| METASOLV INC ITEM 1A RISK FACTORS We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties |
| The following section describes the risks and uncertainties that we believe may adversely affect our business, financial conditions or results of operations |
| There are additional risks and uncertainties that we do not presently know, or that we currently view as immaterial, that may also impair our business operations |
| This report is qualified in its entirety by these risks |
| You should carefully consider the risks described below before making an investment decision |
| If any of the following risks actually occur, they could materially harm our business, financial condition, or results of operations |
| In that case, the trading price of our common stock could decline |
| OUR QUARTERLY OPERATING RESULTS CAN VARY SIGNIFICANTLY AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE Our quarterly operating results can vary 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 certain quarters our operating results will be below the expectations of public market analysts or investors |
| In such an event, the market price of our common stock may decline significantly |
| A number of factors are likely to cause our quarterly results to vary, including: • The overall level of demand for communications services by consumers and businesses and its effect on demand for our products and services by our customers; • Our customers’ willingness to buy, rather than build, order management, inventory management, service activation, and network mediation 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 timing of software maintenance agreement renewals and related payments, which could impact our ability to recognize a portion of maintenance support revenues in a given quarter; • The introduction of new communications services and our ability to react quickly compared to our competitors; • Our ability to manage costs of operating the business; • 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; -14- ______________________________________________________________________ [35]Table of Contents • Our ability to collect outstanding accounts receivable; • Innovation and introduction of new technologies, products and services in the communications and information technology industries; • A requirement that we defer recognition of revenue for a significant period of time after entering into a contract due to undelivered products, extended payment terms, or product acceptance; • The occasional sale of large pass-through licenses or sublicenses for software provided by third parties, where MetaSolv may incur a substantial license fee that decreases margins on license revenues for the period; and • Changes in services and license revenues as a percentage of total revenues, as license revenues typically have higher gross margin than services revenues |
| 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 cannot 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, significant portions of our operating expenses are fixed in the short term |
| Therefore, failure to generate revenues according to our expectations in a particular quarter could have an immediate negative effect on results for that quarter |
| Our quarterly revenues are dependent, in part, 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 |
| Accordingly, delays in the completion of sales near the end of a quarter could cause quarterly revenues to fall substantially short of anticipated levels |
| Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters |
| Some contracts for software licenses may not qualify for revenue recognition upon product delivery |
| Revenue may be deferred when there are significant elements required under the contract that have not been completed, there are express conditions relating to product acceptance, there are deferred payment terms, or when collection is not considered probable |
| A higher concentration of orders from large telecom service providers, and larger more complex agreements, may increase the frequency and amount of these deferrals |
| With these uncertainties we may not be able to predict accurately when revenue from these contracts will be recognized |
| THE COMMUNICATIONS MARKET IS CHANGING RAPIDLY, AND FAILURE TO ANTICIPATE AND REACT TO THE RAPID CHANGE COULD RESULT IN LOSS OF CUSTOMERS OR UNPRODUCTIVE EXPENDITURES Over the last decade, the market for communications products and services has been characterized by rapid technological developments, evolving industry standards, dramatic changes in the regulatory environment, emerging companies, bankruptcy filings by many new entrants, changes in spending patterns, and frequent new product and services 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 capable of adapting to changing technologies, industry standards, regulatory changes, and customer spending patterns and preferences |
| If we are unable to successfully respond to these changes 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, service industry standards, or spending patterns 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 our encountering new competitors in the marketplace |
| -15- ______________________________________________________________________ [36]Table of Contents Furthermore, if the overall market for our 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 our operating results and financial condition could be materially adversely affected |
| THE COMMUNICATIONS INDUSTRY IS EXPERIENCING CONSOLIDATION, WHICH MAY REDUCE THE NUMBER OF POTENTIAL CUSTOMERS FOR OUR SOFTWARE The communications industry has experienced significant consolidation |
| In the future, there may be fewer potential customers requiring operations support systems and related services, increasing the level of competition in the industry |
| In addition, larger communications companies generally have stronger purchasing power, which could create pressure on the prices we charge and the margins we realize |
| These companies are also striving to streamline their operational systems by combining different communications systems and the related 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 |
| OUR CUSTOMERS’ FINANCIAL WEAKNESS OR THEIR INABILITY TO OBTAIN FINANCING MAY LEAD TO LOWER SALES AND DECREASED PROFITABILITY Some of our customers are small to medium sized competitive communications service providers with limited operating histories |
| Some of these customers are not profitable and are dependent on private sources of capital to fund their operations, and many competitive communications service providers are currently unable to obtain sufficient funds to continue expansion of their businesses |
| At the same time, many communications companies are encountering significant difficulties in achieving their business plans and financial projections |
| During the last three years, several of our customers ceased their business operations, and some have initiated bankruptcy proceedings |
| The downturn in the communications industry and the inability of many communications companies to raise capital have resulted in a decrease in the number of potential customers that are capable of purchasing our software, a delay by some of our existing customers in purchasing additional products, decreases in our customers’ operating budgets relating to our software maintenance services, delays in payments by existing customers, or failure to pay for our products |
