<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1999.
Registration No. 333-86937
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 4
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 75-2436509
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
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 Proposed
Title of Each Class of Amount Offering Maximum Amount of
Securities to be Price Per Aggregate Registration
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) $22,379 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 November 12, 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 7.
-----------
PRICE $ A SHARE
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<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............................................................. 7
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.
METASOLV SOFTWARE
We are a leading provider of software designed to make it easier for emerging
competitive telecommunications service providers to take, manage and fulfill
orders for service from their customers. These telecommunications service
providers offer a full array of telecommunications services including local and
long-distance telephone services, high-speed data services and Internet
services, often as a bundled offering. We derive substantially all of our
revenue from the sale of licenses, related professional services and
maintenance and support of our Telecom Business Solution, or TBS, packaged
software to these competitive telecommunications service providers.
We are focused on creating software to help telecommunications service
providers take orders, and fulfill those orders, more efficiently in today's
complex telecommunications environment. These complexities result from
regulatory changes and technological innovations. The break-up of the
telecommunications network beginning with the divestiture of AT&T enabled
competitive service providers to provide access to long-distance service. We
began to build order processing, management and fulfillment software in early
1994 in conjunction with ALLTEL, a local telecommunications service provider.
The initial system developed by MetaSolv and ALLTEL focused on simplifying and
improving the ordering process necessary to connect local telephone networks to
those of the long-distance providers. We realized that ALLTEL's needs were not
unique and developed our product as a standardized package rather than a custom
solution designed to meet the needs of a specific customer.
The breakup of the telecommunications network continued with the
Telecommunications Act of 1996, which resulted in the creation of competitive
service providers able to provide local phone service. After the
Telecommunications Act of 1996, we expanded our product line to address the
needs of telecommunications service providers involved in the resale and
wholesale of local and long-distance services. The divestiture of AT&T and the
Telecommunications Act of 1996 have created an environment whereby
telecommunications service providers compete to offer a variety of services to
the customer, and, at the same time, must cooperate to interconnect their
pieces of the network to establish a nationwide, and even global, network. Our
software is designed to automate and simplify the fulfillment of
telecommunications services across interconnected networks.
The rapid introduction of telecommunications technologies designed to bring
faster, cheaper communications services to homes and businesses created
additional complexities. Demand for faster, cheaper services is driven
primarily by the unprecedented growth in the Internet as a communications
medium. In early 1997, we expanded our TBS software to support order
processing, management and fulfillment for service providers offering voice and
data telecommunications services over high-speed networks. With the rapid
emergence of the Internet, we enhanced our TBS software in 1998 and 1999 to
support order processing and fulfillment of Internet-based services.
The combination of deregulation and advances in technology necessitate
extensive coordination in the order fulfillment process--both coordination
between telecommunications service providers whose networks must interconnect
in order to establish service to the customer, and between different
telecommunications technologies that must work together to carry the
telecommunications service. Traditional software systems were not designed to
manage the complexities of a variety of telecommunications services delivered
over a diverse network spanning
4
<PAGE>
multiple telecommunications service providers. Consequently, the new
competitive service providers needed non-traditional software systems designed
to be open and flexible to rapidly changing market and technology demands.
Based on recent industry reports, we estimate the worldwide spending on third-
party order processing, management and fulfillment solutions by competitive
telecommunications service providers will grow by over 40% per year to $1.2
billion in 2001.
We have become a leading provider of order processing, management and
fulfillment software by continually enhancing our software to manage the
complexities of providing multiple telecommunications services over a diverse,
interconnected network. We currently have over 50 customers representing all
facets of the telecommunications industry. Our customers include
telecommunications service providers competing in local-service markets, such
as Allegiance Telecom and GST Telecommunications; operators of the large, high-
speed networks that sell network capacity to other service providers or sell
high-speed telecommunications services directly to customers, such as Qwest
Communications and Williams Communications; new service providers that
specialize in providing data-communications services, such as HarvardNET and
GTE Global Networks Infrastructure; incumbent telecommunications service
providers, such as GTE and ALLTEL; and the emerging long-distance operations of
companies such as BellSouth and Ameritech.
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.................... 5,000,000 shares
Common stock to be outstanding after
this offering.......................... 33,278,366
Use of proceeds......................... For general corporate purposes,
including working capital.
Proposed Nasdaq National Market
symbol................................. MSLV
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 29,453
------- ------ ------- ------- -------
Income (loss) from operations......... $ 581 $ 65 $ (508) $(2,182) $ 1,977
======= ====== ======= ======= =======
Net income (loss)..................... $ 648 $ 120 $ (186) $(1,723) $ 1,174
======= ====== ======= ======= =======
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 a 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 order processing,
management and fulfillment software in early 1994. Accordingly, our prospects
must be considered in light of the risks and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new, rapidly evolving and highly competitive markets. To address
these risks, we must respond effectively to competition, continue to attract,
retain and motivate qualified personnel and continue to improve our products.
Although we 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 14%, 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 processing,
management and fulfillment software;
. The timing of individual software orders, particularly those of our
major customers involving large license fees that would materially
affect our revenue in a given quarter;
. The introduction of new 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
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Potential Future Acquisitions Could Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value and Adversely Affect Our Operating Results
We may acquire other businesses in the future, which would complicate our
management tasks. We may need to integrate widely dispersed operations that
have different and unfamiliar corporate cultures. These integration efforts
may not succeed or may distract management's attention from existing business
operations. Our failure to successfully manage future acquisitions could
seriously harm our business. Also, our existing stockholders would be diluted
if we financed the acquisitions by issuing equity securities.
Our Failure to Meet Customer Expectations or Deliver Error-Free Software
Could Result in Losses and Negative Publicity
The complexity of our products and the potential for undetected software
errors increase the risk of claims and claim-related costs. Due to the
mission-critical nature of order processing, management and fulfillment
software, undetected software errors are of particular concern. The
implementation of our products, which we accomplish through our professional
services division and with our 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 processing, management and
fulfillment software grows more slowly than we anticipate, or if our products
and services fail in any respect to achieve market acceptance, our revenues
would be lower than we anticipate and operating results and financial
condition could be materially adversely affected.
The 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 software that supports the operations of telecommunications
service providers, 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 communications over the Internet may not develop and our sales
would be adversely affected. Consumers and businesses may reject the Internet
as a viable commercial medium for a number of reasons, including potentially
inadequate network infrastructure, slow development of technologies or
insufficient commercial support. The Internet infrastructure may not be able
to support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased government regulation could cause the Internet to lose
its viability as a commercial medium. Even if the required infrastructure,
standards, protocols or complementary products, services or facilities are
developed, we may incur substantial expense adapting our solutions to changing
or emerging technologies.
Changes in 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
processing, management and fulfillment software, 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.
