-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hn+vRYH192XCP9g3b0wvKFNn3VEK39XHdSwzS0qOUd66YMJmMN+UezeQQFKGNJa9 GMH6cgDu2DzXyNENNxVQXQ== 0000912057-01-527414.txt : 20010813 0000912057-01-527414.hdr.sgml : 20010813 ACCESSION NUMBER: 0000912057-01-527414 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVOLVING SYSTEMS INC CENTRAL INDEX KEY: 0001052054 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 841010843 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24081 FILM NUMBER: 1702990 BUSINESS ADDRESS: STREET 1: 9777 MT PYRAMID COURT CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3038021000 MAIL ADDRESS: STREET 1: 9777 MT PYRAMID COURT CITY: ENGLEWOOD STATE: CO ZIP: 80112 10-Q 1 a2056277z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------ (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 0-24081 EVOLVING SYSTEMS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 84-1010843 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 9777 MT. PYRAMID COURT, ENGLEWOOD, COLORADO 80112 (Address of Principal Executive Offices) (Zip Code) (303) 802-1000 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filed such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of July 31, 2001, there were outstanding 13,182,057 shares of Registrant's Common Stock (par value $0.001 per share). EVOLVING SYSTEMS, INC.
PART 1 FINANCIAL INFORMATION PAGE Item 1. Financial Statements (unaudited) Balance Sheets June 30, 2001 and December 31, 2000 (unaudited) ............... 3 Statements of Operations for the three-month and six-month periods ended June 30, 2001 and June 30, 2000 (unaudited) ............................ 4 Condensed Statements of Cash Flow for the six-month periods ended June 30, 2001 and June 30, 2000 (unaudited) ..................................... 5 Notes to Financial Statements (unaudited) ........................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 7 PART II OTHER INFORMATION ................................................ 11 Item 1. Legal Proceedings ................................................ 11 Item 2. Changes in Securities ............................................ 12 Item 3. Defaults on Senior Securities .................................... 12 Item 4. Submission of Matters to a Vote of Security Holders .............. 12 Item 5. Other Information ................................................ 12 Item 6. Exhibits and Reports on Form 8-K ................................. 12 SIGNATURES ............................................................... 12
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EVOLVING SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (unaudited)
June 30, Dec. 31, 2001 2000 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 12,209 $ 4,382 Short-term investments 596 5,931 Contract receivables, net of allowance for doubtful accounts of $492 and $643 as of June 30, 2001 and December 31, 2000, respectively 9,934 15,202 Unbilled work-in-progress 14,402 14,110 Prepaid and other current assets 1,260 1,622 -------- -------- Total current assets 38,401 41,247 Property and equipment, net 5,105 5,141 Long-term prepaids 367 0 Deferred tax assets 1,485 1,547 -------- -------- Total assets $ 45,358 $ 47,935 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 28 $ 163 Accounts payable and accrued liabilities 4,438 5,054 Unearned revenue and customer deposits 3,190 5,880 -------- -------- Total current liabilities 7,656 11,097 Long-term obligations 131 0 Stockholders' equity: Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued -- -- Common stock, $.001 par value; 25,000,000 shares authorized; 13,181,964 and 12,950,620 shares issued and outstanding as of June 30, 2001 and December 31, 2000, respectively 13 13 Additional paid-in-capital 53,540 53,063 Deferred compensation 0 (37) Accumulated deficit (15,982) (16,201) -------- -------- Total stockholders' equity 37,571 36,838 -------- -------- Total liabilities and stockholders' equity $ 45,358 $ 47,935 ======== ========
The accompanying notes are an integral part of the financial statements. 3 EVOLVING SYSTEMS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- Revenue: 2001 2000 2001 2000 -------- -------- -------- -------- License fees and related services $ 6,069 $ 5,438 $ 11,214 $ 8,717 Other services 5,897 8,663 14,347 17,073 -------- -------- -------- -------- Total revenue 11,966 14,101 25,561 25,790 -------- -------- -------- -------- Cost of revenue: License fees and related services 1,810 2,013 4,412 3,857 Other services 5,624 6,500 11,069 11,825 -------- -------- -------- -------- Total cost of revenue 7,434 8,513 15,481 15,682 -------- -------- -------- -------- Gross margin 4,532 5,588 10,080 10,108 Operating expenses: Sales and marketing 2,143 2,274 4,448 4,319 General and administrative 2,115 2,925 4,565 5,330 Research and development 701 -- 1,062 -- -------- -------- -------- -------- Total operating expenses 4,959 5,199 10,075 9,649 -------- -------- -------- -------- Income (loss) from operations (427) 389 5 459 Other income, net 112 211 276 454 -------- -------- -------- -------- Income (loss) before income taxes (315) 600 281 913 Provision for (benefit from) income taxes (66) -- 62 -- -------- -------- -------- -------- Net income (loss) $ (249) $ 600 $ 219 $ 913 ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE: Basic $ (.02) $ .05 $ .02 $ .07 Diluted $ (.02) $ .05 $ .02 $ .07 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic shares outstanding 12,973 12,626 12,963 12,558 Diluted shares outstanding 12,973 13,268 13,524 13,804
