Unvested Vested Unvested
---- ----------- ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James P. Janicki........ 100,000 $326,500 702,000 798,000 $2,265,230 $2,492,270
Michael J. Watters...... -- -- -- -- -- --
Jonathan K. Hustis...... -- -- 20,000 180,000 63,300 543,200
Dana R. Brown........... -- -- 64,000 136,000 205,610 405,740
Joseph W. Pollard....... -- -- 56,000 224,000 177,240 708,960
</TABLE>
- --------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) Some of the options are immediately exercisable, but any shares purchased
under those options will be subject to repurchase by us, at the original
exercise price paid per share, upon the optionee's cessation of service
with us, before vesting in such shares. For those immediately exercisable
options, the heading "Vested" refers to shares no longer subject to
repurchase; the heading "Unvested" refers to shares subject to repurchase
as of December 31, 1998. Those option shares that are not immediately
exercisable will vest and become exercisable 20% upon completion of 12
months of service from the vesting start date, with the balance vesting in
a series of equal annual installments over the next four years of service.
(3) Based on the fair market value of our common stock at the end of 1998 as
determined by our board of directors, $3.50, less the exercise price
payable for such shares. The fair market value of our common stock at the
end of 1998 was estimated by the board of directors on the basis of the
purchase price paid by investors for shares of our preferred stock (taking
into account the liquidation preferences and other rights, privileges and
preferences associated with the preferred stock) and an evaluation by the
board of our revenues, operating history and prospects. The initial public
offering price is higher than the estimated fair market value on December
31, 1998, and the value of unexercised options would be higher than the
numbers shown in the table if the value were calculated by subtracting the
exercise price from the initial public offering price.
Termination and Change of Control Arrangements
On November 2, 1998, Michael J. Watters resigned from his employment with
us. Under the terms of a severance agreement, we agreed to pay Mr. Watters two
lump-sum payments in the aggregate amount of $160,000, plus $10,633 in accrued
vacation. We also agreed to continue his salary for up to 18 months at the
rate of $11,666.67 per month ($210,000 in total). Under certain circumstances
the salary continuation period may end prior to the completion of 18 months.
In addition to the foregoing payments, we agreed to continue and
54
<PAGE>
pay for Mr. Watters' health insurance coverage for the duration of the salary
continuation period. In exchange for the payments to Mr. Watters, he released
us from any claims he may have had against us and agreed that, for a period of
18 months, he would not become employed by any entity which competes against
us, nor would he solicit any of our customers or employees.
James P. Janicki, Jonathan K. Hustis and Dana R. Brown received options in
1998 to purchase shares of our common stock. Under the terms of their
respective option agreements, they will be entitled to certain accelerated
vesting if their employment is terminated, other than for cause, after a
change of control. In the event their employment terminates after a change of
control occurs, they will become immediately vested in all shares that
otherwise would have vested following the date their employment terminates.
Employee Stock Plans
Long-Term Incentive Plan
On August 24, 1999, our board of directors adopted the Long-Term Incentive
Plan, which is designed to enhance long-term profitability and stockholder
value by offering common stock, common stock-based and other performance
incentives to those employees, directors and consultants who are key to our
growth and success. We also view the Long-Term Incentive Plan as a vehicle to
attract and retain experienced employees and to align our employees' economic
incentives with those of our stockholders. On August 24, 1999, our board also
approved the merger of our 1992 Stock Option Plan into the Long-Term Incentive
Plan, so that we now have one comprehensive stock-based incentive plan. Our
stockholders also approved the Long-Term Incentive Plan.
The Long-Term Incentive Plan is administered by the compensation committee
of our board, which, has exclusive authority to grant awards under the Long-
Term Incentive Plan and to make all interpretations and determinations
affecting the Long-Term Incentive Plan. The compensation committee has the
discretion to determine the individuals to whom awards are granted, the amount
of each award, any applicable vesting schedule and other terms of any award.
In no event, however, may an individual receive option grants under the Long-
Term Incentive Plan for more than 1,000,000 shares of common stock in any
calendar year.
Participation in the Long-Term Incentive Plan is limited to our employees,
consultants, advisors, independent contractors and directors. In addition,
non-employee directors (other than venture capital investors and founders who
hold our stock) automatically participate in the formula program. Awards under
the Long-Term Incentive Plan may be in the form of stock options (including
both incentive stock options that meet the requirements of Section 422 of the
Internal Revenue Code and nonqualified stock options), stock awards,
restricted stock grants, stock appreciation rights and performance awards
(collectively, "Awards"). Awards in the form of stock options will be for an
exercise price of not less than fair market value on the date of the option's
grant. Any Award issued under the Long-Term Incentive Plan that is forfeited,
expired, cancelled or terminated prior to exercise will again become available
for grant under the Long-Term Incentive Plan.
The Long-Term Incentive Plan also includes a directors' formula program. The
formula program provides for the automatic grant of options to purchase shares
of common stock to our non-employee directors (other than venture capital
investors and founders who hold our stock). Pursuant to the terms of the
formula program, each of these non-employee directors who is or becomes a
member of the board on or after the date of this offering will be granted an
option to purchase up to 30,000 shares of our common stock (up to 10,000
shares for each year of his or her term) under the Long-Term Incentive Plan on
the first annual meeting after this offering or, if later, on the date he or
she is elected to the board. The formula is subject to decrease at the board's
discretion. Each option will have an exercise price equal to the fair market
value of our common stock on the date of grant and will have a ten-year term,
but will generally terminate within a specified time, as defined in the Long-
Term Incentive Plan, following the date the optionholder ceases to be a
director. Each continuing non-employee director will receive an additional
award of a formula option of up to 30,000 shares, upon each subsequent
election to the board. Each option award will vest in equal annual
installments over the term of the director.
55
<PAGE>
The maximum number of shares of common stock which may be issued and awarded
under the Long-Term Incentive Plan is 9,320,000 shares. That number will be
increased as of each January 1 by 5% of our outstanding common stock. In the
event of any stock dividend, stock split, recapitalization, merger, other
change in our capitalization, or similar corporate transaction or event
affecting the common stock, the compensation committee may make appropriate
adjustments to the Awards. We also may accelerate the timing of the exercise
of any Awards or cancel any Award and provide instead for the payment to the
participant in cash of the economic value of the award at the time of
cancellation. Our board may amend or terminate the Long-Term Incentive Plan at
any time. If our board amends the Plan, it does not need to ask for
stockholder approval unless applicable law requires it.
As of September 30, 1999, there are options outstanding under the Long-Term
Incentive Plan to purchase 6,726,680 shares of common stock at a weighted
average price of $2.11 per share, of which 4,168,986 are currently
exercisable.
Employee Stock Purchase Plan
Our Board of Directors adopted the Employee Stock Purchase Plan on August
24, 1999. Our stockholders also approved this plan. The Employee Stock
Purchase Plan is intended to qualify under Section 423 of the Internal Revenue
Code of 1986. We have reserved 600,000 shares of our common stock for issuance
under the plan. That number will increase as of each January 1 by 1% of our
outstanding common stock. The Employee Stock Purchase Plan will be
administered by the compensation committee of our Board of Directors.
All of our employees are eligible to participate in the Employee Stock
Purchase Plan, if they are employed by us for more than 20 hours per week.
Eligible employees may begin participating in the Employee Stock Purchase Plan
at the start of any calendar year quarter.
Our Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions
may not exceed 15% of his or her cash compensation. Purchases of our common
stock will occur on the last day of each calendar year quarter, based upon the
amount deducted by the employee during that calendar year quarter. The value
of the shares purchased in any calendar year by any one employee may not
exceed $25,000.
The price of each share of common stock purchased under our Employee Stock
Purchase Plan will be equal to 85% of the lower of:
. The fair market value per share of common stock on the first day of the
applicable calendar year quarter, or
. The fair market value per share of common stock on the purchase date
(that is, on the last day of the calendar year quarter).
Employees may end their participation in our Employee Stock Purchase Plan at
any time. Participation ends automatically upon termination of employment with
us. Our board may amend or terminate the Employee Stock Purchase Plan at any
time. If our Board increases the number of shares of common stock reserved for
issuance under the plan, it must seek shareholder approval.
56
<PAGE>
CERTAIN TRANSACTIONS
Transactions with Directors and Officers
In June 1998, we raised additional capital to finance our operations through
the sale of 2,250,844 shares of Class C Preferred Stock to the following
principal and affiliate stockholders for approximately $3.50 per share:
<TABLE>
<CAPTION>
Shares of
Shares of Common Stock
Class C Aggregate Issuable Upon
Preferred Stock Consideration Conversion
--------------- ------------- -------------
<S> <C> <C> <C>
Adam Solomon...................... 139,616 $ 488,656 139,616
Austin Ventures IV-A, L.P. ....... 184,452 645,582 184,452
Austin Ventures IV-B, L.P. ....... 386,978 1,354,423 386,978
CKS Family Trust.................. 69,808 244,328 69,808
Joseph W. Pollard................. 20,000 70,000 20,000
Kettle Partners, L.P. ............ 142,858 500,003 142,858
Pangaea Partners, L.P. ........... 92,844 324,954 92,844
WPG Enterprise Fund III, L.P. .... 735,064 2,572,724 735,064
WPG Information Sciences
Entrepreneur Fund, L.P. ......... 32,464 113,624 32,464
Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. ...... 106,184 371,644 106,184
Weiss, Peck & Greer Venture
Associates IV, L.P. ............. 840,576 2,942,016 840,576
--------- ---------- ---------
Total........................... 2,750,844 $9,627,954 2,250,844
========= ========== =========
</TABLE>
The outstanding shares of Class A Preferred Stock, Class B Preferred Stock
and Class C Preferred Stock will convert into Common Stock on a 1 to 1 basis
upon the closing of this offering.
In connection with this financing, Mr. Eggers became a member of our Board
of Directors. Mr. Eggers is a general partner of Weiss, Peck & Greer Venture
Partners, an affiliate of WPG Enterprise Fund III, L.P., Weiss, Peck & Greer
Venture Associates IV, L.P., Weiss, Peck & Greer Venture Associates IV Cayman,
L.P. and WPG Information Sciences Entrepreneur Fund, L.P.
In December 1998, John W. White, a director of MetaSolv, was granted options
to purchase 100,000 shares of MetaSolv Common Stock at an exercise price of
$3.50 per share in connection with his appointment to the Board.
In December 1998, we granted John Dirvin, an employee of Austin Ventures,
options to purchase 30,000 shares of MetaSolv Common Stock at an exercise
price of $3.50 per share in connection with consulting services rendered.
In addition, we have granted options to our directors and executive
officers. See "Management -- Option Grants in the Last Fiscal Year" and
"Principal Stockholders."
In addition, we have entered into Employment Agreements with certain
Executive Officers. See "Management -- Termination and Change of Control
Arrangements."
Indemnification and Limitation of Director and Officer Liability
We have entered into an Indemnification Agreement with each of our executive
officers and directors. See "Management -- Indemnification."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent
and disinterested outside directors on the board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to shares
beneficially owned by (1) each person who is known by us to be the beneficial
owner of more than five percent of our outstanding shares of common stock, (2)
the Chief Executive Officer and each of our other executive officers named on
the Summary Compensation Table; (3) each of our directors; and (4) all current
directors and executive officers as a group. Beneficial ownership has been
determined in accordance with Rule 13d-3 under the Exchange Act. Under this
rule, certain shares may be deemed to be beneficially owned by more than one
person (if, for example, persons share the power to vote or the power to
dispose of the shares). In addition, shares are deemed to be beneficially
owned by a person if the person has the right to acquire shares (for example,
upon exercise of an option or warrant) within sixty (60) days of the date as
of which the information is provided. In computing the percentage ownership of
any person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of such
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date. The percentage of
beneficial ownership for the following table is based on 28,278,366 shares of
common stock outstanding as of September 30, 1999 assuming conversion of all
preferred stock and 33,278,366 shares of common stock outstanding after the
completion of this offering. Unless otherwise indicated, the address for each
listed stockholder is: c/o MetaSolv Software, Inc., 5560 Tennyson Parkway,
Plano, Texas 75024. To our knowledge, except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to the
shares of common stock indicated.
<TABLE>
<CAPTION>
Shares
Beneficially Percent Beneficially
5% Stockholders, Named Officers, Owned Owned
Directors, ------------ ------------------------
and Directors and Executive Officers Before After
as a Group Number Offering Offering
------------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
John D. Thornton...................... 9,063,954 32.05% 27.24%
Entities affiliated with Austin Ven-
tures (1)
Michael J. Watters (2)................ 4,580,000 16.20 13.76
William N. Sick, Jr. ................. 6,057,586 21.42 18.20
Business Resources International,
Inc. (3)
Barry F. Eggers....................... 1,923,262 6.80 5.78
Entities affiliated with Weiss, Peck
& Greer (4)
James P. Janicki (5).................. 1,423,414 4.83 4.13
Dana R. Brown (5)..................... 1,423,414 4.83 4.13
David R. Semmel (6)................... 1,276,594 4.51 3.84
Adam Solomon (7)...................... 1,135,346 4.02 3.41
John W. White (8)..................... 100,000 * *
Joseph W. Pollard (9)................. 426,912 1.50 1.28
Jonathan K. Hustis (10)............... 200,000 * *
All directors and executive officers 22,807,408 73.66% 63.42%
as a group (14 persons) (11).........
</TABLE>
- --------
*Less than 1%
(1) Includes 2,608,092 shares held by Austin Ventures IV-A, L.P., 5,470,998
shares held by Austin Ventures IV-B, L.P. and 984,864 shares held by
Austin Ventures VI, L.P. Mr. Thornton, one of our directors, is a partner
of AV Partners IV, L.P., which is the general partner of Austin Ventures
IV-A, L.P. and Austin Ventures IV-B, L.P., and a general partner of AV
Partners VI, L.P., which is the general partner of Austin Ventures VI,
L.P. Mr. Thornton disclaims beneficial ownership of the shares held by
Austin Ventures IV-A, L.P., Austin Ventures IV-B, L.P. and Austin Ventures
VI, L.P., except to the extent of his pecuniary interest therein arising
from his partnership interest in AV Partners IV, L.P. and AV Partners VI,
L.P., as the case may be.
(2) Includes 458,000 shares held by The Watter's Children Trust, 780,000
shares held by Mike and Carole Watters Charitable Remainder Trust and
3,342,000 shares held by MCDA International Partnership, Ltd.
58
<PAGE>
(3) Includes 3,344,000 shares held by Business Resources International, Inc.,
304,000 shares held by Jill Melanie Sick 1991 Trust, 304,000 shares held
by David Louis Sick 1991 Trust, 152,000 shares held by Louis Pitchlyn
Williams 1992 Trust and 22,414 shares held by Jill M. Sick.
(4) Includes 824,672 shares held by WPG Enterprise Fund III, L.L.C., 943,036
shares held by Weiss, Peck & Greer Venture Associates IV, L.L.C., 119,120
shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. and
36,434 shares held by WPG Information Sciences Entrepreneur Fund, L.P. Mr.
Eggers, one of our directors, is a Managing Member of WPG VC Fund Adviser,
L.L.C., which is the Fund Investment Advisory Member of WPG Enterprise
Fund III, L.L.C. and Weiss, Peck & Greer Venture Associates IV, L.L.C., is
the general partner of WPG Information Sciences Entrepreneur Fund, L.P.
and is a general partner of Weiss, Peck & Greer Venture Associates IV
Cayman, L.P. Mr. Eggers disclaims any beneficial ownership of the shares
held by these funds, except to the extent of his pecuniary interests
therein.
(5) Represents (i) 221,270 shares held of record by Mr. Janicki and Ms. Brown,
joint tenants, (ii) 1,060,144 shares subject to stock options held by Mr.
Janicki that are exercisable within 60 days of September 30, 1999 and
(iii) 142,000 shares subject to stock options held by Ms. Brown that are
exercisable within 60 days of September 30, 1999.
(6) Includes 242,858 shares held by Kettle Partners, L.P. and 331,116 shares
held by Pangaea Partners, L.P. Mr. Semmel, one of our directors, is a
member of Moraine, L.L.C., the general partner of Kettle Partners, L.P.,
and is the sole general partner of Pangaea Partners, L.P. Mr. Semmel
disclaims beneficial ownership of all shares held by Kettle Partners,
L.P., except to the extent of his pecuniary interest, and all shares held
by Pangaea Partners, L.P.
(7) Includes 471,088 shares held by CKS Family Trust and 123,362 shares held
by Anthony M. Solomon-1990 Trust.
(8) Consists of 100,000 shares subject to stock options held by Mr. White that
are exercisable within 60 days of September 30, 1999.
(9) Includes 117,232 shares subject to stock options held by Mr. Pollard that
are exercisable within 60 days of September 30, 1999.
(10) Includes 100,000 shares subject to stock options held by Mr. Hustis that
are exercisable within 60 days of September 30, 1999.
(11) Includes 2,684,286 shares subject to stock options that are exercisable
within 60 days of September 30, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.005 par value, and 10,000,000 shares
of preferred stock, $0.005 par value.
Common Stock
As of September 30, 1999, there were 12,033,060 shares of common stock
outstanding that were held of record by approximately 85 stockholders. As of
September 30, 1999 there were 6,766,680 shares of common stock subject to
outstanding options, of which options to purchase 4,168,986 shares are
currently exercisable. There will be 33,278,366 shares of common stock
outstanding (assuming no exercise of the underwriters' over-allotment option
and assuming no exercise after September 30, 1999, of outstanding options or
warrants) after giving effect to the sale of the shares of common stock to the
public in this offering and the automatic conversion of our preferred stock
into common stock on a one-for-one basis. The holders of common stock are
entitled to one vote per share on all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for the payment of dividends. In the
event of the liquidation, dissolution, or winding up of MetaSolv, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued on completion of this offering will be fully paid and
nonassessable.
Preferred Stock
On the closing of this offering, 10,000,000 shares of preferred stock will
be authorized and no shares will be outstanding. The board of directors has
the authority to issue the preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control
of MetaSolv without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of the
preferred stock.
Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law
Certificate of Incorporation and Bylaws. Our amended and restated
certificate of incorporation to be effective on the closing of this offering
provides that the board of directors will be divided into three classes of
directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third-
party from making a tender offer or otherwise attempting to obtain control of
MetaSolv and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. The amended and restated certificate of
incorporation also provides that, effective on the closing of this offering,
all stockholder actions must be effected at a duly called meeting and not by a
consent in writing. Further, provisions of the bylaws and the amended and
restated certificate of incorporation provide that the stockholders may amend
the bylaws or certain provisions of the amended and restated certificate of
incorporation only with the affirmative vote of 75% of our capital stock.
These provisions of the amended and restated certificate of incorporation and
bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of MetaSolv. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and in the
60
<PAGE>
policies formulated by the Board of Directors and to discourage certain types
of transactions that may involve an actual or threatened change of control of
MetaSolv. These provisions are designed to reduce our vulnerability to an
unsolicited acquisition proposal. The provisions also are intended to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual
or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management. See "Risk Factors--We Have Various
Mechanisms in Place to Discourage Takeover Attempts."
Delaware Takeover Statute. We are subject to Section 203 of the Delaware
General Corporation Law, or DGCL Section 203, which regulates corporate
acquisitions. DGCL Section 203 prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq National Market,
from engaging, under certain circumstances in a "business combination" with
any "interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of DGCL Section
203, a "business combination" includes, among other things, a merger or
consolidation involving MetaSolv and the interested stockholder and the sale
of 10% or more of our assets. In general, DGCL Section 203 defines an
"interested stockholder" as any entity or person beneficially owning 15% or
more of our outstanding voting stock and any entity or person affiliated with
or controlling or controlled by such entity or person. A Delaware corporation
may "opt out" of DGCL Section 203 with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of
at least a majority of the corporation's outstanding voting shares. We have
not "opted out" of the provisions of DGCL Section 203.
Registration Rights
After this offering, the holders of approximately 20,437,306 shares of
common stock or rights to acquire such shares will be entitled to rights with
respect to the registration of such shares under the Securities Act. Under the
terms of the agreement between us and the holders of such registrable
securities, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such common
stock in the registration. Additionally, such holders are also entitled to
demand registration rights, pursuant to which they may require us on up to two
occasions to file a registration statement under the Securities Act at our
expense with respect to their shares of common stock, and we are required to
use all reasonable efforts to effect such registration. Further, holders may
require us to file an unlimited number of additional registration statements
on Form S-3 at our expense. All of these registration rights terminate after
four (4) years following the consummation of our initial public offering are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration and our right not to effect a requested registration within 180
days following an offering of our securities, including the offering made by
this prospectus.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. and its telephone number is (214) 965-2235.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
On completion of this offering, we will have 33,278,366 shares of common
stock outstanding, assuming no exercise of the underwriters" over-allotment
option and no exercise of options after September 30, 1999. Of these shares,
the 5,000,000 sold in this offering and 389,360 shares issued prior to this
offering will be available for immediate sale in the public market as of the
date of this prospectus; provided, however, that if shares are purchased by
"affiliates" as that term is defined in Rule 144, their sales of shares would
be subject to certain restrictions and limitations that are described below.
Approximately 413,933 additional shares will be available for sale in the
public market 90 days after the offering, subject to compliance with the
volume and other limitations of Rule 144. Approximately 26,333,036 additional
shares will be available for sale in the public market following the
expiration of 180-day lockup agreements with representatives of the
underwriters, subject in some cases to compliance with the volume and other
limitations of Rule 144. The table below sets forth the approximate number of
shares eligible for future sale after giving effect to the lock-up and the
holding requirements under Rule 144.
<TABLE>
<CAPTION>
Days after Date of Approximate Shares
this Prospectus Eligible for Future Sale Comment
------------------ ------------------------ -------
<S> <C> <C>
On Effectiveness........ 5,389,360 Freely tradable shares sold in offering; shares
salable under Rule 144
90 Days................. 413,933 Shares salable under Rule 144; vested options
for shares salable under Rule 701
180 Days................ 26,333,036 Lock-up released; shares and vested options for
shares salable under Rule 144, 144(k) or 701
Thereafter.............. 1,756,638 Restricted securities held for one year or less
</TABLE>
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least
one year is entitled to sell within any three-month period commencing 90 days
after the date of this prospectus a number of shares that does not exceed the
greater of (a) 1% of the then outstanding shares of common stock which will be
approximately 333,000 shares immediately after the offering, or (b) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to manner of sale requirements, and depending on the amount
sold, the filing of a Form 144 with respect to such sale. A person or persons
whose shares are aggregated who is not deemed to have been an affiliate of
MetaSolv at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must always sell pursuant to
Rule 144, even after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under
Rule144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to this
offering, there has been no public market for the common stock, and there can
be no assurance that a significant public market for the common stock will
develop or be sustained after the offering. Any future sale of substantial
amounts of the common stock in the open market may adversely affect the market
price of the common stock in this offering.
We, our directors, executive officers and other stockholders, holding an
aggregate of approximately common shares or rights to acquire the shares,
have agreed pursuant to the Underwriting Agreement and other agreements that
we and they will not sell any common stock without the prior consent of Morgan
Stanley & Co. Incorporated for a period of 180 days from the date of this
prospectus, except that we may, without such consent, grant options and sell
shares pursuant to our stock plans. Morgan Stanley & Co. Incorporated may, in
its sole discretion, choose to release any or all of these shares from such
restrictions at any time.
62
<PAGE>
Any of our employees or consultants who purchased shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of the date of this prospectus, the holders of options
exercisable into approximately shares of common stock will be eligible to
sell their shares on the expiration of the 180-day lockup period, or subject
in certain cases to vesting of such options.
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock issued or reserved for issuance under
our stock plans within 180 days after the date of this prospectus, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act. We intend to register these
shares on Form S-8, along with options that have not been issued under our
stock plans as of the date of this prospectus.
In addition, after this offering, the holders of approximately 20,437,306
shares of common stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares, except for shares
purchased by affiliates of MetaSolv, becoming freely tradable without
restriction under the Securities Act immediately on the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
63
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and Jefferies &
Company, Inc. are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them an aggregate of 5,000,000 shares
of common stock. The number of shares of common stock that each underwriter
has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
BancBoston Robertson Stephens Inc..................................
Jefferies & Company, Inc...........................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock in this offering are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock in this offering, other than those covered by the over-
allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $. a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in
excess of $. a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the representatives
of the underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an aggregate of 750,000 additional shares of common stock at
the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with this offering. To the extent such option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
the number set forth next to such underwriter's name in the preceding table
bears to the total number of shares of common stock set forth next to the
names of all underwriters in the preceding table. If the underwriter's over-
allotment option is exercised in full, the total price to public would be
$ , the total underwriters' discounts and commissions would be $ and the
total proceeds to us would be $ before deducting estimated offering
expenses of $ .
At our request, the underwriters have reserved up to shares of common
stock to be sold in this offering, at the public offering price, to our
directors, officers, employees, business associates and related persons.
64
<PAGE>
The number of shares of common stock available for sale to the general public
will be reduced to the extent such individuals purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares.
We, the directors, officers and certain other of our stockholders have each
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 180 days
after the date of this prospectus, we will not, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock
(whether such shares or any such securities are then owned by such
person or are thereafter acquired directly from us); or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise. Morgan Stanley &
Co. Incorporated may in its sole discretion choose to release any or all of
these shares from these restrictions at any time.
The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance by MetaSolv of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on
the date of this prospectus which is described in the prospectus;
. transactions by any person other than MetaSolv relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "MSLV."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between MetaSolv and
65
<PAGE>
the representatives of the underwriters. Among the factors considered in
determining the public offering price were our record of operations, our
current financial position and future prospects, the experience of our
management, our sales, earnings and other financial and operating information
in recent periods, the price-earnings ratios, price-sales ratios, market
prices of securities and financial and operating information of companies
engaged in activities similar to ours.
LEGAL MATTERS
The validity of the issuance of the common stock issued in this offering
will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Austin, Texas and for the underwriters by Davis Polk &
Wardwell, New York, New York.
CHANGE IN ACCOUNTANTS
Arthur Andersen LLP was previously the principal accountants for MetaSolv
Software, Inc. On October 17, 1997, that firm's appointment as principal
accountants was terminated and KPMG LLP was engaged as principal accountants.
The decision to change accountants was approved by the board of directors.
During 1997, through October 17, 1997, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement. A letter from Arthur Andersen LLP is filed as an exhibit hereto.
EXPERTS
The financial statements and schedule of MetaSolv Software, Inc. as of
December 31, 1997 and December 31, 1998, and for each of the years in the
three-year period ended December 31, 1998, have been included in this
prospectus in reliance upon the reports of KPMG LLP, independent certified
public accountants, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock to be issued in this offering. This prospectus
does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. For
further information with respect to us and the common stock issued in this
offering, reference is made to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained
in this prospectus concerning the contents of any contract or any other
document referred to are not necessarily complete. Each statement in this
prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified in all respects by the contents of the
exhibit. The registration statement, including exhibits and schedules thereto,
may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Commission. The Securities
and Exchange Commission maintains a Web site that contains report, proxy and
information statement and other information regarding registrants who, like
us, file electronically with it.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial data
for the first three quarters of each year.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
MetaSolv Software, Inc.:
We have audited the accompanying balance sheets of MetaSolv Software, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997 and 1998, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 26, 1999
F-2
<PAGE>
METASOLV SOFTWARE, INC.
Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, 1999
December 31, (unaudited)
--------------- --------------------
1997 1998 Actual Pro Forma
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Assets (note 1(n))
Current assets:
Cash and cash equivalents............. $ 3,639 $ 7,984 $12,404 $12,404
Restricted cash....................... 689 -- -- --
Trade accounts receivable, less
allowance for doubtful accounts of
$90 in 1997, $600 in 1998 and $1,750
in 1999.............................. 2,028 11,078 13,361 13,361
Unbilled receivables.................. 897 957 3,508 3,508
Prepaid expenses...................... 167 859 903 903
Other current assets.................. 319 818 1,272 1,272
------- ------- ------- -----------
Total current assets................ 7,739 21,696 31,448 31,448
Equipment, furniture and fixtures, net.. 2,205 4,738 5,433 5,433
Other assets............................ 18 93 91 91
------- ------- ------- -----------
Total assets........................ $ 9,962 $26,527 $36,972 $ 36,972
======= ======= ======= ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................... $ 381 $ 2,216 $ 2,090 $ 2,090
Accrued expenses...................... 1,990 7,071 8,344 8,344
Deferred revenue...................... 2,882 2,648 8,721 8,721
Note payable.......................... 93 -- 1,762 1,762
------- ------- ------- -----------
Total current liabilities........... 5,346 11,935 20,917 20,917
Deferred income taxes .................. 67 156 188 188
Class B redeemable convertible preferred
stock, $.0025 par value; 6,738,160
shares authorized, issued and
outstanding at December 31, 1997 and
1998 and September 30, 1999; no shares
authorized, issued or outstanding, pro
forma.................................. 2,610 2,610 2,610 --
Class C redeemable convertible preferred
stock, $.50 par value; 2,857,146 shares
authorized, issued and outstanding at
December 31, 1998 and September 30,
1999; no shares authorized, issued or
outstanding, pro forma................. -- 10,000 10,000 --
Stockholders' equity:
Class A convertible preferred stock,
$.0025 par value; 6,650,000 shares
authorized, issued and outstanding at
December 31, 1997 and 1998, and
September 30, 1999 (liquidation value
$1,750); no shares authorized, issued
or outstanding, pro forma............ 18 18 18 --
Preferred stock, $.01 par value, no
shares authorized, issued or
outstanding, actual; 10,000,000
shares authorized pro forma, no
shares issued or outstanding, pro
forma................................ -- -- -- --
Common stock, $.01 par value,
46,000,000 shares authorized,
11,409,360 and 11,646,580 shares
issued and outstanding at December
31, 1997 and 1998, respectively and
12,057,060 shares issued at September
30, 1999; 100,000,000 shares
authorized, 28,302,366 shares issued,
pro forma............................ 57 58 60 141
Additional paid-in capital............ 1,818 1,890 2,134 14,681
Treasury stock--at cost, 24,000 shares
at September 30, 1999................ -- -- (14) (14)
Retained earnings (deficit)........... 46 (140) 1,059 1,059
------- ------- ------- -----------
Total stockholders' equity.......... 1,939 1,826 3,257 15,867
------- ------- ------- -----------
Commitments and contingencies
Total liabilities and stockholders'
equity............................. $ 9,962 $26,527 $36,972 $ 36,972
======= ======= ======= ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
METASOLV SOFTWARE, INC.
Statements of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
Year ended December 31, (unaudited)
------------------------- -----------------
1996 1997 1998 1998 1999
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
License....................... $ 1,895 $ 5,262 $ 23,432 $ 13,225 $ 27,202
Service....................... 1,927 4,037 19,144 12,645 23,783
-------- ------- -------- -------- --------
Total revenues.............. 3,822 9,299 42,576 25,870 50,985
-------- ------- -------- -------- --------
Cost of revenues:
License....................... 69 223 1,298 842 1,262
Service....................... 568 2,359 14,803 9,722 18,293
-------- ------- -------- -------- --------
Total cost of revenues...... 637 2,582 16,101 10,564 19,555
-------- ------- -------- -------- --------
Gross profit................ 3,185 6,717 26,475 15,306 31,430
-------- ------- -------- -------- --------
Operating expenses:
Research and development...... 945 2,367 10,170 7,272 12,017
Sales and marketing........... 1,006 2,996 11,634 7,098 9,940
General and administrative.... 653 1,289 5,179 3,118 7,471
-------- ------- -------- -------- --------
Total operating expenses.... 2,604 6,652 26,983 17,488 29,428
-------- ------- -------- -------- --------
Income (loss) from operations... 581 65 (508) (2,182) 2,002
Interest and other income, net.. 67 115 298 236 87
-------- ------- -------- -------- --------
Income (loss) before taxes...... 648 180 (210) (1,946) 2,089
Income tax expense (benefit).... -- 60 (24) (223) 890
-------- ------- -------- -------- --------
Net income (loss)............... $ 648 $ 120 $ (186) $ (1,723) $ 1,199
======== ======= ======== ======== ========
Earnings (loss) per share of
common stock:
Basic......................... $ 0.06 $ 0.01 $ (0.02) $ (0.15) $ 0.10
======== ======= ======== ======== ========
Diluted....................... $ 0.03 $ 0.00 $ (0.02) $ (0.15) $ 0.04
======== ======= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
METASOLV SOFTWARE, INC.
Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred stock Common stock Treasury stock Additional Retained
------------------ ----------------- ---------------- paid-in earnings
Shares Amount Shares Amount Shares Amount capital (deficit) Total
---------- ------ ---------- ------ -------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 6,650,000 $18 11,400,200 $ 57 -- $ -- $ 1,816 $ (722) $ 1,169
Exercise of stock
options............... -- -- 9,000 -- -- -- 2 -- 2
Net income............. -- -- -- -- -- -- -- 648 648
---------- --- ---------- ---- -------- ------ ------- ------ -------
Balance, December 31,
1996................... 6,650,000 18 11,409,200 57 -- -- 1,818 (74) 1,819
Exercise of stock
options............... -- -- 160 -- -- -- -- -- --
Net income............. -- -- -- -- -- -- -- 120 120
---------- --- ---------- ---- -------- ------ ------- ------ -------
Balance, December 31,
1997................... 6,650,000 18 11,409,360 57 -- -- 1,818 46 1,939
Exercise of stock
options............... -- -- 237,220 1 -- -- 72 -- 73
Net loss............... -- -- -- -- -- -- -- (186) (186)
---------- --- ---------- ---- -------- ------ ------- ------ -------
Balance, December 31,
1998................... 6,650,000 18 11,646,580 58 -- -- 1,890 (140) 1,826
Exercise of stock
options, unaudited.... -- -- 410,480 2 -- -- 244 -- 246
Purchase of stock
(unaudited)........... 24,000 (14) (14)
Net income
(unaudited)........... -- -- -- -- -- -- -- 1,199 1,199
---------- --- ---------- ---- -------- ------ ------- ------ -------
Balance, September 30,
1999 (unaudited)....... 6,650,000 18 12,057,060 60 24,000 (14) 2,134 $1,059 3,257
Pro forma conversion of
Class A, B, and C
preferred stock
(unaudited)........... (6,650,000) (18) 16,245,306 81 -- -- 12,547 -- 12,610
---------- --- ---------- ---- -------- ------ ------- ------ -------
Pro forma balance
September 30, 1999
(unaudited)............ -- $-- 28,302,366 $141 24,000 $ (14) $14,681 $1,059 $15,867
========== === ========== ==== ======== ====== ======= ====== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
METASOLV SOFTWARE, INC.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
Year ended December 31, (unaudited)
--------------------------- -----------------
1996 1997 1998 1998 1999
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $ 648 $ 120 $ (186) $ (1,723) $ 1,199
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization........... 113 293 763 516 1,079
Loss on asset disposal.. -- -- -- -- 130
Deferred tax expense
(benefit).............. -- 35 (498) (393) (261)
Changes in operating
assets and liabilities:
Restricted cash....... (335) (353) 689 (15) --
Trade accounts
receivable, net...... (1,108) (363) (9,050) (3,712) (2,283)
Unbilled receivables.. -- (897) (60) (1,559) (2,551)
Other assets.......... 16 (408) (679) (2,360) (203)
Accounts payable and
accrued expenses..... 404 1,740 6,916 3,780 1,147
Deferred revenue...... 1,105 1,708 (234) 70 6,073
-------- ------- -------- -------- --------
Net cash provided by
(used in) operating
activities......... 843 1,875 (2,339) (5,396) 4,330
-------- ------- -------- -------- --------
Cash flows from investing
activities:
Purchases of equipment,
furniture and fixtures... (665) (1,682) (3,296) (2,625) (1,904)
Purchase of marketable
securities............... (771) -- -- -- --
Sale of marketable
securities............... 764 260 -- -- --
-------- ------- -------- -------- --------
Net cash used in
investing
activities......... (672) (1,422) (3,296) (2,625) (1,904)
-------- ------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from sale of
redeemable preferred
stock.................... 2,475 110 10,000 10,000 --
Borrowings from bank...... -- 93 1,000 1,000 1,866
Payments on debt.......... -- -- (1,093) (1,093) (104)
Proceeds from issuance of
common stock............. 2 -- 73 27 246
Purchase of treasury
stock.................... -- -- -- -- (14)
-------- ------- -------- -------- --------
Net cash provided by
financing
activities......... 2,477 203 9,980 9,934 1,994
-------- ------- -------- -------- --------
Increase in cash and cash
equivalents................ 2,648 656 4,345 1,913 4,420
Cash and cash equivalents,
beginning of year.......... 335 2,983 3,639 3,639 7,984
-------- ------- -------- -------- --------
Cash and cash equivalents,
end of year................ $ 2,983 $ 3,639 $ 7,984 $ 5,552 $ 12,404
======== ======= ======== ======== ========
Supplemental disclosures of
cash flow information--Cash
paid during the year for:
Interest.................. $ -- $ 7 $ 26 $ 26 $ 109
======== ======= ======== ======== ========
Income taxes.............. $ -- $ 7 $ 33 $ 33 $ 868
======== ======= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended September
30, 1998 and 1999 are unaudited)
1) Organization and Summary of Significant Accounting Policies
MetaSolv Software, Inc. (the "Company"), a Delaware corporation
headquartered in Plano, Texas, develops, delivers and supports order
management and service provisioning solutions, or O&P solutions, for next-
generation telecommunications service providers. The Company's Telecom
Business Solution, or TBS, software is a comprehensive O&P solution that
encompasses all of the functions necessary to fulfill customer requests for
telecommunications services. The Company's TBS software is licensed to
different types of telecommunications service providers including competitive
local exchange carriers, or CLECs, broadband backbone providers, incumbent
local exchange providers, long distance providers and new data CLECs.
a) Revenue Recognition
The Company's software products are licensed to customers through the
Company's direct sales force. Software license revenue is generally recognized
when the following criteria have been met: (a) a written contract for the
license of software has been executed, (b) the Company has delivered the
product to the customer, (c) the license fee is fixed or determinable, and (d)
collectibility of the resulting receivable is deemed probable. Revenue on
maintenance contracts is recognized ratably over the contract period. Revenue
for implementation training and other services is generally recognized as the
service is performed.
The Company is frequently engaged to provide consulting and implementation
services in connection with the licensing of its software. In situations where
such services include significant modification or customization of the
software or are otherwise essential to the functionality of the software,
revenue relating to the software license and services are aggregated and the
combined revenues are recognized using the percentage-of-completion method.
Revenue earned on the percentage-of-completion method is based on management's
estimate of progress towards completion. Changes to estimates of progress
towards completion, if any, are accounted for as a change in estimate in the
period of the change. Of total deferred revenues, $1,584,515 as of December
31, 1997 represent billings in excess of costs and related profits on certain
contracts accounted for under the percentage-of-completion method. Of total
unbilled receivables, $897,091 and $335,000 as of December 31, 1997 and 1998,
respectively, represent costs and related profits in excess of billings on
contracts accounted for under the percentage-of-completion method.
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition."
Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2 generally
requires revenue recognized from software arrangements to be allocated to each
element of the arrangement based on the relative fair values of the elements,
such as software products, consulting, education services, installation or
post-contract customer support. Fair values are based upon vendor specific
objective evidence ("VSOE"). If evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist, or until all elements of the
arrangement are delivered.
In February 1998, AcSEC issued SOP 98-4, "Deferral of the Effective Date of
SOP 97-2." The SOP defers the effective date for applying the provisions
regarding VSOE of fair value until the AcSEC can reconsider what constitutes
such VSOE. There was no material change to the Company's accounting for
revenues as a result of the adoption of SOP 98-4.
F-7
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
In December 1998, AcSEC issued SOP 98-9, "Software Revenue Recognition, with
Respect to Certain Arrangements," which requires recognition of revenue using
the "residual method" in a multiple element arrangement when fair value does
not exist for one or more of the delivered elements in the arrangement. Under
the "residual method," the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. There was no
material change to the Company's accounting for revenues as a result of the
adoption of SOP 98-9.
b) Cash and Cash Equivalents
Cash equivalents consist of investments in an interest-bearing money market
account with an average maturity of three months or less. For purposes of the
statements of cash flows, the Company considers all highly liquid investments
with remaining maturity of three months or less at the date of purchase to be
cash equivalents.
c) Restricted Cash
Restricted cash consisted of cash deposited and held in escrow related to a
license agreement. The restrictions were lifted during 1998 upon the
customer's acceptance of the software.
d) Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the assets, which range from three to twelve years.
e) Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable and accounts
payable approximate fair value due to their short maturities. The note payable
bears interest at a floating market rate and, therefore, its carrying value
approximates fair value.
f) Research and Development Costs
Research and development costs incurred prior to the establishment of
technological feasibility of the product are expensed as incurred. After
technological feasibility is established, any additional software development
costs would be capitalized in accordance with SFAS No. 86. Through September
30, 1999, the Company believes its process for developing software was
essentially completed concurrently with the establishment of technological
feasibility and, accordingly, no software development costs have been
capitalized to date.
During 1996, the Company entered into customer-funded development
arrangements with two customers in order to expedite the development of
certain planned enhancements to the company's software. The proceeds from
these arrangements, $1,243,044 in 1996 and $2,246,401 in 1997, were recorded
as an offset against research and development expenses.
g) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairments to be recognized are measured by the
F-8
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost to sell.
h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is reflected in income tax expense in the period that
includes the enactment date.
i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j) Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded
only if the fair value of the underlying stock exceeded its exercise price on
the date of grant.
k) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. The statement
requires additional disclosures in the financial statements, but does not
affect the Company's financial position or results of operations. Net income
(loss) as reported in the statements of operations is the Company's only
component of comprehensive income during all periods presented.
l) Earnings (Loss) Per Share
Earnings (loss) per share of common stock is presented in accordance with
the provisions of SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic
earnings (loss) per share excludes dilution for potentially dilutive
securities and is computed by dividing income or loss available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Potentially dilutive
securities are excluded from the computation of diluted earnings/loss per
share when their inclusion would be antidilutive.
m) Unaudited Interim Consolidated Financial Statements
The accompanying unaudited interim consolidated financial statements as of
September 30, 1999, and for the nine months ended September 30, 1998 and 1999,
have been prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation have been
included.
F-9
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
n) Unaudited Pro Forma Consolidated Balance Sheet
If the offering contemplated by this prospectus is consummated, all of the
redeemable and convertible preferred stock outstanding will automatically be
converted into common stock. The unaudited pro forma consolidated balance
sheet as of September 30, 1999, has been adjusted for the assumed conversion
of the outstanding shares of convertible preferred stock as of September 30,
1999.
o) Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the current presentation.
2) Equipment, Furniture and Fixtures
Equipment, furniture, and fixtures consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998 September 30, 1999
------ ------- -------------------
<S> <C> <C> <C>
Computer equipment and software....... $1,461 $ 3,707 $ 4,310
Furniture and fixtures................ 889 1,357 1,746
Leasehold improvements................ 303 885 1,023
Construction in progress.............. -- -- 460
------ ------- -------
2,653 5,949 7,539
Less accumulated depreciation......... (448) (1,211) (2,106)
------ ------- -------
Equipment, furniture and fixtures,
net.................................. $2,205 $ 4,738 $ 5,433
====== ======= =======
3) Income Taxes
During 1996, the Company utilized operating loss carryforwards for which no
benefit had been recognized; therefore, a provision for income taxes was not
recorded. Income tax expense (benefit) for the years ended December 31, 1997
and 1998, and the nine months ended September 30, 1999, consists of (in
thousands):
<CAPTION>
Year ended
December 31, Nine months
--------------- ended September 30,
1997 1998 1999
------ ------- -------------------
<S> <C> <C> <C>
Current income tax expense:
Federal............................. $ 17 $ 434 $ 992
State............................... 8 66 140
------ ------- -------
25 500 1,151
------ ------- -------
Deferred income tax expense (benefit):
Federal............................. 35 (462) (225)
State............................... -- (62) (36)
------ ------- -------
35 (524) (261)
------ ------- -------
Total expense (benefit)............... $ 60 $ (24) $ 890
====== ======= =======
</TABLE>
F-10
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income in the years ended
December 31, 1996, 1997 and 1998, and the nine months ended September 30, 1999
as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, Nine months
-------------------------- ended September 30,
1996 1997 1998 1999
-------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit)............ $ 220 $ 61 $ (71) $710
Utilization of net operating
loss carry-forwards for which
no benefit had been
recognized................... (224) (40) -- --
Expenses not deductible for
tax purposes................. 4 14 42 49
Effect of state and local
taxes, net of federal
benefit...................... -- 8 2 81
Other......................... -- 17 3 50
-------- ------ ------- ----
Provision for income taxes.... $ -- $ 60 $ (24) $890
======== ====== ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses.............................. $ 19 $ 489 $ 355
Allowance for doubtful accounts............... 13 156 582
------ ------ ------
Total gross deferred tax assets............... 32 645 937
Deferred tax liability--equipment, furniture
and fixtures, due to differences in
depreciation................................. (67) (156) (188)
------ ------ ------
Net deferred tax asset (liability)........ $ (35) $ 489 $ 749
====== ====== ======
4) Accrued Expenses
Accrued expenses consist of the following (in thousands):
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Employee compensation......................... $ 983 $3,929 $3,221
Sales tax payable............................. 409 496 1,257
Royalties, income taxes and other expenses.... 598 2,646 3,866
------ ------ ------
$1,990 $7,071 $8,344
====== ====== ======
</TABLE>
5) Note Payable
The Company has a committed revolving line of credit agreement with a bank,
expiring in July 2002, in the amount of $6,000,000 and an equipment term loan
facility that provides for borrowings up to $4,000,000. Interest on
outstanding borrowings accrues at the bank's prime rate of interest (8.5% as
of December 31, 1997 and 1998, and 8.25% as of September 30, 1999). The
facility is secured by substantially all of the Company's tangible
F-11
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
assets. As of December 31, 1997 there was $92,913 of outstanding borrowings
under a previous line of credit, which were due and paid in 1998. As of
September 30, 1999 there was $1,762,000 of outstanding borrowings under the
revolving line of credit. The Company also had a standby letter of credit (in
lieu of a security deposit) totaling $900,000 as of December 31, 1997, and
$1,300,000 as of December 31, 1998 and September 30, 1999, which reduce the
borrowing availability under the revolving line of credit.
6) Preferred Stock and Redeemable Preferred Stock
In 1996, the Company issued 6,458,480 shares of Class B redeemable preferred
stock for net cash proceeds of $2,475,400. In 1997, the Company issued 279,680
additional shares of Class B redeemable preferred stock for cash proceeds of
$110,400. In 1998, the Company issued 2,857,146 shares of Class C redeemable
preferred stock for cash proceeds of $10,000,011.
Class A preferred stock is not redeemable. Class B and C redeemable
preferred shareholders are entitled to request mandatory redemption of their
stock beginning in April 2005 at a price equal to the liquidation value of
such stock. The holders of the Class A, Class B and Class C preferred stock
are entitled to certain additional rights as described below.
Dividend Preference--The preferred shareholders are entitled to receive
dividends before any distributions are made to holders of common stock. No
dividends have been declared on any preferred stock.
Liquidation Preference--Upon voluntary or involuntary liquidation,
dissolution or other winding up of the Company, preferred shareholders in each
class are entitled to a liquidation preference per share on a pro rata basis
of the original issue price per share for such class ($.263 for Class A, $.375
for Class B, and $3.50 for Class C), plus declared but unpaid dividends for
such class, before any distributions are made to holders of common stock.
Conversion Rights--Each share of preferred stock is convertible at the
option of the holder, at any time after issuance, into a number of shares of
common stock to be determined by dividing the original issue price by the
Conversion Price, as defined. The Conversion Price per share is the same as
the original issue price per share, except that for Class B and Class C stock
the Conversion Price is subject to adjustment for certain dilutive issuances,
and that the Conversion Price for each share of preferred stock is subject to
adjustment for stock splits, stock dividends or other recapitalizations or
combinations. The Company may require the conversion of all of the outstanding
preferred stock upon the closing of a firm commitment for an underwritten
public offering of shares of the Company's common stock in which the net
proceeds received by the Company and the price per share of common stock meet
certain minimums. There is also a special mandatory conversion requirement for
Class B and Class C preferred stock in the event of certain dilutive financing
events where a holder of such preferred stock does not exercise his or her
rights of first offer to participate in the dilutive financing.
Voting Rights--Each share of preferred stock votes on an as-converted basis
on all matters submitted to the Company's shareholders.
During 1998, the Company issued 380 shares of Class A preferred stock in
exchange for each of the 17,500 outstanding shares of Class A preferred stock,
and 380 shares of Class B preferred stock in exchange for each of the 17,732
outstanding shares of Class B preferred stock. The Company has treated the
exchanges like a stock split and has adjusted the historical share amounts on
a retroactive basis.
F-12
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
7) Stock Option Plan and Employee Stock Purchase Plan
In 1992, the Company adopted a stock option plan pursuant to which the Board
of Directors may grant stock options to officers and employees. In August
1999, the company adopted a new long-term incentive plan and merged it with
the existing plan. The stock option plan authorizes grants of options to
purchase up to 9,320,000 shares of authorized but unissued common stock. The
number of shares issuable under the plan will increase annually during the
first five years following adoption of the plan by 5% of the company's
outstanding common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. All options have
ten-year terms and generally become exercisable in five equal cumulative
installments beginning on the first anniversary of the grant date.
At September 30, 1999, there were 1,959,060 additional shares available for
grant under the plan. The per share weighted-average fair value of stock
options granted for the years ended December 31, 1996, 1997, and 1998 and the
nine months ended September 30, 1999 was $.085, $.075, $.415 and $.94,
respectively, as estimated using the minimum value option-pricing model with
the following assumptions: expected dividend yield of 0%, risk-free interest
rate of 6%, and an expected life of five years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, the Company's net income would have been reduced to the
pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Year ended December 31, September 30,
------------------------ -----------------
1996 1997 1998 1998 1999
------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Net income (loss):
As reported..................... $648 $120 $(186) $(1,723) $1,199
Pro forma....................... 642 88 (278) (1,779) 877
</TABLE>
F-13
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
Stock option activity during the periods indicated is as follows:
Pro forma net loss reflects only stock options granted after December 31,
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options'
vesting periods of five years and compensation expense pertaining to stock
options granted in prior periods is not considered.
<TABLE>
<CAPTION>
Weighted-
Number average
of shares exercise price
--------- --------------
<S> <C> <C>
Balance as of December 31, 1995....................... 1,029,800 $ .24
Granted............................................. 784,000 .34
Exercised........................................... (9,000) .24
Forfeited........................................... (140,040) .30
---------
Balance as of December 31, 1996....................... 1,664,760 .28
Granted............................................. 2,060,600 .34
Exercised........................................... (160) .34
Forfeited........................................... (346,640) .34
---------
Balance as of December 31, 1997....................... 3,378,560 .31
Granted............................................. 1,693,700 1.79
Exercised........................................... (237,220) .31
Forfeited........................................... (404,600) 1.36
---------
Balance as of December 31, 1998....................... 4,430,440 .78
Granted............................................. 3,135,100 3.72
Exercised........................................... (410,480) .62
Forfeited........................................... (428,380) 1.48
---------
Balance as of September 30, 1999...................... 6,726,680 2.11
=========
</TABLE>
F-14
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.24 to $3.50 and 7.76
years, respectively. The following table presents information about
outstanding stock options as of December 31, 1998:
<TABLE>
<CAPTION>
Options vested and
Weighted average exercisable
Range of -------------------- --------------------------
Exercise Number of Exercise Contractual Number of Weighted average
Prices options price life options price
---------- --------- -------- ----------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$.24 - .34 3,045,940 $0.31 7.42 years 1,222,080 $0.29
.45 - .60 766,800 0.60 9.12 10,000 0.45
1.75 72,800 1.75 9.40 --
3.50 549,500 3.50 9.76 --
--------- ---------
Totals 4,435,040 1,232,080
========= =========
</TABLE>
At December 31, 1996, 1997 and 1998, and September 30, 1999, 313,380,
644,860, 1,232,080 and 1,748,700 options were vested and exercisable at a
weighted-average exercise price of $.25, $.26, $.30 and $.49, respectively.
In August 1999, the Company adopted an employee stock purchase plan
contingent upon the completion of its initial public offering. The plan is
authorized to issue 600,000 shares of its authorized and unissued common stock
and that number will increase annually during the first five years following
adoption of the plan by 1% of the Company's outstanding common stock.
8) 401(k) Plan and Trust Agreement
The Company has a 401(k) Plan and Trust Agreement under which employees are
entitled to deduct and contribute up to 15% of their salary, subject to
certain regulatory limitations, to a defined contribution plan. In 1996, 1997
and 1998 the Company made discretionary profit sharing contributions of
$24,000, $123,444 and $337,084, respectively, to the plan. For the nine months
ended September 30, 1999 the Company has recorded discretionary profit sharing
contributions of $372,770.
9) Commitments and Contingencies
Leases
The Company leases its offices under operating leases, which expire through
2010. Future minimum annual rent payments for leases having initial or
remaining noncancelable lease terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
Total minimum
Years ending lease payments
December 31, --------------
<S> <C>
1999........................................................ $ 1,227
2000........................................................ 2,177
2001........................................................ 2,598
2002........................................................ 2,652
2003........................................................ 2,707
Thereafter.................................................. 17,558
-------
$28,919
=======
</TABLE>
Included above are $19,125,000 of minimum lease payments related to office
space currently under construction that the Company expects to occupy in the
fourth quarter of 1999. Rent expense for the years ended December 31, 1996,
1997 and 1998, and the nine months ended September 30, 1999, amounted to
$91,727, $558,778, $1,175,047 and $1,092,381, respectively.
F-15
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
10) Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended September 30,
---------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).............. $ 648 $ 120 $ (186) $ (1,723) $ 1,199
======= ======= ====== ========== =========
Denominator:
Denominator for basic earnings
(loss) per share-- weighted-
average common shares
outstanding................... 11,404 11,409 11,472 11,436 11,781
Effect of dilutive securities:
Preferred stock.............. 10,764 13,248 -- -- 16,245
Employee stock options....... 272 286 -- -- 3,420
------- ------- ------ ---------- ---------
Denominator for diluted
earnings (loss) per share--
weighted-average common and
common equivalent shares
outstanding................... 22,440 24,943 11,472 11,436 31,446
======= ======= ====== ========== =========
Earnings (loss) per common share:
Basic earnings (loss) per
common share.................. $ 0.06 0.01 (0.02) (0.15) 0.10
======= ======= ====== ========== =========
Diluted earnings (loss) per
common share.................. $ 0.03 0.00 (0.02) (0.15) 0.04
======= ======= ====== ========== =========
</TABLE>
There are no potentially dilutive shares that are excluded from the earnings
per share calculations for the nine months ended September 30, 1999.
11) Segment Information and Concentration of Credit Risk
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to stockholders. The method for determining what information to
report is based on the way management organizes the operating segments within
the Company for making operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the Chief
Executive Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
product and service line for purposes of making operating decisions and
assessing financial performance. The financial information reviewed by the CEO
is identical to the information presented in the accompanying statements of
operations. Therefore, the Company operates in a single operating segment:
telecommunications software and related services.
F-16
<PAGE>
METASOLV SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 are unaudited)
Revenue information regarding operations for different products and services
is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended September 30,
----------------------- --------------------
1996 1997 1998 1998 1999
------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Software.......................... $ 1,895 $ 5,262 $23,432 $ 13,225 $27,202
Professional services............. 1,477 3,140 14,472 9,742 16,855
Post-contract customer support.... 450 897 4,672 2,903 6,928
------- ------- ------- ---------- ---------
Total revenues.................... $ 3,822 $9,299 $42,576 $25,870 $50,985
======= ======= ======= ========== =========
</TABLE>
The Company has derived substantially all of its revenues from the United
States and Canada. Accordingly, the Company does not produce reports that
measure performance of segments by geographic region.
The Company evaluates the performance of its operating segments based on
revenues only. The Company does not assess the performance of its segments on
other measures of income or expense, such as depreciation and amortization,
operating income or net income. In addition, the Company's assets are not
allocated to any specific segment, and the Company does not produce reports
that measure segment performance based on any asset-based metrics. Therefore,
segment information is presented only for revenues.
The Company licenses its telecommunications software products to incumbent
local exchange telephone carriers, competitive local exchange carriers, and
competitive access providers. The Company performs ongoing credit evaluations
of its customers' financial condition but does not require collateral or other
security to support its trade accounts receivable. The table below presents the
portion of the Company's revenues derived from its major customers for the
periods presented and the portion of accounts receivable as of December 31,
1998 and June 30, 1999 related to such customers:
<TABLE>
<CAPTION>
Accounts Receivable Revenues
Customers ----------------------- --------------------------------------------
Year ended December 31, Nine months ended
Dec. 31, Sept. 30, ------------------------- September 30,
1998 1999 1996 1997 1998 1999
--------- ---------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
A........... 22% 13% -- 15% 22% 13%
B........... 4% -- 3% 2% 11% 1%
C........... 20% 7% -- -- 8% 7%
D........... 1% 4% -- 17% 5% 4%
E........... 5% 2% 36% 18% 3% 2%
F........... -- 2% -- 12% 4% 1%
G........... -- -- 13% 1% -- --
</TABLE>
F-17
<PAGE>
[LOGO OF METASOLV SOFTWARE APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................. $ 22,379
NASD fee......................................................... 8,550
Nasdaq National Market initial listing fee....................... 17,500
Printing and engraving........................................... 200,000
Legal fees and expenses of the Company........................... 350,000
Accounting fees and expenses..................................... 225,000
Directors and Officers Liability Insurance....................... 300,000
Blue sky fees and expenses....................................... 10,000
Transfer agent fees.............................................. 15,000
Miscellaneous.................................................... 51,571
----------
Total.......................................................... 1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of the Registrant's By-Laws provides for mandatory
indemnification of its directors and officers and permissible indemnification
of employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's amended and restated certificate of
incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the
amended and restated certificate of incorporation does not eliminate the
directors' fiduciary duty, 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 actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a
form of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers
and directors with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The Registrant maintains liability
insurance for its directors and officers. Reference is also made to Section
of the underwriting agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities, and
Section 1.9 of the Investors' Rights Agreement contained in Exhibit 4.1
hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.
Item 15. Recent Sales of Unregistered Securities
(a) From October 1, 1996 through September 30, 1999, the Registrant has
issued and sold the following securities:
1. The Registrant granted stock options to purchase 6,955,800 shares of
Common Stock at exercise prices ranging from $0.34 to $5.00 per share to
employees, consultants and directors pursuant to its 1992 Stock Option
Plan.
II-1
<PAGE>
2. From October 1, 1996 through September 30, 1999, the Registrant issued
and sold an aggregate of 628,360 shares of its Common Stock to
employees, consultants and directors for aggregate consideration of
approximately $313,971 pursuant to exercises of options granted under
its 1992 Stock Option Plan.
3. In June 1998, the Registrant issued and sold 2,857,146 shares of its
Class C Preferred Stock for an aggregate purchase price of approximately
$10,000,011.
The issuances described in Items 15(a)(1) and (2) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
under the Securities Act or Section 4(2) of the Securities Act. The issuance
of the securities described in Item 15(a)(3) was deemed exempt from
registration under the Act in reliance on section 4(2) of such Act as
transactions by an issuer not involving any public offering. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had adequate access, through their relationships with the Registrant, to
information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant, as amended to date.
3.2+ Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed after the closing of the offering made
pursuant to this Registration Statement.
3.3+ Amended and Restated Bylaws of the Registrant, dated May 26, 1998.
3.4+ Form of Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to their
Registration Statement.
4.1+ Investors' Rights Agreement, dated June 2, 1998, among the
Registrant and the shareholders named therein, as amended.
4.2* Specimen Certificate of the Registrant's common stock.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant.
10.1+ Form of Indemnification Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ 1992 Stock Option Plan.
10.3+ Long-Term Incentive Plan.
10.4+ Employee Stock Purchase Plan.
10.5* Mutual Release between the Registrant and Michael J. Watters,
dated .
10.6 Commercial Lease Agreement between the Registrant and CrownInvest
I, L.P., dated April 1, 1997, as amended to date.
10.7 Commercial Lease Agreement between the Registrant and William R.
Cooper and Craig A. Cooper, dated August 21, 1998 , as amended to
date.
10.8 Master Software License and Services Agreement entered into
between Registrant and Qwest Communications Corporation, dated
May 30, 1997.
10.9* Master License, Development and Service Agreement entered into
between Registrant and Time Warner Communications Holdings, Inc.,
dated May 7, 1998.
10.10* Master Software License and Services Agreement entered into
between Registrant and Allegiance Telecom, Inc., dated December
19, 1997.
16.1 Consent of Arthur Andersen, former independent accountants.
23.1 Consent of KPMG LLP, independent accountants.
23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant. Reference is made to
Exhibit 5.1.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be supplied by amendment.
**Confidential treatment requested as to certain portions of these exhibits.
(b) Financial Statement Schedule
Auditors' Report on Schedule
Schedule II--Valuations and Qualifying accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the By-Laws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the underwriting agreement, 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 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 hereunder, 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 of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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.
(2) For the purpose of determining any liability under the 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Plano, State of Texas, on this day of October, 1999.
MetaSolv Software, Inc.
/s/ JAMES P. JANICKI
By: _________________________________
James P. Janicki
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES P. JANICKI President, Chief Executive September 18, 1999
______________________________________ Officer and Director
James P. Janicki (Principal Executive
Officer)
GLENN A. ETHERINGTON* Chief Financial Officer September 18, 1999
______________________________________ (Principal Financial and
Glenn A. Etherington Accounting Officer)
DAVID R. SEMMEL* Director September 18, 1999
______________________________________
David R. Semmel
WILLIAM N. SICK, JR.* Director September 18, 1999
______________________________________
William N. Sick, Jr.
ADAM SOLOMON* Director September 18, 1999
______________________________________
Adam Solomon
JOHN D. THORNTON* Director September 18, 1999
______________________________________
John D. Thornton
BARRY F. EGGERS* Director September 18, 1999
______________________________________
Barry F. Eggers
JOHN W. WHITE* Director September 18, 1999
______________________________________
John W. White
</TABLE>
/s/ JAMES P. JANICKI
*By: _______________________
II-4
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
MetaSolv Software, Inc.
Under date of February 26, 1999 we reported on the balance sheets of MetaSolv
Software, Inc. as of December 31, 1997 and 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which are included in the
prospectus. In connection with our audits of the aforementioned financial
statements, we also audited the related financial statement schedule included
in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule 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/ KPMG LLP
KPMG LLP
Dallas, Texas
February 26, 1999
<PAGE>
METASOLV SOFTWARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged Balance at
beginning costs and to other end of
Description of period expenses accounts Deductions period
- ----------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1998
Allowances Deducted from
Assets:
Accounts receivable... $90 $510 -- -- $600
=== ==== === === ====
FOR THE YEAR ENDED
DECEMBER 31, 1997
Allowances Deducted from
Assets:
Accounts receivable... $35 $186 -- 131 $ 90
=== ==== === === ====
FOR THE YEAR ENDED
DECEMBER 31, 1996
Allowances Deducted from
Assets:
Accounts receivable... $-- $ 35 -- -- $ 35
=== ==== === === ====
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Exhibit Page
----------- ------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation
of the Registrant, as amended to date.
3.2+ Form of Amended and Restated Certificate of
Incorporation of the Registrant to be filed after
the closing of the offering made pursuant to this
Registration Statement.
3.3+ Amended and Restated Bylaws of the Registrant,
dated May 26, 1998.
3.4+ Form of Amended and Restated Bylaws of the
Registrant to be effective upon the closing of the
offering made pursuant to this Registration
Statement.
4.1+ Investors' Rights Agreement, dated June 2, 1998,
among the Registrant and the shareholders named
therein, as amended.
4.2* Specimen Certificate of the Registrant's common
stock.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel to the
Registrant.
10.1+ Form of Indemnification Agreement entered into
between the Registrant and its directors and
executive officers.
10.2+ 1992 Stock Option Plan.
10.3+ Long-Term Incentive Plan.
10.4+ Employee Stock Purchase Plan.
10.5* Mutual Release between the Registrant and Michael
J. Watters, dated .
10.6 Commercial Lease Agreement between the Registrant
and CrownInvest I, L.P., dated April 1, 1997, as
amended to date.
10.7 Commercial Lease Agreement between the Registrant
and William R. Cooper and Craig A. Cooper, dated
August 21, 1998, as amended to date.
10.8 Master Software License and Service Agreement
entered into between Registrant and Qwest
Communications Corporation, dated May 30, 1997.
10.9* Master License, Development and Service Agreement
entered into between Registrant and Time Warner
Communications Holdings, Inc., dated May 7, 1998.
10.10* Master Software License and Services Agreement
entered into between Registrant and Allegiance
Telecom, Inc., dated December 19, 1997.
16.1 Consent of Arthur Andersen, former independent
accountants.
23.1 Consent of KPMG LLP, independent accountants.
23.2* Consent of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel to the
Registrant. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney. Reference is made to page II-4.
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be supplied by amendment.
<PAGE>
EXHIBIT 10.6
COMMERCIAL LEASE AGREEMENT
CROWINVEST I, L.P.
(LANDLORD)
AND
METASOLV SOFTWARE, INC.