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 offerings. 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.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
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 Long-Term
Incentive 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, $.01 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.................... 2,790 15,337 74,562
Deferred compensation......................... (631) (631) (631)
Treasury stock--at cost, 24,000 shares........ (14) (14) (14)
Retained earnings............................. 1,034 1,034 1,034
------- ------- -------
Total stockholders' equity.................. 3,257 15,867 75,117
------- ------- -------
Total capitalization........................ $15,867 $15,867 $75,117
======= ======= =======
</TABLE>
18
<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 Long Term Incentive 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.
19
<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 7,496
------ ------- ------- ------- ------- -------- --------
Total operating
expenses............ 602 1,972 2,604 6,652 26,983 17,488 29,453
------ ------- ------- ------- ------- -------- --------
Income (loss) from
operations............. (189) (19) 581 65 (508) (2,182) 1,977
Interest and other
income, net............ 30 28 67 115 298 236 87
------ ------- ------- ------- ------- -------- --------
Income (loss) before
taxes.................. (159) 9 648 180 (210) (1,946) 2,064
Income tax expense
(benefit).............. -- -- -- 60 (24) (223) 890
------ ------- ------- ------- ------- -------- --------
Net income (loss)....... $ (159) $ 9 $ 648 $ 120 $ (186) $ (1,723) $ 1,174
====== ======= ======= ======= ======= ======== ========
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>
20
<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 software designed to make it easier for
emerging competitive telecommunications service providers to take, manage and
fulfill orders for service from their customers. These telecommunications
service providers offer a full array of telecommunications services including
local and long distance telephone services, high-speed data services and
Internet services, often as a bundled offering. Our Telecom Business Solution,
or TBS, software is designed to help telecommunications service providers take
orders, and fulfill those orders, more efficiently in today's complex
telecommunications environment. We have become a leading provider of order
processing, management and fulfillment software by continually enhancing our
software to manage the complexities of providing multiple telecommunications
services over a diverse, interconnected network.
Founded in 1992, we began development of order processing, management and
fulfillment software in early 1994. We have continually upgraded and expanded
our TBS software product since that time, adding support for networks that
combine voice and data services in early 1997. Throughout 1998 and 1999, we
expanded our TBS software to support the creation and delivery of services
that utilize the Internet as a communications network. 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
21
<PAGE>
which are driven by quarterly capital expenditure budgets. Accordingly, delays
in the completion of sales near the end of a quarter could negatively impact
revenues in that quarter. On occasion, consistent with industry practice, we
may agree to bill our license fees in more than one installment. These
extended payment terms are fixed obligations and generally do not exceed six
months. In these situations, amounts not billed immediately are recorded as
unbilled receivables.
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>
22
<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.
23
<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 $844,000 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 43%, an increase in bad debt expense of
$881,000 related to potential collection problems with one customer,
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
24
<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 $1.5 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,
$1.2 million in 1996 and $2.2 million 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
25
<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.
26
<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 2,394
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,203 4,183 5,569 7,737 9,494 8,217 10,227 11,009
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (707) (1,249) (330) (601) 1,672 459 644 878
Interest and other
income, net............ 12 45 53 137 63 82 54 (49)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (695) (1,204) (277) (464) 1,735 541 698 829
Income tax expense
(benefit).............. (234) (137) (32) (53) 198 184 339 366
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (461) $(1,067) $ (245) $ (411) $ 1,537 $ 357 $ 359 $ 463
======= ======= ======= ======= ======= ======= ======= =======
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 -- (1)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (22) (26) (3) (4) 10 4 4 4
Income tax expense
(benefit).............. (7) (3) -- (1) 1 2 2 2
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (15)% (23)% (3)% (3)% 9% 2% 2% 2%
======= ======= ======= ======= ======= ======= ======= =======
</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.
27
<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. The allowance for doubtful
accounts increased from $600,000, or 4.7% of accounts receivable at December
31, 1998 to $1,750,000, or 9.4% of accounts receivable at September 30, 1999.
This increase was due to potential collection problems associated with one
customer who failed to make payment when required, due to financial
difficulties. 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 $1.9
million on this line through 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.
28
<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 software designed to make it easier for
emerging competitive telecommunications service providers to take, manage and
fulfill orders from their customers. Our customers, these telcommunications
service providers, offer a variety of telecommunications services including
local and long distance telephone services, high-speed data services and
Internet services, often as a bundled package. We derive substantially all of
our revenue from the sale of licenses, related professional services and
maintenance and support of our Telecom Business Solution, or TBS, packaged
software to these competitive telecommunications service providers.
Our software helps telecommunications service providers take orders, and
fulfill those orders, more efficiently in today's complex telecommunications
environment. Regulatory changes and technology innovations have made today's
telecommunications environment increasingly complex. Regulatory changes have
lead to the break-up of the telecommunications network beginning with the
divestiture of AT&T, thereby enabling competitive service providers to provide
access to long distance service. In early 1994, we began to build an order
processing, management and fulfillment software solution. The initial software
system focused on simplifying and improving the ordering process necessary to
connect local telephone networks to those of the long-distance providers. We
developed our product offering as a standardized, packaged solution rather
than a custom solution designed to meet the needs of a specific customer.
The breakup of the telecommunications network continued with the
Telecommunications Act of 1996, which resulted in the creation of competitive
service providers able to provide local phone service. As a result of the
market opportunities created by this legislation, we expanded our product line
to address the needs of telecommunications service providers involved in the
resale and wholesale of local and long-distance telephony services. The result
of the divestiture of AT&T and the Telecommunication Act of 1996 have created
an environment whereby telecommunications service providers must both compete
to offer a variety of services to the customer and cooperate to interconnect
their pieces of the network to establish a nationwide, and even global,
network. Our software is designed to automate and simplify the fulfillment of
telecommunications services across interconnected networks.
The rapid introduction of telecommunications technologies designed to bring
faster, cheaper communications services to homes and businesses have created
additional complexities. Specifically, unprecedented growth in the Internet as
a communications medium has driven the demand for faster, cheaper
communications services. In early 1997, we expanded our TBS software to
support order processing, management and fulfillment of voice and data
telecommunications services over high-speed networks. With the rapid
acceptance of the Internet, we further enhanced our TBS software in 1998 and
1999 to support order processing and fulfillment of Internet-based services.
Worldwide deregulation and privatization coupled with technological advances
necessitate extensive coordination in the order fulfillment process--both
coordination between telecommunications service providers whose networks must
interconnect in order to establish service to the customer, and between
diverse pieces of telecommunications technology that must work together to
carry the telecommunication service. Traditional software systems were not
designed to meet the needs of competitive service providers who must manage
the complexities of multiple telecommunications services delivered over a
diverse network spanning multiple telecommunications service providers. These
competitive service providers are looking for new software systems designed to
be open and flexible to rapidly changing market and technology demands. We
have continually enhanced our software to meet the needs of these competitive
service providers by providing software that manages the complexities of
providing multiple telecommunications services over a diverse,
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interconnected network. Based on recent industry reports, we estimate the
worldwide spending on third-party order processing, management and fulfillment
solutions by competitive telecommunications service providers will grow by
over 40% per year to $1.2 billion in 2001.