The accompanying notes are an integral part of the financial statements. 4 EVOLVING SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOW (IN THOUSANDS) (unaudited)
Six Months Ended June 30, ----------------------- 2001 2000 -------- -------- OPERATING ACTIVITIES: Net income $ 219 $ 913 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of deferred compensation 37 22 Depreciation, amortization and loss on disposal of property and equipment 1,316 1,772 Provision for deferred income taxes 62 -- Change in operating assets and liabilities: Contract receivables 5,268 363 Unbilled work-in-progress (292) (6,644) Prepaid and other assets (5) (196) Accounts payable and accrued liabilities (616) (186) Unearned revenue and customer deposits (2,690) (3,811) -------- -------- Net cash provided by (used in) operating activities 3,299 (7,767) -------- -------- INVESTING ACTIVITIES: Purchases of property and equipment, net (1,131) (1,540) Sales of short-term investments, net 5,335 5,143 -------- -------- Net cash provided by investing activities 4,204 3,603 -------- -------- FINANCING ACTIVITIES: Repayment of long-term obligations (153) (329) Proceeds from issuance of common stock 477 682 -------- -------- Net cash provided by financing activities 324 353 -------- -------- Net increase (decrease) in cash and cash equivalents 7,827 (3,811) Cash and cash equivalents at beginning of period 4,382 4,266 -------- -------- Cash and cash equivalents at end of period $ 12,209 $ 455 ======== ======== Supplemental disclosure of other cash and non-cash financing transactions: Assets acquired under capital lease $ 190 --
The accompanying notes are an integral part of the financial statements. 5 EVOLVING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION INTERIM FINANCIAL STATEMENTS. The accompanying financial statements of Evolving Systems, Inc. (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited financial statements included in this document have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation in accordance with generally accepted accounting principles. Our results for the period ended June 30, 2001 are not necessarily indicative of the results we will have for any subsequent quarter or full fiscal year. You should read these financial statements in conjunction with the audited financial statements and the notes to those statements for the year ended December 31, 2000 including Evolving Systems Form 10-K/A for the year ended December 31, 2000. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires us 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) EARNINGS (LOSS) PER COMMON SHARE Basic EPS was computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS was computed using the weighted average number of common shares plus all dilutive potential common shares outstanding during the period unless the effect of the potential common shares is anti-dilutive. The following is the reconciliation of the numerators and denominators of the basic and diluted EPS computations (in thousands, except per share data):
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Basic earnings per share: Net income (loss) $ (249) $ 600 $ 219 $ 913 Weighted average common shares outstanding 12,973 12,626 12,963 12,558 Basic net income (loss) per common share $ (.02) $ .05 $ .02 $ .07 Effect of dilutive securities: Options and warrants -- 642 561 1,246 Diluted weighted average common shares outstanding 12,973 13,268 13,524 13,804 Diluted net income (loss) per common share $ (.02) $ .05 $ .02 $ .07
Options to purchase 1,748,000 and 1,825,000 shares of common stock were excluded from dilutive stock option calculations for the three and six month periods ended June 30, 2001 respectively because their exercise prices were greater than the average fair market value of the Company's stock for the period and as such, they would be anti-dilutive. Options to purchase an additional 1,998,000 shares of common stock whose exercise prices were below the average fair market value of the company's stock were excluded from the dilutive stock option calculation for the three month period ended June 30, 2001 due to the net loss. (3) SEGMENT INFORMATION In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we define operating segments as components of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We identified our chief operating decision-makers as three key executives-the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. This chief operating decision-making group reviews the revenue and overall results of operations by the nature of the products and services provided. The accounting policies of the operating segments below are the same as those described in the summary of significant accounting policies included in our Annual Report on Form 10-K/A for the year ended December 31, 2000. We develop products and solutions for the telecommunications industry and provide a broad range of both fixed-price and time-and-materials software solutions. 