(TENANT)
Address:
5560 Tennyson Parkway
Plano, Texas 75024
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
1. PREMISES, TERM, AND INITIAL IMPROVEMENTS................................................................................1
2. BASE RENT, SECURITY DEPOSIT AND ADDITIONAL RENT.........................................................................1
3. TAXES...................................................................................................................3
4. NET LEASE...............................................................................................................3
5. TENANT'S AND LANDLORD'S MAINTENANCE AND REPAIR OBLIGATIONS..............................................................4
6. ALTERATIONS.............................................................................................................4
7. SIGNS...................................................................................................................5
8. UTILITIES...............................................................................................................5
9. INSURANCE...............................................................................................................6
11. LIABILITY, INDEMNIFICATION..............................................................................................6
12. USE.....................................................................................................................7
13. INSPECTION..............................................................................................................7
14. ASSIGNMENT AND SUBLETTING...............................................................................................7
15. CONDEMNATION............................................................................................................9
16. SURRENDER OF PREMISES; HOLDING OVER.....................................................................................9
17. QUIET ENJOYMENT.........................................................................................................9
18. EVENTS OF DEFAULT.......................................................................................................9
19. REMEDIES...............................................................................................................10
20. LANDLORD'S LIABILITY...................................................................................................11
21. MORTGAGES..............................................................................................................11
22. ENCUMBRANCES...........................................................................................................11
23. MISCELLANEOUS..........................................................................................................11
24. NOTICES................................................................................................................12
25. HAZARDOUS WASTE........................................................................................................13
26. CONDITIONS TO LANDLORD'S OBLIGATIONS...................................................................................13
27. LANDLORD'S LIEN........................................................................................................13
28. ROOFTOP EQUIPMENT......................................................................................................13
</TABLE>
i
<PAGE>
LIST OF DEFINED TERMS
---------------------
<TABLE>
<CAPTION>
Page No.
<S> <C>
AAA.........................................................................................................................F-1
AAA...........................................................................................................................8
Abatement Date................................................................................................................1
Abatement Period..............................................................................................................1
Affiliate....................................................................................................................11
Applicable Percentage.......................................................................................................E-1
AS-IS.......................................................................................................................B-1
Base Rent.....................................................................................................................1
Building......................................................................................................................1
Building's Structure..........................................................................................................4
Casualty......................................................................................................................6
Claimant.....................................................................................................................10
Commencement Date.............................................................................................................1
Disabilities Acts.............................................................................................................7
Environmental Law............................................................................................................13
Event of Default..............................................................................................................9
Existing Improvements.........................................................................................................1
Extension...................................................................................................................F-1
Extension Notice............................................................................................................D-1
Fair Market Rental Rate.....................................................................................................F-1
FMRR Notice.................................................................................................................F-1
GAAP..........................................................................................................................2
Hazardous Substances.........................................................................................................13
HVAC System...................................................................................................................4
including....................................................................................................................11
Indemnified Parties...........................................................................................................6
Initial Construction Allowance................................................................................................5
Initial Improvements..........................................................................................................4
Land..........................................................................................................................1
Landlord......................................................................................................................1
Landlord's Mortgagee.........................................................................................................11
Landlord's Proposal.........................................................................................................E-1
Law..........................................................................................................................11
Laws.........................................................................................................................11
Lease.........................................................................................................................1
Legal Requirements...........................................................................................................13
Letter of Credit..............................................................................................................2
Loss..........................................................................................................................6
Market Area.................................................................................................................F-1
Monument Sign.................................................................................................................5
Mortgage.....................................................................................................................11
MSDS.........................................................................................................................13
New Parking Area............................................................................................................E-1
New Parking Area Construction Costs.........................................................................................E-1
Parking Area Construction Financing.........................................................................................E-1
Parking Notice..............................................................................................................E-1
Pass-Through Expenses.........................................................................................................2
Permitted Activities.........................................................................................................13
Permitted Materials..........................................................................................................13
Permitted Transfer............................................................................................................8
Permitted Transferee..........................................................................................................8
Permitted Use.................................................................................................................7
Premises......................................................................................................................1
Primary Lease................................................................................................................11
Release Conditions............................................................................................................2
rent..........................................................................................................................3
Rooftop Equipment............................................................................................................13
Secondary Work................................................................................................................5
Secondary Work Allowance......................................................................................................5
Security Deposit..............................................................................................................2
Sign Conditions...............................................................................................................5
Sign Requirements.............................................................................................................5
Space.......................................................................................................................F-1
Taking........................................................................................................................9
Tangible Net Worth............................................................................................................8
Taxes.........................................................................................................................3
Tenant........................................................................................................................1
Tenant Panel..................................................................................................................5
Tenant Party.................................................................................................................11
Tenant's Financial Statements.................................................................................................2
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Term..........................................................................................................................1
Total Construction Costs......................................................................................................4
Transfer......................................................................................................................7
Vacation Date.................................................................................................................7
Work........................................................................................................................B-1
Working Drawings............................................................................................................B-1
</TABLE>
iii
<PAGE>
LEASE AGREEMENT
---------------
This Lease Agreement (this "Lease") is entered into by CROWINVEST I, L.P.,
-----
a Delaware limited partnership ("Landlord"), and METASOLV SOFTWARE, INC., a
--------
Delaware corporation ("Tenant").
------
1 PREMISES, TERM, AND INITIAL IMPROVEMENTS.
----------------------------------------
(a) Landlord leases to Tenant, and Tenant leases from Landlord, the
real property described on Exhibit A (the "Premises"), which includes the
--------- --------
approximately 52,000 rentable square foot building (the "Building") located on
--------
the real property described on Exhibit A (the "Land"), subject to the terms and
--------- ----
conditions in this Lease. Landlord and Tenant stipulate that for purposes of
calculating Tenant's obligations to pay Base Rent the size of the Premises shall
be deemed to be 52,000 rentable square feet.
(b) The Lease term shall be 144 months, beginning on the Commencement
Date (defined below) (the "Term", which defined term shall include all renewals
----
and extensions of the Term); however, if the Commencement Date is not the first
day of a calendar month, then the Term shall end on the last day of the 144-
month period that begins with the first day of the first full calendar month of
the Term. The "Commencement Date" shall be the earlier to occur of (i) the date
-----------------
on which Tenant occupies and begins conducting business in the Premises or (ii)
45 days after the current tenant of the Building vacates the Premises. If this
Lease is executed before the Premises become vacant or otherwise available and
ready for occupancy by Tenant and Landlord is unable to tender possession of the
Premises to Tenant by July 1, 1997, then (a) Tenant's obligation to pay Base
Rent and Tenant's share of Pass-Through Expenses (defined below) shall be waived
until Landlord tenders possession of the Premises to Tenant, (b) the Term shall
be extended by the time between the scheduled Commencement Date and the earlier
of (1) the date on which Tenant occupies the Premises and begins conducting
business therein or (2) 45 days after Landlord tenders possession of the
Premises to Tenant (which earlier date will then be defined as the Commencement
Date), (c) Landlord shall not be in default hereunder or be liable for damages
therefor, and (d) Tenant shall accept possession of the Premises when Landlord
tenders possession thereof to Tenant, subject to (a), (b) and (c) above. By
occupying the Premises, Tenant shall have accepted the Premises in their
condition as of the date of such occupancy. Notwithstanding the foregoing, if
Landlord fails to tender possession of the entire Premises to Tenant by July 1,
1997 and if such failure to tender possession of the entire Premises is not
caused by a Tenant Party, then Landlord shall abate Base Rent from the date
Tenant would otherwise be obligated to commence paying Base Rent hereunder, for
a period (the "Abatement Period") equal to one day for each day after the
----------------
Abatement Date that possession of the Premises is not so tendered to Tenant, and
the Term shall be extended by the number of days in the Abatement Period. The
"Abatement Date" shall be the date which is the same number of days after July
- ---------------
1, 1997 as the number of days of delay in tendering to Tenant possession of the
Premises caused by a Tenant Party. Tenant shall apply against the initial Base
Rent amounts owing under this Lease the Base Rent amounts abated during the
Abatement Period until all such amounts have been paid or offset. If the tenant
currently occupying the Building has not vacated the Premises by August 1, 1997,
Tenant shall have the right to immediately terminate this Lease upon written
notice thereof to Landlord, provided that such notice is delivered before such
tenant vacates the Premises. The abatement of Base Rent and the termination
right herein provided shall be Tenant's sole remedies for Landlord's failure to
timely tender possession of the Premises to Tenant. Tenant shall execute and
deliver to Landlord, within ten days after Landlord has requested same, a letter
confirming (1) the Commencement Date, (2) that Tenant has accepted the Premises,
subject to Landlord's obligations under the last sentence of Section 1.(c), and
(3) that Landlord has performed all of its obligations with respect to the
Premises.
(c) Tenant may during the Term, at its sole risk and expense, use any
existing fixtures, improvements or equipment in the Premises (the "Existing
--------
Improvements"). Landlord makes no representations or warranties regarding the
- ------------
Existing Improvements, including without limitation that the Existing
Improvements comply with any Disabilities Acts (defined below) or that Landlord
owns any of the Existing Improvements. Landlord shall not be required to
perform any repairs or maintenance of the Existing Improvements, and Tenant
accepts them in their "AS-IS" condition. Notwithstanding the foregoing,
-----
Landlord shall repair all damage caused by the existing tenant in the Building
after the date hereof.
2 BASE RENT, SECURITY DEPOSIT AND ADDITIONAL RENT.
-----------------------------------------------
(a) Tenant shall pay to Landlord "Base Rent", in advance, without
---------
demand, deduction or set off, equal to the following amounts for the following
months of the Term:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Annual Base Rent
Rate Per Rentable
Time Period Square Foot Monthly Base Rent
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Months 1 through 12 $14.00 $60,666.67
- -------------------------------------------------------------------------------------------------
Months 13 through 24 $14.42 $62,486.67
- -------------------------------------------------------------------------------------------------
Months 25 through 36 $14.84 $64,306.67
- -------------------------------------------------------------------------------------------------
Months 37 through 48 $15.26 $66,126,67
- -------------------------------------------------------------------------------------------------
Months 49 through 60 $15.68 $67,946.67
- -------------------------------------------------------------------------------------------------
Months 61 through 72 $16.10 $69,766.67
- -------------------------------------------------------------------------------------------------
Months 73 through 84 $16.52 $71,586.67
- -------------------------------------------------------------------------------------------------
Months 85 through 96 $16.94 $73,406.67
- -------------------------------------------------------------------------------------------------
Months 97 through 108 $17.36 $75,226.67
=================================================================================================
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C>
Months 109 through the expiration date $17.78 $77,046.67
==================================================================================================
</TABLE>
The first monthly installment of Base Rent, plus the other monthly charges set
forth in Section 2.(c), shall be due on the Commencement Date; thereafter,
monthly installments of Base Rent shall be due on the first day of each calendar
month following the Commencement Date. If the Term begins on a day other than
the first day of a month or ends on a day other than the last day of a month,
the Base Rent and additional rent for such partial month shall be prorated.
(b) Tenant shall deposit with Landlord within five business days after
the date hereof, either (1) $900,000 in immediately available funds or (2) a
Letter of Credit (defined below) (the "Security Deposit"), which shall be held
----------------
by Landlord to secure Tenant's obligations under this Lease; however, the
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages for an Event of Default (defined below). Landlord may use any portion
of the Security Deposit to satisfy Tenant's unperformed obligations hereunder,
without prejudice to any of Landlord's other remedies. If so used, Tenant shall
pay Landlord an amount that will restore the Security Deposit to its original
amount upon request. The Security Deposit shall be Landlord's property. The
unused portion of the Security Deposit will be returned to Tenant within 45 days
after the end of the Term, provided that Tenant has fully and timely performed
its obligations hereunder throughout the Term. Notwithstanding the foregoing,
if (A) Tenant successfully completes an initial public offering of Tenant's
stock on a nationally-recognized public exchange, (B) on the 90th day after such
initial public offering, Tenant has on deposit in a financial institution at
least $10,000,000 in unencumbered cash as evidenced by a statement from such
financial institution delivered to Landlord, and (C) Tenant has fully and timely
performed its obligations hereunder throughout the Term before such date, then
Landlord shall release the Security Deposit to Tenant.
As used herein, "Letter of Credit" shall mean a standby, unconditional,
----------------
irrevocable letter of credit in the initial face amount of $900,000, naming
Landlord as beneficiary issued by a bank or financial institution reasonably
acceptable to Landlord with banking offices (or providing for draws on a
confirming bank with offices) in Houston, Dallas, or Austin, Texas, permitting
partial draws thereon, and otherwise in form reasonably acceptable to Landlord.
Tenant shall from time to time cause the Letter of Credit, if any, to be renewed
no later than 60 days prior to any expiration date thereof so that the Letter of
Credit remains in effect for 60 days after the scheduled expiration date of the
Term or any renewal Term; if Tenant fails timely to renew the Letter of Credit,
then Landlord shall have the right to draw thereon, and retain the amounts so
drawn as the Security Deposit. Landlord may draw upon the Letter of Credit and
apply the proceeds thereof to perform any of Tenant's unperformed obligations
under this Lease. After any such draw, Tenant shall pay to Landlord on demand
the amount so drawn to be held as part of the Security Deposit.
Notwithstanding the foregoing, if no Event of Default has occurred, then,
beginning in 1998, within 30 days after Landlord's receipt of Tenant's audited
financial statements (such audited financial statements are herein called
"Tenant's Financial Statements") for the immediately preceding fiscal year
- ------------------------------
prepared in accordance with generally accepted accounting principles ("GAAP"),
----
the amount of the Security Deposit required to be deposited by Tenant and held
by Landlord during the then current year shall be reduced as follows if Tenant's
Financial Statements verify that (1) either Tenant's then-current Tangible Net
Worth exceeds $2,500,000, or Tenant then has on deposit in a financial
institution at least $1,000,000 in unencumbered cash and (2) the results of
Tenant's operations for such immediately preceding fiscal year meet or exceed
each of the following conditions (collectively, the "Release Conditions"):
------------------
<TABLE>
<CAPTION>
Reduction in Amount of
Net Income Security Deposit
Fiscal Year Gross Revenue Before Taxes --------------------------
- --------------------------- --------------------- ------------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ending December 31, 1997 $7,596,955 $379,847 $150,000
- -------------------------------------------------------------------------------------------------------------
ending December 31, 1998 $11,395,433 $569,771 $250,000
- -------------------------------------------------------------------------------------------------------------
ending December 31, 1999 $17,093,150 $854,658 $250,000
- -------------------------------------------------------------------------------------------------------------
ending December 31, 2000 $25,639,725 $1,281,986 $250,000 (until Security
and each year thereafter Deposit reaches $0)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
If Tenant does not meet the Release Conditions for any preceding fiscal year, no
reduction in the amount of the Security Deposit will occur during the year
following such fiscal year (e.g., if the Release Conditions are not met for
1997, then there shall be no reduction in the Security Deposit for 1998). If
Tenant does meet the Release Conditions for any preceding fiscal year, then
Landlord shall return the amount of the reduction in the Security Deposit to
Tenant (if Tenant has delivered to Landlord a cash Security Deposit) or return
the original Letter of Credit to Tenant upon Tenant's delivery to Landlord of a
substitute Letter of Credit satisfying the conditions of the original Letter of
Credit, but with the face amount thereof reduced by the amount of the allowed
reduction in the Security Deposit provided above.
(c) Tenant shall pay, as additional rent, all costs incurred by
Landlord for the following expenses ("Pass-Through Expenses"): (1) the cost of
---------------------
insurance, to the extent paid by Landlord, including that portion of the
premiums under any blanket or umbrella insurance policy maintained and paid by
Landlord as may be reasonably allocated to the Premises by Landlord; and (2)
rents under Primary Leases (defined below), if any. Upon written request of
Tenant, Tenant may obtain bids from comparable insurance companies satisfactory
to Landlord and Landlord's Mortgagee for comparable insurance for the Premises
(as determined by Landlord and Landlord's Mortgagee), and if the cost of such
insurance is materially less than the cost of the existing insurance for the
Premises, and if Landlord's Mortgagee consents thereto, Landlord shall use
commercially reasonable efforts to use such insurance company to provide
insurance for the Premises. Tenant shall pay all insurance premiums in one
installment in advance within ten days after Landlord requests such payment.
The initial monthly payments of Pass-Through Expenses are based upon Landlord's
estimate of the Pass-Through Expenses for the year in question, and shall be
increased or decreased annually to reflect the projected actual Pass-Through
Expenses for that year. If Tenant's total payments in respect of Pass-Through
2
<PAGE>
Expenses for any year are less than the Pass-Through Expenses for that year,
Tenant shall pay the difference to Landlord within ten days after Landlord's
request therefor; if such payments are more than such Pass-Through Expenses,
Landlord shall retain such excess and credit it against Tenant's future annual
payments. The amounts of the initial monthly installments of Base Rent and
Pass-Through Expenses are as follows:
Base Rent............................................. $60,666.67
Pass-Through Expenses................................. $ 0.00*
----------
Total initial monthly payment......................... $60,666.67
==========
*This estimate assumes that the insurance expenses described above have already
been paid by Tenant to reimburse Landlord for the cost of a lump sum annual
insurance installment payment.
(d) If any payment required of Tenant under this Lease is not paid
when due and Tenant fails to pay such amount within five days after Landlord
delivers to Tenant written notice thereof, then Landlord may charge Tenant a fee
equal to 5% of the delinquent payment to reimburse Landlord for its cost and
inconvenience incurred as a consequence of Tenant's delinquency; however, if
during the 12-month period preceding any such delinquent payment, Landlord has
twice delivered to Tenant written notice that Tenant has failed to pay rent when
due, then Landlord may charge Tenant such 5% fee for the delinquent payment in
question when such payment is past due without first delivering to Tenant
written notice thereof.
(e) All payments and reimbursements required to be made by Tenant
under this Lease shall constitute "rent" (herein so called).
----
3 TAXES.
-----
(a) Tenant shall pay all taxes, assessments and governmental charges
whether federal, state, county, or municipal and whether they are imposed by
taxing or management districts or authorities presently existing or hereafter
created and all dues, assessment and other charges applicable to the Premises
payable to any property or community owner association under restrictive
covenants or deed restrictions encumbering the Premises (collectively, "Taxes")
-----
that accrue against the Premises and deliver to Landlord receipts from the
applicable taxing authority or other evidence acceptable to Landlord to verify
the payment thereof at least ten days before such Taxes become delinquent. If,
during the Term, there is levied, assessed or imposed on Landlord a capital levy
or other tax directly on the rent or a franchise tax, assessment, levy or charge
measured by or based, in whole or in part, upon rent, then all such taxes,
assessments, levies or charges, or the part thereof so measured or based, shall
be included within the term "Taxes".
(b) Tenant may, at its expense, contest the validity or amount of any
Taxes in accordance with Law, in which event the obligation to pay such amount
under this Lease shall be deferred during the pendency of such contest, if
diligently prosecuted. Within 15 days before any contested Taxes become due,
Tenant shall deposit with Landlord an amount equal to the amount payable for
such contested Taxes for the preceding Tax year (together with any interest,
fees, and penalties that may accrue during any such contest), which amount shall
be applied to the payment of the contested Taxes when the amount thereof shall
be finally determined, with Tenant paying any unpaid portion of the amount of
the contested Taxes (together with interest, fees, and penalties that may accrue
thereon). Nothing herein, however, shall permit any Taxes to remain unpaid for
any interval that would permit the Premises, or any part thereof, to be sold or
seized by any governmental authority for the nonpayment of Taxes. If at any
time, in the reasonable judgment of Landlord, it shall become necessary to do
so, Landlord may, after written notice to Tenant, under protest, if so requested
by Tenant, apply the amounts so deposited or so much thereof as may be required
to prevent a sale or seizure of the Premises or foreclosure of any lien created
thereon to secure payment of such unpaid Taxes. Tenant shall pay all penalties,
interest, and fees assessed because of Tenant's failure to pay Taxes when due,
and Tenant shall indemnify, defend, and hold harmless Landlord from and against
any costs, liability, or damage incurred by Landlord arising out of or
attributable to Tenant's failure to pay Taxes when due. If required by Law,
Landlord shall join in any contest proceedings brought by Tenant, at Tenant's
expense.
(c) If Tenant fails timely to deliver evidence of the payment of the
amounts required to be paid by Tenant under this Section 3, then Landlord may
pay such amounts, in which case, Tenant shall reimburse to Landlord all amounts
so paid within ten days after Landlord delivers to Tenant written notice
thereof.
(d) If any Landlord's Mortgagee requires that Landlord establish an
escrow for the payment of Taxes or if an Event of Default occurs, then Tenant
shall pay to Landlord a sum equal to 1/12th of the annual Taxes payable under
this Lease on the first day of each month during the Term. Landlord shall hold
such payments in a non-interest bearing account. All such monthly payments of
Taxes shall be based on Landlord's reasonable estimate of the Taxes due for the
year in question, and any deficiency of funds in the escrow account shall be
paid by Tenant to Landlord upon demand. If an Event of Default occurs, Landlord
may apply any funds in the escrow account to the satisfaction of any unperformed
obligation of Tenant under this Lease.
4 NET LEASE. This Lease is intended to be an absolutely net lease;
---------
accordingly, except as provided in Section 5.(b), Landlord shall not be required
to maintain, repair or perform any other obligations with respect to the
Premises. Except as provided in Section 15 hereof, Tenant's obligation to pay
rent hereunder shall be absolute and net of all expenses incurred in connection
with the operation, maintenance, ownership and management of the Premises.
5 TENANT'S AND LANDLORD'S MAINTENANCE AND REPAIR OBLIGATIONS.
-----------------------------------------------------------
(a) Tenant's Obligations. Except as provided in Section 5.(b), Tenant
--------------------
shall maintain all parts of the Premises including the Building's roof and
structural elements, all mechanical, electrical, plumbing, and lighting
3
<PAGE>
systems and equipment, and skylights, windows, plate glass, doors, and
partitions in good condition and promptly make all necessary repairs and
replacements to the Premises. If any portion of the Premises cannot be fully
repaired or restored, then Tenant shall promptly replace such portion of the
Premises, regardless of whether the benefit of such replacement extends beyond
the Term. Without limiting the generality of the foregoing, Tenant shall perform
the following obligations:
(1) Tenant shall maintain the parking areas, driveways, alleys,
landscaping and grounds surrounding the Premises in a clean and
sanitary condition, consistent with the operation of a first-class
office/warehouse building, including prompt maintenance, repairs and
replacements of (A) the exterior of the Building (including painting),
(B) sprinkler systems and sewage lines, (C) pavement, curbs, and
sidewalks, and (D) any other items normally associated with the
foregoing.
(2) Tenant shall maintain the hot water equipment and the
heating, air condition, and ventilation equipment and system (the
"HVAC System"), in good repair and condition and in accordance with
------------
Law and with such equipment manufacturers' suggested
operation/maintenance service program; such obligation shall include
replacement of all equipment necessary to maintain such equipment and
system in good working order. Within ten business days after the
Commencement Date, Tenant shall enter into regularly scheduled
preventive maintenance/service contracts for such equipment, each in
form and substance and with a contractor reasonably acceptable to
Landlord, and deliver copies thereof to Landlord. At least 14 days
before the end of the Term, Tenant shall deliver to Landlord a
certificate from an engineer reasonably acceptable to Landlord
certifying that the hot water equipment and the HVAC System are then
in good repair and working order.
(b) Landlord's Obligations. Landlord's maintenance obligations are
----------------------
limited solely to the maintenance of the foundation piers and structural members
of the exterior walls; however, Landlord shall not be responsible (1) for any
such work until Tenant delivers to Landlord written notice of the need therefor,
(2) for alternations to such items required by Law because of Tenant's use of
the Premises (which alterations shall be performed by Tenant), or (3) for damage
caused to such items by a Tenant Party. Landlord's liability for any such items
shall be limited to the cost of performing such work.
6 ALTERATIONS.
-----------
(a) General. Tenant shall not make any alterations, additions or
-------
improvements to the Premises which affect the Building's Structure (defined
below) without the prior written consent of Landlord. Landlord shall not be
required to notify Tenant of whether it consents to any such alteration,
addition or improvements until it (1) has received plans and specifications
therefor which are sufficiently detailed to allow construction of the work
depicted thereon to be performed in a good and workmanlike manner and (2) has
had a reasonable opportunity to review them. If the alteration, addition or
improvement will affect the Building's roof, foundation and structural elements
(the roof, foundation, and structural elements being herein collectively called
the "Building's Structure"), HVAC System, or mechanical, electrical, or plumbing
--------------------
systems, then the plans and specifications therefor must be prepared by a
licensed engineer reasonably acceptable to Landlord. Landlord's approval of any
plans and specifications shall not be a representation that the plans or the
work depicted thereon will comply with Law or be adequate for any purpose, but
shall merely be Landlord's consent to performance of the work. Upon completion
of any alteration, addition, or improvement, Tenant shall deliver to Landlord
accurate, reproducible as-built plans therefor. Tenant may erect shelves, bins,
machinery and trade fixtures provided that such items (A) do not alter the basic
character of the Premises; (B) do not overload or damage the Premises; and (C)
may be removed without damage to the Premises. Unless Landlord specifies in
writing otherwise, all alterations, additions, improvements, and fixtures shall
be Landlord's property when installed in the Premises, except for furniture and
equipment of Tenant which is not affixed to the Premises so as to become a
fixture (i.e., unattached items and items which are temporarily attached by
bolts and screws, but not items which are built-in or incorporated into the
Building or the electrical, plumbing, or mechanical systems therein). All work
performed by a Tenant Party in the Premises (including that relating to the
installations, repair, replacement, or removal of any item) shall be performed
in accordance with Law and with Landlord's specifications and requirements, in a
good and workmanlike manner, and so as not to damage or alter the Building's
Structure or the Premises.
(b) Initial Tenant Improvements. Tenant shall construct the initial
---------------------------
tenant improvements during the first three months of the Term (those
improvements completed during the first three months of the Term are herein
called the "Initial Improvements") and the Secondary Work in accordance with
--------------------
Section 6.(a) and Exhibit B, at Tenant's expense, except as provided below.
---------
(1) Tenant shall bear the entire cost of performing the Work (defined
below) relating to the Initial Improvements and Secondary Work (including,
without limitation, design of the Initial Improvements and Secondary Work
and preparation of the Working Drawings, costs of construction labor and
materials, electrical usage during construction, additional janitorial
services, general tenant signage, related taxes and insurance costs
relating thereto, all of which costs are herein collectively called the
"Total Construction Costs") in excess of the Initial Construction Allowance
-------------------------
and the Secondary Work Allowance. Upon approval of the Working Drawings
for the Initial Improvements and Secondary Work and selection of a
contractor, Tenant shall promptly execute a work order agreement prepared
by Landlord which identifies such drawings, itemizes the Total Construction
Costs and sets forth the Initial Construction Allowance and the Secondary
Work Allowance.
(2) Provided no Event of Default exists, Landlord shall provide to
Tenant a construction allowance for the Initial Improvements (the "Initial
-------
Construction Allowance") equal to the lesser of (A) the Total Construction
----------------------
Costs incurred for the Initial Improvements or (B) $286,000. Landlord
shall provide to Tenant a construction allowance for the construction of
the mezzanine level and first floor buildout of any warehouse space in the
Building (the "Secondary Work") equal to $104,000 plus the lesser of (i)
--------------
the amount
4
<PAGE>
by which the Total Construction Costs for the Secondary Work exceeds
$104,000 or (ii) the positive difference, if any, obtained by subtracting
the Initial Improvements' Total Construction Costs from $286,000 (the
"Secondary Work Allowance"). The Secondary Work Allowance shall be paid to
------------------------
Tenant after Tenant has paid Base Rent for 12 consecutive months (following
abatements for any Abatement Period), Tenant has delivered to Landlord
evidence of the cost thereof, and no Event of Default exists. If Tenant
fails to commence work on the Secondary Work within 13 months after the
Commencement Date or, after beginning such work, fails to complete the
Secondary Work within 18 months after the Commencement Date Landlord's
obligation to provide the Secondary Work Allowance shall terminate. To the
extent Tenant is entitled to receive such allowances, the construction
allowances shall be disbursed in monthly advances based on the costs of the
work incurred. Tenant shall submit to Landlord (but not more frequently
than once per month) construction allowance requests accompanied by all
invoices from contractors, subcontractors, and suppliers evidencing the
cost of performing the Work for which the request is being submitted,
together with lien waivers from such parties. Provided that no Event of
Default exists, Landlord shall make advances of the construction allowances
within ten days after its receipt of the advance request accompanied by the
appropriate documentation; however, the final draw of the applicable
allowance (i.e., the Initial Construction Allowance or the Secondary Work
Allowance), which shall not be less than 10% of the amount of such
allowance, shall not be disbursed until Landlord has received final lien
waivers from all persons performing work or supplying materials for the
Initial Improvements or Secondary Work, as applicable, and a certificate of
occupancy from the appropriate governmental authority, if applicable to the
Work for the Initial Improvements and Secondary Work, or, if applicable,
evidence of governmental inspection and approval of the Work for the
Initial Improvements and Secondary Work.
7 SIGNS.
-----
(a) Subject to Section 7.(b), Tenant shall not place, install or
attach any signage, decorations, advertising media, blinds, draperies, or window
treatments which can be viewed from outside the Building, or bars, or security
installations to the Premises or the Building without Landlord's prior written
approval. Tenant shall repair, paint, and/or replace any portion of the
Premises or the Building damaged or altered as a result of its signage when it
is removed (including, without limitation, any discoloration of the Building).
Subject to Section 7.(b), Tenant shall not (1) make any changes to the exterior
of the Premises or the Building, (2) install any exterior lights, decorations,
balloons, flags (except for a flag with Tenant's name and logo thereon on the
existing flag pole adjacent to the Building), pennants, banners or paintings, or
(3) erect or install any signs, windows or door lettering, decals, window or
storefront stickers, placards, decorations or advertising media of any type that
is visible from the exterior of the Premises without Landlord's prior written
consent. Landlord shall not be required to notify Tenant of whether it consents
to any sign until it (A) has received detailed, to-scale drawings thereof
specifying design, material composition, color scheme, and method of
installation, and (B) has had a reasonable opportunity to review them.
(b) If (1) Tenant or its Affiliates are occupying the entire Premises,
and (2) Tenant's right to possess the Premises or this Lease has not been
terminated (collectively, the "Sign Conditions"), then Tenant may, at its risk
---------------
and expense place Tenant's sign panel (the "Tenant Panel") on the Building's
------------
existing monument sign (the "Monument Sign"). The location, design, size, color
-------------
and material composition of the Tenant Panel must be reasonably acceptable to
Landlord. If Landlord grants its approval, Tenant shall install the Tenant
Panel and maintain the Tenant Panel in a good, clean and safe condition and in
accordance with all Laws, including the payment of all fees in connection
therewith (the "Sign Requirements"). If either of the Sign Conditions are not
-----------------
satisfied, Tenant shall remove the Tenant Panel upon Landlord's written demand
therefor and Tenant's rights under this Section 7.(b) shall terminate. If
Tenant fails to so remove the Tenant Panel within 10 days after Landlord's
written request, Landlord may, at Tenant's expense, remove and dispose of the
Tenant Panel in any manner it deems appropriate, all without compensation to
Tenant. After the end of the Term or after Tenant's right to possess the
Premises has been terminated, Landlord may require that Tenant remove the Tenant
Panel by delivering to Tenant written notice thereof within 30 days after the
end of the Term. If Landlord so requests, Tenant shall remove the Tenant Panel
and repair all damage caused thereby, within ten days after Landlord's request
therefor (reasonable wear and tear and damage by fire or other casualty
excepted). If Tenant fails to timely do so, Landlord may, without compensation
to Tenant, (1) use the Tenant Panel or (2) at Tenant's expense, remove the
Tenant Panel, perform the related restoration and repair work and dispose of the
Tenant Panel in any manner Landlord deems appropriate. Tenant shall defend,
indemnify, and hold harmless Landlord from all losses, claims, costs and
liabilities arising in connection with or relating to the installation,
maintenance, use, or removal of the Tenant Panel, including those arising from
----------------------------
Landlord's negligence. The rights granted to Tenant under this Section 7.(b)
- ---------------------
may not be assigned to any party, other than in connection with a Permitted
Transfer of the entire Premises.
8 UTILITIES. Tenant shall obtain and pay for all water, gas,
---------
electricity, heat, telephone, sewer, sprinkler charges and other utilities and
services used at the Premises, together with any taxes, penalties, surcharges,
maintenance charges, and the like pertaining to the Tenant's use of the
Premises. Landlord shall not be liable for any interruption or failure of
utility service to the Premises. If Tenant fails to pay any such amounts when
due, Landlord may do so, in which case, Tenant shall reimburse Landlord for all
amounts paid by Landlord within ten days after Landlord's request therefor.
9 INSURANCE.
---------
(a) Tenant shall maintain (1) workers' compensation insurance (with a
waiver of subrogation endorsement reasonably acceptable to Landlord) and
commercial general liability insurance (with contractual liability endorsement),
including personal injury and property damage in the amount of $1,000,000 per
occurrence combined single limit for personal injuries and death of persons and
property damage occurring in or about the Premises, plus umbrella liability
coverage of at least $2,000,000 per occurrence, (2) fire and extended coverage
insurance covering (A) the replacement cost of all alterations, additions,
partitions and improvements installed in the Premises, (B) the replacement cost
of all of Tenant's personal property in the Premises, and (C) loss of profits in
the event of an insured peril damaging the Premises, and (3) such other
insurance as Landlord may reasonably require. Such policies shall
5
<PAGE>
(i) name Landlord, Landlord's agents, Landlord's Mortgagee's and their
respective Affiliates (defined below), as additional insureds (and as loss
payees on the fire and extended coverage insurance), (ii) be issued by an
insurance company acceptable to Landlord, (iii) provide that such insurance may
not be cancelled unless 30-days' prior written notice is first given to Landlord
and Landlord's Mortgagee, (iv) be delivered to Landlord by Tenant before the
Commencement Date and at least 15 days before each renewal thereof, and (v)
provide primary coverage to Landlord when any policy issued to Landlord is
similar or duplicate in coverage, in which case Landlord's policy shall be
excess over Tenant's policies.