We have become a leading provider of order processing, management and
fulfillment software and currently have over 50 customers representing all
facets of the telecommunications industry. Our customers include
telecommunications service providers competing in local residential and
business markets, such as Allegiance Telecom and GST Telecommunications;
companies operating large, high-speed networks and selling network capacity to
other service providers or selling high-speed telecommunications services
directly to customers, such as Qwest Communications and Williams
Communications; companies specializing in data-communications services, such
as HarvardNET and GTE Global Networks Infrastructure; incumbent
telecommunications service providers, such as GTE and ALLTEL; and the emerging
long-distance operations of companies such as BellSouth and Ameritech.
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,
continued to operate as regional monopolies, with little competition in their
local markets. The Telecommunications Act of 1996, however, opened those
markets to competition. The Telecommunications Act of 1996 requires the
Regional Bell Operating Companies and other traditional local service
providers, such as GTE, to give new competitors access to their local
networks. With such access, these new competitive telecommunications service
providers can provide local services to customers. Prompted by the need to
distinguish themselves in a more crowded market, both traditional service
providers and new competitive service providers 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
telecommunications service providers 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 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, new
competitive service providers 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
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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. Telecommunications 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 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 order
processing, management and fulfillment systems are becoming more important as
a tool that enables a given service provider to distinguish itself from its
competitors.
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The Order Management and Service Fulfillment
Order management and service fulfillment 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 these and other software programs used by telecommunications
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."]
Traditional telecommunications service providers either build their own
order processing, management and fulfillment 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 traditional
systems are proprietary and support only a limited number of
telecommunications services, primarily voice.
By contrast, emerging competitive telecommunications service providers need
order processing, management and fulfillment systems that enable them to
respond to customer demands for a bundle of services. Such a bundle can
include local 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 order processing,
management and fulfillment 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.
Order processing, management and fulfillment systems used by traditional
service providers do not generally meet the requirements of the new
competitive telecommunications service providers for several reasons:
. They do not integrate different functions associated with different
types of service; thus, a service provider must use separate order
processing, management and fulfillment 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 order processing, management and
fulfillment 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.
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To overcome these limitations, telecommunications service providers need a
flexible, adaptable order processing, management and fulfillment system that
can meet the service requirements of converged networks. To launch their
businesses and provide a single, unified order processing, management and
fulfillment system that accommodates packages of services, an increasing
number of these service providers are turning to commercially available,
third-party packaged software. We estimate, based on recent industry reports,
that the global market for such third-party order processing, management and
fulfillment 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 order processing, management and fulfillment
software specifically designed to meet the complex business needs of
competitive telecommunications service providers. Our Telecom Business
Solution, or TBS, software is a comprehensive order processing, management and
fulfillment 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
fulfillment of existing telecommunications services with the rapid development
and deployment of new services.
We believe our software 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.
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. These application
programming interfaces make it easier for our customers, partners, and other
third parties to integrate the TBS software with other software applications.
Our customers can also use the application programming interface 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;
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and service provider-to-service provider electronic exchange of information.
In addition, we have alliances with software vendors 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 servers.
The MetaSolv Software Strategy
Our strategy is to solidify our position as a leader in the order
processing, management and fulfillment market by establishing our TBS software
as the platform of choice for providers of convergent 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
telecommunications service providers for comprehensive order processing,
management and fulfillment functionality from packaged software, rather than
from custom software 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 Competitive Telecommunications Service Providers
Worldwide. The unique capabilities of the TBS software product line enable us
to address the market for converged telecommunications 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 telecommunications service provider customers
include:
. market-leading competitive local telecommunications service providers,
both wireline and wireless, that operate their own networks, including
Allegiance Telecom, Electric Lightwave, GST Telecommunications, 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
. new telecommunications service providers 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 order processing, management and fulfillment 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 order processing, management and
fulfillment solutions for numerous telecommunications service providers. Our
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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 order processing, management and fulfillment 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 order processing, management and fulfillment 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.
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 order processing,
management and fullfillment software for competitive 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
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subsystems: order management, service provisioning, network inventory and
design, customer care, trouble management and application programming
interface and gateway management. These subsystems are coordinated by a common
data management and workflow management subsystem. 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.
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.
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Service provisioning is the term for the complex process by which engineers
determine how a requested service is to be fufilled, 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.
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
39
<PAGE>
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 related service requests, 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 and
interfaces with third-party systems.
Application Programming Interface 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. These
application programming interfaces make it easier for our customers to
integrate the TBS software 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.
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. 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
40
<PAGE>
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
such as service fulfillment plans, equipment specifications, and products,
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 to improve the skills of the
individuals on the customer implementation team and to streamline the TBS
software implementation, primarily by improving business methods and
processes. The workshop provides in-depth exposure to TBS software concepts
and implementation requirements. Team members learn how and where information
is loaded in the TBS software database, and they see demonstrations of best
practices for setting up and maintaining TBS software.
Educational Offerings
We provide a comprehensive series of classes to our customers, employees and
partners so they acquire the knowledge and skills necessary to deploy, use and
maintain our software solutions. These classes focus on the technical aspects
of our products and on real-world business issues and processes. All classes
include lectures, demonstrations, discussions and hands-on use of our
software. Classes are held regularly at our training centers in our Plano,
Texas headquarters and in our Englewood, Colorado and McLean, Virginia
facilities. We also offer Train-the-Trainer programs that enable our customers
to conduct their own internal end-user training.
Maintenance and Technical Support
Our maintenance and technical support services include help desk support,
problem resolution, software maintenance and scheduled software upgrades. 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. 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
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<PAGE>
have alliances with other software-integration vendors that provide commercial
interfaces between our TBS software and other third-party software systems.
Our partners in this area include:
.Customer Care and Billing--Siebel Systems, Saville Systems, Daleen and
Portal Software;
.Network Management--Harris, Nortel Networks and Syndesis;
.Interconnection Gateways--DSET and Quintessent Technologies; and
.Software Integration--Vitria Technology and Crossworlds Software.
Hardware/Software Platform Vendors. Our technology strategy is to focus
exclusively on our core order processing, management and fulfillment package,
TBS software. Accordingly, we have formed 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 order processing, management and
fulfillment software package. As of September 30, 1999, we had licensed TBS to
more than 50 customers worldwide, including:
<TABLE>
<S> <C>
.Allegiance Telecom .HarvardNET
.Ameritech .MaxCom
.Bell Atlantic .Net2000 Communications
.BellSouth .NorthwesTel
.Birch Telecom .Telergy
.Cox Communications .Time Warner Telecom
.GTE .Qwest Communications International
.GTE Global Networks Infrastructure .US Xchange
.Electric Lightwave .Williams Communications
.GST Communications .Winstar Wireless
</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
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. User Interface Tier: includes the client-based graphical user interface
presentation services, which run on a browser or Windows, Windows NT, or
Windows 95/98. Some client-side application logic also resides on this
tier.