6 The groupings presented below represent an aggregation of financial information for business segments meeting certain criteria, including economic characteristics, similar customers, and the same products and services. The OSS Products Group encompasses a broad array of software and systems that perform critical functions for telecommunications carriers, including ordering, provisioning, service assurance and billing. The Wireless Data Group provides custom software infrastructure products for Lucent, a leading equipment supplier. The infrastructure products enable Cellular Digital Packet Data (CDPD), Code Division Multiple Access (CDMA), and Over-the-Air-Service Provisioning (OTASP) in wireless network environments. We provide services and products solely within the United States geographic area. Total assets have not been specified by segment, as it is impractical to do so as this information is not available to the decision-making group. The following table provides revenue and gross margin by segment for the three and six month periods ended June 30, 2001 and June 30, 2000, respectively:
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- REVENUE OSS Products Group: LNP $ 7,295 $ 7,243 $13,960 $11,596 NPAC 1,347 2,159 3,121 4,324 OSS Solutions 1,023 1,913 2,566 4,409 Wireless Data Group: Wireless 2,301 2,786 5,914 5,461 Total Revenue $11,966 $14,101 $25,561 $25,790 GROSS MARGIN OSS Products Group: LNP $ 2,227 $ 3,274 $ 4,547 $ 5,102 NPAC 718 1,302 1,633 2,385 OSS Solutions 265 129 602 956 Wireless Data Group: Wireless 1,322 883 3,298 1,665 Total Gross Margin $ 4,532 $ 5,588 $10,080 $10,108
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Evolving Systems provides the telecommunications industry with solutions comprised of software products and systems integration services for a full range of operational support systems, and network element software and wireless data applications. We derive revenue from license fees and services under the terms of both fixed price and time-and-materials contracts. License fees and related services revenue consists of revenue from contracts that generally provide for both licenses and services related to our standard software products. Other services revenue consists of revenue from custom programming, systems integration of third-party products, annual maintenance contracts and training. License fees and related services revenue is generated from fixed price contracts that provide for both licenses and services. Where the services are essential to the functionality of the delivered software, we generally recognize revenue using the percentage-of-completion method of accounting. We determine the percentage of completion for each contract based on the ratio of direct labor hours incurred to total estimated direct labor hours. We record amounts billed in advance of services being performed as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed price contracts. All such amounts are expected to be billed and collected during the succeeding 12 months. In arrangements where the services are not essential to the functionality of the delivered software, we recognize license revenue when a license agreement has been signed, delivery has occurred, the fee is fixed or determinable, collectibility is probable and the customer has accepted the software. Where applicable, fees from multiple element arrangements are unbundled and recorded as revenue as the elements are delivered to the extent that vendor specific objective evidence ("VSOE") of fair value exists. If VSOE does not exist, fees from such arrangements are deferred until the earlier of the date that VSOE does exist or all of the elements are delivered. We generally recognize services revenue provided under fixed price contracts using the percentage-of-completion method of accounting described above. We recognize revenue from other services provided pursuant to time-and-materials contracts as the services are performed. We record annual maintenance revenue as deferred revenue and recognize it ratably over the service period, which is generally 12 months. We recognize revenue from training services as the training services are performed. When 7 maintenance or training services are bundled with the original license fee arrangement, we defer their fair value and recognize it during the periods in which we provide the services. We may encounter budget and schedule overruns on fixed price contracts caused by increased material, labor or overhead costs. We make adjustments to cost estimates in the periods in which the facts requiring such revisions become known to us. We record estimated losses, if any, in the period in which current estimates of total contract revenue and contract costs indicate a loss. RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the Company's statement of operations reflected as a percentage of total revenue.
Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------- Revenue: 2001 2000 2001 2000 ------- ------- ------- ------- License fees and related services 50.7% 38.6% 33.8% 43.9% Other services 49.3 61.4 56.1 66.2 ------- ------- ------- ------- Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: License fees and related services 15.1 14.3 17.3 15.0 Other services 47.0 46.1 43.3 45.9 ------- ------- ------- ------- Total cost of revenue 62.1 60.4 60.6 60.9 Gross margin 37.9 39.6 39.4 39.1 Operating expenses: Sales and marketing 17.9 16.1 17.4 16.7 General and administrative 17.7 20.7 17.9 20.7 Research and development 5.9 0.0 4.1 0.0 ------- ------- ------- ------- Total operating expenses 41.5 36.8 39.4 37.4 Income (loss) from operations (3.6) 2.8 0.0 1.7 Other income, net 0.9 1.5 1.1 1.8 ------- ------- ------- ------- Income (loss) before income taxes (2.7) 4.3 1.1 3.5 Provision for (benefit from) income taxes (.6) 0.0 0.2 0.0 ------- ------- ------- ------- Net income (loss) (2.1)% 4.3% 0.9% 3.5% ======= ======= ======= =======
THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000 REVENUE. Total revenue decreased approximately $2.1 million or 15% to $12.0 million in the three months ended June 30, 2001 from $14.1 million in the three months ended June 30, 2000. License fees and related services revenue increased by $631,000 or 12% to $6.1 million in the three months ended June 30, 2001 from $5.4 million in the three months ended June 30, 2000, reflecting the increased customer interest in new LNP products for wireline and wireless customers. Other services revenue decreased by $2.8 million or 32% to $5.9 million in the three months ended June 30, 2001 from $8.7 million in the three months ended June 30, 2000, reflecting less demand for custom programming services as customers migrate to more standardized solutions. As a percentage of total revenue, license fees and related services revenue increased to 51% for the three months ended June 30, 2001 from 39% for the three months ended June 30, 2000 reflecting increasing focus on sales of license products and customer willingness to accept more standardized products to meet their market timing demands. COST OF REVENUE. Total cost of revenue decreased by $1.1 million or 13% to $7.4 million in the three months ended June 30, 2001 from $8.5 million in the three months ended June 30, 2000. Cost of revenue has decreased compared to the three months ended June 30, 2000 due to management focus on cost control and staff utilization in the three months ended June 30, 2001. As a percentage of total revenue, costs increased to 62% of revenue for the three months ended June 30, 2001 from 60% of revenue in the three months ended June 30, 2000. The percentage increase in costs from the three months ended June 30, 2000 is a result of the previously announced delayed contract resulting in decreased staff utilization. Cost of license fees and related services decreased by $203,000 or 10% to $1.8 million for the three months ended June 30, 2001 from $2.0 million for the three months ended June 30, 2000, due to reduced staffing requirements for these services. As a percentage of total revenue, cost of license fees and related services increased to 15% for the three months ended June 30, 2001 from 14% in the three months ended June 30, 2000. The percentage increase in costs is a reflection of the reduced revenues from the three months ended June 30, 2001. Cost of other services decreased by $876,000 or 13% to 8 $5.6 million for the three months ended June 30, 2001 from $6.5 million for the three months ended June 30, 2000. Cost of other services revenue has decreased from the three months ended June 30, 2000 due to management focus on cost control and efficiency of staff utilization in the three months ended June 30, 2001. Cost of other services as a percent of revenue increased from 46% in the three month period ended June 30, 2000 to 47% in the three month period ended June 30, 2001. The change can be attributed to the lower revenue in the three months ended June 30, 2001 compared to June 30, 2000 resulting in reduced staff utilization. We experienced a 38% gross margin. This is a 2% decrease in total gross margin in the three months ended June 30, 2001 compared to the three months ended June 30, 2000. The change can be attributed to the lower revenue in the three months ended June 30, 2001 compared to June 30, 2000 resulting in reduced staff utilization. When short-term revenue declines, staffing costs will result in lower gross margins. The Company's expense levels are based in significant part on its expectations regarding future revenues. The Company's revenue is difficult to forecast because the market for the Company's products and services is rapidly evolving, and the Company's sales cycle and the size and timing of significant contracts vary substantially among customers. SALES AND MARKETING. Sales and marketing expenses decreased by $131,000 or 6% to $2.1 million in the three months ended June 30, 2001 from $2.3 million in the three months ended June 30, 2000. The decrease in costs from the three months ending June 30, 2000 is due to lower commissions paid out in the three months ended June 30, 2001 due to lower sales. As a percentage of revenue, sales and marketing increased to 18% of revenue in the three months ended June 30, 2001 from 16% in the three months ended June 30, 2000. The increase in sales and marketing costs as a percentage of revenue from the three months ended June 30, 2000 is a result of the lower revenue earned in the three months ended June 30, 2001 as discussed above. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by $810,000 or 28% to $2.1 million in the three months ended June 30, 2001 from $2.9 million in the three months ended June 30, 2000. As a percentage of revenue, general and administrative expenses decreased to 18% in the three months ended June 30, 2001 from 21% in the three months ended June 30, 2000. The decrease in dollars and as a percentage of revenues are a result of management cost controls and efficiencies implemented since the three months ended June 30, 2000, including a 25% reduction in headcount. In addition, due to lower than expected revenues, there was a reduction in bonus expense for the three months ended June 30, 2001 compared to June 30, 2000. RESEARCH AND DEVELOPMENT. Research and development expenses increased to $701,000 in the three months ended June 30, 2001 from $0 in the three months ended June 30, 2000, reflecting our strategic decision to begin investing in new wireless products and additional LNP features. As a percentage of revenue, research and development expenses increased to 6% in the three months ended June 30, 2001 from 0% in the three months ended June 30, 2000. OTHER INCOME, NET. Other income, net, decreased $99,000, or 47%, to $112,000 in the three months ended June 30, 2001 from $211,000 in the three months ended June 30, 2000 due to lower interest income. While interest expense declined as debt was paid down, interest income for the three months ended June 30, 2001 compared to the three months ended June 30, 2000, declined primarily due to decreased investment balances and interest rates. PROVISION FOR (BENEFIT FROM) INCOME TAXES. Evolving Systems has recorded a partial valuation allowance against carryforward tax benefits to the extent we believe that it is more likely than not that all of such benefits will not be realized in the foreseeable future. Our assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular, we considered both historical results and our projections of profitability for only reasonably foreseeable future periods. For the three months ended June 30, 2001, we have recorded a benefit from income taxes of $66,000 based on our estimated effective tax rate of 21% and our assessment that we will realize the deferred tax assets recorded on the balance sheet at June 30, 2001. Our realization of our recorded net deferred tax assets is dependent on future taxable income and therefore, we are not assured that such benefits will be realized. THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000 REVENUE. Total revenue decreased approximately $229,000 or 1% to $25.6 million in the six months ended June 30, 2001 from $25.8 million in the six months ended June 30, 2000. License fees and related services revenue increased by $2.5 million or 29% to $11.2 million in the six months ended June 30, 2001 from $8.7 million in the six months ended June 30, 2000, reflecting growing LNP product sales since the prior period. Other services revenue decreased by $2.7 million or 16% to $14.3 million in the six months ended June 30, 2001 from $17.1 million in the six months ended June 30, 2000, reflecting less demand for custom programming services as customers migrate to more standardized solutions. As a percentage of total revenue, other services revenue decreased to 56% for the six months ended June 30, 2001 from 66% for the six months ended June 30, 2000. COST OF REVENUE. Cost of revenue decreased $201,000 or 1% to $15.5 million in the six months ended June 30, 2001 from $15.7 million in the six months ended June 30, 2000. License fees and related services cost increased by $555,000 or 14% to $4.4 million for the six months ended June 30, 2001 from $3.9 million for the six months ended June 30, 2000. The increase in cost of license fees and related services in the three months ended June 30, 2001 reflects the effort necessary to complete the custom development of new LNP Wireless products. Other services cost decreased $756,000 or 6% to $11.1 million in the six months ended June 30, 2001 from $11.8 million in the six months ended June 30, 2000. The decrease in costs is due to management's focus on cost controls and a reduction in staffing given the declining demand for custom services in the six months ended June 30, 2001. 9 SALES AND MARKETING. Sales and marketing expenses increased by $129,000 or 3% to $4.4 million in the six months ended June 30, 2001 from $4.3 million in the six months ended June 30, 2000. This increase in costs is due to gradually increased sales staff in 2001 and increased costs related to participation in more industry trade shows. As a percentage of revenue, sales and marketing expenses remained at 17% of revenue in the six months ended June 30, 2001 from the six months ended June 30, 2000. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by $765,000 or 14% to $4.6 million in the six months ended June 30, 2001 from $5.3 million in the six months ended June 30, 2000. As a percentage of revenue, general and administrative expenses decreased to 18% in the six months ended June 30, 2001 from 21% in the six months ended June 30, 2000. The decrease in general and administrative costs is due to a decrease in headcount from 65 at June 30, 2000 compared to 50 at June 30, 2001. RESEARCH AND DEVELOPMENT. Research and development expenses increased by $1.1 million, or 100%, to $1.1 million in the six months ended June 30, 2001 from $0 in the six months ended June 30, 2000, reflecting our strategic decision to begin investing in new wireless products and additional LNP features. As a percentage of revenue, research and development expenses increased to 4% in the six months ended June 30, 2001 from 0% in the six months ended June 30, 2000. OTHER INCOME, NET. Other income, net decreased by $178,000 or 39%, to $276,000 in the six months ended June 30, 2001 from 454,000 in the six months ended June 30, 2000. As a percentage of revenue, other income, net decreased to 1% of income in the six months ended June 30, 2001 from 2% of expense in the six months ended June 30, 2000. This change resulted from reduced interest income due to lower interest rates offset by a decline in interest expense as debt continued to decline. PROVISION FOR (BENEFIT FROM) INCOME TAXES. Evolving Systems has recorded a partial valuation allowance against carryforward tax benefits to the extent we believe that it is more likely than not that all of such benefits will not be realized in the foreseeable future. Our assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular, we considered both historical results and our projections of profitability for only reasonably foreseeable future periods. For the six months ended June 30, 2001, we have recorded a provision for income taxes of $62,000 based on our estimated effective tax rate for the year. Our realization of our recorded net deferred tax assets is dependent on future taxable income and therefore, we are not assured that such benefits will be realized. LIQUIDITY AND CAPITAL RESOURCES. The Company has financed its operations through a combination of cash from operations, borrowings and its initial public offering in May 1998. At June 30, 2001, the Company's principal sources of liquidity included $12.2 million in cash and cash equivalents, and $596,000 in short-term investments. Net cash provided by operating activities was $3.3 million in the six months ended June 30, 2001 compared to $7.8 million used in operations in the six months ended June 30, 2000. The primary source of cash from operations in the six months ended June 30, 2001 was increased collection activity on major accounts, reflected in decreased contract receivable of $5.3 million, partially offset by a $2.7 million decrease in unearned revenue and customer deposits. Net cash provided by investing activities during the six months ended June 30, 2001 was $4.2 million compared to $3.6 million in the six months ended June 30, 2000. Purchases of property and equipment to support operations accounted for $1.1 million in the six months ended June 30, 2001 compared to $1.5 million for the six months ended June 30, 2000. The sale of $5.3 million in short-term investments provided cash during the six months ended June 30, 2001 compared to $5.1 million in sales during the six months ended June 30, 2000. Net cash provided by financing activities was $324,000 resulting from the sale of common stock upon the exercise of $477,000 in stock options offset by $153,000 in repayments of capital lease obligations for the six months ended June 30, 2001. This compares to $353,000 provided by financing activities in the six months ended June 30, 2000 resulting from the sale of common stock upon the exercise of $682,000 in stock options offset by $329,000 in repayments for capital lease obligations for the six months ended June 30, 2001. The Company believes that its current cash and short-term investments, together with anticipated cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. Thereafter, the Company may require additional funds to support such activity through public or private equity financing or from other sources. There can be no assurance that additional financing will be available at all or that if available, such financing will be obtainable on terms favorable to the Company and would not be dilutive. RECENT ACCOUNTING PRONOUNCEMENTS. In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 establishes methods of accounting for business combinations using the purchase method of accounting with goodwill initially recognized as an asset in the financial statements. The provisions of SFAS No. 141 will apply to all business combinations initiated after June 30, 2001. To date, we have not entered into any business combination activities. 10 In June 2001, the FASB issued SFAS No. 142, " Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the requirement to amortize goodwill and provides for testing the value of the Goodwill for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 with initial impairment tests performed on all goodwill within six months of adoption. We anticipate that SFAS No. 142 will have no impact on our financial condition or results of operations due to our lack of business combination activity. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. We adopted SFAS No. 133, as amended, in the first quarter 2001. To date, we have not entered into any derivative financial instruments or hedging activities. FACTORS THAT MIGHT AFFECT OPERATING RESULTS. Our operating results have fluctuated significantly in the past and are likely to continue to fluctuate significantly in the future. Fluctuations in operating results may continue to result in volatility in the price of our Common Stock. We cannot provide assurance that we will be profitable in the future or that our level of profitability will not vary significantly between quarters. These quarterly fluctuations may result from a number of factors, including the magnitude, timing and signing of new contracts; our rate of progress under such contracts; the timing of customer and market acceptance of our product and service offerings; actual or anticipated changes in government laws