(b) Landlord shall maintain fire and extended insurance against risks
customarily covered by reasonably prudent landlords of comparable office
buildings in the Market Area (hereafter defined), covering the Building's
Structure in the amount of its full replacement cost, with a deductible amount
not to exceed $50,000, which provides for rent loss insurance for at least 12
months (or, if 12-month, rent-loss insurance is unavailable, the maximum rent-
loss insurance which can then be obtained). Such insurance shall be endorsed to
provide that the underwriter thereof shall have no subrogation rights against
Tenant.
10 DESTRUCTION OF OR DAMAGE TO PROPERTY.
------------------------------------
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage (a "Casualty") to the Premises. In no event shall rent
--------
abate, nor shall this Lease terminate, because of a Casualty, except as provided
below. If a material portion of the Premises is damaged or destroyed and (1)
cannot be rebuilt and repaired due to applicable Law or (2) if a Casualty occurs
during the last 12 months of the Term and such damage cannot be repaired within
30 days after such Casualty and Tenant has not elected to extend the Term as
provided in Exhibit D, then Landlord or (if a Tenant Party did not cause such
---------
Casualty) Tenant may terminate this Lease by delivering to the other written
notice thereof within 30 days after such Casualty, in which case, the rent shall
be abated during the unexpired portion of the Term effective upon the date the
Casualty occurred. Time is of the essence with respect to the delivery of such
notices.
(b) Subject to Section 10.(c), if this Lease is not terminated under
Section 10.(a), then subject to Tenant's payment to Landlord of any deductible
amounts relating to the insurance coverage for such Casualty, Landlord shall
restore the Premises to substantially the same or better condition as existed
before the occurrence of such Casualty, except that Landlord shall not be
required to rebuild, repair, or replace any part of the partitions, fixtures,
additions and other improvements or personal property required to be covered by
Tenant's insurance under Section 9, and this Lease shall remain in effect.
Tenant's obligations to pay rent shall be abated while the Premises are
untenantable, but only to the extent of the rent-loss insurance received by
Landlord in connection with such Casualty.
(c) If the Premises are destroyed or substantially damaged by any
peril not covered by the insurance maintained by Landlord, or any Landlord's
Mortgagee (defined below) requires that insurance proceeds be applied to the
indebtedness secured by its Mortgage (defined below) obligations, Landlord may
terminate this Lease by delivering written notice of termination to Tenant
within 30 days after such destruction or damage or such requirement is made
known by any such Landlord's Mortgagee, as applicable, whereupon all rights and
obligations hereunder shall cease and terminate, except for any liabilities of
Tenant which accrued before this Lease is terminated.
11 LIABILITY, INDEMNIFICATION , WAIVER OF SUBROGATION AND NEGLIGENCE
-------------------------- --------------------------------------
CLAIMS.
- ------
(a) Subject to Section 11.(b), Tenant shall indemnify, defend, and
hold harmless Landlord, its successors, assigns, agents, employees, contractors,
partners, directors, officers and Affiliates (collectively, the "Indemnified
-----------
Parties") from and against all fines, suits, losses, costs, liabilities, claims,
- -------
demands, actions and judgments of every kind or character (1) arising from
Tenant's failure to perform its covenants hereunder, (2) recovered from or
asserted against any of the Indemnified Parties on account of any Loss (defined
below) to the extent that any such Loss directly or indirectly relates to or is
caused by the actions or omissions of a Tenant Party or any other person
entering upon the Premises under or with a Tenant Party's express or implied
invitation or permission, or (3) arising from or out of the occupancy or use by
a Tenant Party or arising from or out of any occurrence in the Premises;
provided, however, nothing contained herein shall obligate Tenant to indemnify
Landlord for any Losses caused in whole or in part by any Indemnified Party's
gross negligence or willful misconduct.
(b) Landlord shall not be liable to Tenant or those claiming by,
through, or under Tenant for any injury to or death of any person or persons or
the damage to or theft, destruction, loss, or loss of use of any property or
inconvenience (a "Loss") caused by casualty, theft, fire, third parties, or any
----
other matter (including Losses arising through repair or alteration of any part
of the Building, or failure to make repairs, or from any other cause),
regardless of whether the negligence of either party caused such Loss in whole
- ------------------------------------------------------------------------------
or in part. Each of Landlord and Tenant waives any claim it might have against
- ----------
the other for any damage to or theft, destruction, loss, or loss of use of any
property, to the extent the same is insured against under any insurance policy
maintained by it that covers the Premises, Landlord's or Tenant's fixtures,
personal property, leasehold improvements, or business, or is required to be
insured against by it under the terms hereof, regardless of whether the
-------------------------
negligence or fault of the other party caused such loss; however, Landlord's
- -------------------------------------------------------
waiver shall be inapplicable to any deductible amount maintained under
Landlord's insurance policies.
12 USE.
---
(a) The Premises shall be used only for general office use and for
receiving, storing, shipping and selling products, materials and merchandise
made or distributed by Tenant and for such other lawful purposes as may be
incidental thereto (the "Permitted Use"); however, no store-front retail sales
-------------
may be made from the Premises. By the 18th month after the Commencement Date,
Tenant shall, at Tenant's expense, make alterations to the Premises such that it
consists of at least 57,000 rentable square feet with not more than 2,500
rentable square feet being warehouse
6
<PAGE>
space for storage purposes only and not less than 54,500 rentable square feet of
office space. Notwithstanding the increase in the number of rentable square feet
in the Building caused by such alterations, Tenant's obligation to pay Base Rent
shall be calculated as if the Building contained 52,000 rentable square feet.
Tenant may not use any part of the Premises for any use other than office use
(except for the warehouse space described in the second preceding sentence which
may only be used for storage purposes) without Landlord's consent, which shall
not be unreasonably withheld. Tenant shall not use the Premises to receive,
store or handle any product, material or merchandise that is explosive or highly
inflammable or hazardous, except in compliance with all applicable Laws and in
accordance with Section 25. Outside storage is prohibited. Tenant shall be
solely responsible for complying with all Laws applicable to the use, occupancy,
and condition of the Premises. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, light, noise or vibrations to emanate from
the Premises; nor take any other action that would constitute a nuisance or
would disturb, unreasonably interfere with, or endanger Landlord or any other
person; nor permit the Premises to be used for any purpose or in any manner that
would (1) void the insurance thereon, (2) increase the insurance risk, or (3A
cause the disallowance of any sprinkler credits. Tenant shall pay to Landlord on
demand any increase in the cost of any insurance on the Premises incurred by
Landlord, which is caused by Tenant's use of the Premises or because Tenant
vacates the Premises.
(b) Tenant and its employees and invitees may use any parking areas
associated with the Premises. Landlord shall not be responsible for enforcing
Tenant's parking rights against third parties.
(c) Notwithstanding anything in this Lease to the contrary, as
between Landlord and Tenant, Tenant shall bear the risk of complying with Title
III of the Americans with Disabilities Act of 1990, the Texas Elimination of
Architectural Barriers Act, and all rules, regulations, and guidelines
promulgated under either of such acts, as they may be amended from time to time
(collectively, the "Disabilities Acts"), in the Premises.
-----------------
13. INSPECTION. Upon twenty-four (24) hours prior written or oral
----------
notice to Tenant (except in the event of an emergency, in which case no such
notice is required), Landlord and Landlord's agents and representatives may
enter the Premises during business hours to inspect the Premises; to make such
repairs as may be required or permitted under this Lease; to perform any
unperformed obligations of Tenant hereunder; and to show the Premises to
prospective purchasers, mortgagees, ground lessors, and (during the last 9
months of the Term) tenants. During the last 9 months of the Term, Landlord may
erect a sign reasonably acceptable to Landlord and Tenant on the Premises
indicating that the Premises are available and, if applicable, that Tenant is
relocating. Tenant shall notify Landlord in writing of its intention to vacate
the Premises at least 60 days before Tenant will vacate the Premises; such
notice shall specify the date on which Tenant intends to vacate the Premises
(the "Vacation Date"). At least 30 days before the Vacation Date, Tenant shall
-------------
arrange to meet with Landlord for a joint inspection of the Premises. After
such inspection, Landlord shall prepare a list of items that Tenant must perform
before the Vacation Date to substantially restore the Premises to the condition
required in Section 16. If Tenant fails to arrange for such inspection, then
Landlord may conduct such inspection and Landlord's determination of the work
Tenant is required to perform before the Vacation Date shall be conclusive. If
Tenant fails to perform such work before the Vacation Date, then Landlord may
perform such work at Tenant's cost. Tenant shall pay all costs incurred by
Landlord in performing such work within ten days after Landlord's request
therefor.
14. ASSIGNMENT AND SUBLETTING.
-------------------------
(a) Tenant shall not, without the prior written consent of Landlord,
(1) assign, transfer, or encumber this Lease or any estate or interest herein,
whether directly or by operation of law, (2) permit any other entity to become
Tenant hereunder by merger, consolidation, or other reorganization, except as
provided in Section 14.(c), (3A if Tenant is an entity other than a corporation
whose stock is publicly traded, permit the transfer of more than 50% of the
ownership interest in Tenant, (4) sublet any portion of the Premises , (5) grant
any license, concession, or other right of occupancy of any portion of the
Premises, or (6) permit the use of the Premises by any parties other than Tenant
(any of the events listed in Sections 14.(a)(1) through 14.(a)(6) being a
"Transfer"). Provided that (A) the proposed assignment or sublease is for the
- ---------
entire Premises (including, if Tenant has exercised its expansion option under
Section 30, any such expansion space), and (B) at the time of the proposed
assignment or subletting, Tenant delivers to Landlord Tenant's Financial
Statements verifying that Tenant's gross revenue for the preceding 12-month
period exceeds $25,000,000 and that Tenant's net income before taxes for the
preceding 12-month period exceeds $1,300,000, Landlord shall not unreasonably
withhold its consent to any assignment or subletting of the Premises to a party
which (i) may reasonably be expected to fulfill the obligations of Tenant
hereunder, and (ii) will use the Premises for the purposes herein stated.
Without limited the foregoing, Landlord may withhold its consent to any such
assignment or subletting of the Premises to a) any governmental agency, b) any
party which is a tenant in a building which is owned by Landlord, c) any party
which will use Hazardous Substances in the Premises, d) any party with whom
Landlord is actively negotiating the terms of a lease for space in the complex
where the Building is located, or e) any party to whom Landlord's Mortgagee
objects. If Tenant requests Landlord's consent to a Transfer, then Tenant shall
provide Landlord with a written description of all terms and conditions of the
proposed Transfer, copies of the proposed documentation, and the following
information about the proposed transferee: name and address; reasonably
satisfactory information about its business and business history; its proposed
use of the Premises; banking, financial, and other credit information; and
general references sufficient to enable Landlord to determine the proposed
transferee's creditworthiness and character. Tenant shall reimburse Landlord
for its reasonable attorneys' fees and other expenses incurred in connection
with considering any request for its consent to a Transfer. Landlord shall,
within thirty (30) days of receipt of such information from Tenant, approve such
Transfer or notify Tenant in writing of Landlord's reason for not approving such
proposed Transfer. Landlord will use commercially reasonable efforts to obtain
the consent of Landlord's Mortgagee to any proposed assignee or subtenant of
which Landlord approves. If Landlord fails to so notify Tenant within such
period, then the proposed Transfer shall be deemed disapproved. If Landlord
consents to a proposed Transfer, then the proposed transferee shall deliver to
Landlord a written agreement whereby it expressly assumes the Tenant's
obligations hereunder (however, any transferee of less than all of the space in
the Premises shall be liable only for obligations under this Lease that are
properly allocable to the space subject to the Transfer, and only to the extent
of the rent it has agreed
7
<PAGE>
to pay Tenant therefor). No transfer shall release Tenant from performing the
obligations of the "Tenant" under this Lease, but rather Tenant and its
transferee shall be jointly and severally liable therefor. Landlord's consent to
any Transfer shall not waive Landlord's rights as to any subsequent Transfers.
If an Event of Default occurs while the Premises or any part thereof are subject
to a Transfer, then Landlord, in addition to its other remedies, may collect
directly from such transferee all rents becoming due to Tenant and apply such
rents against Tenant's rent obligations. Tenant authorizes its transferees to
make payments of rent directly to Landlord upon receipt of notice from Landlord
to do so.
(b) Tenant hereby assigns, transfers and conveys all consideration
(less reasonable costs and expenses actually incurred by Tenant directly
relating to such Transfer) received by Tenant under any Transfer, which are in
excess of the rents payable by Tenant under this Lease, and Tenant shall hold
such amounts in trust for Landlord and pay them to Landlord within ten days
after receipt.
(c) Notwithstanding the foregoing, Tenant may Transfer all or part of
its interest in this Lease or all or part of the Premises to the following types
of entities (a "Permitted Transferee") without the written consent of Landlord
--------------------
(a "Permitted Transfer"), provided that the conditions set forth below are
------------------
satisfied:
(1) an Affiliate of Tenant;
(2) any corporation in which or with which Tenant, or its
corporate successors or assigns, is merged or consolidated, in
accordance with applicable statutory provisions governing merger and
consolidation of corporations, so long as (A) Tenant's obligations
hereunder are assumed by the corporation surviving such merger or
created by such consolidation; (B) the Tangible Net Worth of the
surviving or created corporation is not less than the Tangible Net
Worth of Tenant as of the date hereof; and (C) the combined gross
revenues of Tenant and the other corporation for the preceding 12-
month period exceeded $25,000,000 and the combined net income of
Tenant and the other corporation before taxes for the preceding 12-
month period exceeding $1,300,000, as verified by the audited
financial statement of Tenant and such other corporation delivered to
Landlord; or
(3) any corporation acquiring all or substantially all of
Tenant's assets, if (A) such corporation's Tangible Net Worth after
such acquisition is not less than the Tangible Net Worth of Tenant as
of the date hereof, and (B) such corporation has gross revenues for
the preceding 12-month period exceeding $25,000,000 and has net income
before taxes for the preceding 12-month period exceeding $1,300,000,
as verified by the acquiring corporation's audited financial
statements delivered to Landlord.
Tenant shall promptly notify Landlord of any such Permitted Transfer. As a
condition precedent to any Permitted Transfer, the proposed Permitted Transferee
must deliver to Landlord a written agreement whereby it expressly assumes the
Tenant's obligations hereunder. As used herein, "Tangible Net Worth" shall mean
------------------
the excess of total assets over total liabilities (in each case, determined in
accordance with GAAP) excluding from the determination of total assets all
assets which would be classified as intangible assets under GAAP, including,
without limitation, goodwill, licenses, patents, trademarks, trade names,
copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee
shall be subject to Landlord's prior written consent (which Landlord may grant
or deny in its sole discretion). Notwithstanding any assignment or subletting,
Tenant shall at all times remain fully responsible and liable for the payment of
the rent and for compliance with all of Tenant's other obligations under this
Lease (regardless of whether Landlords' approval has been obtained for any such
assignments or sublettings).
(d) With respect to any written request by Tenant to Landlord for
Landlord's consent to a Transfer (other than a Permitted Transfer), Landlord
may, within 30 days after submission of such request, cancel this Lease (or, as
to a subletting or assignment, cancel as to the portion of the Premises proposed
to be sublet or assigned) as of the date of the proposed Transfer was to be
effective. If, pursuant to the exercise of this right, Landlord cancels this
Lease as to any portion of the Premises, then this Lease shall cease for such
portion of the Premises and Tenant shall pay to Landlord all rent accrued
through the cancellation date relating to the portion of the Premises covered by
the proposed Transfer. Thereafter, Landlord may lease such portion of the
Premises to the prospective transferee (or to any other person) without
liability to Tenant.
(e) If Tenant believes Landlord has unreasonably withheld its
consent, then, as Tenant's exclusive remedy therefor, Tenant may notify Landlord
in writing of such dispute, whereupon the following shall occur within ten days
of Tenant's delivery of such notice, Landlord and Tenant shall jointly appoint a
person to resolve such dispute, who shall have at least ten-years' experience in
commercial real estate matters. If Landlord and Tenant are unable to agree on
such person within such ten-day period, then either party may ask the Dallas
office of the American Arbitration Association ("AAA") to select such person.
---
The AAA's selection of the arbitrator shall be binding on Landlord and Tenant.
The determination of the person finally selected to settle such dispute shall be
binding on Landlord and Tenant. The non-prevailing party shall pay the fees of
the arbitrator.
15. CONDEMNATION. If a material portion of the Premises is permanently
------------
taken for any public or quasi-public use by right of eminent domain or private
purchase in lieu thereof (a "Taking"), and the Taking prevents or materially
------
interferes with the use of the remainder of the Premises for the purpose for
which they were leased to Tenant, either party may terminate this Lease by
delivering to the other written notice thereof within 30 days after the Taking,
in which case rent shall be abated during the unexpired portion of the Term,
effective on the date of such Taking. If the permanent Taking does not prevent
or materially interfere with the use of the Premises for the purpose for which
they were leased to Tenant, then neither party may terminate this Lease, but the
rent payable during the unexpired portion of the Term shall be reduced to such
extent as may be fair and reasonable under the circumstances, and Landlord shall
8
<PAGE>
repair any damage to the Premises caused by the Taking, to the extent of the
award actually received by Landlord (less than the cost incurred in connection
with the receiving of such award and any amounts payable to a Landlord's
Mortgagee). All compensation awarded for any Taking shall be the property of
Landlord and Tenant assigns any interest it may have in any such award to
Landlord; however, Landlord shall have no interest in any award made to Tenant
for loss of business or goodwill or for the taking of Tenant's property, if a
separate award for such items is made to Tenant. If a Taking occurs which is
not permanent in nature, then Tenant shall continue to pay rent hereunder
without abatement and all condemnation awards payable in respect of the Premises
for the portion of such Taking during the Term shall be payable to Tenant, and
the remainder of such award shall be payable to Landlord.
16. SURRENDER OF PREMISES; HOLDING OVER.
-----------------------------------
(a) No act by Landlord shall be an acceptance of a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless it is in writing and signed by Landlord. At the end of the Term or the
termination of Tenant's right to possess the Premises, Tenant shall (1) deliver
to Landlord the Premises with all improvements located thereon in good repair
and condition, reasonable wear and tear (subject however to Tenant's maintenance
obligations) excepted, and with the HVAC System, and the plumbing, mechanical,
and electrical systems and equipment (including hot water equipment), light and
light fixtures (including ballasts), overhead doors and related equipment, and
roof in good working order, condition and repair, (2) deliver to Landlord all
keys to the Premises, and (3A remove all signage placed on the Premises by or at
Tenant's request. All fixtures, alterations, additions, and improvements
(whether temporary or permanent) shall be Landlord's property and shall remain
on the Premises except as provided in the next two sentences. Tenant may remove
all of Tenant's furniture and equipment which is not affixed to the Premises so
as to become a fixture (i.e, unattached items and items which are temporarily
attached by bolts and screws, but not items which are built-in or incorporated
into the Building or the electrical, plumbing, or mechanical systems therein),
but Tenant shall not remove any such item which was paid for, in whole or in
part, by Landlord. Additionally, Tenant shall remove such alterations,
additions, improvements, fixtures, equipment, wiring, furniture, and other
property to the extent that such items were constructed or installed by or under
the direction of a Tenant Party as Landlord may request, provided such request
is made within 30 days after the end of the Term, unless Landlord has
specifically agreed in writing that such items need not be so removed. All
items not so removed shall, at the option of Landlord, be deemed abandoned by
Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed
of by Landlord without notice to Tenant and without any obligation to account
for such items and Tenant shall pay for the costs incurred by Landlord in
connection therewith. All work required of Tenant under this Section 16.(a)
shall be coordinated with Landlord and be done in a good and workmanlike manner,
in accordance with all Laws, and so as not to damage the Building. Tenant
shall, at its expense, repair all damage caused by any work performed by Tenant
under this Section 16.(a).
(b) If Tenant fails to vacate the Premises at the end of the Term,
then Tenant shall be a Tenant at will and Tenant shall pay, in addition to the
other rent due hereunder, a daily base rental equal to 150% of the daily Base
Rent payable during the last month of the Term. Additionally, Tenant shall
defend, indemnify, and hold harmless Landlord from any damage, liability and
expense (including attorneys' fees and expenses) incurred because of such
holding over. No payments of money by Tenant to Landlord after the Term shall
reinstate, continue or extend the Term, and no extension of the Term shall be
valid unless it is in writing and signed by Landlord and Tenant.
17. QUIET ENJOYMENT. Provided Tenant has fully performed its
---------------
obligations under this Lease, Tenant shall peaceably and quietly hold and enjoy
the Premises for the Term, without hindrance from Landlord or any party claiming
by, through, or under Landlord, but not otherwise.
18. EVENTS OF DEFAULT. Each of the following events shall constitute an
-----------------
"Event of Default" under this Lease:
----------------
(a) Tenant fails to pay any rent when due and such failure continues
for a period of five (5) days from the date Landlord notifies Tenant in writing
of such failure.
(b) The filing of a petition by or against Tenant (1) in any
bankruptcy or other insolvency proceeding; (2) seeking in any relief under any
debtor relief Law; (3) for the appointment of a liquidator, receiver, trustee,
custodian, or similar official for all or substantially all of Tenant's property
or for Tenant's interest in this Lease; or (4) for reorganization or
modification of Tenant's capital structure (however, if any such petition is
filed against Tenant, then the filing of such petition shall not constitute an
Event of Default, unless it is not dismissed within 45 days after the filing
thereof).
(c) Tenant (1) vacates all or a substantial portion of the Premises
for a period of 90 days or (2A fails to continuously operate its business at the
Premises for the Permitted Use.
(d0 Tenant fails to discharge any lien placed upon the Premises in
violation of Section 22 within ten (10) days after any such lien or encumbrance
is filed against the Premises.
(e) Tenant fails to comply with any term, provision or covenant of
this Lease (other than those listed in this Section 18), or in any other
agreement between Landlord and Tenant and such failure continues for 30 days
after Tenant commences to cure such default following written notice thereof to
Tenant and Tenant thereafter diligently pursues same to completion.
(f) Tenant fails to pay its obligations as they become due or Tenant
has defaulted under any agreement executed in connection with or evidencing
indebtedness of Tenant in excess of $100,000.
19. REMEDIES.
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9
<PAGE>
(a) Upon any Event of Default, Landlord may, in addition to all other
rights and remedies afforded Landlord hereunder or by Law, take any of the
following actions:
(1 Terminate this Lease by giving Tenant written notice
thereof, in which event, Tenant shall pay to Landlord the sum of (A) all
rent accrued hereunder through the date of termination, (B) all amounts due
under Section 19.(b), and (C) an amount equal to (i) the total rent that
Tenant would have been required to pay for the remainder of the Term
discounted to present value at a per annum rate equal to the "Discount
Rate" as published on the date this Lease is terminated by The Wall Street
Journal, Southwest Edition, in its listing of "Money Rates," minus (ii) the
then present fair rental value of the Premises for such period, similarly
discounted; or
(2 Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (A) all rent and other amounts accrued
hereunder to the date of termination of possession, (B) all amounts due
from time to time under Section 19.(b), and (C) all rent and other sums
required hereunder to be paid by Tenant during the remainder of the Term,
diminished by any net sums thereafter received by Landlord through
reletting the Premises during such period. Landlord shall use reasonable
efforts to relet the Premises on such terms and conditions as Landlord may
determine (including a term different than the Term, rental concessions,
and alterations to, and improvement of, the Premises). Landlord shall not
be liable for, nor shall Tenant's obligations hereunder be diminished
because of Landlord's failure to relet the Premises or to collect rent due
for a reletting. Tenant shall not be entitled to the excess of any
consideration obtained by reletting over the rent due hereunder. Reentry
by Landlord in the Premises shall not affect Tenant's obligations hereunder
for the unexpired Term; rather, Landlord may, from time to time, bring
action against Tenant to collect amounts due by Tenant, without the
necessity of Landlord's waiting until the Term ends. Unless Landlord
delivers written notice to Tenant expressly stating that it has elected to
terminate this Lease, all actions taken by Landlord to exclude or
dispossess Tenant of the Premises shall be deemed to be taken under this
Section 19.(a)(2). If Landlord elects to proceed under this Section
19.(a)(2), it may at any time elect to terminate this Lease under Section
19.(a)(1).
Additionally, Landlord may perform Tenant's unperformed obligations hereunder
and, without notice, Landlord may alter locks or other security devices at the
Premises to deprive Tenant of access thereto, and Landlord shall not be required
to provide a new key or right of access to Tenant.
(b) Tenant shall pay to Landlord all costs incurred by Landlord
(including court costs and reasonable attorneys' fees and expenses) in (1)
obtaining possession of the Premises, (2) removing and storing Tenant's or any
other occupant's property, (3) repairing, restoring, altering, remodeling, or
otherwise putting the Premises into condition acceptable to a new tenant, (4) if
Tenant is dispossessed of the Premises and this Lease is not terminated,
reletting all or any part of the Premises (including brokerage commissions, cost
of tenant finish work, and other costs incidental to such reletting), (5)
performing Tenant's obligations which Tenant failed to perform, and (6)
enforcing, or advising Landlord of, its rights, remedies, and recourses.
Landlord's acceptance of rent following an Event of Default shall not waive
Landlord's rights regarding such Event of Default. Landlord's receipt of rent
with knowledge of any default by Tenant hereunder shall not be a waiver of such
default, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless set forth in writing and signed by Landlord. No
waiver by Landlord of any violation or breach of any of the terms contained
herein shall waive Landlord's rights regarding any future violation of such term
or violation of any other term. If Landlord repossesses the Premises pursuant
to the authority herein granted, then Landlord shall have the right to (A) keep
in place and use or (B) remove and store, at Tenant's expense, all of the
furniture, fixtures, equipment and other property in the Premises, including
that which is owned by or leased to Tenant at all times before any foreclosure
thereon by Landlord or repossession thereof by any lessor thereof or third party
having a lien thereon. Landlord may relinquish possession of all or any portion
of such furniture, fixtures, equipment and other property to any person (a
"Claimant") who presents to Landlord a copy of any instrument represented by
- ---------
Claimant to have been executed by Tenant (or any predecessor of Tenant) granting
Claimant the right under various circumstances to take possession of such
furniture, fixtures, equipment or other property, without the necessity on the
part of Landlord to inquire into the authenticity or legality of the instrument.
Landlord may, at its option and without prejudice to or waiver of any rights it
may have, escort Tenant to the Premises to retrieve any personal belongings of
Tenant and/or its employees, and make such property available to Tenant and/or
Tenant's employees; however, Tenant first shall pay in cash all costs and
estimated expenses to be incurred in connection with the removal of such
property and making it available. The rights of Landlord herein stated are in
addition to any and all other rights that Landlord has or may hereafter have at
law or in equity, and Tenant agrees that the rights herein granted Landlord are
commercially reasonable.
20. LANDLORD'S LIABILITY, Liability of Landlord to Tenant for any
--------------------
default by Landlord, shall be limited to actual, direct, but not consequential,
damages therefor and shall be recoverable only from the interest of Landlord in
the Building and the Land, and neither Landlord nor Landlord's owners shall have
any personal liability therefor. Tenant hereby waives its rights under Section
91.004 of the Texas Property Code.
21. MORTGAGES.
---------
(a) This Lease shall be subordinate to any deed of trust, mortgage or
other security instrument (a "Mortgage"), and any ground lease, master lease, or
--------
primary lease (a "Primary Lease") that now or hereafter covers any portion of
-------------
the Premises (the mortgagee under any Mortgage or the lessor under any Primary
Lease is referred to herein as "Landlord's Mortgagee"), and to increases,
--------------------
renewals, modifications, consolidations, replacements, and extensions thereof.
However, any Landlord's Mortgagee may elect to subordinate its Mortgage or
Primary Lease (as the case may be) to this Lease by delivering written notice
thereof to Tenant. The provisions of this Section 21 shall be self-
10
<PAGE>
operative, and no further instrument shall be required to effect such
subordination; however, Tenant shall from time to time within ten days after
request therefor, execute any instruments that may be required by any Landlord's
Mortgagee to evidence the subordination of this Lease to any such Mortgage or
Primary Lease.
(b) Tenant shall attorn to any party succeeding to Landlord's
interest in the Premises, whether by purchase, foreclosure, deed in lieu of
foreclosure, power of sale, termination of lease, or otherwise, upon such
party's request, and shall execute such agreements confirming such attornment as
such party may reasonably request. Tenant shall not seek to enforce any remedy
it may have for any default on the part of Landlord without first giving written
notice by certified mail, return receipt requested, specifying the default in
reasonable detail to any Landlord's Mortgagee whose address has been given to
Tenant, and affording such Landlord's Mortgagee a reasonable opportunity to
perform Landlord's obligations hereunder.
(c) Notwithstanding any such attornment or subordination of a
Mortgage or Primary Lease to this Lease, the Landlord's Mortgagee shall not be
liable for any acts of any previous landlord, shall not be obligated to install
the Initial Improvements, and shall not be bound by any amendment to which it
did not consent in writing nor any payment of rent made more than one month in
advance.
(d) Notwithstanding the provisions of this Section 21 and except as
provided in the Nondisturbance, Attornment and Subordination Agreement executed
by Tenant as provided below and Landlord's Mortgagee, so long as this Lease is
in effect, Tenant's right of possession to the Premises and other rights arising
out of this Lease shall not be affected or disturbed by any Landlord's Mortgagee
in the exercise of its rights under the Mortgage, and in the event that any
Landlord's Mortgagee shall agree to the sale of the Land pursuant to its
exercise of any rights and remedies under the Mortgage or otherwise, such sale
shall be made subject to this Lease and the rights of the Tenant hereunder.
(e) At the closing of Landlord's acquisition of the Land and the
Building, Tenant agrees to execute and acknowledge the forms of Nondisturbance,
Attornment and Subordination Agreement and Lender Estoppel attached as Exhibits
C-1 and C-2 and deliver them to Landlord.
22. ENCUMBRANCES. Tenant has no authority, express or implied, to
------------
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind Landlord's property or the interest of Landlord or
Tenant in the Premises or to charge the rent for any claim in favor of any
person dealing with Tenant, including those who may furnish materials or perform
labor for any construction or repairs. Tenant shall pay or cause to be paid all
sums due for any labor performed or materials furnished in connection with any
work performed on the Premises by or at the request of Tenant. Tenant shall
give Landlord immediate written notice of the placing of any lien or encumbrance
against the Premises.
23. MISCELLANEOUS.
-------------
(a) Words of any gender used in this Lease shall include any other
gender, and words in the singular shall include the plural, unless the context
otherwise requires. The captions inserted in this Lease are for convenience
only and in no way affect the interpretation of this Lease. The following terms
shall have the following meanings: "Laws" shall mean all federal, state, and
----
local laws, rules, and regulations; all court orders, governmental directives,
and governmental orders; and all restrictive covenants affecting the Property,
and "Law" shall mean any of the foregoing; "Affiliate" shall mean any person or
--- ---------
entity which, directly or indirectly, controls, is controlled by, or is under
common control with the party in question; "Tenant Party" shall include Tenant,
------------
any assignees claiming by, through, or under Tenant, any subtenants claiming by,
through, or under Tenant, and any of their respective agents, contractors,
employees, and invitees; and "including" means including without limitation.
---------
(b) Landlord may transfer and assign, in whole or in part, its rights
and obligations in the Premises, in which case Landlord shall have no further
liability hereunder. Each party shall furnish to the other, promptly upon
demand, a corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this Lease.
(c) Other than for Tenant's monetary obligations under this Lease,
whenever a period of time is herein prescribed for action to be taken by
Landlord or Tenant, neither Landlord nor Tenant shall not be liable or
responsible for, and there shall be excluded from the computation for any such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations, or restrictions, or any
other causes of any kind whatsoever which are beyond the control of Landlord or
Tenant, as the case may be.
(d) Tenant shall, from time to time, within 15 days after request of
Landlord, deliver to Landlord, or Landlord's designee, a certificate of
occupancy for the Premises, financial statements for itself and any guarantor of
its obligations hereunder, evidence reasonably satisfactory to Landlord that
Tenant has performed its obligations under this Lease (including evidence of the
payment of the Security Deposit), and an estoppel certificate stating that this
Lease is in full effect, the date to which rent has been paid, the unexpired
Term and such other factual matters pertaining to this Lease as may be requested
by Landlord. Tenant's obligation to furnish the above-described items in a
timely fashion is a material inducement for Landlord's execution of this Lease.