. Application Server Tier: includes the business logic in components
running on Microsoft Transaction Server. These business logic and
database access objects enable us to build different graphical user
interfaces with the same business logic code. In addition, application
programming interfaces give our customers and partners access to these
components. Open and fully-documented application programming interfaces
make it possible to customize and integrate the TBS software with
existing customer, partner and third-party software applications. We
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.
This three-tier technology design provides the following benefits to our
customers:
. Flexibility: Multiple graphical user interfaces enable our customers to
select the presentation platform of their choice, as well as to manage
the upgrade and internal distribution of the software.
. Scalability: The TBS software grows easily, from dozens to thousands of
users, while simultaneously maintaining high performance levels. Our
customers can add multiple servers as needed to any level of the system,
generally without service interruption.
. Data Integrity: The database design preserves data integrity while
ensuring fast, efficient transaction-oriented data retrieval methods. As
a demonstration of resilience, the database design has remained constant
during the life and evolution of other components of the software. This
stability provides reusability of the business functionality as new,
updated graphical user interfaces are developed.
. Open Design: Our open, fully-documented application programming
interfaces 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.
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<PAGE>
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 order processing, management and
fulfillment products and services outside of North America. We intend to
expand our sales and marketing efforts accordingly, through a combination of
direct sales in selected markets; continued partnerships; and the extension of
our relationships with existing customers as they expand into international
markets.
Marketing
We focus our marketing efforts on developing market strategies and product
plans, creating awareness of our order processing, management and fulfillment
software and generating new sales opportunities. Our product management
organization provides direction on target markets and their order processing,
management and fulfillment requirements. We base our product strategy on an
analysis of market requirements, competitive offerings and projected return on
investment. Our product 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 packaged order processing, management and fulfillment software.
In addition, we rely on several marketing activities to create awareness of
our TBS software solution and to generate sales opportunities. Through our
product marketing and marketing communications functions, we manage and
maintain our Web site, publish product-related communications and educational
white papers and conduct seminars and user-group conferences. We also have an
aggressive public-relations program and maintain relationships with recognized
industry analysts; both are part of an ongoing effort to create awareness of
order processing, management and fulfillment solutions and our TBS software in
particular. We are an active sponsor of technology-related conferences and
demonstrate our product at trade shows targeted at providers of
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 software;
.the quality and performance of our product;
.our high-quality customer service;
.our ability to implement and integrate solutions;
.the overall value of our software; 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 order processing, management and fulfillment software market and that
the market for our products and services will remain intensely competitive.
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Research and Development
Teams of development engineers, software architects and product managers are
responsible for our research and development efforts. The organization uses a
software development process that includes planning and documenting
deliverables in advance; rigorously adhering to coding standards; and
performing significant performance and function tests. Involving all
functional groups at various levels within MetaSolv, this process provides a
framework for all the steps necessary to turn concepts into products and to
market those products cost-effectively and successfully. In addition, we have
recruited development engineers, architects and product managers with
experience in order processing, management and fulfillment solutions and other
facets of software, along with senior managers experienced in software used by
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.
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.
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<PAGE>
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 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.
46
<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......... 42 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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<PAGE>
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 provider
of commercial image processing systems.
Dana R. Brown joined MetaSolv at its founding in July 1992 and since such
time has served in various capacities. She has served as Vice President-
Marketing of MetaSolv since August 1997. Ms. Brown was the business unit
manager of MetaSolv's object-oriented component software group from August
1992 to March 1996 and the Director of Marketing from April 1996 to August
1997. From April 1989 to July 1992, Ms. Brown held various consulting
positions with Texas Instruments, Advanced Information Management software
division. From May 1987 to April 1989, Ms. Brown was a Management Information
Systems Consultant with Arthur Andersen, a public accounting firm. Ms. Brown
is the wife of Mr. Janicki, our President and Chief Executive Officer.
Eleanor M. Luce has served as Vice President-Services of MetaSolv since
February 1999. From February 1996 to February 1999, Ms. Luce was a Vice
President of Professional Services at Sybase, a database software company.
From June 1990 to February 1996, Ms. Luce was a Vice President at MCI Network
Systems, a developer of network management systems.
Glenda J. Akers has served as Vice President-Engineering of MetaSolv since
March 1999. From September 1998 to March 1999, Ms. Akers was the Vice
President of Engineering for WarpSpeed Communications, a developer of high-
speed networking products. From March 1996 to March 1998, she was the Vice
President of Server Engineering for Sybase, Inc., where she managed the
engineering development for Sybase's core product, SQL Server. From February
1990 to March 1996, Ms. Akers was Director-Engineering for Network and
Provisioning Systems at MCI Network Systems.
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
48
<PAGE>
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, which consisted of
Messrs. Sick and Thornton during 1998, 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.
49
<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.
50
<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.
51
<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 1,693,700 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 ($.60 per share) 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.)
52
<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 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
53
<PAGE>
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.
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.
54
<PAGE>
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.
55
<PAGE>
CERTAIN TRANSACTIONS
Transactions with Directors and Officers
In June 1998, we raised additional capital to finance our operations through
the sale of 2,750,844 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 2,750,844
========= ========== =========
</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.
56
<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.
57
<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.
58
<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, $0.01 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 6,726,680 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
59
<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.
60
<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 9,360 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 384,236 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 28,819,098 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........ 5,009,360 Freely tradable shares sold in offering; shares
salable under Rule 144
90 Days................. 384,236 Shares salable under Rule 144; vested options
for shares salable under Rule 701
180 Days................ 28,819,098 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 29,794,400 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.
61
<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 2,520,546 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."
62
<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.
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<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
64
<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.