and regulations related to the telecommunications market or judicial or administrative actions with respect to such laws or regulations; the nature and pace of enforcement of the Telecommunications Act of 1996; the impact of changes to revenue recognition rules; changes in management; sale of our software in an application service provider (ASP) model; product lifecycles; our success in building a product-based business and developing and marketing new products; the mix of products and services sold; changes in demand for our products and services; the timing of third-party contractors' delivery of software and hardware; budgeting cycles of our customers; changes in the renewal rate of support agreements; the timing and amount of our expenditures for research and development sales, general and administrative expenses; competition by existing and emerging competitors in the telecommunications software markets; controlling costs, attracting and retaining qualified personnel and expanding our sales and marketing programs; regional office expansion; software defects and other product quality problems; changes in our strategy; the extent of industry consolidation; expansion into international markets, and general economic conditions. A significant portion of our revenue has been and is expected to continue to be derived from a small number of customers. Accordingly, the loss of any significant customer, delays in delivery or acceptance of any of our products or delays in the performance of services could have a material adverse effect on our business, financial condition and results of operations. Historically, we have generally recognized both license fees and service fee revenue under our customer contracts using the percentage-of-completion method. We have broadened our strategy to include the development and sale of standard, packaged software products and we also offer our software under ASP arrangements. To the extent that we are successful in our strategy, we expect that we may record future revenue from license fees upon the acceptance of a software product by customers, or as monthly payments are invoiced under an ASP arrangement. Software companies that account for revenue from license fees upon acceptance of software products may be exposed to increased risk of quarterly fluctuations. Likewise, software companies that adopt an ASP licensing model, in lieu of recording revenue upon acceptance, may have temporary revenue reductions until the ASP licensing model is fully realized. To the extent that this pattern develops, any failure or delay in the delivery and acceptance of orders during any given quarter, or any signing of an ASP licensing arrangement in lieu of receiving payment of the packaged software up front, could have a material adverse effect on our business, financial condition and results of operations. The timing of revenue recognition from our contracts has caused, and may continue to cause, material fluctuations in our operating results, particularly on a quarterly basis. Our expense levels are based in significant part on our expectations regarding future revenue. Our revenue is difficult to forecast because the market for our products and services is rapidly evolving, and our sales cycle and the size and timing of significant contracts vary substantially among customers. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenue. Any significant shortfall from anticipated levels of demand for our products and services could have a material adverse effect on our business, financial condition and results of operations. Based on all of the foregoing, we believe that future revenue, expenses and operating results are likely to vary significantly from quarter to quarter. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. Furthermore, we believe that it is likely that in some future quarter our operating results will be below the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail, or are perceived to prevail, with respect to our business or generally, the market price of our Common Stock would likely go down. These results should be read in conjunction with the risk factors defined in the Company's Amended Form 10-K/A for the year ended December 31, 2000. Statements contained in this Form 10-Q with respect to future revenue and expenses are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ. Among the factors that could cause actual results to differ are those described above and in more detail in our Amended Form 10-K/A. PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 From time to time we are involved in various legal proceedings arising in the normal course of business operations. We do not expect that any such proceedings will have a material adverse effect on our financial position, results of operations or cash flows. Item 2. Changes in Securities None Item 3. Defaults on Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On March 23, 2001, the Company solicited the written consent of its security holders with respect to (a) Election of Directors; (b) Amendment of the Company's Stock Option Plan; (c) Amendment to the Company's Employee Stock Purchase Plan; and (d) Ratification of PricewaterhouseCoopers LLP as the independent auditors of the Company. These matters were voted on and approved by the shareholders on April 25, 2001. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: 8/09/2000 /s/ David R. Johnson ------------------------------- David R. Johnson Senior Vice President of Finance, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) 12 -----END PRIVACY-ENHANCED MESSAGE-----