(e) This Lease constitutes the entire agreement of the Landlord and
Tenant with respect to the subject matter of this Lease, and contains all of the
covenants and agreements of Landlord and Tenant with respect thereto. Landlord
and Tenant each acknowledge that no representations, inducements, promises or
agreements, oral or written, have been made by Landlord or Tenant, or anyone
acting on behalf of Landlord or Tenant, which are not contained herein, and any
prior agreements, promises, negotiations, or representations not expressly set
forth in this Lease
11
<PAGE>
are of no effect. This Lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
(f) All obligations of Tenant hereunder not fully performed by the
end of the Term shall survive, including, without limitation, all payment
obligations with respect to Taxes and insurance and all obligations concerning
the condition and repair of the Premises. Upon the end of the Term and before
Tenant vacates the Premises, Tenant shall pay to Landlord any amount reasonably
estimated by Landlord as necessary to put the Premises in good condition and
repair, reasonable wear and tear excluded. Tenant shall also, prior to vacating
the Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's
obligation hereunder for Pass-Through Expenses for the year in which the Term
ends. All such amounts shall be used and held by Landlord for payment of such
obligations of Tenant hereunder, with Tenant being liable for any additional
costs therefor upon demand by Landlord or with any excess to be returned to
Tenant after all such obligations have been determined and satisfied as the case
may be. Any Security Deposit held by Landlord may be credited against the
amount due by Tenant under this Section 23.(f).
(g) If any provision of this Lease is illegal, invalid or
unenforceable, then the remainder of this Lease shall not be affected thereby,
and in lieu of each such provision, there shall be added, as a part of this
Lease, a provision as similar in terms to such illegal, invalid or unenforceable
clause or provision as may be possible and be legal, valid and enforceable.
(h) All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
(i) Landlord and Tenant each warrant to the other that it has not
dealt with any broker or agent in connection with this Lease, other than Cushman
& Wakefield of Texas, Inc. and Trammell Crow Dallas/Fort Worth Limited
Partnership, whose commissions shall be paid by Landlord pursuant to a separate
written agreement. Tenant and Landlord shall each indemnify the other against
all costs, attorneys' fees, and other liabilities for commissions or other
compensation claimed by any broker or agent claiming the same by, through, or
under the indemnifying party.
(j) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of a notice
specifying an individual at a specific address within the continental United
States for the receipt of notices and payments to Tenant. All parties included
within the terms "Landlord" and "Tenant," respectively, shall be bound by
notices given in accordance with the provisions of Section 24 to the same effect
as if each had received such notice.
(k) The terms and conditions of this Lease are confidential and
Tenant shall not disclose the terms of this Lease to any third party except as
may be required by law or to enforce its rights hereunder.
(l) Tenant shall pay interest on all past-due rent from the date due
until paid at the maximum lawful rate. In no event, however, shall the charges
permitted under this Section 23.(l) or elsewhere in this Lease, to the extent
they are considered to be interest under applicable Law, exceed the maximum
lawful rate of interest.
24. NOTICES. Each provision of this instrument or of any applicable
-------
Laws and other requirements with reference to the sending, mailing or delivering
of notice or the making of any payment hereunder shall be deemed to be complied
with when and if the following steps are taken:
(a) All rent shall be payable to Landlord at the address for Landlord
set forth below or at such other address as Landlord may specify from time to
time by written notice delivered in accordance herewith. Tenant's obligation to
pay rent shall not be deemed satisfied until such rent has been actually
received by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
(c) Any written notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered upon the earlier to occur of
(1) tender of delivery (in the case of a hand-delivered notice), (2A deposit in
the United States Mail, postage prepaid, Certified Mail, or (3) receipt by
facsimile transmission, in each case, addressed to the parties hereto at the
respective addresses set out below, or at such other address as they have
theretofore specified by written notice delivered in accordance herewith. If
Landlord has attempted to deliver notice to Tenant at Tenant's address reflected
on Landlord's books but such notice was returned or acceptance thereof was
refused, then Landlord may post such notice in or on the Premises, which notice
shall be deemed delivered to Tenant upon the posting thereof.
25. HAZARDOUS WASTE. The term "Hazardous Substances," as used in this
--------------- --------------------
Lease shall mean pollutants, contaminants, toxic or hazardous wastes, or any
other substances, the removal of which is required or the use of which is
restricted, prohibited or penalized by any "Environmental Law," which term shall
-----------------
mean any Law relating to health, pollution or protection of the environment.
Tenant hereby agrees that (a) no activity will be conducted on the Premises that
will produce any Hazardous Substances, except for such activities that are part
of the ordinary course of Tenant's business activities (the "Permitted
---------
Activities") provided such Permitted Activities are conducted in accordance with
- ----------
all Environmental Laws and have been approved in advance in writing by Landlord;
(b) the Premises will not be used in any manner for the storage of any Hazardous
Substances except for any temporary storage of such materials that are used in
the ordinary course of Tenant's business (the "Permitted Materials") provided
-------------------
such Permitted Materials are properly stored in a manner and location satisfying
all Environmental Laws and approved in advance in writing by Landlord; (c) no
portion of the Premises will be used as a landfill or a dump; (d) Tenant will
not install any underground tanks of any type; (e) Tenant will not allow any
surface or subsurface conditions to exist or come into existence that
constitute, or with the passage of time may constitute a public or private
nuisance; and (f) Tenant will not permit any
12
<PAGE>
Hazardous Substances to be brought onto the Premises, except for the Permitted
Materials, and if so brought or found located thereon, the same shall be
immediately removed by Tenant, with proper disposal, and all required cleanup
procedures shall be diligently undertaken pursuant to all Environmental Laws. If
at any time during or after the Term, the Premises are found to be so
contaminated by or subject to such conditions which were caused by a Tenant
Party, Tenant shall defend, indemnify and hold Landlord harmless from all
claims, demands, actions, liabilities, costs, expenses, damages and obligations
of any nature arising therefrom or as a result thereof. Tenant will maintain on
the Premises a list of all materials stored at the Premises for which a
materials safety data sheet (an "MSDS") was issued by the producers or
----
manufacturers thereof, together with copies of the MSDS for such materials, and
shall deliver such list and MSDS copies to Landlord upon Landlord's request
therefor. Tenant shall remove all Permitted Materials from the Premises in a
manner acceptable to Landlord before Tenant's right to possess the Premises is
terminated. Unless expressly identified on an addendum to this Lease, as of the
date hereof there are no "Permitted Activities" or "Permitted Materials" for
purposes of the foregoing provision and none shall exist unless and until
approved in writing by the Landlord. Landlord may enter the Premises and conduct
environmental inspections and tests therein as it may require from time to time,
provided that Landlord shall use reasonable efforts to minimize the interference
with Tenant's business. Such inspections and tests shall be conducted at
Landlord's expense, unless they reveal the presence of Hazardous Substances
(other than Permitted Materials) which were caused by a Tenant Party, or that
Tenant has not complied with the requirements set forth in this Section 25, in
which case Tenant shall reimburse Landlord for the cost thereof within ten days
after Landlord's request therefor. Landlord represents and warrants that to the
best of its current actual knowledge there are no Hazardous Substances or other
environmental contamination in, on or under the Land, the Building or the
Premises. Within three business days after its receipt thereof, Landlord shall
have delivered to Tenant copies of any Phase I reports or other environmental
reports or studies regarding the Land or the Building in Landlord's possession.
26. CONDITIONS TO LANDLORD'S OBLIGATIONS. Notwithstanding anything in
------------------------------------
this Lease to the contrary, Landlord's obligations hereunder are conditioned
upon its acquiring the Land and the Building on satisfactory terms and
conditions.
27. LANDLORD'S LIEN. Landlord hereby waives its statutory landlord's
---------------
lien.
28. ROOFTOP EQUIPMENT. Provided that Tenant complies with the terms of
-----------------
this Section, Tenant may, at its risk and expense, install a satellite dish and
related communications equipment and wiring (collectively, the "Rooftop
-------
Equipment") on the roof of the Building at a location approved by Landlord,
- ---------
which equipment may be used solely by Tenant and its Permitted Transferees or
Permitted Sublessees. Before installing the Rooftop Equipment, Tenant shall
submit to Landlord for its approval (which approval shall be in Landlord's sole
discretion) plans and specifications which (a) specify in detail the design,
location, size, and, in the case of a satellite dish, frequency of the Rooftop
Equipment and (b) are sufficiently detailed to allow for the installation of the
Rooftop Equipment in a good and workmanlike manner and in accordance with all
Laws (the "Legal Requirements"). If Landlord approves of such plans, Tenant
------------------
shall install (in a good and workmanlike manner), maintain and use the Rooftop
Equipment in accordance with all Legal Requirements and shall obtain all
consents and permits required for the installation and operation thereof; copies
of all such permits and evidence of such consents must be submitted to Landlord
before Tenant begins to install the Rooftop Equipment. Tenant shall thereafter
maintain all permits necessary for the maintenance and operation of the Rooftop
Equipment while it is on the Building and operate and maintain the Rooftop
Equipment in such a manner so as not to unreasonably interfere with any other
satellite, antennae, or other transmission facility on the Building's roof or in
the Building. Landlord may require that Tenant screen the Rooftop Equipment
with a parapet or other screening device acceptable to Landlord. Tenant shall
maintain the Rooftop Equipment and screening device in good repair and
condition. Tenant shall, at its risk and expense, remove the Rooftop Equipment
(including all wiring related thereto), within five days after the occurrence of
any of the following events: (1) the termination of Tenant's right to possess
the Premises; (2) the termination of the Lease; (3) the expiration of the Term;
or (4) Tenant's vacating the Premises. If Tenant fails to do so, Landlord may
remove the Rooftop Equipment and store or dispose of it in any manner Landlord
deems appropriate without liability to Tenant; Tenant shall reimburse Landlord
for all costs incurred by Landlord in connection therewith within ten days after
Landlord's request therefor. Tenant shall repair any damage to the Building
caused by or relating to the Rooftop Equipment, including that which is caused
by its installation, maintenance, use, or removal and shall indemnify Landlord
against all Losses arising from the installation, maintenance, use, or removal
of the Rooftop Equipment, including that caused by Landlord's negligence. All
----------------------------------------------
work relating to the Rooftop Equipment shall, at Tenant's expense, be
coordinated with Landlord's roofing contractor so as not to affect any warranty
for the Building's roof.
29. TERMINATION. Tenant shall have to option to terminate this Lease by
-----------
delivering written notice thereof to Landlord on or before 5:00 p.m., Dallas,
Texas time on March 31, 1997 if Tenant discovers any material defect in the
Building or the presence of any Hazardous Substances in the Building or on the
Land which violates applicable Laws, which cannot be cured or remedied by
Landlord (at Landlord's option) on or before the Commencement Date.
30. EXPANSION OPTION. At any time during the Term, Tenant may deliver
----------------
written notice to Landlord requesting that Landlord expand the Premises.
Landlord shall, within a reasonable time, deliver a written response to Tenant's
request, provided that (a) Landlord shall have no obligation to expand the
Premises and (b) Landlord's election not to expand the Premises shall not in any
way alter or modify the terms of this Lease or Tenant's obligations hereunder.
TENANT ACKNOWLEDGES THAT (1) IT HAS INSPECTED AND ACCEPTS THE PREMISES IN
AN "AS IS, WHERE IS" CONDITION, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN,
(2) LANDLORD HAS MADE NO WARRANTY, REPRESENTATION, COVENANT, OR AGREEMENT WITH
RESPECT TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE
PREMISES, (3) THE PREMISES ARE IN GOOD AND SATISFACTORY CONDITION, (4) NO
REPRESENTATIONS AS TO THE REPAIR OF THE PREMISES, NOR PROMISES TO ALTER, REMODEL
OR IMPROVE THE PREMISES HAVE BEEN MADE BY LANDLORD, AND (5) THERE ARE NO
REPRESENTATIONS OR WARRANTIES, EXPRESSED, IMPLIED OR STATUTORY, THAT EXTEND
BEYOND THE DESCRIPTION OF THE PREMISES.
13
<PAGE>
Executed by Tenant on March , 1997.
---
TENANT: METASOLV SOFTWARE, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Address: 14900 Landmark, Suite 530
Dallas, Texas 75240
Telephone: 972-239-0623
Fax: 972-239-0653
Executed by Landlord on March , 1997.
---
LANDLORD: CROWINVEST I, L.P.
By: InvestCrow I, L.L.C., a Delaware
limited liability company, its
general partner
By: , Executive Committee
------------
Member
Address:
------------------------------
Telephone:
----------------------------
Fax:
----------------------------------
14
<PAGE>
EXHIBIT A
[Description of Premises]
A-1
<PAGE>
EXHIBIT B
TENANT WORK
-----------
1. Tenant hereby accepts the Premises in their "AS-IS" condition, and
-----
Landlord shall have no obligation to perform any work therein (including,
without limitation, demolition of any improvements existing therein or
construction of any tenant finish-work or other improvements therein), and,
except as provided in Section 6.(b) of the Lease shall not be obligated to
reimburse Tenant or provide an allowance for any costs related to the demolition
or construction of improvements therein. Before Tenant may occupy the Premises
to conduct its business therein, Tenant shall, at its expense, obtain and
deliver to Landlord a certificate of occupancy from the appropriate governmental
authority for the Premises.
2. Before commencing any Work, Tenant shall provide to Landlord for its
approval final working drawings, prepared by an architect that has been approved
by Landlord (which approval shall not unreasonably be withheld), of all
improvements that Tenant proposes to install in the Premises; such working
drawings shall include the partition layout, ceiling plan, electrical outlets
and switches, telephone outlets, drawings for any modifications to the
mechanical and plumbing systems of the Building, and detailed plans and
specifications for the construction of the improvements called for under this
Exhibit in accordance with all Laws. Further, if any of Tenant's proposed
construction work will affect the Building's Structure, the Building's HVAC,
electrical, mechanical, or plumbing systems, then the working drawings
pertaining thereto shall be prepared by a licensed engineer reasonably
acceptable to Landlord, whom Tenant shall at its cost engage for such purpose.
Landlord's approval of such working drawings shall not be unreasonably withheld,
provided that (a) they comply with all Laws, (b) such working drawings are
sufficiently detailed to allow construction of the improvements in a good and
workmanlike manner, and (c) the improvements depicted thereon conform to the
rules and regulations promulgated from time to time by the Landlord for the
construction of tenant improvements (a copy of which has been delivered to
Tenant). As used herein, "Working Drawings" shall mean the final working
----------------
drawings approved by Landlord, as amended from time to time by any approved
changes thereto, and "Work" shall mean all improvements to be constructed in
----
accordance with and as indicated on the Working Drawings. Approval by Landlord
of the Working Drawings shall not be a representation or warranty of Landlord
that such drawings are adequate for any use, purpose, or condition, or that such
drawings comply with any applicable law or code, but shall merely be the consent
of Landlord to the performance of the Work. Tenant shall, at Landlord's
request, sign the Working Drawings to evidence its review and approval thereof.
All changes in the Work must receive the prior written approval of Landlord, and
in the event of any such approved change Tenant shall, upon completion of the
Work, furnish Landlord with an accurate, reproducible "as-built" plan (e.g.,
sepia) of the improvements as constructed, which plan shall be incorporated into
this Lease by this reference for all purposes.
3. All Work shall be performed only by contractors and subcontractors
approved in writing by Landlord, which approval shall not be unreasonably
withheld. Tenant shall have the right to competitively bid all the work to
approved reputable contractors. If Tenant elects to have Landlord or an
affiliate perform construction management services in connection with the Work,
Tenant shall pay such entity a construction management fee of 5% of the Total
Construction Costs. All contractors and subcontractors shall be required to
procure and maintain (a) insurance against such risks, in such amounts, and with
such companies as Landlord may reasonably require and (b) payment and
performance bonds covering the cost of the Work and otherwise reasonably
satisfactory to Landlord. Certificates of such insurance, with paid receipts
therefor, and copies of such bonds must be received by Landlord before the Work
is commenced. The Work shall be performed in a good and workmanlike manner that
is free of defects and is in strict conformance with the Working Drawings, and
shall be performed in such a manner and at such times as to maintain harmonious
labor relations and not to interfere with or delay Landlord's other contractors
or the operation of the Building. At Landlord's request, Tenant shall deliver
suitable evidence of timely and complete payment of all contractors performing
any part of the Work, together with lien waivers relating to such Work.
4. Landlord or its affiliate shall have the right to supervise all Work
(at no charge to Tenant, provided Landlord has not been engaged by Tenant to
perform or supervise the Work) and coordinate the relationship between the Work,
the Building, and the Building's systems.
5. To the extent not inconsistent with this Exhibit, Section 6 of this
Lease shall govern the performance of all Work and the Landlord's and Tenant's
respective rights and obligations regarding the improvements installed pursuant
thereto.
6. After Landlord tenders possession of the Premises to Tenant, Tenant may
enter the Premises to perform the Work, provided that (1) Landlord is given
prior written notice of any such entry, (2) such entry shall be coordinated with
Landlord, and (3) Tenant shall deliver to Landlord evidence that the insurance
required under this Lease has been obtained. Any such entry shall be on the
terms of this Lease, but no rent shall accrue in respect of Base Rent or Pass-
Through Expenses during the period that Tenant so enters the Premises.
B-1
<PAGE>
EXHIBIT C
---------
FORMS OF SNDA AND LENDER ESTOPPEL
---------------------------------
C-1
<PAGE>
EXHIBIT D
---------
EXTENSION OPTIONS
-----------------
Provided no Event of Default exists and Tenant is occupying the entire
Premises at the time of such election, Tenant may renew this Lease as to all of
the then-leased Premises for two additional periods of five years each on the
same terms provided in this Lease (except as set forth below), by delivering
written notice of the exercise thereof to Landlord (an "Extension Notice") not
----------------
later than nine months before the expiration of the Term. On or before the
commencement date of the extended Term in question, Landlord and Tenant shall
execute an amendment to this Lease extending the Term on the same terms provided
in this Lease, except as follows:
(1) The Basic Rental payable for each month during each such extended
Term shall be the Fair Market Rental Rate for the extended Term.
(2) Tenant shall have no option for additional parking;
(3) Tenant shall have no further renewal options or expansion options
(except as otherwise provided herein) unless expressly granted by Landlord
in writing; and
(4) Landlord shall lease to Tenant the Premises in their then-current
condition, and Landlord shall not provide to Tenant any allowances (e.g.,
moving allowance, construction allowance, and the like) or other tenant
inducements.
Tenant's rights under this Exhibit shall terminate if (1) this Lease or
Tenant's right to possession of the Premises is terminated, (2) Tenant assigns
any of its interest in this Lease or sublets any portion of the Premises, except
to a Permitted Transferee or to an assignee or subtenant approved by Landlord as
provided in this Lease, or (3) Tenant fails to timely exercise its option under
this Exhibit, time being of the essence with respect to Tenant's exercise
thereof. Tenant may not assign its rights under this Exhibit to any assignee or
subtenant other than to a Permitted Transferee of the entire Premises.
D-1
<PAGE>
EXHIBIT E
---------
PARKING
-------
Tenant may, at any time during the first three years of the initial Term,
request in writing (a "Parking Notice") that Landlord construct additional
--------------
surface parking on the portion of the Land depicted on Exhibit E-1 (the "New
----------- ---
Parking Area"). The Parking Notice shall set forth a general description of the
- ------------
New Parking Area. Within 30 days from Landlord's receipt of the Parking Notice,
Landlord shall submit a proposal to Tenant for Landlord's construction of the
New Parking Area ("Landlord's Proposal") which such proposal shall be based upon
-------------------
the Parking Notice, subject to compliance with all Laws and Landlord's agreement
as to the size, location, design, color and material composition therefor, the
date by which the New Parking Area would be complete, and all hard and soft
costs incurred in connection with the design and construction of the New Parking
Area (the "New Parking Area Construction Costs") which shall include a
-----------------------------------
construction management fee to Landlord of 5% of the New Parking Area
Construction Costs. Within 15 days from delivery of Landlord's Proposal, Tenant
shall notify Landlord in writing of whether Tenant accepts Landlord's Proposal.
If Tenant accepts Landlord's Proposal, Landlord and Tenant shall execute an
amendment to this Lease (a) increasing the annual per-rentable-square-foot Base
Rent rate for the remainder of the Term after the completion of the New Parking
Area by the quotient obtained by dividing (A) the product of (i) the New Parking
Area Construction Costs, multiplied by (ii) the Applicable Percentage (defined
below) by (B) 52,000 plus the number of rentable square feet in any expansion
space constructed pursuant to Section 30 of the Lease, if any; and (b) other
amendments will be made to this Lease as required by Landlord's Proposal.
Landlord's obligation to construct the New Parking Area shall be subject to
(a) all applicable Laws, (b) Landlord obtaining financing acceptable to the
Landlord in its sole discretion in all respects for the construction of the New
Parking Area (the "Parking Area Construction Financing") and (c) the occurrence
-----------------------------------
of no Event of Default. Landlord shall use reasonably diligent efforts to
obtain such financing. Accordingly, if any Law would prohibit the construction
of the New Parking Area, or if Landlord cannot obtain Parking Area Construction
Financing on commercially reasonable terms acceptable to Landlord in its sole
discretion, or an Event of Default has occurred, Landlord shall have no
obligation to construct the New Parking Area.
"Applicable Percentage" shall mean the greater of (a) 11%, or (b) the
---------------------
prevailing market capitalization rate then being used to value buildings
comparable to the Building in the Market Area (hereafter defined), taking into
account Tenant's creditworthiness, as determined by Landlord in its reasonable
discretion.
E-1
<PAGE>
EXHIBIT E-1
-----------
E-1-1
<PAGE>
EXHIBIT F
---------
FAIR MARKET RENTAL RATE
-----------------------
1. Definition. The term "Fair Market Rental Rate" shall mean the market
-----------------------
rental rate for the time period such determination is being made for office
space in office buildings in the vicinity of the Building (the "Market Area") of
-----------
comparable age, quality and condition for space of equivalent quality, size,
utility, and location. Such determination shall take into account all relevant
factors, including, without limitation, the following matters: the credit
standing of Tenant; the length of the term; expense stops; and construction
allowances and other tenant concessions or lack thereof.
2. Determination. Landlord shall deliver to Tenant notice confirming the
Fair Market Rental Rate (the "FMRR Notice") for the space in question (the
-----------
"Space") or extension of the Term (an "Extension") within 20 days after Tenant
- ------ ---------
exercises the option giving rise for the need to determine the Fair Market
Rental Rate. If Tenant disagrees with Landlord's assessment of the Fair Market
Rental Rate specified in a FMRR Notice, then it shall so notify Landlord in
writing within ten days after delivery of such FMRR Notice; otherwise, the rate
set forth in such notice shall be the Fair Market Rental Rate. If Tenant timely
delivers to Landlord written notice that it disagrees with Landlord's assessment
of the Fair Market Rental Rate, then Landlord and Tenant shall meet to attempt
to determine the Fair Market Rental Rate. If Tenant and Landlord are unable to
agree on such Fair Market Rental Rate within ten days after Tenant notifies
Landlord of its disagreement with Landlord's assessment thereof, then (within
the next ten days) Landlord and Tenant shall jointly appoint an independent MAI
real estate appraiser with at least five-years' commercial real estate appraisal
experience in the Market Area and submit their respective assessments of the
Fair Market Rental Rate to the appraiser. If the parties are unable to agree on
an independent real estate appraiser, then either party may apply to any Dallas,
Texas office of the American Arbitration Association (the "AAA") to appoint an
---
appraiser having the qualifications described in the previous sentence. The
AAA's selection of the appraiser shall be binding on Landlord and Tenant. The
appraiser shall then, within ten days after his designation, select the
assessment (i.e., either Landlord's or Tenant's) that is closest to his
determination of the Fair Market Rental Rate, which assessment shall then be the
Fair Market Rental Rate for the Space in question or Extension (as applicable).
The party whose assessment was not chosen by the appraiser shall pay the fees
and expenses of the appraiser.
3. Administration. If Tenant has exercised an option or right to lease
Space to extend the Term and the Fair Market Rental Rate for the Space or
Extension has not been determined in accordance with this Exhibit by the time
that Base Rent for such Space or Extension is to commence in accordance with the
terms hereof, then Tenant shall pay base rent for such Space based on the Fair
Market Rental Rate proposed by Landlord pursuant to this Exhibit until such time
as the Fair Market Rental Rate has been so determined, at which time appropriate
cash adjustments shall be made between Landlord and Tenant such that Tenant is
charged Base Rent based on the Fair Market Rental Rate (as finally determined
pursuant to this Exhibit) for the Space during the interval in question.
F-1
<PAGE>
FIRST AMENDMENT TO COMMERCIAL LEASE AGREEMENT
---------------------------------------------
THIS FIRST AMENDMENT TO COMMERCIAL LEASE AGREEMENT (this "Amendment") is
---------
made and entered into on the 21st day of August, 1998, by and between WILLIAM R.
----
COOPER and CRAIG A. COOPER ("Landlord"), successor-in-interest to CROWINVEST II,
--------
L.P. ("Crow"), and METASOLV SOFTWARE, INC., a Delaware corporation ("Tenant").
---- ------
WITNESSETH:
WHEREAS, Crow and Tenant entered into that certain Commercial Lease
Agreement (the "Lease") dated April 1, 1997, covering approximately 52,000
-----
rentable square feet in the building located at 5560 Tennyson Parkway, Plano,
Texas (the "Building");
--------
WHEREAS, Crow has assigned all of its right, title and interest under the
Lease to landlord; and
WHEREAS, Landlord and Tenant desire to modify the terms of the Lease in
accordance with the terms and conditions herein provided.
NOW THEREFORE, for and in consideration of the sum of Ten and No/100
Dollars($10.00) and other good and valuable consideration paid by each party
hereto to the other, the receipt and sufficiency of which are hereby mutually
acknowledged, Landlord and Tenant hereby agree as follows:
1. Notwithstanding anything contained in Section 1. (b) of the Lease,
the Lease term shall be coterminous with the term of that certain Commercial
Lease Agreement dated of even date herewith between Landlord and Tenant covering
premises located on the real property described on Exhibit A attached thereto.
---------
The Base Rent payable under Section 2.(a) of the Lease for months 109 through
the expiration date (as amended hereby) shall be $77,046.67 per month.
2. It is understood and agreed that the Letter of Credit described in
Section 2.(b) of the New Lease shall also constitute the Security Deposit
hereunder, and the terms and provisions of Section 2.(b) of the New Lease shall
be deemed incorporated herein as if fully set forth herein. Section 2.(b)
hereof is deleted in its entirety, effective as of the date hereof.
3. Section 2.(c) of the Lease is hereby amended by deleting the following
sentence therefrom:
"Upon written request of Tenant, Tenant may obtain bids from
comparable insurance companies satisfactory to Landlord and Landord's
Mortgagee for comparable insurance for the Premises (as determined by
Landlord and Landlord's Mortgagee), and if the cost of such insurance is
materially less than the cost of the existing insurance for the Premises,
and if Landlord's Mortgagee consents thereto, Landlord shall use
commercially reasonable efforts to use such insurance company to provide
insurance for the Premises".
4. Section 9.(b) of the Lease is hereby deleted in its entirety.
5. Section 14 (e) of the Lease is hereby deleted in its entirety.
6. (a) Any capitalized term or phrase used in this Amendment shall
have the same meaning as the meaning ascribed to such term of phrase in the
Lease unless expressly otherwise defined in this Amendment.
(b) In the event that the terms of the Lease conflict or are
inconsistent with those of this Amendment, the terms of this Amendment shall
govern.
-1-
<PAGE>
(c) Except as amended by this Amendment, the terms of the Lease
remain in full force and effect.
(d) This Amendment shall become effective only upon execution and
delivery by both Landlord and Tenant.
(e) This Amendment is the complete agreement of the parties and
supersedes all prior written or oral agreements.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be
executed on the date set forth above.
LANDLORD:
--------
/s/ William R. Cooper
---------------------------------------
WILLIAM R. COOPER
/s/ Craig A. Cooper
----------------------------------------
CRAIG A. COOPER
TENANT:
METASOLV SOFTWARE, INC.,
a Delaware corporation
By: /s/ Jonathan K. Hustis
------------------------------------
Name: JONATHAN K. HUSTIS
-----------------------------------
Title: V.P. -- Business Services
----------------------------------
-2-
<PAGE>
SECOND AMENDMENT TO COMMERCIAL LEASE AGREEMENT
----------------------------------------------
(Phase I Lease)
THIS SECOND AMENDMENT TO COMMERCIAL LEASE AGREEMENT (this "Amendment") is
---------
made and entered into as of September 16, 1998, by and between PARAGON LEGACY
ASSOCIATES, INC. ("Landlord"), and METASOLVE SOFTWARE, INC., a Delaware
--------
corporation ("Tenant").
------
RECITALS
WHEREAS, Landlord is the owner of an approximately 9.565-acre tract of land
located on Tennyson Parkway in Plano, Texas, which, together with the
improvements thereon, is known as the "MetaSolv Project" (the "Land");
----
WHEREAS, Tenant currently occupies approximately 52,000 rentable square
feet in the existing building on the Land (the "Phase I Building"), pursuant to
----------------
that certain Commercial Lease Agreement dated April 1, 1997, between Tenant and
CrowInvest II, L.P., as amended by that certain First Amendment to Commercial
Lease Agreement dated August 21, 1998, between Landlord and Tenant, and as
assigned by that certain Blanket Bill of Sale and Assignment dated September
16, 1998, from CRIN-Plano I., L.P. to Landlord and that certain Assignment of
Lease Documents dated as of September 16, 1998, from the Coopers to Landlord
(such assignments being collectively herein called the "Lease Assignments"; and
-----------------
such lease, as so amended and assigned, being collectively herein called the
"Phase I Lease");
- --------------
WHEREAS, Tenant has requested construction of the additional surface
parking contemplated in Exhibit D to the Lease;
WHEREAS, Tenant has heretofore entered into that certain Commercial Lease
Agreement with the Coopers to cover an additional building to be constructed on
the Land, as assigned to Landlord by the Lease Assignments (such lease, as
assigned, being herein called the "Phase II Lease"); and
--------------
WHEREAS, Landlord and Tenant desire to modify the terms of the Phase I
Lease as provided below in this Amendment;
AGREEMENTS
NOW, THEREFORE, for and in consideration of the sum of Ten and No/100
Dollars ($10.00) and other good and valuable consideration paid by each party
hereto to the other, the receipt and sufficiency of which are mutually
acknowledged, Landlord and Tenant hereby agree as follows:
1. Exhibit D Deleted. Landlord and Tenant hereby confirm and agree that
-----------------
the plans, specifications, times for completion of construction, compensation to
Landlord for such construction and all other matters pertaining to the
construction of such additional surface parking shall be governed by the Phase
II Lease. Exhibit D to the Phase I Lease is hereby deleted in its entirety. To
the extent of any conflict between the Phase II Lease and any provision in the
Phase I Lease pertaining to such additional surface parking, the Phase II Lease
shall be controlling.
2. Phase I Lease Ratified. As amended hereby, Landlord and Tenant
----------------------
confirm and ratify all of the terms and provisions of the Phase I Lease.
3. Miscellaneous. The headings sections in this Amendment are for
-------------
convenience only shall not be construed as limiting or affecting the meaning of
the text of this Amendment. This Amendment may not be rescinded, terminated,
waived, amended or modified in whole or in part, orally, by course of conduct or
otherwise than by a writing signed by both Landlord and Tenant. This Amendment
may be executed in one or more counterparts, and provided that each of the
1
<PAGE>
parties hereto signs at least one counterpart, such counterparts shall together
constitute one agreement that may be sufficiently evidenced by any counterpart.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Amendment to be effective as of the date first written
above.
LANDLORD:
--------
PARAGON LEGACY ASSOCIATES, LTD.,
a Texas limited partnership
By: WRC Turtle Creek, Inc.
a Texas corporation
By:
------------------------------------
William R. Cooper, President
TENANT:
------
METASOLV SOFTWARE, INC.,
a Delaware corporation
By: /s/ Jonathan K. Hustis
------------------------------------
Name: Jonathan K. Hustis
-------------------------------
Title: V.P. -- Business Services
------------------------------
2
<PAGE>
Exhibit 10.7
COMMERCIAL LEASE AGREEMENT
WILLIAM R. COOPER
and
CRAIG A. COOPER
(LANDLORD)
AND
METASOLV SOFTWARE, INC.
(TENANT)
Address:
_____ Tennyson Parkway
Plano, Texas 75024
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
1. PREMISES, TERM, AND INITIAL IMPROVEMENTS..........................................................1
----------------------------------------
2. BASE RENT, SECURITY DEPOSIT AND ADDITIONAL RENT...................................................1
-----------------------------------------------
3. TAXES.............................................................................................3
-----
4. NET LEASE.........................................................................................3
---------
5. TENANT'S AND LANDLORD'S MAINTENANCE AND REPAIR OBLIGATIONS........................................3
----------------------------------------------------------
6. ALTERATIONS.......................................................................................4
-----------
7. SIGNS.............................................................................................5
-----
8. UTILITIES.........................................................................................5
---------
9. INSURANCE.........................................................................................5
---------
11. LIABILITY, INDEMNIFICATION.......................................................................6
--------------------------
12. USE..............................................................................................6
---
13. INSPECTION.......................................................................................7
----------
14. ASSIGNMENT AND SUBLETTING........................................................................7
-------------------------
15. CONDEMNATION.....................................................................................8
------------
16. SURRENDER OF PREMISES; HOLDING OVER..............................................................8
-----------------------------------
17. QUIET ENJOYMENT..................................................................................9
---------------
18. EVENTS OF DEFAULT................................................................................9
-----------------
19. REMEDIES.........................................................................................9
--------
20. LANDLORD'S LIABILITY............................................................................10
--------------------
21. MORTGAGES.......................................................................................10
---------
22. ENCUMBRANCES....................................................................................11
------------
23. MISCELLANEOUS...................................................................................11
-------------
24. NOTICES.........................................................................................12
-------
25. HAZARDOUS WASTE.................................................................................12
---------------
26. (INTENTIONALLY DELETED.)........................................................................13
-----------------------
27. LANDLORD'S LIEN.................................................................................13
---------------
28. ROOFTOP EQUIPMENT...............................................................................13
-----------------
29. TAX INCENTIVES..................................................................................13
--------------
</TABLE>
i
<PAGE>
LIST OF DEFINED TERMS
---------------------
<TABLE>
<CAPTION>
Page No.