65
<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, except as to Note 12,
which is as of October 28, 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, $.005 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 2,790 15,337
Deferred compensation................. -- -- (631) (631)
Treasury stock--at cost, 24,000 shares
at September 30, 1999................ -- -- (14) (14)
Retained earnings (deficit)........... 46 (140) 1,034 1,034
------- ------- ------- -----------
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 7,496
-------- ------- -------- -------- --------
Total operating expenses.... 2,604 6,652 26,983 17,488 29,453
-------- ------- -------- -------- --------
Income (loss) from operations... 581 65 (508) (2,182) 1,977
Interest and other income, net.. 67 115 298 236 87
-------- ------- -------- -------- --------
Income (loss) before taxes...... 648 180 (210) (1,946) 2,064
Income tax expense (benefit).... -- 60 (24) (223) 890
-------- ------- -------- -------- --------
Net income (loss)............... $ 648 $ 120 $ (186) $ (1,723) $ 1,174
======== ======= ======== ======== ========
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
======== ======= ======== ======== ========
Unaudited proforma earnings
(loss)
per share:
Basic......................... $ (0.01) $ 0.04
======== ========
Diluted....................... $ (0.01) $ 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>
Class A Convertible
Preferred stock Common stock Treasury stock Additional Retained
------------------------ ----------------- ---------------- paid-in Deferred earnings
Shares Amount Shares Amount Shares Amount capital compensation (deficit) Total
------------- --------- ---------- ------ -------- ------- ---------- ------------ --------- -------
<S> <C> <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)
Deferred
compensation......... -- -- -- -- -- -- 656 (656) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- -- -- 25 -- 25
Net income
(unaudited).......... -- -- -- -- -- -- -- -- 1,174 1,174
------------- ------ ---------- ---- -------- ------ ------- ------ ------ -------
Balance, September 30,
1999 (unaudited)...... 6,650,000 18 12,057,060 60 24,000 (14) 2,790 (631) 1,034 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) $15,337 $ (631) $1,034 $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) $ 1,174
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization........... 113 293 763 516 1,104
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 software
designed to make it easier for emerging competitive telecommunications service
providers to take, manage and fulfill orders for services from their
customers. These telecommunications service providers offer a full array of
telecommunications services including local and long distance telephone
services, high-speed data services and Internet services, often as a bundled
offering. The Company derives substantially all if its revenue from the sale
of licenses, related professional services and maintenance and support of its
Telecom Business Solution, or TBS, packaged software to these competitive
telecommunications service providers.
a) Revenue Recognition
The Company's software products are licensed to customers through the
Company's direct sales force. Software license revenue is generally recognized
when the following criteria have been met: (a) a written contract for the
license of software has been executed, (b) the Company has delivered the
product to the customer, (c) the license fee is fixed or determinable, and (d)
collectibility of the resulting receivable is deemed probable. Revenue 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, $1,965,000, $49,328 and
$383,338 as of December 31, 1997, 1998 and September 30, 1999, respectively,
represent billings in excess of costs and related profits on certain contracts
accounted for under the percentage-of-completion method. Of total unbilled
receivables, $897,091, $335,000 and $0 as of December 31, 1997, 1998 and
September 30, 1999, 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 is 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 66 159
------ ------- -------
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) $702
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 57
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 $10,000,011. These share amounts have
been adjusted for a 1998 stock split as well as the proposed stock split
discussed in Note 12.
Class A preferred stock is not redeemable. Class B and C redeemable
preferred shareholders are entitled to request mandatory redemption of their
stock beginning in April 2005 at a price equal to the liquidation value of
such stock. The holders of the Class A, Class B and Class C preferred stock
are entitled to certain additional rights as described below.
Dividend Preference--The preferred shareholders are entitled to receive
dividends before any distributions are made to holders of common stock. No
dividends have been declared on any preferred stock.
Liquidation Preference--Upon voluntary or involuntary liquidation,
dissolution or other winding up of the Company, preferred shareholders in each
class are entitled to a liquidation preference per share on a pro rata basis
of the original issue price per share for such class ($.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.
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 stock option plan. The 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 the plan merger 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 stock options
granted to employees and non-employee directors under its stock option plans.
The Company recorded $656,400 of deferred compensation during the nine months
ended September 30, 1999, as a result of granting stock options with exercise
prices below the estimated fair value per share of the Company's common stock
at the date of grant. Deferred compensation has been recorded as a component
of stockholders' equity and is being amortized as a charge to operations over
the vesting period of the applicable options. Amortization of deferred
compensation of $25,000 was recognized in the nine months ended September 30,
1999.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation, the Company's net
income would have been reduced to the pro forma amounts indicated below (in
thousands):
<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) $1,174
Pro forma....................... 642 88 (278) (1,779) 863
Earnings per share:
Basic:
As reported................... $0.06 $0.01 $ (0.02) $ (0.15) $ 0.10
Pro forma..................... 0.06 0.01 (0.02) (0.16) 0.07
Diluted:
As reported................... $0.03 $0.00 $ (0.02) $ (0.15) $ 0.04
Pro forma..................... 0.03 0.00 (0.02) (0.16) 0.03
</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)
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.
Stock option activity during the periods indicated is as follows:
<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 --
3.50 544,900 3.50 9.76 --
--------- ---------
Totals 4,430,440 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 authorized and unissued common stock and
shares issuable under the plan will increase annually during the first five
years following adoption of the plan by 1% of the Company's outstanding common
stock.
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) $ 1,174
======= ======= ====== ========== =========
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. Pro forma
basic and diluted earnings per share have been calculated assuming the
conversion of class A, B and C preferred stock outstanding at December 31,
1998 and September 30, 1999, as if the preferred stock had converted
immediately upon its issuance, resulting in 15,054,828 and 16,245,306
additional shares of common stock outstanding, respectively.
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
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)
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.
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 September 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>
12) Stock Split
On October 28, 1999, the Company consummated a 2 for 1 split of all classes
of its common and preferred stock. The financial statements have been adjusted
to give retroactive effect to the stock split.
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........................................... 320,000
Legal fees and expenses of the Company........................... 430,000
Accounting fees and expenses..................................... 325,000
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.
** Confidential treatment requested as to certain portions of this exhibit and
the omitted portions have been filed with the Securities and Exchange
Commission.
(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 12th day of November, 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 November 12, 1999
______________________________________ Officer and Director
James P. Janicki (Principal Executive
Officer)
GLENN A. ETHERINGTON* Chief Financial Officer November 12, 1999
______________________________________ (Principal Financial and
Glenn A. Etherington Accounting Officer)
DAVID R. SEMMEL* Director November 12, 1999
______________________________________
David R. Semmel
WILLIAM N. SICK, JR.* Director November 12, 1999
______________________________________
William N. Sick, Jr.
ADAM SOLOMON* Director November 12, 1999
______________________________________
Adam Solomon
JOHN D. THORNTON* Director November 12, 1999
______________________________________
John D. Thornton
BARRY F. EGGERS* Director November 12, 1999
______________________________________
Barry F. Eggers
JOHN W. WHITE* Director November 12, 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.
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 November 20, 1998.
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.
** Confidential treatment requested as to certain portions of this exhibit and
the omitted portions have been filed with the Securities and Exchange
Commission.
<PAGE>
EXHIBIT 10.4
METASOLV SOFTWARE, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE
The purpose of the MetaSolv Software, Inc. Employee Stock Purchase Plan is
to provide eligible Employees of MetaSolv Software, Inc., and its Affiliates
with an opportunity to acquire a proprietary interest in the Company through the
purchase of Common Stock of the Company on a payroll deduction basis. It is
believed that participation in the ownership of the Company will be to the
mutual benefit of the eligible Employees and the Company. It is intended that
this Plan shall constitute an "employee stock purchase plan" within the meaning
of Section 423 of the Internal Revenue Code of 1986, as amended. The provisions
of the Plan shall, accordingly, be construed so as to extend and limit
participation in a manner consistent with the requirements of Code Section 423.