<S> <C>
AAA...............................................................................F-1
AAA.................................................................................8
Affiliate..........................................................................11
Applicable Percentage.............................................................E-1
Base Rent...........................................................................1
Building............................................................................1
Building's Structure................................................................4
Casualty............................................................................6
Claimant...........................................................................10
Commencement Date...................................................................1
Construction Allowance..............................................................5
Disabilities Acts...................................................................7
Environmental Law..................................................................13
Event of Default....................................................................9
Extension.........................................................................F-1
Extension Notice..................................................................D-1
Fair Market Rental Rate...........................................................F-1
FMRR Notice.......................................................................F-1
Hazardous Substances...............................................................13
HVAC System.........................................................................4
including..........................................................................11
Indemnified Parties.................................................................6
Improvements........................................................................4
Land................................................................................1
Landlord............................................................................1
Landlord's Mortgagee...............................................................11
Landlord's Proposal...............................................................E-1
Law................................................................................11
Laws...............................................................................11
Lease...............................................................................1
Legal Requirements.................................................................13
Letter of Credit....................................................................2
Loss................................................................................6
Market Area.......................................................................F-1
Monument Sign.......................................................................5
Mortgage...........................................................................11
MSDS...............................................................................13
Original Lease......................................................................1
Pass-Through Expenses...............................................................2
Permitted Activities...............................................................13
Permitted Materials................................................................13
Permitted Transfer..................................................................8
Permitted Transferee................................................................8
Permitted Use.......................................................................7
Premises............................................................................1
Primary Lease......................................................................11
rent................................................................................3
Rooftop Equipment..................................................................13
Security Deposit....................................................................2
Sign Conditions.....................................................................5
Sign Requirements...................................................................5
Space.............................................................................F-1
Taking..............................................................................9
Tangible Net Worth..................................................................7
Taxes...............................................................................3
Tenant..............................................................................1
Tenant Panel........................................................................5
Tenant Party.......................................................................11
Term................................................................................1
Total Construction Costs............................................................4
Transfer............................................................................7
Vacation Date.......................................................................7
</TABLE>
ii
<PAGE>
LEASE AGREEMENT
---------------
This Lease Agreement (this "Lease") is entered into by WILLIAM R. COOPER
-----
and CRAIG A. COOPER ("Landlord"), and METASOLV SOFTWARE, INC., a Delaware
--------
corporation ("Tenant").
------
1. PREMISES, TERM, AND IMPROVEMENTS.
--------------------------------
(a) Landlord leases to Tenant, and Tenant leases from Landlord, the
real property described on Exhibit A (the "Premises"), which includes the
--------- --------
approximately 100,000 rentable square foot building (the "Building") to be
--------
constructed by Landlord on the real property described on Exhibit A (the
---------
"Land"), subject to the terms and conditions in this Lease. Landlord and Tenant
----
stipulate that for purposes of calculating Tenant's obligations to pay Base Rent
the size of the Premises shall be determined by Landlord's architect upon
completion of construction of the Building using current applicable BOMA
standards.
(b) The Lease term shall be 132 months, beginning on the Commencement
Date (defined below) (the "Term", which defined term shall include all renewals
----
and extensions of the Term); however, if the Commencement Date is not the first
day of a calendar month, then the Term shall end on the last day of the 132-
month period that begins with the first day of the first full calendar month of
the Term. The "Commencement Date" shall be the date which is 60 days following
-----------------
the date on which the Premises are tendered to Tenant, which shall be the date
of substantial completion of the construction of the Building by Landlord (as
defined in Exhibit B hereto). Tenant shall execute and deliver to Landlord,
---------
within ten days after Landlord has requested same, a letter confirming (1) the
Commencement Date, (2) that Tenant has accepted the Premises, subject to
Landlord's obligations to complete "punchlist" items following substantial
completion of construction of the Building, and (3) that Landlord has performed
all of its obligations with respect to the Premises.
2. BASE RENT, SECURITY DEPOSIT AND ADDITIONAL RENT.
-----------------------------------------------
(a) Tenant shall pay to Landlord "Base Rent", in advance, without
---------
demand, deduction or set off, equal to the following amounts for the following
months of the Term:
<TABLE>
<CAPTION>
========================================================================================================
Monthly Base Rent
(subject to verification
Annual Base Rent of net rentable area, as
Rate Per Rentable set forth in Section
Time Period Square Foot 1.(a) above)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Months 1 through 12 $12.00 $100,000.00
- --------------------------------------------------------------------------------------------------------
Months 13 through 24 $16.32 $136,000.00
- --------------------------------------------------------------------------------------------------------
Months 25 through 36 $16.65 $138,750.00
- --------------------------------------------------------------------------------------------------------
Months 37 through 48 $16.98 $141,500.00
- --------------------------------------------------------------------------------------------------------
Months 49 through 60 $17.31 $144,250.00
- --------------------------------------------------------------------------------------------------------
Months 61 through 72 $17.64 $147,000.00
- --------------------------------------------------------------------------------------------------------
Months 73 through 84 $17.97 $149,750.00
- --------------------------------------------------------------------------------------------------------
Months 85 through 96 $18.30 $152,500.00
- --------------------------------------------------------------------------------------------------------
Months 97 through 108 $18.83 $156,916.67
- --------------------------------------------------------------------------------------------------------
Months 109 through 120 $19.36 $161,333.33
- --------------------------------------------------------------------------------------------------------
Months 121 through the expiration date $19.89 $165,750.00
========================================================================================================
</TABLE>
The first monthly installment of Base Rent, plus the other monthly charges set
forth in Section 2.(c), shall be due on the Commencement Date; thereafter,
monthly installments of Base Rent shall be due on the first day of each calendar
month following the Commencement Date. If the Term begins on a day other than
the first day of a month or ends on a day other than the last day of a month,
the Base Rent and additional rent for such partial month shall be prorated.
(b) Tenant shall deposit with Landlord within five business days after
the date hereof, a Letter of Credit (defined below) (the "Security Deposit"),
----------------
which shall be held by Landlord to secure Tenant's obligations under this Lease
and under that certain Commercial Lease Agreement dated April 1, 1997 between
CrowInvest I, L.P., as Landlord (as assigned to Landlord hereunder) and Tenant
covering premises located at 5560 Tennyson Parkway, Plano, Texas (the "Original
--------
Lease"); however, the Security Deposit is not an advance rental deposit or a
- -----
measure of Landlord's damages for an Event of Default (defined below). Landlord
may use any portion of the Security Deposit to satisfy Tenant's unperformed
obligations hereunder or under the Original Lease, without prejudice to any of
Landlord's other remedies. If so used, Tenant shall pay Landlord an amount that
will restore the Security Deposit to its original amount upon request. The
Security Deposit shall be Landlord's property. The unused portion of the
Security Deposit will be returned to Tenant within 45 days after the end of the
Term, provided that Tenant has fully and timely performed its obligations
hereunder throughout the Term.
As used herein, "Letter of Credit" shall mean a standby, unconditional,
----------------
irrevocable letter of credit in the initial face amount of $1,300,000, naming
Landlord as beneficiary issued by a bank or financial institution acceptable to
Landlord with banking offices (or providing for draws on a confirming bank with
offices) in Dallas,
1
<PAGE>
Texas, permitting partial draws thereon, and otherwise in form acceptable to
Landlord (including without limitation, provisions for drawing "on sight" only
and permitting assignment to any person or entity. Tenant shall from time to
time cause the Letter of Credit, if any, to be renewed no later than 60 days
prior to any expiration date thereof so that the Letter of Credit remains in
effect for 60 days after the scheduled expiration date of the Term or any
renewal Term; if Tenant fails timely to renew the Letter of Credit, then
Landlord shall have the right to draw thereon, and retain the amounts so drawn
as the Security Deposit. Landlord may draw upon the Letter of Credit and apply
the proceeds thereof to perform any of Tenant's unperformed obligations under
this Lease. After any such draw, Tenant shall pay to Landlord on demand the
amount so drawn to be held as part of the Security Deposit.
Notwithstanding the foregoing, the face amount of the Letter of Credit
required to be maintained hereunder shall be reduced to $650,000 upon the
satisfaction or occurrence, as the case may be, of the following:
(a) during the Term of this Lease,
(i) no Event of Default has occurred and is continuing under
either this Lease or the Original Lease, and Tenant has fully paid and performed
all of its obligations under both this Lease and the Original Lease for the same
twelve (12) consecutive month period; and
(ii) Tenant has an unencumbered cash balance of not less than
Ten Million and No/100 Dollars ($10,000,000) at the time it has satisfied the
other requirements of this Section 2(b); and
(iii) Tenant has a Tangible Net Worth (as defined in Section
14(c) hereof) of not less than Forty Million and No/100 Dollars ($40,000,000) at
the time it has satisfied the other requirements of this Section 2(b); and
(iv) Tenant currently occupies all of the Premises and no
portion thereof is subject to a sublease; and
(v) the amount of Tenant's outstanding indebtedness (which
shall not include trade payables or contingent liabilities with respect to lease
obligations) shall not exceed thirty percent (30%) of the value of Tenant's
assets (as Landlord shall verify by reviewing evidence thereof submitted by
Tenant); and
(vi) Tenant's Cash Flow shall equal or exceed twice the amount
of Tenant's monetary obligations under this Lease for the twelve (12) month
period following the date of satisfaction of the other requirements of this
Section 2(b); as used herein, "Cash Flow" shall mean all revenues, receipts and
---------
proceeds received by Tenant from its business operations less all costs incurred
in connection with Tenant's business operations which costs shall include,
without limitation, operating costs, capital expenditures, all interest paid on
loans to Tenant and other forms of indebtedness of Tenant and investments made
by Tenant (but excluding from such costs non-cash charges). Cash Flow shall be
computed on an accrual basis with respect to expenses only.
Tenant shall submit audited financial statements for its immediately
preceding fiscal year prepared in accordance with generally accepted accounting
principles to verify the satisfaction of the conditions set forth in clauses
(ii), (iii), (v) and (vi) hereof. Additionally, the requirement that Tenant
maintain the Letter of Credit shall be waived upon the satisfaction or
occurrence, as the case may be, of the following: (aa) the passage of forty-
five (45) days following the expiration of the Term of this Lease, or (bb) the
satisfaction of the conditions set forth in subparagraph (a), clauses (i)
through (vi) hereof in at least two (2) separate, consecutive fiscal years (and
the pertinent time periods shall be completely separate, consecutive and
distinct).
(c) Tenant shall pay, as additional rent, all costs incurred by
Landlord for the following expenses ("Pass-Through Expenses"): (1) the cost of
---------------------
insurance, to the extent paid by Landlord, including that portion of the
premiums under any blanket or umbrella insurance policy maintained and paid by
Landlord as may be reasonably allocated to the Premises by Landlord; and (2)
rents under Primary Leases (defined below), if any. Tenant shall pay all
insurance premiums in one installment in advance within ten days after Landlord
requests such payment. The initial monthly payments of Pass-Through Expenses
are based upon Landlord's estimate of the Pass-Through Expenses for the year in
question, and shall be increased or decreased annually to reflect the projected
actual Pass-Through Expenses for that year. If Tenant's total payments in
respect of Pass-Through Expenses for any year are less than the Pass-Through
Expenses for that year, Tenant shall pay the difference to Landlord within ten
days after Landlord's request therefor; if such payments are more than such
Pass-Through Expenses, Landlord shall retain such excess and credit it against
Tenant's future annual payments. The amounts of the initial monthly
installments of Base Rent and Pass-Through Expenses are as follows:
Base Rent.................................... $100,000.00
Pass-Through Expenses........................ $ 0.00*
-----------
Total initial monthly pay ment............... $100,000.00
===========
*This estimate assumes that the insurance expenses described above have already
been paid by Tenant to reimburse Landlord for the cost of a lump sum annual
insurance installment payment.
(d) If any payment required of Tenant under this Lease is not paid
when due and Tenant fails to pay such amount within five days after Landlord
delivers to Tenant written notice thereof, then Landlord may charge Tenant a fee
equal to 5% of the delinquent payment to reimburse Landlord for its cost and
inconvenience incurred as a consequence of Tenant's delinquency; however, if
during the 12-month period preceding any such delinquent payment, Landlord has
twice delivered to Tenant written notice that Tenant has failed to pay rent when
2
<PAGE>
due, then Landlord may charge Tenant such 5% fee for the delinquent payment in
question when such payment is past due without first delivering to Tenant
written notice thereof.
(e) All payments and reimbursements required to be made by Tenant
under this Lease shall constitute "rent" (herein so called).
----
3. TAXES.
-----
(a) Tenant shall pay all taxes, assessments and governmental charges
whether federal, state, county, or municipal and whether they are imposed by
taxing or management districts or authorities presently existing or hereafter
created and all dues, assessment and other charges applicable to the Premises
payable to any property or community owner association under restrictive
covenants or deed restrictions encumbering the Premises (collectively, "Taxes")
-----
that accrue against the Premises and deliver to Landlord receipts from the
applicable taxing authority or other evidence acceptable to Landlord to verify
the payment thereof at least ten days before such Taxes become delinquent. If,
during the Term, there is levied, assessed or imposed on Landlord a capital levy
or other tax directly on the rent or a franchise tax, assessment, levy or charge
measured by or based, in whole or in part, upon rent, then all such taxes,
assessments, levies or charges, or the part thereof so measured or based, shall
be included within the term "Taxes".
(b) Tenant may, at its expense, contest the validity or amount of any
Taxes in accordance with Law, in which event the obligation to pay such amount
under this Lease shall be deferred during the pendency of such contest, if
diligently prosecuted. Within 15 days before any contested Taxes become due,
Tenant shall deposit with Landlord an amount equal to the amount payable for
such contested Taxes for the preceding Tax year (together with any interest,
fees, and penalties that may accrue during any such contest), which amount shall
be applied to the payment of the contested Taxes when the amount thereof shall
be finally determined, with Tenant paying any unpaid portion of the amount of
the contested Taxes (together with interest, fees, and penalties that may accrue
thereon). Nothing herein, however, shall permit any Taxes to remain unpaid for
any interval that would permit the Premises, or any part thereof, to be sold or
seized by any governmental authority for the nonpayment of Taxes. If at any
time, in the reasonable judgment of Landlord, it shall become necessary to do
so, Landlord may, after written notice to Tenant, under protest, if so requested
by Tenant, apply the amounts so deposited or so much thereof as may be required
to prevent a sale or seizure of the Premises or foreclosure of any lien created
thereon to secure payment of such unpaid Taxes. Tenant shall pay all penalties,
interest, and fees assessed because of Tenant's failure to pay Taxes when due,
and Tenant shall indemnify, defend, and hold harmless Landlord from and against
any costs, liability, or damage incurred by Landlord arising out of or
attributable to Tenant's failure to pay Taxes when due. If required by Law,
Landlord shall join in any contest proceedings brought by Tenant, at Tenant's
expense.
(c) If Tenant fails timely to deliver evidence of the payment of the
amounts required to be paid by Tenant under this Section 3, then Landlord may
pay such amounts, in which case, Tenant shall reimburse to Landlord all amounts
so paid within ten days after Landlord delivers to Tenant written notice
thereof.
(d) If any Landlord's Mortgagee requires that Landlord establish an
escrow for the payment of Taxes or if an Event of Default occurs, then Tenant
shall pay to Landlord a sum equal to 1/12th of the annual Taxes payable under
this Lease on the first day of each month during the Term. Landlord shall hold
such payments in a non-interest bearing account. All such monthly payments of
Taxes shall be based on Landlord's reasonable estimate of the Taxes due for the
year in question, and any deficiency of funds in the escrow account shall be
paid by Tenant to Landlord upon demand. If an Event of Default occurs, Landlord
may apply any funds in the escrow account to the satisfaction of any unperformed
obligation of Tenant under this Lease.
4. NET LEASE. This Lease is intended to be an absolutely net lease;
---------
accordingly, except as provided in Section 5.(b), Landlord shall not be required
to maintain, repair or perform any other obligations with respect to the
Premises. Except as provided in Section 15 hereof, Tenant's obligation to pay
rent hereunder shall be absolute and net of all expenses incurred in connection
with the operation, maintenance, ownership and management of the Premises.
5. TENANT'S AND LANDLORD'S MAINTENANCE AND REPAIR OBLIGATIONS.
----------------------------------------------------------
(a) Tenant's Obligations. Except as provided in Section 5.(b), Tenant
--------------------
shall maintain all parts of the Premises including the Building's roof and
structural elements, all mechanical, electrical, plumbing, and lighting systems
and equipment, and skylights, windows, plate glass, doors, and partitions in
good condition and promptly make all necessary repairs and replacements to the
Premises. If any portion of the Premises cannot be fully repaired or restored,
then Tenant shall promptly replace such portion of the Premises, regardless of
whether the benefit of such replacement extends beyond the Term. Without
limiting the generality of the foregoing, Tenant shall perform the following
obligations:
(1) Tenant shall maintain the parking areas, driveways, alleys,
landscaping and grounds surrounding the Premises in a clean and
sanitary condition, consistent with the operation of a first-class
office/warehouse building, including prompt maintenance, repairs and
replacements of (A) the exterior of the Building (including painting),
(B) sprinkler systems and sewage lines, (C) pavement, curbs, and
sidewalks, and (D) any other items normally associated with the
foregoing.
(2) Tenant shall maintain the hot water equipment and the
heating, air condition, and ventilation equipment and system (the
"HVAC System"), in good repair and condition and in
------------
3
<PAGE>
accordance with Law and with such equipment manufacturers' suggested
operation/maintenance service program; such obligation shall include
replacement of all equipment necessary to maintain such equipment and
system in good working order. Within ten business days after the
Commencement Date, Tenant shall enter into regularly scheduled
preventive maintenance/service contracts for such equipment, each in
form and substance and with a contractor reasonably acceptable to
Landlord, and deliver copies thereof to Landlord. At least 14 days
before the end of the Term, Tenant shall deliver to Landlord a
certificate from an engineer reasonably acceptable to Landlord
certifying that the hot water equipment and the HVAC System are then
in good repair and working order.
(b) Landlord's Obligations. Landlord's maintenance obligations are
----------------------
limited solely to the maintenance of the foundation piers and structural members
of the exterior walls and replacement of the roof if same is damaged; however,
Landlord shall not be responsible (1) for any such work until Tenant delivers to
Landlord written notice of the need therefor, (2) for alternations to such items
required by Law because of Tenant's use of the Premises (which alterations shall
be performed by Tenant), or (3) for damage caused to such items by a Tenant
Party. Landlord's liability for any such items shall be limited to the cost of
performing such work.
6. ALTERATIONS.
-----------
(a) General. Tenant shall not make any alterations, additions or
-------
improvements to the Premises which affect the Building's Structure (defined
below) without the prior written consent of Landlord. Landlord shall not be
required to notify Tenant of whether it consents to any such alteration,
addition or improvements until it (1) has received plans and specifications
therefor which are sufficiently detailed to allow construction of the work
depicted thereon to be performed in a good and workmanlike manner and (2) has
had a reasonable opportunity to review them. If the alteration, addition or
improvement will affect the Building's roof, foundation and structural elements
(the roof, foundation, and structural elements being herein collectively called
the "Building's Structure"), HVAC System, or mechanical, electrical, or plumbing
--------------------
systems, then the plans and specifications therefor must be prepared by a
licensed engineer reasonably acceptable to Landlord. Landlord's approval of any
plans and specifications shall not be a representation that the plans or the
work depicted thereon will comply with Law or be adequate for any purpose, but
shall merely be Landlord's consent to performance of the work. Upon completion
of any alteration, addition, or improvement, Tenant shall deliver to Landlord
accurate, reproducible as-built plans therefor. Tenant may erect shelves, bins,
machinery and trade fixtures provided that such items (A) do not alter the basic
character of the Premises; (B) do not overload or damage the Premises; and (C)
may be removed without damage to the Premises. Unless Landlord specifies in
writing otherwise, all alterations, additions, improvements, and fixtures shall
be Landlord's property when installed in the Premises, except for furniture and
equipment of Tenant which is not affixed to the Premises so as to become a
fixture (i.e., unattached items and items which are temporarily attached by
bolts and screws, but not items which are built-in or incorporated into the
Building or the electrical, plumbing, or mechanical systems therein). All work
performed by a Tenant Party in the Premises (including that relating to the
installations, repair, replacement, or removal of any item) shall be performed
in accordance with Law and with Landlord's specifications and requirements, in a
good and workmanlike manner, and so as not to damage or alter the Building's
Structure or the Premises.
(b) Tenant Improvements. Following the date on which Landlord has
-------------------
tendered the Premises to Tenant (which shall be upon substantial completion of
Landlord's construction of the Building), the tenant improvements (the
"Improvements") shall be constructed at Tenant's expense, except as provided
- -------------
below.
(1) Tenant shall bear the entire cost of performing the Work (defined
below) relating to the Improvements (including, without limitation, design
of the Improvements and preparation of the Working Drawings, costs of
construction labor and materials, electrical usage during construction,
additional janitorial services, general tenant signage, related taxes and
insurance costs relating thereto, all of which costs are herein
collectively called the "Total Construction Costs") in excess of the
------------------------
Construction Allowance. Upon approval of the Working Drawings for the
Improvements and selection of a contractor, Tenant shall promptly execute a
work order agreement prepared by Landlord which identifies such drawings,
itemizes the Total Construction Costs and sets forth the Construction
Allowance.
(2) Provided no Event of Default exists, Landlord shall provide to
Tenant a construction allowance for the Improvements (the "Construction
------------
Allowance") equal to the lesser of (A) the Total Construction Costs
---------
incurred for the Improvements or (B) the product of $15.00 times the actual
rentable area of the Premises (as determined by Landlord's architect
pursuant to Section 1.(a)). To the extent Tenant is entitled to receive
such allowance, the construction allowance shall be disbursed in monthly
advances based on the costs of the work incurred. Tenant shall submit to
Landlord (but not more frequently than once per month) construction
allowance requests accompanied by all invoices from contractors,
subcontractors, and suppliers evidencing the cost of performing the Work
for which the request is being submitted, together with lien waivers from
such parties. Provided that no Event of Default exists, Landlord shall
make advances of the construction allowances within ten days after its
receipt of the advance request accompanied by the appropriate
documentation; however, the final draw of the Construction Allowance, which
----------------------
shall not be less than 10% of the amount of such allowance, shall not be
disbursed until Landlord has received final lien waivers from all persons
performing work or supplying materials for the Improvements and a
certificate of occupancy from the appropriate governmental authority, if
applicable to the Work for the Improvements, or, if applicable, evidence of
governmental inspection and approval of the Work for the Improvements.
Tenant shall have the right to apply any unused portion of the Construction
Allowance toward other non-specific improvements relating to the finish-out
of the Premises.
4
<PAGE>
If Landlord constructs the Improvements on behalf of Tenant, then
all costs relating to the construction thereof and of other improvements
requested by Tenant such as a skybridge, energy management system and
monument sign, in excess of the Construction Allowance shall be payable to
----------------------
Landlord as additional rent, and such excess amount shall be amortized on a
monthly basis over the Term using an interest rate of eleven percent (11%).
Such excess amount shall not be greater than $500,000; however, such other
improvements which are not essentially "building standard" in nature (such
as those set forth in this paragraph) shall not exceed the sum of $300,000.
7. SIGNS.
-----
(a) Subject to Section 7.(b), Tenant shall not place, install or
attach any signage, decorations, advertising media, blinds, draperies, or window
treatments which can be viewed from outside the Building, or bars, or security
installations to the Premises or the Building without Landlord's prior written
approval. Tenant shall repair, paint, and/or replace any portion of the
Premises or the Building damaged or altered as a result of its signage when it
is removed (including, without limitation, any discoloration of the Building).
Subject to Section 7.(b), Tenant shall not (1) make any changes to the exterior
of the Premises or the Building, (2) install any exterior lights, decorations,
balloons, flags, pennants, banners or paintings, or (3) erect or install any
signs, windows or door lettering, decals, window or storefront stickers,
placards, decorations or advertising media of any type that is visible from the
exterior of the Premises without Landlord's prior written consent. Landlord
shall not be required to notify Tenant of whether it consents to any sign until
it (A) has received detailed, to-scale drawings thereof specifying design,
material composition, color scheme, and method of installation, and (B) has had
a reasonable opportunity to review them.
(b) If (1) Tenant or its Affiliates are occupying the entire Premises,
and (2) Tenant's right to possess the Premises or this Lease has not been
terminated (collectively, the "Sign Conditions"), then Tenant may, at its risk
---------------
and expense place Tenant's sign panel (the "Tenant Panel") on the Building's
------------
existing monument sign (the "Monument Sign"). The location, design, size, color
-------------
and material composition of the Tenant Panel must be reasonably acceptable to
Landlord. If Landlord grants its approval, Tenant shall install the Tenant
Panel and maintain the Tenant Panel in a good, clean and safe condition and in
accordance with all Laws, including the payment of all fees in connection
therewith (the "Sign Requirements"). If either of the Sign Conditions are not
-----------------
satisfied, Tenant shall remove the Tenant Panel upon Landlord's written demand
therefor and Tenant's rights under this Section 7.(b) shall terminate. If
Tenant fails to so remove the Tenant Panel within 10 days after Landlord's
written request, Landlord may, at Tenant's expense, remove and dispose of the
Tenant Panel in any manner it deems appropriate, all without compensation to
Tenant. After the end of the Term or after Tenant's right to possess the
Premises has been terminated, Landlord may require that Tenant remove the Tenant
Panel by delivering to Tenant written notice thereof within 30 days after the
end of the Term. If Landlord so requests, Tenant shall remove the Tenant Panel
and repair all damage caused thereby, within ten days after Landlord's request
therefor (reasonable wear and tear and damage by fire or other casualty
excepted). If Tenant fails to timely do so, Landlord may, without compensation
to Tenant, (1) use the Tenant Panel or (2) at Tenant's expense, remove the
Tenant Panel, perform the related restoration and repair work and dispose of the
Tenant Panel in any manner Landlord deems appropriate. Tenant shall defend,
indemnify, and hold harmless Landlord from all losses, claims, costs and
liabilities arising in connection with or relating to the installation,
maintenance, use, or removal of the Tenant Panel, excluding those arising from
----------------------------
Landlord's negligence. The rights granted to Tenant under this Section 7.(b)
- ---------------------
may not be assigned to any party, other than in connection with a Permitted
Transfer of the entire Premises.
8. UTILITIES. Tenant shall obtain and pay for all water, gas,
---------
electricity, heat, telephone, sewer, sprinkler charges and other utilities and
services used at the Premises, together with any taxes, penalties, surcharges,
maintenance charges, and the like pertaining to the Tenant's use of the
Premises. Landlord shall not be liable for any interruption or failure of
utility service to the Premises. If Tenant fails to pay any such amounts when
due, Landlord may do so, in which case, Tenant shall reimburse Landlord for all
amounts paid by Landlord within ten days after Landlord's request therefor.
Landlord will cooperate with Tenant in obtaining the most favorable rates for
utilities available in the area commonly known as the Legacy Business Park.
9. INSURANCE. Tenant shall maintain (1) workers' compensation insurance
---------
(with a waiver of subrogation endorsement reasonably acceptable to Landlord) and
commercial general liability insurance (with contractual liability endorsement),
including personal injury and property damage in the amount of $1,000,000 per
occurrence combined single limit for personal injuries and death of persons and
property damage occurring in or about the Premises, plus umbrella liability
coverage of at least $2,000,000 per occurrence, (2) fire and extended coverage
insurance covering (A) the replacement cost of all alterations, additions,
partitions and improvements installed in the Premises, (B) the replacement cost
of all of Tenant's personal property in the Premises, and (C) loss of profits in
the event of an insured peril damaging the Premises, and (3) such other
insurance as Landlord may reasonably require. Such policies shall (i) name
Landlord, Landlord's agents, Landlord's Mortgagee's and their respective
Affiliates (defined below), as additional insureds (and as loss payees on the
fire and extended coverage insurance), (ii) be issued by an insurance company
acceptable to Landlord, (iii) provide that such insurance may not be canceled
unless 30-days' prior written notice is first given to Landlord and Landlord's
Mortgagee, (iv) be delivered to Landlord by Tenant before the Commencement Date
and at least 15 days before each renewal thereof, and (v) provide primary
coverage to Landlord when any policy issued to Landlord is similar or duplicate
in coverage, in which case Landlord's policy shall be excess over Tenant's
policies.
10. DESTRUCTION OF OR DAMAGE TO PROPERTY.
------------------------------------
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage (a "Casualty") to the Premises. In no event shall rent
--------
abate, nor shall this Lease terminate, because of a Casualty, except as provided
below. If a material portion of the Premises is damaged or destroyed and (1)
cannot be rebuilt
5
<PAGE>
and repaired due to applicable Law or (2) if a Casualty occurs during the last
12 months of the Term and such damage cannot be repaired within 30 days after
such Casualty and Tenant has not elected to extend the Term as provided in
Exhibit D, then Landlord or (if a Tenant Party did not cause such Casualty)
- ---------
Tenant may terminate this Lease by delivering to the other written notice
thereof within 30 days after such Casualty, in which case, the rent shall be
abated during the unexpired portion of the Term effective upon the date the
Casualty occurred. Time is of the essence with respect to the delivery of such
notices.
(b) Subject to Section 10.(c), if this Lease is not terminated under
Section 10.(a), then subject to Tenant's payment to Landlord of any deductible
amounts relating to the insurance coverage for such Casualty, Landlord shall
restore the Premises to substantially the same or better condition as existed
before the occurrence of such Casualty, except that Landlord shall not be
required to rebuild, repair, or replace any part of the partitions, fixtures,
additions and other improvements or personal property required to be covered by
Tenant's insurance under Section 9, and this Lease shall remain in effect.
Tenant's obligations to pay rent shall be abated while the Premises are
untenantable, but only to the extent of the rent-loss insurance received by
Landlord in connection with such Casualty.
(c) If the Premises are destroyed or substantially damaged by any
peril not covered by the insurance maintained by Landlord, or any Landlord's
Mortgagee (defined below) requires that insurance proceeds be applied to the
indebtedness secured by its Mortgage (defined below) obligations, Landlord may
terminate this Lease by delivering written notice of termination to Tenant
within 30 days after such destruction or damage or such requirement is made
known by any such Landlord's Mortgagee, as applicable, whereupon all rights and
obligations hereunder shall cease and terminate, except for any liabilities of
Tenant which accrued before this Lease is terminated.
11. LIABILITY, INDEMNIFICATION, WAIVER OF SUBROGATION AND NEGLIGENCE
----------------------------------------------------------------
CLAIMS.
- ------
(a) Subject to Section 11.(b), Tenant shall indemnify, defend, and
hold harmless Landlord, its successors, assigns, agents, employees, contractors,
partners, directors, officers and Affiliates (collectively, the "Indemnified
-----------
Parties") from and against all fines, suits, losses, costs, liabilities, claims,
- -------
demands, actions and judgments of every kind or character (1) arising from
Tenant's failure to perform its covenants hereunder, (2) recovered from or
asserted against any of the Indemnified Parties on account of any Loss (defined
below) to the extent that any such Loss directly or indirectly relates to or is
caused by the actions or omissions of a Tenant Party or any other person
entering upon the Premises under or with a Tenant Party's express or implied
invitation or permission, or (3) arising from or out of the occupancy or use by
a Tenant Party or arising from or out of any occurrence in the Premises;
provided, however, nothing contained herein shall obligate Tenant to indemnify
Landlord for any Losses caused in whole or in part by any Indemnified Party's
gross negligence or willful misconduct.
(b) Landlord shall not be liable to Tenant or those claiming by,
through, or under Tenant for any injury to or death of any person or persons or
the damage to or theft, destruction, loss, or loss of use of any property or
inconvenience (a "Loss") caused by casualty, theft, fire, third parties, or any
----
other matter (including Losses arising through repair or alteration of any part
of the Building, or failure to make repairs, or from any other cause),
regardless of whether the negligence of either party caused such Loss in whole
- ------------------------------------------------------------------------------
or in part. Each of Landlord and Tenant waives any claim it might have against
- ----------
the other for any damage to or theft, destruction, loss, or loss of use of any
property, to the extent the same is insured against under any insurance policy
maintained by it that covers the Premises, Landlord's or Tenant's fixtures,
personal property, leasehold improvements, or business, or is required to be
insured against by it under the terms hereof, regardless of whether the
-------------------------
negligence or fault of the other party caused such loss; however, Landlord's
- -------------------------------------------------------
waiver shall be inapplicable to any deductible amount maintained under
Landlord's insurance policies.
12. USE.
---
(a) The Premises shall be used only for general office use and for
receiving, storing, shipping and selling products, materials and merchandise
made or distributed by Tenant and for such other lawful purposes as may be
incidental thereto (the "Permitted Use"); however, no store-front retail sales
-------------
may be made from the Premises. Tenant may not use any part of the Premises for
any use other than office use without Landlord's consent, which shall not be
unreasonably withheld. Tenant shall not use the Premises to receive, store or
handle any product, material or merchandise that is explosive or highly
inflammable or hazardous, except in compliance with all applicable Laws and in
accordance with Section 25. Outside storage is prohibited. Tenant shall be
solely responsible for complying with all Laws applicable to the use, occupancy,
and condition of the Premises. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, light, noise or vibrations to emanate from
the Premises; nor take any other action that would constitute a nuisance or
would disturb, unreasonably interfere with, or endanger Landlord or any other
person; nor permit the Premises to be used for any purpose or in any manner that
would (1) void the insurance thereon, (2) increase the insurance risk, or (3)
cause the disallowance of any sprinkler credits. Tenant shall pay to Landlord
on demand any increase in the cost of any insurance on the Premises incurred by
Landlord, which is caused by Tenant's use of the Premises or because Tenant
vacates the Premises.
(b) Tenant and its employees and invitees may use the parking areas
described in Exhibit E. Landlord shall not be responsible for enforcing
---------
Tenant's parking rights against third parties.
(c) Notwithstanding anything in this Lease to the contrary, as between
Landlord and Tenant, Tenant shall bear the risk of complying with Title III of
the Americans with Disabilities Act of 1990, the Texas Elimination of
Architectural Barriers Act, and all rules, regulations, and guidelines
promulgated under either of such
6
<PAGE>
acts, as they may be amended from time to time (collectively, the "Disabilities
------------
Acts"), in the Premises. However, Landlord warrants that the Building shell
- ----
shall be in compliance with the Disabilities Acts and other applicable laws as
of the Commencement Date.
13. INSPECTION. Upon twenty-four (24) hours prior written or oral
----------
notice to Tenant (except in the event of an emergency, in which case no such
notice is required), Landlord and Landlord's agents and representatives may
enter the Premises during business hours to inspect the Premises; to make such
repairs as may be required or permitted under this Lease; to perform any
unperformed obligations of Tenant hereunder; and to show the Premises to
prospective purchasers, mortgagees, ground lessors, and (during the last 9
months of the Term) tenants. During the last 9 months of the Term, Landlord may
erect a sign reasonably acceptable to Landlord and Tenant on the Premises
indicating that the Premises are available and, if applicable, that Tenant is
relocating. Tenant shall notify Landlord in writing of its intention to vacate
the Premises at least 60 days before Tenant will vacate the Premises; such
notice shall specify the date on which Tenant intends to vacate the Premises
(the "Vacation Date"). At least 30 days before the Vacation Date, Tenant shall
-------------
arrange to meet with Landlord for a joint inspection of the Premises. After
such inspection, Landlord shall prepare a list of items that Tenant must perform
before the Vacation Date to substantially restore the Premises to the condition
required in Section 16. If Tenant fails to arrange for such inspection, then
Landlord may conduct such inspection and Landlord's determination of the work
Tenant is required to perform before the Vacation Date shall be conclusive. If
Tenant fails to perform such work before the Vacation Date, then Landlord may
perform such work at Tenant's cost. Tenant shall pay all costs incurred by
Landlord in performing such work within ten days after Landlord's request
therefor.
14. ASSIGNMENT AND SUBLETTING.
-------------------------
(a) Except as provided below, Tenant shall not, without the prior
written consent of Landlord, (1) assign, transfer, or encumber this Lease or any
estate or interest herein, whether directly or by operation of law, (2) permit
any other entity to become Tenant hereunder by merger, consolidation, or other
reorganization, except as provided in Section 14.(c), (3) if Tenant is an entity
other than a corporation whose stock is publicly traded, permit the transfer of
more than 50% of the ownership interest in Tenant, (4) grant any license,
concession, or other right of occupancy of any portion of the Premises, or (5)
permit the use of the Premises by any parties other than Tenant (any of the
events listed in Sections 14.(a)(1) through 14.(a)(5) being a "Transfer"). If
--------
Tenant requests Landlord's consent to a Transfer, then Tenant shall provide
Landlord with a written description of all terms and conditions of the proposed
Transfer, copies of the proposed documentation, and the following information
about the proposed transferee: name and address; reasonably satisfactory
information about its business and business history; its proposed use of the
Premises; banking, financial, and other credit information; and general
references sufficient to enable Landlord to determine the proposed transferee's
creditworthiness and character. Tenant shall reimburse Landlord for its
reasonable attorneys' fees and other expenses incurred in connection with
considering any request for its consent to a Transfer. Landlord shall, within
fifteen (15) days of receipt of such information from Tenant, approve such
Transfer or notify Tenant in writing of Landlord's reason for not approving such
proposed Transfer. Landlord will use commercially reasonable efforts to obtain
the consent of Landlord's Mortgagee to any proposed assignee or subtenant of
which Landlord approves. If Landlord fails to so notify Tenant within such
period, then the proposed Transfer shall be deemed disapproved. If Landlord
consents to a proposed Transfer, then the proposed transferee shall deliver to
Landlord a written agreement whereby it expressly assumes the Tenant's
obligations hereunder (however, any transferee of less than all of the space in
the Premises shall be liable only for obligations under this Lease that are
properly allocable to the space subject to the Transfer, and only to the extent
of the rent it has agreed to pay Tenant therefor). No Transfer or Permitted
Transfer shall release Tenant from performing the obligations of the "Tenant"
under this Lease, but rather Tenant and its transferee shall be jointly and
severally liable therefor. Landlord's consent to any Transfer shall not waive
Landlord's rights as to any subsequent Transfers. If an Event of Default occurs
while the Premises or any part thereof are subject to a Transfer, then Landlord,
in addition to its other remedies, may collect directly from such transferee all
rents becoming due to Tenant and apply such rents against Tenant's rent
obligations. Tenant authorizes its transferees to make payments of rent
directly to Landlord upon receipt of notice from Landlord to do so.
(b) Tenant hereby assigns, transfers and conveys all consideration
(less reasonable costs and expenses actually incurred by Tenant directly
relating to such Transfer) received by Tenant under any Transfer, which are in
excess of the rents payable by Tenant under this Lease, and Tenant shall hold
such amounts in trust for Landlord and pay them to Landlord within ten days
after receipt.
(c) Notwithstanding the foregoing, Tenant may Transfer all or part of
its interest in this Lease or all or part of the Premises to the following types
of entities (a "Permitted Transferee") without the written consent of Landlord
--------------------
(a "Permitted Transfer"), provided that the conditions set forth below are
------------------
satisfied:
(1) an Affiliate of Tenant (as defined in Section 23);
(2) any corporation in which or with which Tenant, or its
corporate successors or assigns, is merged or consolidated, in
accordance with applicable statutory provisions governing merger and
consolidation of corporations, or any transfer of more than fifty
percent (50%) of the ownership interest in Tenant, so long as (A)
Tenant's obligations hereunder are assumed by the corporation or other
entity surviving such merger or transfer of interest or created by
such consolidation or transfer of interest; (B) the Tangible Net Worth
of the surviving or created corporation or other entity is not less
than the Tangible Net Worth of Tenant as of the date hereof; and (C)
the combined gross revenues of Tenant and the other corporation or
other form of transferee for the preceding 12-month period exceeded
$25,000,000 and the combined net income of Tenant and the other
corporation or other form of transferee before taxes for the
7
<PAGE>
preceding 12-month period exceeding $1,300,000, as verified by the
audited financial statement of Tenant and such other corporation or
other form of transferee delivered to Landlord; or
(3) any corporation acquiring all or substantially all of
Tenant's assets, if (A) such corporation's Tangible Net Worth after
such acquisition is not less than the Tangible Net Worth of Tenant as
of the date hereof, and (B) such corporation has gross revenues for
the preceding 12-month period exceeding $25,000,000 and has net income
before taxes for the preceding 12-month period exceeding $1,300,000,
as verified by the acquiring corporation's audited financial
statements delivered to Landlord.
Tenant shall promptly notify Landlord of any such Permitted Transfer. As a
condition precedent to any Permitted Transfer, the proposed Permitted Transferee
must deliver to Landlord a written agreement whereby it expressly assumes the
Tenant's obligations hereunder. As used herein, "Tangible Net Worth" shall mean
------------------
the excess of total assets over total liabilities (in each case, determined in
accordance with GAAP) excluding from the determination of total assets all
assets which would be classified as intangible assets under GAAP, including,
without limitation, goodwill, licenses, patents, trademarks, trade names,
copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee
shall be subject to Landlord's prior written consent (which Landlord may grant
or deny in its sole discretion). Notwithstanding any assignment or subletting,
Tenant shall at all times remain fully responsible and liable for the payment of
the rent and for compliance with all of Tenant's other obligations under this
Lease (regardless of whether Landlords' approval has been obtained for any such
assignments or sublettings).
(d) With respect to any written request by Tenant to Landlord for
Landlord's consent to a Transfer (other than a Permitted Transfer), Landlord
may, within 30 days after submission of such request, cancel this Lease (or, as
to a subletting or assignment, cancel as to the portion of the Premises proposed
to be sublet or assigned) as of the date of the proposed Transfer was to be
effective. If, pursuant to the exercise of this right, Landlord cancels this
Lease as to any portion of the Premises, then this Lease shall cease for such
portion of the Premises and Tenant shall pay to Landlord all rent accrued
through the cancellation date relating to the portion of the Premises covered by
the proposed Transfer. Thereafter, Landlord may lease such portion of the
Premises to the prospective transferee (or to any other person) without
liability to Tenant. Notwithstanding the foregoing, Landlord shall not have the
right to cancel this Lease with respect to the portion of space proposed to be
leased under the first two Qualifying Subleases (as defined herein) presented to
Landlord for its consent during the primary term of this Lease. A "Qualifying
----------
Sublease" shall mean a sublease for a portion of the Premises to a person or
- --------
entity provided that the aggregate sublease space at any given time does not
exceed fifty percent (50%) of the rentable area of the Premises and the duration
of the primary term of such sublease does not exceed three (3) years in the
aggregate.
(e) Tenant shall have the right to sublease all or any part of the
Premises with the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. Notwithstanding the foregoing, Tenant shall
have the right to sublease all or any part of the Premises to an Affiliate
without the prior written consent of Landlord if such Affiliate's use of the
Premises will be substantially similar to Tenant's use thereof. Landlord shall
have the right to withhold its consent to any proposed sublease to a non-
Affiliate unless such proposed sublease is for at least 25,000 contiguous
rentable square feet within the Premises.
15. CONDEMNATION. If a material portion of the Premises is permanently
------------
taken for any public or quasi-public use by right of eminent domain or private
purchase in lieu thereof (a "Taking"), and the Taking prevents or materially
------
interferes with the use of the remainder of the Premises for the purpose for
which they were leased to Tenant, either party may terminate this Lease by
delivering to the other written notice thereof within 30 days after the Taking,
in which case rent shall be abated during the unexpired portion of the Term,
effective on the date of such Taking. If the permanent Taking does not prevent
or materially interfere with the use of the Premises for the purpose for which
they were leased to Tenant, then neither party may terminate this Lease, but the
rent payable during the unexpired portion of the Term shall be reduced to such
extent as may be fair and reasonable under the circumstances, and Landlord shall
repair any damage to the Premises caused by the Taking, to the extent of the
award actually received by Landlord (less than the cost incurred in connection
with the receiving of such award and any amounts payable to a Landlord's
Mortgagee). All compensation awarded for any Taking shall be the property of
Landlord and Tenant assigns any interest it may have in any such award to
Landlord; however, Landlord shall have no interest in any award made to Tenant
for loss of business or goodwill or for the taking of Tenant's property, if a
separate award for such items is made to Tenant. If a Taking occurs which is
not permanent in nature, then Tenant shall continue to pay rent hereunder
without abatement and all condemnation awards payable in respect of the Premises
for the portion of such Taking during the Term shall be payable to Tenant, and
the remainder of such award shall be payable to Landlord.
16. SURRENDER OF PREMISES; HOLDING OVER.
-----------------------------------
(a) No act by Landlord shall be an acceptance of a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless it is in writing and signed by Landlord. At the end of the Term or the
termination of Tenant's right to possess the Premises, Tenant shall (1) deliver
to Landlord the Premises with all improvements located thereon in good repair
and condition, reasonable wear and tear (subject however to Tenant's maintenance
obligations) excepted, and with the HVAC System, and the plumbing, mechanical,
and electrical systems and equipment (including hot water equipment), light and
light fixtures (including ballasts), overhead doors and related equipment, and
roof in good working order, condition and repair, (2) deliver to Landlord all
keys to the Premises, and (3) remove all signage placed on the Premises by or at
Tenant's request. All fixtures, alterations, additions, and improvements
(whether temporary or permanent) shall be Landlord's property and shall remain
on the Premises except as provided in the next two sentences. Tenant may remove
all of Tenant's furniture and equipment which is not affixed to the Premises so
as to become a fixture (i.e, unattached items and items which
8
<PAGE>
are temporarily attached by bolts and screws, but not items which are built-in
or incorporated into the Building or the electrical, plumbing, or mechanical
systems therein), but Tenant shall not remove any such item which was paid for,
in whole or in part, by Landlord. Additionally, Tenant shall remove such
alterations, additions, improvements, fixtures, equipment, wiring, furniture,
and other property to the extent that such items were constructed or installed
by or under the direction of a Tenant Party as Landlord may request, provided
such request is made within 30 days after the end of the Term, unless Landlord
has specifically agreed in writing that such items need not be so removed. All
items not so removed shall, at the option of Landlord, be deemed abandoned by
Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed
of by Landlord without notice to Tenant and without any obligation to account
for such items and Tenant shall pay for the costs incurred by Landlord in
connection therewith. All work required of Tenant under this Section 16.(a)
shall be coordinated with Landlord and be done in a good and workmanlike manner,
in accordance with all Laws, and so as not to damage the Building. Tenant shall,
at its expense, repair all damage caused by any work performed by Tenant under
this Section 16.(a).
(b) If Tenant fails to vacate the Premises at the end of the Term,
then Tenant shall be a Tenant at will and Tenant shall pay, in addition to the
other rent due hereunder, a daily base rental equal to 150% of the daily Base
Rent payable during the last month of the Term. Additionally, Tenant shall
defend, indemnify, and hold harmless Landlord from any damage, liability and
expense (including attorneys' fees and expenses) incurred because of such
holding over. No payments of money by Tenant to Landlord after the Term shall
reinstate, continue or extend the Term, and no extension of the Term shall be
valid unless it is in writing and signed by Landlord and Tenant.
17. QUIET ENJOYMENT. Provided Tenant has fully performed its
---------------
obligations under this Lease, Tenant shall peaceably and quietly hold and enjoy
the Premises for the Term, without hindrance from Landlord or any party claiming
by, through, or under Landlord, but not otherwise.
18. EVENTS OF DEFAULT. Each of the following events shall constitute an
-----------------
"Event of Default" under this Lease:
----------------
(a) Tenant fails to pay any rent when due and such failure continues
for a period of five (5) days from the date Landlord notifies Tenant in writing
of such failure.
(b) The filing of a petition by or against Tenant (1) in any
bankruptcy or other insolvency proceeding; (2) seeking in any relief under any
debtor relief Law; (3) for the appointment of a liquidator, receiver, trustee,
custodian, or similar official for all or substantially all of Tenant's property
or for Tenant's interest in this Lease; or (4) for reorganization or
modification of Tenant's capital structure (however, if any such petition is
filed against Tenant, then the filing of such petition shall not constitute an
Event of Default, unless it is not dismissed within 45 days after the filing
thereof).
(c) Tenant (1) vacates all or a substantial portion of the Premises
for a period of 90 days or (2) fails to continuously operate its business at the
Premises for the Permitted Use.
(d) Tenant fails to discharge any lien placed upon the Premises in
violation of Section 22 within ten (10) days after any such lien or encumbrance
is filed against the Premises.
(e) Tenant fails to comply with any term, provision or covenant of
this Lease (other than those listed in this Section 18), or in any other
agreement between Landlord and Tenant and such failure continues for 30 days
after Tenant commences to cure such default following written notice thereof to
Tenant and Tenant thereafter diligently pursues same to completion.
(f) Tenant fails to pay its obligations as they become due or Tenant
has defaulted under any agreement executed in connection with or evidencing
indebtedness of Tenant in excess of $100,000.
(g) An Event of Default has occurred under the Original Lease.
19. REMEDIES.
--------
(a) Upon any Event of Default, Landlord may, in addition to all other
rights and remedies afforded Landlord hereunder or by Law, take any of the
following actions:
(1) Terminate this Lease by giving Tenant written notice thereof,
in which event, Tenant shall pay to Landlord the sum of (A) all rent
accrued hereunder through the date of termination, (B) all amounts due
under Section 19.(b), and (C) an amount equal to (i) the total rent that
Tenant would have been required to pay for the remainder of the Term
discounted to present value at a per annum rate equal to the "Discount
Rate" as published on the date this Lease is terminated by The Wall Street
Journal, Southwest Edition, in its listing of "Money Rates," minus (ii) the
then present fair rental value of the Premises for such period, similarly
discounted; or
(2) Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (A) all rent and other amounts accrued
hereunder to the date of termination of possession, (B) all amounts due
from time to time under Section 19.(b), and (C) all rent and other sums
required hereunder to be paid by Tenant during the remainder of the Term,
diminished by any net sums thereafter received by Landlord through
reletting the Premises during such period. Landlord shall use reasonable
efforts to relet the Premises on such terms and conditions as Landlord may
determine (including a term different than the Term, rental concessions,
9
<PAGE>
and alterations to, and improvement of, the Premises). Landlord shall not
be liable for, nor shall Tenant's obligations hereunder be diminished
because of Landlord's failure to relet the Premises or to collect rent due
for a reletting. Tenant shall not be entitled to the excess of any
consideration obtained by reletting over the rent due hereunder. Reentry
by Landlord in the Premises shall not affect Tenant's obligations hereunder
for the unexpired Term; rather, Landlord may, from time to time, bring
action against Tenant to collect amounts due by Tenant, without the
necessity of Landlord's waiting until the Term ends. Unless Landlord
delivers written notice to Tenant expressly stating that it has elected to
terminate this Lease, all actions taken by Landlord to exclude or
dispossess Tenant of the Premises shall be deemed to be taken under this
Section 19.(a)(2). If Landlord elects to proceed under this Section
19.(a)(2), it may at any time elect to terminate this Lease under Section
19.(a)(1).
Additionally, Landlord may perform Tenant's unperformed obligations hereunder
and, without notice, Landlord may alter locks or other security devices at the
Premises to deprive Tenant of access thereto, and Landlord shall not be required
to provide a new key or right of access to Tenant.
(b) Tenant shall pay to Landlord all costs incurred by Landlord
(including court costs and reasonable attorneys' fees and expenses) in (1)
obtaining possession of the Premises, (2) removing and storing Tenant's or any
other occupant's property, (3) repairing, restoring, altering, remodeling, or
otherwise putting the Premises into condition acceptable to a new tenant, (4) if
Tenant is dispossessed of the Premises and this Lease is not terminated,
reletting all or any part of the Premises (including brokerage commissions, cost
of tenant finish work, and other costs incidental to such reletting), (5)
performing Tenant's obligations which Tenant failed to perform, and (6)
enforcing, or advising Landlord of, its rights, remedies, and recourses.
Landlord's acceptance of rent following an Event of Default shall not waive
Landlord's rights regarding such Event of Default. Landlord's receipt of rent
with knowledge of any default by Tenant hereunder shall not be a waiver of such
default, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless set forth in writing and signed by Landlord. No
waiver by Landlord of any violation or breach of any of the terms contained
herein shall waive Landlord's rights regarding any future violation of such term
or violation of any other term. If Landlord repossesses the Premises pursuant
to the authority herein granted, then Landlord shall have the right to (A) keep
in place and use or (B) remove and store, at Tenant's expense, all of the
furniture, fixtures, equipment and other property in the Premises, including
that which is owned by or leased to Tenant at all times before any foreclosure
thereon by Landlord or repossession thereof by any lessor thereof or third party
having a lien thereon. Landlord may relinquish possession of all or any portion
of such furniture, fixtures, equipment and other property to any person (a
"Claimant") who presents to Landlord a copy of any instrument represented by
- ---------
Claimant to have been executed by Tenant (or any predecessor of Tenant) granting
Claimant the right under various circumstances to take possession of such
furniture, fixtures, equipment or other property, without the necessity on the
part of Landlord to inquire into the authenticity or legality of the instrument.
Landlord may, at its option and without prejudice to or waiver of any rights it
may have, escort Tenant to the Premises to retrieve any personal belongings of
Tenant and/or its employees, and make such property available to Tenant and/or
Tenant's employees; however, Tenant first shall pay in cash all costs and
estimated expenses to be incurred in connection with the removal of such
property and making it available. The rights of Landlord herein stated are in
addition to any and all other rights that Landlord has or may hereafter have at
law or in equity, and Tenant agrees that the rights herein granted Landlord are
commercially reasonable.
20. LANDLORD'S LIABILITY. Liability of Landlord to Tenant for any
--------------------
default by Landlord, shall be limited to actual, direct, but not consequential,
damages therefor and shall be recoverable only from the interest of Landlord in
the Building and the Land, and neither Landlord nor Landlord's owners shall have
any personal liability therefor. Tenant hereby waives its rights under Section
91.004 of the Texas Property Code.
21. MORTGAGES.
---------
(a) This Lease shall be subordinate to any deed of trust, mortgage or
other security instrument (a "Mortgage"), and any ground lease, master lease, or
--------
primary lease (a "Primary Lease") that now or hereafter covers any portion of
-------------
the Premises (the mortgagee under any Mortgage or the lessor under any Primary
Lease is referred to herein as "Landlord's Mortgagee"), and to increases,
--------------------
renewals, modifications, consolidations, replacements, and extensions thereof.
However, any Landlord's Mortgagee may elect to subordinate its Mortgage or
Primary Lease (as the case may be) to this Lease by delivering written notice
thereof to Tenant. The provisions of this Section 21 shall be self-operative,
and no further instrument shall be required to effect such subordination;
however, Tenant shall from time to time within ten days after request therefor,
execute any instruments that may be required by any Landlord's Mortgagee to
evidence the subordination of this Lease to any such Mortgage or Primary Lease.
(b) Tenant shall attorn to any party succeeding to Landlord's interest
in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure,
power of sale, termination of lease, or otherwise, upon such party's request,
and shall execute such agreements confirming such attornment as such party may
reasonably request. Tenant shall not seek to enforce any remedy it may have for
any default on the part of Landlord without first giving written notice by
certified mail, return receipt requested, specifying the default in reasonable
detail to any Landlord's Mortgagee whose address has been given to Tenant, and
affording such Landlord's Mortgagee a reasonable opportunity to perform
Landlord's obligations hereunder.
(c) Notwithstanding any such attornment or subordination of a Mortgage
or Primary Lease to this Lease, the Landlord's Mortgagee shall not be liable for
any acts of any previous landlord, shall not be obligated to install the
Improvements, and shall not be bound by any amendment to which it did not
consent in writing nor any payment of rent made more than one month in advance.
10
<PAGE>
(d) Notwithstanding the provisions of this Section 21 and except as
provided in the Nondisturbance, Attornment and Subordination Agreement executed
by Tenant as provided below and Landlord's Mortgagee, so long as this Lease is
in effect, Tenant's right of possession to the Premises and other rights arising
out of this Lease shall not be affected or disturbed by any Landlord's Mortgagee
in the exercise of its rights under the Mortgage, and in the event that any
Landlord's Mortgagee shall agree to the sale of the Land pursuant to its
exercise of any rights and remedies under the Mortgage or otherwise, such sale
shall be made subject to this Lease and the rights of the Tenant hereunder.
(e) Within thirty (30) days following the full execution of this
Lease, Tenant agrees to execute and acknowledge the forms of Nondisturbance,
Attornment and Subordination Agreement and Lender Estoppel attached as Exhibits
C-1 and C-2 and deliver them to Landlord.
22. ENCUMBRANCES. Tenant has no authority, express or implied, to
------------
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind Landlord's property or the interest of Landlord or
Tenant in the Premises or to charge the rent for any claim in favor of any
person dealing with Tenant, including those who may furnish materials or perform
labor for any construction or repairs. Tenant shall pay or cause to be paid all
sums due for any labor performed or materials furnished in connection with any
work performed on the Premises by or at the request of Tenant. Tenant shall
give Landlord immediate written notice of the placing of any lien or encumbrance
against the Premises.
23. MISCELLANEOUS.
-------------
(a) Words of any gender used in this Lease shall include any other
gender, and words in the singular shall include the plural, unless the context
otherwise requires. The captions inserted in this Lease are for convenience
only and in no way affect the interpretation of this Lease. The following terms
shall have the following meanings: "Laws" shall mean all federal, state, and
----
local laws, rules, and regulations; all court orders, governmental directives,
and governmental orders; and all restrictive covenants affecting the Property,
and "Law" shall mean any of the foregoing; "Affiliate" shall mean any person or
--- ---------
entity which, directly or indirectly, controls, is controlled by, or is under
common control with the party in question; "Tenant Party" shall include Tenant,
------------
any assignees claiming by, through, or under Tenant, any subtenants claiming by,
through, or under Tenant, and any of their respective agents, contractors,
employees, and invitees; and "including" means including without limitation.
---------
(b) Landlord may transfer and assign, in whole or in part, its rights
and obligations in the Premises, in which case Landlord shall have no further
liability hereunder. Each party shall furnish to the other, promptly upon
demand, a corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this Lease.
(c) Other than for Tenant's monetary obligations under this Lease,
whenever a period of time is herein prescribed for action to be taken by
Landlord or Tenant, neither Landlord nor Tenant shall not be liable or
responsible for, and there shall be excluded from the computation for any such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations, or restrictions, or any
other causes of any kind whatsoever which are beyond the control of Landlord or
Tenant, as the case may be.
(d) Tenant shall, from time to time, within 15 days after request of
Landlord, deliver to Landlord, or Landlord's designee, a certificate of
occupancy for the Premises, financial statements for itself and any guarantor of
its obligations hereunder, evidence reasonably satisfactory to Landlord that
Tenant has performed its obligations under this Lease (including evidence of the
payment of the Security Deposit), and an estoppel certificate stating that this
Lease is in full effect, the date to which rent has been paid, the unexpired
Term and such other factual matters pertaining to this Lease as may be requested
by Landlord. Tenant's obligation to furnish the above-described items in a
timely fashion is a material inducement for Landlord's execution of this Lease.
(e) This Lease constitutes the entire agreement of the Landlord and
Tenant with respect to the subject matter of this Lease, and contains all of the
covenants and agreements of Landlord and Tenant with respect thereto. Landlord
and Tenant each acknowledge that no representations, inducements, promises or
agreements, oral or written, have been made by Landlord or Tenant, or anyone
acting on behalf of Landlord or Tenant, which are not contained herein, and any
prior agreements, promises, negotiations, or representations not expressly set
forth in this Lease are of no effect. This Lease may not be altered, changed or
amended except by an instrument in writing signed by both parties hereto.
(f) All obligations of Tenant hereunder not fully performed by the end
of the Term shall survive, including, without limitation, all payment
obligations with respect to Taxes and insurance and all obligations concerning
the condition and repair of the Premises. Upon the end of the Term and before
Tenant vacates the Premises, Tenant shall pay to Landlord any amount reasonably
estimated by Landlord as necessary to put the Premises in good condition and
repair, reasonable wear and tear excluded. Tenant shall also, prior to vacating
the Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's
obligation hereunder for Pass-Through Expenses for the year in which the Term
ends. All such amounts shall be used and held by Landlord for payment of such
obligations of Tenant hereunder, with Tenant being liable for any additional
costs therefor upon demand by Landlord or with any excess to be returned to
Tenant after all such obligations have been determined and satisfied as the case
may be. Any Security Deposit held by Landlord may be credited against the
amount due by Tenant under this Section 23.(f).
(g) If any provision of this Lease is illegal, invalid or
unenforceable, then the remainder of this Lease shall not be affected thereby,
and in lieu of each such provision, there shall be added, as a part of this
11
<PAGE>
Lease, a provision as similar in terms to such illegal, invalid or unenforceable
clause or provision as may be possible and be legal, valid and enforceable.
(h) All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
(i) Landlord and Tenant each warrant to the other that it has not
dealt with any broker or agent in connection with this Lease, other than Cushman
& Wakefield of Texas, Inc. and Trammell Crow Dallas/Fort Worth, Inc., whose
commissions shall be paid by Landlord pursuant to a separate written agreement.
Tenant and Landlord shall each indemnify the other against all costs, attorneys'
fees, and other liabilities for commissions or other compensation claimed by any
broker or agent claiming the same by, through, or under the indemnifying party.
(j) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of a notice
specifying an individual at a specific address within the continental United
States for the receipt of notices and payments to Tenant. All parties included
within the terms "Landlord" and "Tenant," respectively, shall be bound by
notices given in accordance with the provisions of Section 24 to the same effect
as if each had received such notice.
(k) The terms and conditions of this Lease are confidential and Tenant
shall not disclose the terms of this Lease to any third party except as may be
required by law or to enforce its rights hereunder.
(l) Tenant shall pay interest on all past-due rent from the date due
until paid at the maximum lawful rate. In no event, however, shall the charges
permitted under this Section 23.(l) or elsewhere in this Lease, to the extent
they are considered to be interest under applicable Law, exceed the maximum
lawful rate of interest.
24. NOTICES. Each provision of this instrument or of any applicable
-------
Laws and other requirements with reference to the sending, mailing or delivering
of notice or the making of any payment hereunder shall be deemed to be complied
with when and if the following steps are taken:
(a) All rent shall be payable to Landlord at the address for Landlord
set forth below or at such other address as Landlord may specify from time to
time by written notice delivered in accordance herewith. Tenant's obligation to
pay rent shall not be deemed satisfied until such rent has been actually
received by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
(c) Any written notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered upon the earlier to occur of
(1) tender of delivery (in the case of a hand-delivered notice), (2) deposit in
the -United States Mail, postage prepaid, Certified Mail, or (3) receipt by
facsimile transmission, in each case, addressed to the parties hereto at the
respective addresses set out below, or at such other address as they have
theretofore specified by written notice delivered in accordance herewith. If
Landlord has attempted to deliver notice to Tenant at Tenant's address reflected
on Landlord's books but such notice was returned or acceptance thereof was
refused, then Landlord may post such notice in or on the Premises, which notice
shall be deemed delivered to Tenant upon the posting thereof.
25. HAZARDOUS WASTE. The term "Hazardous Substances," as used in this
--------------- --------------------
Lease shall mean pollutants, contaminants, toxic or hazardous wastes, or any
other substances, the removal of which is required or the use of which is
restricted, prohibited or penalized by any "Environmental Law," which term shall
-----------------
mean any Law relating to health, pollution or protection of the environment.
Tenant hereby agrees that (a) no activity will be conducted on the Premises that
will produce any Hazardous Substances, except for such activities that are part
of the ordinary course of Tenant's business activities (the "Permitted
---------
Activities") provided such Permitted Activities are conducted in accordance with
- ----------
all Environmental Laws and have been approved in advance in writing by Landlord;
(b) the Premises will not be used in any manner for the storage of any Hazardous
Substances except for any temporary storage of such materials that are used in
the ordinary course of Tenant's business (the "Permitted Materials") provided
-------------------
such Permitted Materials are properly stored in a manner and location satisfying
all Environmental Laws and approved in advance in writing by Landlord; (c) no
portion of the Premises will be used as a landfill or a dump; (d) Tenant will
not install any underground tanks of any type; (e) Tenant will not allow any
surface or subsurface conditions to exist or come into existence that
constitute, or with the passage of time may constitute a public or private
nuisance; and (f) Tenant will not permit any Hazardous Substances to be brought
onto the Premises, except for the Permitted Materials, and if so brought or
found located thereon, the same shall be immediately removed by Tenant, with
proper disposal, and all required cleanup procedures shall be diligently
undertaken pursuant to all Environmental Laws. If at any time during or after
the Term, the Premises are found to be so contaminated by or subject to such
conditions which were caused by a Tenant Party, Tenant shall defend, indemnify
and hold Landlord harmless from all claims, demands, actions, liabilities,
costs, expenses, damages and obligations of any nature arising therefrom or as a
result thereof. Tenant will maintain on the Premises a list of all materials
stored at the Premises for which a materials safety data sheet (an "MSDS") was
----
issued by the producers or manufacturers thereof, together with copies of the
MSDS for such materials, and shall deliver such list and MSDS copies to Landlord
upon Landlord's request therefor. Tenant shall remove all Permitted Materials
from the Premises in a manner acceptable to Landlord before Tenant's right to
possess the Premises is terminated. Unless expressly identified on an addendum
to this Lease, as of the date hereof there are no "Permitted Activities" or
"Permitted Materials" for purposes of the foregoing provision and none shall
exist unless and until approved in writing by the Landlord. Landlord may enter
the Premises and conduct environmental inspections and tests therein as it may
require from time to time, provided that Landlord shall use reasonable efforts
to minimize the interference with
12
<PAGE>
Tenant's business. Such inspections and tests shall be conducted at Landlord's
expense, unless they reveal the presence of Hazardous Substances (other than
Permitted Materials) which were caused by a Tenant Party, or that Tenant has not
complied with the requirements set forth in this Section 25, in which case
Tenant shall reimburse Landlord for the cost thereof within ten days after
Landlord's request therefor. Landlord represents and warrants that to the best
of its current actual knowledge there are no Hazardous Substances or other
environmental contamination in, on or under the Land, the Building or the
Premises. Within three business days after its receipt thereof, Landlord shall
have delivered to Tenant copies of any Phase I reports or other environmental
reports or studies regarding the Land or the Building in Landlord's possession.