2. DEFINITIONS
Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this Plan, have the following meanings. Wherever
appropriate, words used in the singular shall be deemed to include the plural
and vice versa, and the masculine gender shall be deemed to include the feminine
gender.
(a) Account means the funds accumulated with respect to an Employee as a
result of deductions from his paycheck for the purpose of purchasing Common
Stock under the Plan. The funds allocated to an Employee's Account shall
remain the property of the Employee at all times prior to the purchase of
the Common Stock, but may be commingled with the assets of the Company and
used for general corporate purposes. No interest shall be paid or accrued on
any funds accumulated in the Accounts of Employees.
(b) Affiliate means a corporation, as defined in Section 424(f) of the
Code, that is a parent or subsidiary of the Company, direct or indirect.
(c) Board means the Board of Directors of the Company.
(d) Code means the Internal Revenue Code of 1986, as amended.
(e) Committee means the committee to which the Board delegates the power to
act under or pursuant to the provisions of the Plan, or the Board if no
committee is selected.
(f) Common Stock means the shares of common stock of the Company, $.01 par
value.
(g) Company means MetaSolv Software, Inc., a Delaware corporation, and any
corporate successor to all or substantially all of the assets or voting
stock of the Company.
(h) Compensation means the compensation paid to an Employee by the Company
during a payroll period for federal income tax purposes, as reported on an
Employee's Form W-2 (or comparable reporting form) for income tax
withholding purposes.
(i) Effective Date means the date the Plan is adopted by, and made
effective by, the Board, subject to the limitations of Section 16.
(j) Employee means any person who is employed by the Company or an
Affiliate on a regular full-time or part-time basis. A person shall be
considered employed on a regular full-time or part-time basis if he is
customarily employed for more than twenty (20) hours per week.
(k) Offering Date means the date on which the Committee grants Employees
the option to purchase shares of Common Stock.
(l) Offering Period means the period between the Offering Date and the
Purchase Date.
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(m) Participant means an Employee who elects to participate in the Plan.
(n) Plan means the MetaSolv Software, Inc. Employee Stock Purchase Plan.
(o) Purchase Date means the date on which the Committee purchases the shares
of Common Stock, which date shall be the last day of an Offering Period.
3. ELIGIBILITY
All Employees of the Company and, if designated by the Board, any Affiliate,
who are employed by the Company and/or such designated Affiliate on the
Effective Date shall be eligible to participate in the Plan on the Effective
Date. Subject to the enrollment limitations of Section 6, each other Employee of
the Company and/or a designated Affiliate shall be eligible to participate on
the first to occur of (i) the Offering Date coincident with or next following
the Employee's first day of employment, or (ii) the first day of any calendar
month coincident with or next following the Employee's first day of employment.
4. ADMINISTRATION
The Plan shall be administered by the Committee, which shall consist of not
less than two (2) members of the Board. Subject to the provisions of the Plan,
the Committee shall be vested with full authority to make, administer, and
interpret such rules and regulations as it deems necessary to administer the
Plan, and any determination, decision, or action of the Committee in connection
with the construction, interpretation, administration, and application of the
Plan shall be final, conclusive, and binding upon all Participants and any and
all persons claiming under or through any Participant. Notwithstanding anything
to the contrary in the Plan, the Committee shall have the discretion to modify
the terms of the Plan with respect to Participants who reside outside of the
United States or who are employed by a subsidiary of the Company that has been
formed under the laws of any foreign country, if such modification is necessary
in order to conform such terms to the requirements of local laws.
5. STOCK
(a) The Common Stock to be sold to Participants under the Plan may, at the
election of the Company, be either treasury shares, shares acquired on the
open market, and/or shares originally issued for such purpose. The aggregate
number of shares of Common Stock that shall be made available for purchase
under the Plan shall not exceed three hundred thousand (300,000) shares
(subject to adjustment upon changes in capitalization of the Company as
provided in subparagraph (b) below); provided, however, that the number of
shares of Common Stock available for purchase under the Plan shall
automatically increase on the first trading day of each calendar year
(during the first five (5) years following the adoption of the Plan by the
Board) by one percent (1%) of the number of shares of Common Stock of the
Company outstanding on such first trading day. In the event any purchase
right granted under the Plan expires or terminates for any reason without
having been exercised in full or ceases for any reason to be exercisable in
whole or in part, the unpurchased shares subject thereto will again be
available for purchase by Employees upon the exercise of purchase rights. If
the total number of shares that otherwise would have been acquired under the
Plan on any Purchase Date exceeds the number of shares of Common Stock then
available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available in as nearly a uniform manner as shall be
practicable and as it shall determine to be equitable. In such event, the
payroll deductions to be made pursuant to the Participants' authorizations
shall be reduced accordingly, or refunded to the Participants, as the case
may be, and the Company shall give written notice of such reduction or
refund to each affected Participant.
(b) Appropriate adjustments in the aggregate number of shares of Common
Stock that shall be made available for purchase under the Plan shall be made
to give effect to any stock splits, stock dividends, or other similar
changes in the capitalization of the Company. The establishment of the Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations, or changes in its capital
or business structure or to merge, consolidate, dissolve, liquidate, sell,
or otherwise transfer all or any part of its business or assets. Adjustments
under this Section 5 shall be made in the sole discretion of the Committee,
and its decision shall be binding and conclusive.
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(c) A Participant shall not have any interest in shares covered by his
authorized payroll deduction until shares of Common Stock are acquired for
his Account.
6. PARTICIPATION
(a) Each Employee may become a Participant in the Plan by authorizing a
payroll deduction on a form provided by the Committee. Such authorization
shall become effective on the first day of the month (or the next Offering
Date, if earlier) following the delivery of the authorization form to the
Committee (or its designated representative); provided, (i) that the
Employee is eligible under Section 3 to participate in the Plan on such day
and (ii) that if the authorization form is delivered to the Committee later
than fifteen (15) days prior to the end of any month (or prior to the
Offering Date, if applicable), it shall become effective on the first day of
the month that is fifteen (15) or more days following delivery of the
authorization form to the Committee (or its designated representative).
(b) At the time an Employee files his authorization for a payroll deduction,
he shall elect to have deductions made from each paycheck that he receives,
such deductions to continue until the Participant withdraws from the Plan or
otherwise becomes ineligible to participate in the Plan. Authorized payroll
deductions shall be for a minimum of one percent (1%) and a maximum of
fifteen percent (15%) of the Participant's Compensation. The deduction rate
so authorized shall continue in effect through the Offering Period and each
succeeding Offering Period, subject to the following: (i) a Participant may,
at any time during any Offering Period, reduce his rate of payroll deduction
by filing a new authorization form with the Company, which shall become
effective as soon as practicable after it is filed; and (ii) a Participant
may increase the rate of his payroll deduction effective as of any
subsequent Offering Date by filing a new authorization form with the
Committee fifteen (15) or more days prior to the next Offering Date.
(c) All Compensation deductions made for a Participant shall be credited to
his Account. Except as may otherwise be provided by the Committee under
Section 4, a Participant may not make any separate cash payment into his
Account.
7. PURCHASE OF SHARES
(a) On the date when a Participant's authorization form for a deduction
becomes effective, and on each Offering Date thereafter, he shall be deemed
to have been granted an option to purchase as many full shares of Common
Stock as he will be able to purchase with the Compensation deductions
credited to his Account during the payroll periods within the applicable
Offering Period for which the Compensation deductions are made. In addition
to the foregoing, any cash dividends paid on shares of Common Stock held in
his Account shall be added to the Account, and used to purchase Common Stock
as otherwise provided herein.
(b) The purchase price for the shares of Common Stock to be purchased with
payroll deductions from the Participant shall be equal to eighty-five
percent (85%) (or such other amount as the Committee shall authorize, but in
no event less than eighty-five percent (85%)) of (i) the "fair market value"
of a share of Common Stock on the Offering Date (or, if later, on the date
the Participant's authorization form becomes effective as set forth in
Section 6) or (ii) the "fair market value" of a share on the Purchase Date.
However, if a Participant enters the Plan on other than the Offering Date,
the clause (i) amount shall in no event be less than the fair market value
per share of Common Stock on the Offering Date. Fair market value shall be
defined as the closing sales price of the Common Stock on the largest
national securities exchange on which such Common Stock is listed at the
time the Common Stock is to be valued. If the Common Stock is not then
listed on any such exchange, the fair market value shall be the closing
sales price if such is reported or otherwise the mean between the closing
"Bid" and the closing "Ask" prices, if any, as reported in the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") for
the date of valuation, or if none, on the most recent trade date thirty (30)
days or less prior to the date of valuation for which such quotations are
reported. If the Common Stock is not then listed on any such exchange or
quoted in NASDAQ, the fair market value shall be the mean between the
average of the "Bid" and the average of the "Ask" prices, if any, as
reported in the National Daily Quotation Service for the date of valuation,
or, if none, for the most recent trade date thirty (30) days or less prior
to the date of valuation for which such quotations are reported. If the fair
market value cannot be determined under the preceding three sentences, it
shall be determined in good faith by the Committee.
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8. TIME OF PURCHASE
From time to time, the Committee shall grant to each Participant an option
to purchase shares of Common Stock in an amount equal to the number of shares of
Common Stock that the accumulated payroll deductions to be credited to his
Account during the Offering Period may purchase at the applicable purchase
price. Each Offering Period shall be for a period of time to be fixed by the
Committee and shall be for no less than one (1) month and no more than twenty-
seven (27) months' duration. Each Participant who elects to purchase shares of
Common Stock hereunder shall be deemed to have exercised his option
automatically on such date of purchase. Administrative and commission costs on
purchases shall be paid by the Company. The Committee shall cause to be
delivered periodically to each Participant a statement showing the aggregate
number of shares of Common Stock in his Account, the number of shares of Common
Stock purchased for him in the preceding Offering Period, the price per share
paid for the shares of Common Stock purchased for him during the preceding
Offering Period, and the amount of cash, if any, remaining in his Account at the
end of the preceding Offering Period.
A Participant may request delivery to him of the cash in his Account or of
the shares of Common Stock held in his Account at any time (subject to any
limitations imposed by Section 16(b) of the Securities Exchange Act of 1934),
and the delivery thereof shall be made at such regular time as the Company or
its transfer agent shall determine. If such delivery is required at a time
other than the normal transfer date set by the Company or its transfer agent,
the Participant requesting such transfer shall pay the costs thereof. All of
the cash deposits in his Account shall be paid to him promptly after receipt of
notice of withdrawal, without interest. Shares of Common Stock to be delivered
to a Participant under the Plan shall be registered in the name of the
Participant or, if the Participant so directs in writing to the Committee, in
the name of the Participant and such person(s) as may be designated by the
Participant, to the extent permitted by applicable law, and delivered to the
Participant as soon as practicable after the request for a withdrawal. If a
Participant wishes to sell the shares of Common Stock in his Account, he may
notify the Committee to sell the same, in lieu of a distribution of such shares,
in which event all commission costs incurred in connection with the sale of the
shares of Common Stock shall be borne by the Participant. The Company shall pay
administrative costs associated therewith other than costs arising from a sale
occurring at a time different from the prearranged dates set by the Company or
its transfer agent for making such sales.
9. CESSATION OF PARTICIPATION
A Participant may cease participation in the Plan at any time by notifying
the Committee in writing of his intent to cease his participation. If such
notice is received by the Committee the Company shall distribute to the
Participant all of his accumulated payroll deductions, without interest. If any
Participant ceases participation in the Plan, no further Compensation deductions
shall be made on his behalf after the effective date of his cessation, except in
accordance with a new authorization form filed with the Committee as provided in
Section 6.
10. INELIGIBILITY
An Employee must be employed by the Company or an Affiliate on the Purchase
Date in order to participate in the purchase for that Offering Period. If an
option expires without first having been exercised, all funds credited to the
Participant's Account shall be refunded, without interest. If a Participant
becomes ineligible to participate in the Plan at any time, all Compensation
deductions made on behalf of the Participant that have not been used to purchase
shares of Common Stock shall be paid to the Participant within sixty (60) days
after the Committee determines that the Participant is not eligible to
participate in the Plan.
11. DESIGNATION OF BENEFICIARY
A Participant may file a written designation of a beneficiary who shall
receive any shares of Common Stock (or remaining Compensation deductions)
credited to the Participant's Account under the Plan in the event of such
Participant's death prior to delivery to him of the certificates for such shares
(or remaining Compensation deductions). The designation of a beneficiary may be
changed by the Participant at any time by written notice given
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in accordance with rules and procedures established by the Committee. Upon the
death of a Participant, and upon receipt by the Company of proof of the identity
and existence, at the Participant's death, of a beneficiary validly designated
by him under the Plan, the Company shall deliver such shares of Common Stock (or
remaining Compensation deductions) to such beneficiary. In the event of the
death of the Participant, and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Participant's death, the
Company shall deliver such shares (or remaining Compensation deductions) to the
executor or administrator of the estate of the Participant, or if no such
executor or administrator has been appointed, the Company, in its sole
discretion, may deliver such shares (or remaining Compensation deductions) to
the Participant's spouse or to any one or more dependents or relatives of the
Participant, or to such other person or persons as the Company may designate on
behalf of the estate of such deceased Participant.