26. CONDITIONS TO LANDLORD'S OBLIGATIONS. (Intentionally Deleted).
------------------------------------
27. LANDLORD'S LIEN. Landlord hereby waives its statutory landlord's
---------------
lien.
28. ROOFTOP EQUIPMENT. Provided that Tenant complies with the terms of
-----------------
this Section, Tenant may, at its risk and expense, install a satellite dish and
related communications equipment and wiring (collectively, the "Rooftop
-------
Equipment") on the roof of the Building at a location approved by Landlord,
- ---------
which equipment may be used solely by Tenant and its Permitted Transferees or
Permitted Sublessees. Before installing the Rooftop Equipment, Tenant shall
submit to Landlord for its approval (which approval shall be in Landlord's sole
discretion) plans and specifications which (a) specify in detail the design,
location, size, and, in the case of a satellite dish, frequency of the Rooftop
Equipment and (b) are sufficiently detailed to allow for the installation of the
Rooftop Equipment in a good and workmanlike manner and in accordance with all
Laws (the "Legal Requirements"). If Landlord approves of such plans, Tenant
------------------
shall install (in a good and workmanlike manner), maintain and use the Rooftop
Equipment in accordance with all Legal Requirements and shall obtain all
consents and permits required for the installation and operation thereof; copies
of all such permits and evidence of such consents must be submitted to Landlord
before Tenant begins to install the Rooftop Equipment. Tenant shall thereafter
maintain all permits necessary for the maintenance and operation of the Rooftop
Equipment while it is on the Building and operate and maintain the Rooftop
Equipment in such a manner so as not to unreasonably interfere with any other
satellite, antennae, or other transmission facility on the Building's roof or in
the Building. Landlord may require that Tenant screen the Rooftop Equipment with
a parapet or other screening device acceptable to Landlord. Tenant shall
maintain the Rooftop Equipment and screening device in good repair and
condition. Tenant shall, at its risk and expense, remove the Rooftop Equipment
(including all wiring related thereto), within five days after the occurrence of
any of the following events: (1) the termination of Tenant's right to possess
the Premises; (2) the termination of the Lease; (3) the expiration of the Term;
or (4) Tenant's vacating the Premises. If Tenant fails to do so, Landlord may
remove the Rooftop Equipment and store or dispose of it in any manner Landlord
deems appropriate without liability to Tenant; Tenant shall reimburse Landlord
for all costs incurred by Landlord in connection therewith within ten days after
Landlord's request therefor. Tenant shall repair any damage to the Building
caused by or relating to the Rooftop Equipment, including that which is caused
by its installation, maintenance, use, or removal and shall indemnify Landlord
against all Losses arising from the installation, maintenance, use, or removal
of the Rooftop Equipment, excluding that caused by Landlord's negligence. All
----------------------------------------------
work relating to the Rooftop Equipment shall, at Tenant's expense, be
coordinated with Landlord's roofing contractor so as not to affect any warranty
for the Building's roof.
29. TAX INCENTIVES. Landlord shall reasonably cooperate with Tenant in
--------------
obtaining all governmental tax incentives, abatements, discounts and
concessions.
30. FINANCIAL STATEMENTS. Notwithstanding any other provision of this
--------------------
Lease, until such time as Tenant successfully completes an initial public
offering of Tenant's stock on a nationally-recognized public exchange, Tenant
shall upon Landlord's request therefor, provide Landlord within ninety (90) days
following (i) the end of each fiscal year of Tenant, a copy of audited financial
statements prepared in accordance with generally accepted accounting principles,
and within forty-five (45) days following (ii) the end of each fiscal quarter of
Tenant, the following: (a) a balance sheet, (b) an income statement, (c) a
statement of cash flow and (d) such other supporting documentation as Landlord
may reasonably require.
Executed by Tenant on August 21, 1998.
TENANT: METASOLV SOFTWARE, INC.
By: /s/ Jonathan K. Hustis
---------------------------------------------
Name: Jonathan K. Hustis
-------------------------------------------
Title: V.P. - Business Services
------------------------------------------
Address: 5560 Tennyson Parkway
Plano, Texas 75024
Telephone: 972-239-0623
Fax: 972-239-0653
13
<PAGE>
Executed by Landlord on August 21, 1998.
LANDLORD:
/s/ WILLIAM R. COOPER
--------------------------------------
WILLIAM R. COOPER
/s/ CRAIG A. COOPER
--------------------------------------
CRAIG A. COOPER
Address: Ten Thousand North Central Expressway
Suite 1150
Dallas, Texas 75231
Telephone: 214-360-1830
Fax: 214-360-1844
14
<PAGE>
EXHIBIT A
[Description of Premises]
A-1
<PAGE>
EXHIBIT B
WORK LETTER
-----------
(To be attached)
B
<PAGE>
EXHIBIT C
---------
FORMS OF SNDA AND LENDER ESTOPPEL
---------------------------------
C
<PAGE>
EXHIBIT D
---------
EXTENSION OPTIONS
-----------------
Provided no Event of Default exists and Tenant is occupying the entire
Premises at the time of such election, Tenant may renew this Lease as to all of
the then-leased Premises for two additional periods of five years each on the
same terms provided in this Lease (except as set forth below), by delivering
written notice of the exercise thereof to Landlord (an "Extension Notice") not
----------------
later than nine months before the expiration of the Term. On or before the
commencement date of the extended Term in question, Landlord and Tenant shall
execute an amendment to this Lease extending the Term on the same terms provided
in this Lease, except as follows:
(1) The Basic Rental payable for each month during each such extended
Term shall be the Fair Market Rental Rate for the extended Term.
(2) Tenant shall have no further renewal options or expansion options
(except as otherwise provided herein) unless expressly granted by Landlord
in writing; and
(3) Landlord shall lease to Tenant the Premises in their then-current
condition, and Landlord shall not provide to Tenant any allowances (e.g.,
moving allowance, construction allowance, and the like) or other tenant
inducements.
Tenant's rights under this Exhibit shall terminate if (1) this Lease or
Tenant's right to possession of the Premises is terminated, (2) Tenant assigns
any of its interest in this Lease or sublets any portion of the Premises, except
to a Permitted Transferee or to an assignee or subtenant approved by Landlord as
provided in this Lease, or (3) Tenant fails to timely exercise its option under
this Exhibit, time being of the essence with respect to Tenant's exercise
thereof. Tenant may not assign its rights under this Exhibit to any assignee or
subtenant other than to a Permitted Transferee of the entire Premises.
D
<PAGE>
EXHIBIT E
---------
PARKING
-------
Landlord shall use its best efforts to provide to Tenant a combination of
underground and surface parking at a ratio of no less than four (4) spaces per
1,000 square feet of net rentable area of the Premises. The underground portion
of such parking area shall accommodate at least one hundred twenty (120) spaces.
E
<PAGE>
EXHIBIT F
---------
FAIR MARKET RENTAL RATE
-----------------------
1. Definition. The term "Fair Market Rental Rate" shall mean the market
-----------------------
rental rate for the time period such determination is being made for office
space in office buildings in the vicinity of the Building (the "Market Area") of
-----------
comparable age, quality and condition for space of equivalent quality, size,
utility, and location. Such determination shall take into account all relevant
factors, including, without limitation, the following matters: the credit
standing of Tenant; the length of the term; expense stops; and construction
allowances and other tenant concessions or lack thereof.
2. Determination. Landlord shall deliver to Tenant notice confirming the
Fair Market Rental Rate (the "FMRR Notice") for the space in question (the
-----------
"Space") or extension of the Term (an "Extension") within 20 days after Tenant
- ------ ---------
exercises the option giving rise for the need to determine the Fair Market
Rental Rate. If Tenant disagrees with Landlord's assessment of the Fair Market
Rental Rate specified in a FMRR Notice, then it shall so notify Landlord in
writing within ten days after delivery of such FMRR Notice; otherwise, the rate
set forth in such notice shall be the Fair Market Rental Rate. If Tenant timely
delivers to Landlord written notice that it disagrees with Landlord's assessment
of the Fair Market Rental Rate, then Landlord and Tenant shall meet to attempt
to determine the Fair Market Rental Rate. If Tenant and Landlord are unable to
agree on such Fair Market Rental Rate within ten days after Tenant notifies
Landlord of its disagreement with Landlord's assessment thereof, then (within
the next ten days) Landlord and Tenant shall jointly appoint an independent MAI
real estate appraiser with at least five-years' commercial real estate appraisal
experience in the Market Area and submit their respective assessments of the
Fair Market Rental Rate to the appraiser. If the parties are unable to agree on
an independent real estate appraiser, then either party may apply to any Dallas,
Texas office of the American Arbitration Association (the "AAA") to appoint an
---
appraiser having the qualifications described in the previous sentence. The
AAA's selection of the appraiser shall be binding on Landlord and Tenant. The
appraiser shall then, within ten days after his designation, select the
assessment (i.e., either Landlord's or Tenant's) that is closest to his
determination of the Fair Market Rental Rate, which assessment shall then be the
Fair Market Rental Rate for the Space in question or Extension (as applicable).
The party whose assessment was not chosen by the appraiser shall pay the fees
and expenses of the appraiser.
3. Administration. If Tenant has exercised an option or right to lease
Space to extend the Term and the Fair Market Rental Rate for the Space or
Extension has not been determined in accordance with this Exhibit by the time
that Base Rent for such Space or Extension is to commence in accordance with the
terms hereof, then Tenant shall pay base rent for such Space based on the Fair
Market Rental Rate proposed by Landlord pursuant to this Exhibit until such time
as the Fair Market Rental Rate has been so determined, at which time appropriate
cash adjustments shall be made between Landlord and Tenant such that Tenant is
charged Base Rent based on the Fair Market Rental Rate (as finally determined
pursuant to this Exhibit) for the Space during the interval in question.
F
<PAGE>
FIRST AMENDMENT TO COMMERCIAL LEASE AGREEMENT
---------------------------------------------
(Phase II Lease)
THIS FIRST AMENDMENT TO COMMERCIAL LEASE AGREEMENT (this "Amendment") is
---------
made and entered into as of September 16, 1998, by and between PARAGON LEGACY
ASSOCIATES, INC. ("Landlord"), and METASOLV SOFTWARE, INC., a Delaware
--------
corporation ("Tenant").
------
RECITALS
WHEREAS, Landlord is the owner of an approximately 9.565-acre tract of land
located on Tennyson Parkway in Plano, Texas, which, together with the
improvements thereon, is known as the "MetaSolv Project" (the "Land");
----
WHEREAS, Tenant currently occupies the existing building on the Land (the
"Phase I Building"), pursuant to that certain Commercial Lease Agreement dated
----------------
April 1, 1997, between Tenant and CrowInvest II, L.P., as amended by that
certain First Amendment to Commercial Lease Agreement dated August 21, 1998,
between Landlord and Tenant, and as assigned by that certain Blanket Bill of
Sale and Assignment dated September 16, 1998, from CRIN-Plano I., L.P. to
Landlord and that certain Assignment of Lease Documents dated as of September
16, 1998, from the Coopers to Landlord (such assignments being collectively
herein called the "Lease Assignments", and such lease, as so amended and
-----------------
assigned, being collectively herein called the "Phase I Lease");
-------------
WHEREAS, Tenant has heretofore had the right under the Phase I Lease to
request that Landlord construct additional surface parking for the Phase I
Building (the "Phase I Surface Parking"), provided that the costs for such
-----------------------
construction would be amortized and repaid to Landlord in the form of an
increase in Tenant's rent under such lease, all as more particularly provided on
Exhibit D such lease, and Tenant has heretofore requested the construction of
such parking;
WHEREAS, Tenant has heretofore entered into that certain Commercial Lease
Agreement with the Coopers to cover an additional building to be constructed on
the Land, as assigned to Landlord by the Lease Assignments (such lease, as
assigned, being herein called the "Phase II Lease"; such lease together with the
--------------
Phase I Lease being herein called the "Leases"); and
------
WHEREAS, the Phase II Lease (including the attachments thereto) contains
various plans, specifications, time periods for completion and other provisions
relating to the construction of the New Phase I Parking as well as the
construction of an additional building;
WHEREAS, concurrently herewith, Landlord and Tenant are executing an
amendment to delete Exhibit D to the Phase I Lease;
WHEREAS, Landlord and Tenant desire to modify the provisions of the Phase
II Lease as set out below.
AGREEMENTS
NOW, THEREFORE, for and in consideration of the sum of Ten and No/100
Dollars ($10.00) and other good and valuable consideration paid by each party
hereto to the other, the receipt and sufficiency of which are mutually
acknowledged, Landlord and Tenant hereby agree as follows:
1. Defined Terms. All initially-capitalized terms used and not otherwise
-------------
defined herein shall have the meanings prescribed in the Phase II Lease.
2. Phase II Lease Controlling as to Additional Surface Parking. Landlord
-----------------------------------------------------------
and Tenant hereby confirm and agree that the plans, specifications, times for
completion of construction,
1
<PAGE>
reimbursement to Landlord for such construction and all other matters pertaining
to the construction of the New Phase I Parking shall be governed by the Phase II
Lease. To the extent of any conflict between the Phase II Lease and any
provision in the Phase I Lease pertaining to the New Phase I Parking, the Phase
II Lease shall be controlling.
3. Costs for New Phase I Parking. In lieu of the amortization originally
-----------------------------
contemplated in Exhibit D to the Phase I Lease, Tenant shall pay only one-half
(the "New Parking Payment") of the total costs and expenses for construction of
-------------------
the New Phase I Parking, which total is estimated at $110,000.00 (including any
and all developer or construction management fees payable to Landlord or any
other person to the extent allocable to the New Phase I Parking).
4. Form and Time of Payment. Provided no default then exists on the part
------------------------
of Tenant under either of the Leases, Tenant shall be entitled to pay the New
Parking Payment in any one or more of the following four forms, to the extent
----
such forms are available under then current circumstances, at Tenant's sole
option:
(a) In the form of a check (or cash or cash equivalent);
(b) In the form of a set-off against the Construction Allowance payable
under Section 6(b)(2) of the Phase II Lease, to the extent such
---------------
allowance is not depleted for costs and expenses for the other
construction under the Phase II lease;
(c) If Landlord performs such construction of the Improvements, to the
extent that the total costs and expenses for such construction
including any skybridge or other items requested by Tenant, together
with the New Parking Payment, would exceed the Construction Allowance,
then the new Parking Payment may be made to the extent of such excess
in the form of an addition to any other amounts that are allowed to be
amortized pursuant to Section 6 (b)(2) of the Phase II Lease. To the
----------------
extent, however, that the total excess to be amortized would exceed
the $500,000 ceiling applicable under Section 6(b)(2), the excess over
---------------
such ceiling must be paid in cash; or
(d) In the form of a set-off against the $50,000 maximum allowance for
costs for a monument sign, an energy management system and a security
system, as provided under Section 2 of the Work Agreement attached as
Exhibit B to the Phase II Lease to the extent such allowance is not
depleted for costs and expenses for such three items.
Tenant shall be entitled to require as a condition to payment of the New Parking
Payment (in any form) that Landlord provide copies of invoices or other evidence
of the costs and expenses for the New Phase I Parking reasonably supporting the
amount of such payment. In the event that any portion of the New Parking
Payment is required to be paid in cash pursuant to subsection (b), (c) or (d)
------------------- ---
above, such portion shall be paid within ten (10) days following Landlord's
submission of such evidence reasonably supporting the amount of the New Parking
Payment. Any failure by Tenant to pay such portion in cash fully and promptly
when due shall without further notice constitute an Event of Default under the
Leases.
5. Form of Tenant Estoppel. Tenant hereby confirms and agrees that the
-----------------------
form of Tenant Estoppel attached as Exhibit C-2 hereto is the form of tenant
estoppel referred to in Section 21(e) of the Phase II Lease and is hereby
incorporated into such lease as Exhibit C-2 thereof in lieu of any other form of
tenant estoppel, which is hereby deleted, that may be attached as such exhibit.
6. Phase II Lease Ratified. As amended hereby, Landlord and Tenant
-----------------------
confirm and ratify all of the terms and provisions of the Phase II Lease.
7. Miscellaneous. The headings sections in this Amendment are for
-------------
convenience only shall not be construed as limiting or affecting the meaning of
the text of this Amendment. This Amendment may not be rescinded, terminated,
waived, amended or modified in whole or in part,
2
<PAGE>
orally, by course of conduct or otherwise than by a writing signed by both
Landlord and Tenant. This Amendment may be executed in one or more
counterparts, and provided that each of the parties hereto signs at least one
counterpart, such counterparts shall together constitute one agreement that may
be sufficiently evidenced by any counterpart.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Amendment to be effective as of the date first written
above.
LANDLORD
--------
PARAGON LEGACY ASSOCIATES, LTD.
a Texas limited partnership
By: WRC Turtle Creek, Inc.
a Texas corporation
By: _______________________________
William R. Cooper, President
TENANT:
-------
METASOLV SOFTWARE, INC.
a Delaware corporation
By: /s/ Jonathan K. Hustis
------------------------------------
Name: Jonathan K. Hustis
------------------------------
Title: V.P. - Business Services
-----------------------------
<PAGE>
EXHIBIT 10.8
MASTER SOFTWARE LICENSE AND SERVICES AGREEMENT
THIS SOFTWARE LICENSE AND SERVICES AGREEMENT (this "Agreement") is effective as
of this 30th day of May, 1997, ("Effective Date") by and between MetaSolv
Software, Inc. ("MetaSolv"), a Delaware corporation with principal offices at
14900 Landmark, Suite 530, Dallas, Texas 75240 and Qwest Communications
Corporation with principal offices at 555 17th Street, Suite 1000, Denver,
Colorado 80202.
The terms of this Agreement shall apply to each Software license granted and to
all services provided by MetaSolv under this Agreement. When completed and
executed by both parties, an Order, as described below, shall evidence the
Software licenses granted and the services to be provided by MetaSolv under this
Agreement.
For the purposes of this Agreement, the defined terms set forth herein shall
apply to the respective capitalized terms and their respective singular, plural
and verb forms.
1. Definitions
a) The term "Agreement" includes this Master Software License and
Services Agreement, and any Orders accepted by MetaSolv which
reference it.
b) The term "Software" shall mean the software and related documentation
owned or distributed by MetaSolv for which Customer is granted a
license under this Agreement, the user guides and manuals for use of
the Software, and updates.
c) The term "Order" shall mean a written order for MetaSolv products or
services signed by Customer, accepted by MetaSolv, and referencing
this Agreement. Customer agrees to include a reference to this
Agreement, by Agreement number, in all of its orders submitted for
MetaSolv products or services.
d) The term "Designated System" shall mean the computer hardware and
operating system designated on the relevant Order.
e) Unless otherwise specified in the Order, "User" shall mean an
individual who is authorized by Customer to use the Software on the
Designated System.
2. Software License
a) Rights Granted. MetaSolv grants to Customer a nonexclusive license to
--------------
use the Software Customer obtains under this Agreement as follows:
i) Customer shall use the Software solely for its own internal data
processing operations on the Designated System or on a backup
system if the Designated System is inoperative, up to any
applicable maximum number of designated Users (if any User
limitations apply), or other limitation specified on the Order.
Customer may not use the Software for third-party training,
commercial timesharing, rental or service bureau use.
Page 1
Confidential
<PAGE>
ii) Customer may make up to two archival copies of the Software, for
backup or disaster recovery purposes only, which will include
MetaSolv's copyright, trademark and proprietary notices. Customer
may use the archival copy in a backup or disaster recovery
situation as if it were the original, in accordance with the
licensing rights and restrictions of this Agreement.
b) Verification.
------------
i) At MetaSolv's written request, not more frequently than annually,
Customer shall furnish MetaSolv with a signed certification
verifying that the Software is being used pursuant to the
provisions of this Agreement, including any User and other
limitations, and listing the locations, types and serial numbers
of the systems on which the Software is run.
ii) MetaSolv may, at its expense, audit Customer's use of the
Software. Any such audit shall be conducted during regular
business hours at Customer's facilities and shall not
unreasonably interfere with Customer's business activities. If an
audit reveals that Customer has underpaid fees to MetaSolv,
Customer shall be invoiced for such underpaid fees based on the
current list price in effect at the time the audit is completed.
If the shortfall exceeds 5% of the license fees that the Customer
should have paid, Customer shall also pay MetaSolv reasonable
costs of conducting the audit. Audits shall be conducted not more
than once annually.
c) Ownership Rights. Title and ownership rights to Software, in its
----------------
original form and any modified version, shall remain with MetaSolv and
its applicable licensors. Where modification of any licensed Software
is expressly permitted by written communication from MetaSolv, title
and ownership rights to non-MetaSolv material that Customer
incorporates into a modified or derivative version of the Software
shall remain with Customer or Customer's third-party licensor. This
paragraph does not authorize modification of the Software.
d) Rights in Data. MetaSolv may use any suggestions and improvements
--------------
(other than those that qualify as "Proprietary Information") that
Customer happens to furnish to it in connection with this Agreement,
and Customer grants MetaSolv an unrestricted, irrevocable and royalty-
free license, without warranty of any kind, to include them in
MetaSolv's product or service offerings. Customer shall retain any
ownership of such suggestions and improvements, with an unrestricted
right to use in any manner Customer's ideas, designs, concepts,
inventions, techniques, discoveries or improvements.
e) Patent and Copyright Indemnification. MetaSolv indemnifies Customer
------------------------------------
from any action brought against Customer to the extent that it is
based on a claim that the Software infringes any duly issued patent or
any copyright in the United States or Canada. MetaSolv's indemnity
obligations shall not extend to (i) infringement arising out of
unauthorized use of the Software, (ii) a non-MetaSolv modification of
the Software after delivery by MetaSolv, (iii) the combination,
operation, or use of the Software with non-MetaSolv programs or data
if such infringement would have been avoided by the combination,
operation or use of the Software with other programs or data. MetaSolv
shall pay all damages and costs attributable to an action and finally
awarded against Customer, provided that: MetaSolv is promptly informed
in writing of each such claim, suit or proceeding; Customer shall
Page 2
Confidential
<PAGE>
permit MetaSolv to control the defense in settlement thereof; and
Customer shall cooperate in the defense and settlement thereof.
Customer shall furnish a copy of each communication, notice or other
action relating to the alleged infringement and shall provide MetaSolv
authority, information and assistance (at MetaSolv's expense)
necessary to defend or settle such claim. If the Software becomes, or,
in MetaSolv's opinion is likely to become, the subject of a claim of
infringement subject to this indemnity, then MetaSolv may, at its
option (i) procure for Customer the right to use that Software free of
any liability for infringement, (ii) replace the Software with a non-
infringing substitute complying substantially with all the
requirements of this Agreement, or (iii) refund the license fee
previously paid for the infringing Software, less a charge for the
value of Customer's prior use of the Software based upon a five (5)
year depreciation schedule, and accept return of the infringing
Software. THE FOREGOING INDEMNITY OBLIGATIONS CONSTITUTE METASOLV'S
SOLE LIABILITY AND CUSTOMER'S SOLE REMEDY FOR INFRINGEMENT OF PATENTS
AND COPYRIGHTS RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.
3. Restriction of License
a) Except as otherwise specifically authorized by this Agreement:
i) Customer shall not copy, modify, sublicense, distribute,
transfer, reverse engineer or reverse compile the Software, nor
shall Customer prepare derivative works incorporating the
Software.
ii) Neither Customer nor its personnel having had access to the
Software or documentation may use it to design software with
similar or competitive functionality for distribution to third
parties, nor to distribute or deliver educational courses or
materials based on the Software or documentation to persons other
than to Customer or contractors, and then only for the purpose of
providing Software-related services to Customer.
4. License Fees & Payment
a) All fees and payments are to be made in U.S. dollars. License fees and
payment terms are determined on the Order submitted by Customer and
accepted by MetaSolv. Each Order submitted shall be subject to
applicable license fees. A finance charge of 1.5% per month (but in no
event more than the maximum allowed by law) shall be assessed on all
past-due amounts. Customer shall pay taxes arising out of Customer's
purchase and use of Software under this Agreement, which do not
include taxes based on MetaSolv's income.
5. Services
a) MetaSolv shall provide installation support and user training and
other services, only as specified on the Order. All travel expenses
incurred by MetaSolv as a result of such services shall be paid by
Customer.
Page 3
Confidential
<PAGE>
6. Maintenance
a) Initial Maintenance Period. For the Initial Maintenance Period
--------------------------
specified on the Order, MetaSolv shall provide Standard Maintenance
Support for the Software at no additional charge.
b) Standard Maintenance Support. After the Initial Maintenance Period,
----------------------------
for as long as MetaSolv generally offers Standard Maintenance Support
for the Software to end-user licensees, Customer will automatically
receive Standard Maintenance Support in successive 12-month periods
based on MetaSolv's then current Standard Maintenance Support program.
Fees for Standard Maintenance Support are payable at the beginning of
each renewal maintenance period. Standard Maintenance Support
includes:
i) One (1) copy of standard maintenance releases as generally issued
to end-user licensees under MetaSolv's Maintenance Support
program for the correction of known errors, plus improvements,
modifications and enhancements that MetaSolv incorporates into
the Software and does not market as a separate product.
ii) MetaSolv's standard telephone customer service "hot-line" support
for reporting Software errors. MetaSolv will make reasonable
timely efforts to correct errors in the Software reported in this
way. Maintenance Support at any time covers only the current
release of the Software, plus the most recent prior release for
up to six months after release of the current Software. Error
correction applies only to Software used as authorized by this
Agreement and applicable documentation, and not to Software
modified by Customer.
c) Customer will designate in writing one primary Customer employee, and
two back-up employees, as its single point of contact for MetaSolv's
delivery of Standard Maintenance Support for the Software. Standard
Maintenance Support communications and deliveries between Customer and
MetaSolv shall be through the single point of contact. Customer shall
be responsible for copying, distributing and otherwise disseminating
such Standard Maintenance Support from the single point of contact
throughout Customer. Customer may change its single point of contact
upon reasonable written notice to MetaSolv.
7. Term & Termination of Agreement
a) If not otherwise specified on the Order, each Software license granted
under this Agreement shall remain in effect perpetually unless the
license or this Agreement is terminated in accordance with the
following:
i) For Cause. MetaSolv or Customer may terminate this Agreement and
any license under it at any time if, after thirty (30) days'
written notice, the other fails to correct a material breach of
this Agreement. If such a termination occurs, then in addition to
any other rights and remedies, Customer's rights to the Software
shall end, and within thirty (30) days following termination,
Customer shall either return to MetaSolv all copies of the
Software, or destroy all copies of the Software and provide to
MetaSolv written certification of this destruction.
Page 4
Confidential
<PAGE>
ii) For Convenience. Customer may terminate any license under this
Agreement for convenience at any time by delivery of written
notice and either the return of all Software copies to MetaSolv,
or their destruction with written certification of destruction
delivered to MetaSolv.
8. Confidentiality
a) While this Agreement and related licenses are in effect, MetaSolv and
Customer may disclose their proprietary and confidential information
("Proprietary Information") to each other. Each party shall clearly
mark such information as "Proprietary", "Confidential", or by similar
label. For example, the Software licensed to Customer includes
Proprietary Information of MetaSolv. Customer and MetaSolv each shall
hold the others' Proprietary Information in confidence, with the same
degree of care that they apply to their own Proprietary Information of
like importance, and never less than reasonable care. Neither party
has any confidentiality obligation to the other under this Agreement
for any information to the extent that it can show that the
information: (i) is previously known by it without obligation of
confidence, or without breach of this Agreement, (ii) is publicly
disclosed through no wrongful act of the disclosure, (iii) is received
from a third party without obligation of confidence and without breach
of this Agreement, (iv) is independently developed by the disclosing
party without access to the other's Proprietary Information, or (v) is
approved for release by written authorization of the owner. The
foregoing confidentiality obligation shall survive the termination of
this Agreement.
9. Warranty & Liability
a) MetaSolv warrants that it has the right to grant the licenses provided
by this Agreement.
b) MetaSolv further warrants that during any Maintenance Support period,
the Software shall perform the functions described in the
documentation accompanying it, if properly used in accordance with the
documentation's instructions and specifications.
c) MetaSolv further warrants that services shall be performed in a
professional manner in accordance with standards and practices
generally observed in the industry for similar products and services.
d) During any Maintenance Period, if the warranty is breached, MetaSolv
shall take action to repair or replace defective Software, in
accordance with its Maintenance Support obligations. For services,
MetaSolv will reperform defective services, upon written notice from
Customer received not more than thirty (30) days after the defective
service was performed.
e) METASOLV MAKES NO OTHER WARRANTY FOR ANY PRODUCTS OR SERVICES UNDER
THIS AGREEMENT. THE WARRANTIES ABOVE ARE INSTEAD OF ALL OTHER
WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED
TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, AND ANY OTHER WARRANTY OBLIGATION ON THE PART OF
METASOLV OR ITS LICENSORS. FURTHERMORE, THE STATED REMEDIES FOR BREACH
OF WARRANTY ARE EXCLUSIVE, AND METASOLV PROVIDES NO OTHERS.
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f) Except as otherwise provided for patent and copyright infringement
indemnities above, MetaSolv's maximum liability to Customer, and
Customer's remedy for any cause whatsoever, will be limited to the
recovery of actual damages up to any amounts paid by Customer with
respect to the applicable Order. METASOLV WILL NOT BE LIABLE FOR
SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOSS OF
DATA, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10. Arbitration of Disputes
a) Any dispute arising under this Agreement, shall be submitted to
binding arbitration, to the American Arbitration Association ("AAA")
in Dallas, Texas according to the rules and procedures of the AAA for
commercial arbitration. Unless the parties agree otherwise, there
shall be a single arbitrator selected by agreement among the parties
or, if they cannot agree, designated by the AAA. It shall be the
determination of the arbitrator as to which of the parties shall be
responsible for any attorneys' fees and costs incurred by each party
as a result of the Arbitration. The award of the arbitrator shall be
final and binding upon the parties and may be confirmed by any court
having jurisdiction over the parties and the controversy.
11. General
a) This Agreement may be assigned by Customer, but only to a controlling
parent corporation, a controlled subsidiary corporation, or affiliate
corporation under common control with Customer, in any event with
written notice by Customer to MetaSolv, and Customer's written
guarantee of the Assignee's performance.
b) Neither party shall be liable for failure to perform any material
obligation under this Agreement, if the failure is due to an event
beyond its reasonable control.
c) Each party shall comply with all applicable export control laws and
regulations concerning the Software, including but not limited to the
securing of export licenses and execution of letters of assurance as
required under such laws or regulations.
d) All notices and other communications required or permitted to be given
under this Agreement shall be in writing, by certified mail or courier
service, to the addresses given on the first page of this Agreement,
unless by such notice a different address shall have been designated,
and shall be considered effective when deposited in the U.S. mail,
postage prepaid, and addressed to the appropriate party at the address
noted above.
e) This Agreement is the entire, exclusive set of terms and conditions
for any transactions entered into under it, and may be modified only
by a written instrument duly signed by authorized representatives of
both parties. This Agreement is governed by the laws of the State of
Texas.
f) In the event either party at any time terminates this Agreement as
stipulated in Paragraphs 2(c), 2(d), 3, 8, 9(e), 9(f), 10, and 11, in
their entirety, shall survive the life of this Agreement.
g) Termination of this Agreement or any license shall not relieve
Customer's obligation to pay all fees
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that have accrued or are otherwise owed by Customer under any Order or
other similar ordering document under this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives as set forth below:
MetaSolv Software, Inc. Qwest Communications Corporation
By: /S/ Michael J. Watters By: /S/ Steven Jacobsen
----------------------- ----------------------
(Signature) (Signature)
Michael J. Watters Steven Jacobsen
- --------------------------- --------------------------
Michael J. Watters Typed or Printed Name
CEO SVP
- --------------------------- --------------------------
CEO Title
6/5/97 6/3/97
- --------------------------- --------------------------
Date Date
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EXHIBIT 16.1
[LETTERHEAD OF ARTHUR ANDERSEN]
October 15, 1999
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir/Madam:
We have read the paragraphs of "Change in Accountants" included in the Form S-
1 dated September 10, 1999, of MetaSolv Software, Inc. filed with the
Securities and Exchange Commission and are in agreement with the statements
contained therein.
Very truly yours,
/s/ Arthur Andersen LLP
DHM
Copy to:
Mr. Glenn Etherington, Chief Financial Officer
MetaSolv Software, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in this Prospectus.
KPMG LLP
Dallas, Texas
October 15, 1999