12. TRANSFERABILITY
Neither Compensation deductions credited to a Participant's Account nor any
rights with regard to Plan participation or the right to purchase shares of
Common Stock under the Plan may be assigned, transferred, pledged, or otherwise
disposed of in any way by a Participant other than by will or the laws of
descent and distribution; provided, however, that shares of Common Stock
purchased on behalf of a Participant and left in his Account shall be subject to
his absolute control. Any attempted assignment, transfer, pledge, or other
disposition shall be void and without effect.
13. AMENDMENT OR TERMINATION
The Board may, without further action on the part of the stockholders of
the Company, at any time amend the Plan in any respect, or terminate the Plan,
except that it may not:
(a) Permit the sale of more shares of Common Stock than are authorized
under Section 5;
(b) Change the class of Affiliates whose Employees are eligible to
participate in the Plan; or
(c) Effect a change inconsistent with Section 423 of the Code or the
regulations issued thereunder.
14. NOTICES
All notices or other communications by a Participant under or in connection
with the Plan shall be deemed to have been duly given when received in writing
by the Chief Financial Officer of the Company or when received in the form
specified by the Committee at the location and by the person designated by the
Committee for the receipt thereof.
15. LIMITATIONS
Notwithstanding any other provisions of the Plan:
(a) The Company intends that this Plan shall constitute an employee stock
purchase plan within the meaning of Section 423 of the Code. Any
provisions required to be included in the Plan under said Section, and
under regulations issued thereunder, are hereby included as though set
forth in the Plan at length.
(b) No Employee shall be entitled to participate in the Plan if,
immediately after the grant of an option hereunder, the Employee would own
stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or an Affiliate. For
purposes of this Section 15, stock ownership shall be determined under the
rules of Section 424(d) of the Code and stock that the Employee may
purchase under outstanding options shall be treated as stock owned by the
Employee.
(c) No Employee shall be permitted to purchase Common Stock hereunder if
his right and option to purchase Common Stock under this Plan and under all
other employee stock purchase plans (as defined in Section 423 of the Code)
of the Company or any Affiliates would result in an entitlement to purchase
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Common Stock in any one (1) calendar year in excess of a fair market value
of $25,000 (determined at the time of grant).
(d) All Employees shall have the same rights and privileges under the Plan,
except that the amount of Common Stock that may be purchased pursuant to
the Plan shall bear a uniform relationship to an Employee's Compensation.
All rules and determinations of the Committee shall be uniformly and
consistently applied to all persons in similar circumstances.
(e) Nothing in the Plan shall confer upon any Employee the right to
continue in the employment of the Company or any Affiliate or affect the
right that the Company or any Affiliate may have to terminate the
employment of such Employee.
(f) No Participant shall have any right as a stockholder unless and until
certificates for shares of Common Stock are issued to him or allocated to
his Account.
(g) If under any provision of the Plan that requires a computation of the
number of shares of Common Stock to be purchased, the number so computed is
not a whole number of shares of Common Stock, such number of shares of
Common Stock shall be rounded down to the next whole number.
(h) The Plan is intended to provide shares of Common Stock for investment
and not for resale. The Company does not, however, intend to restrict or
influence any Participant in the conduct of his own affairs. A Participant,
therefore, may sell shares of Common Stock purchased under the Plan at any
time he chooses, subject to compliance with any applicable federal or state
securities laws or any applicable Company restriction or blackout periods;
provided, however, that because of certain federal tax requirements, each
Participant shall agree, by entering the Plan:
(i) promptly to give the Company notice of any shares of Common Stock
disposed of within two (2) years after the date of grant of the
applicable option, or within one (1) year of the Purchase Date, and the
number of such shares disposed of (a "disqualifying disposition");
(ii) that the Company may withhold, pursuant to Code (S)(S) 3102,
3301, and 3402, from his wages and other cash compensation paid to him
in all payroll periods following in the same calendar year, any
additional taxes the Company may become liable for in respect of
amounts includable in his income as additional compensation as a result
of a disqualifying disposition of Common Stock acquired under the Plan,
or as a result of the acquisition of Common Stock under the Plan; and
(iii) that he shall repay the Company any amount of additional taxes
the Company may become liable for in respect of amounts includable in
his income as additional compensation as a result of a disqualifying
disposition of Common Stock acquired under the Plan, or as a result of
the acquisition of Common Stock under the Plan, that cannot be
satisfied by withholding from the wages and other cash compensation
paid to him by the Company.
(i) This Plan is intended to comply in all respects with applicable law and
regulations, including with respect to Participants who are officers or
directors for purposes of Section 16 of the Securities Exchange Act of
1934, as amended from time to time, Rule 16b-3 of the Securities and
Exchange Commission. In case any one or more provisions of this Plan shall
be held invalid, illegal, or unenforceable in any respect under applicable
law and regulations (including Rule 16b-3), the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby and the invalid, illegal, or unenforceable provision
shall be deemed null and void; however, to the extent permitted by law, any
provision that could be deemed null and void shall first be construed,
interpreted, or revised retroactively to permit this Plan to be construed
in compliance with all applicable law (including Rule 16b-3), so as to
further the intent of this Plan. Notwithstanding anything herein to the
contrary, with respect to Participants who are officers and directors for
purposes of Section 16(b) of the Securities Exchange Act of 1934, as
amended from time to time, and if required to comply with the rules
promulgated thereunder, such Participants shall not be permitted to direct
the sale of any Common Stock purchased hereunder until at least six (6)
months have elapsed from the date of a purchase, unless the Committee
determines that the sale of the Common Stock otherwise satisfies the then
current Rule 16b-3 requirements.
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16. EFFECTIVE DATE AND APPROVALS
The Plan shall become effective at a time when:
(a) the Plan has been adopted by the Board; and
(b) a registration statement on Form S-8 under the Securities Act of 1933,
as amended, has become effective with respect to the Plan; and
(c) the Committee has notified the eligible Employees that they may
commence participation in the Plan; and
(d) the Plan is approved by the holders of a majority of the outstanding
shares of Common Stock of the Company, which approval must occur within the
period ending twelve (12) months after the date the Plan is adopted by the
Board. In the event such stockholder approval is not obtained, the Plan
shall terminate and have no further force or effect, and all amounts
collected from the Participants during any initial Offering Period(s)
hereunder shall be refunded.
Unless sooner terminated by the Board, or as set forth above, the Plan shall
terminate upon the earlier of (i) the tenth (10th) anniversary of the adoption
of the Plan by the Board, or (ii) the date on which all shares available for
issuance under the Plan shall have been sold under the Plan.
17. APPLICABLE LAW
All questions pertaining to the validity, construction, and administration
of the Plan shall be determined in conformity with the laws of Delaware, to the
extent not inconsistent with Section 423 of the Code and the regulations
thereunder.
Adopted by the Board of Directors the 24th day of August, 1999.
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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
November 11, 1999