| If our customers are unable to obtain adequate financing, sales of our software could suffer |
| If we fail to increase revenue related to our software, our operating results and financial condition would be adversely affected |
| In addition, adverse market conditions and limitations on the ability of our current customers to obtain adequate financing could adversely affect our ability to collect outstanding accounts receivable resulting in increased bad debt losses and a decrease in our overall profitability |
| Decreases in our customers’ operating budgets relating to software maintenance services could adversely affect our maintenance revenues and profitability |
| Any of our current customers who cease to be viable business operations would no longer be a source of maintenance revenue, or revenue from sales of additional software or services products, and this could adversely affect our financial results |
| WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES A significant portion of revenues each quarter is derived from a relatively small number of large sales |
| As consolidation in the communications industry continues, our reliance on a limited number of customers for a significant portion of our revenues may increase |
| 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 |
| In 2005, our ten largest customers represented approximately half of our total revenue, with our two largest customers, British Telecommunications and Sprint, representing 14prca and 11prca of total revenue, respectively |
| To the extent that any major customer terminates its relationship with us, or that we are unable to consummate one or more substantial sales, our revenues could be adversely affected |
| -16- ______________________________________________________________________ [37]Table of Contents COMPETITION FROM LARGER, BETTER CAPITALIZED OR EMERGING COMPETITORS FOR THE COMMUNICATIONS PRODUCTS AND SERVICES THAT WE OFFER COULD RESULT IN PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE Competition in our markets is intense and involves rapidly changing technologies and customer requirements, as well as evolving industry standards and frequent product introductions |
| Competitors vary in size and scope of products and services offered |
| We encounter direct competition from several product and services vendors |
| Additionally, we compete with OSS solutions sold by large equipment vendors |
| We also compete with systems integrators and with the information technology departments of large communications service providers |
| Finally, we are aware of communications service providers, software developers, and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services intended to compete with ours |
| We anticipate continued long-term growth in the communications industry and the entrance of new competitors in the order processing, inventory management and fulfillment software markets, and we expect that the market for our products and services will remain intensely competitive |
| IF THE INTERNET OR BROADBAND COMMUNICATION SERVICES GROWTH SLOWS, DEMAND FOR OUR PRODUCTS MAY FALL Our success depends heavily on the continued acceptance of the Internet as a medium of commerce and communication, and the growth of broadband communication services |
| The growth of the Internet has driven changes in the public communication network and has given rise to the growth of the next-generation service providers who are our customers |
| If use of the Internet or broadband communication services does not continue to grow or grows more slowly than expected, the market for software that manages communication 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, insufficient commercial support and security or privacy concerns |
| The Internet infrastructure may not be able to support the demands placed on it by increased usage and bandwidth requirements |
| In addition, delays in the development or adoption of new standards and protocols or increased government regulation, could cause the Internet to lose its viability as a commercial medium |
| Even if the required infrastructure, standards, protocols or complementary products, services or facilities are developed, we may incur substantial expense adapting our solutions to changing or emerging technologies |
| CHANGES IN COMMUNICATIONS REGULATIONS COULD ADVERSELY AFFECT OUR CUSTOMERS AND MAY LEAD TO LOWER SALES Our customers are subject to extensive regulation as communications service providers |
| Changes in legislation or regulations that adversely affect our existing and potential customers could lead them to spend less on our software, which would reduce our revenues and could seriously affect our business and financial condition |
| IF WE FAIL TO ACCURATELY ESTIMATE THE RESOURCES NECESSARY TO COMPLETE ANY FIXED-PRICE CONTRACT, IF WE FAIL TO MEET OUR PERFORMANCE OBLIGATIONS, OR IF WE FAIL TO ANTICIPATE COSTS ASSOCIATED WITH PARTICULAR SALES OR SUPPORT CONTRACTS, WE MAY BE REQUIRED TO ABSORB COST OVERRUNS AND WE MAY SUFFER LOSSES ON PROJECTS In addition to time and materials contracts, we enter into fixed-price contracts for software implementation |
| These fixed-price contracts involve risks because they require us to absorb possible cost overruns |
| Our failure to accurately estimate the resources required for a project or our failure to complete our contractual obligations in a manner consistent with the project plan would likely cause us to have lower margins or to suffer a loss on such a project, which would negatively impact our operating results |
| Also, in some instances our sales and support contracts may require us to provide software functionality that we have procured from third party vendors |
| The cost of this third party functionality may impact our margins, and we could fail to accurately anticipate or manage these costs |
| On occasion we have been asked or required to commit unanticipated additional resources or funds to complete projects or fulfill sales and support contracts |
| -17- ______________________________________________________________________ [38]Table of Contents IN ORDER TO 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 |
| 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 |
| As the communications service provider market consolidates, there may be an increased tendency on the part of the remaining service providers to purchase through large systems integrators and third-party resellers |
| We are working to expand our relationships with systems integrators and other partners to expand our indirect sales channels |
| Failure to expand these sales channels could adversely affect our revenues and operating results |
| In addition, we will need to manage potential conflicts between our direct sales force and third party reselling efforts |
| WE DEPEND ON SUBCONTRACTED OFFSHORE PRODUCT DEVELOPMENT AND CONSULTING RESOURCES, WHICH INTRODUCES RISKS RELATED TO OUR COST STRUCTURE, INTELLECTUAL PROPERTY, AND RESOURCE AVAILABILITY We have increased our development investment in new technologies and lowered development expense in certain products by contracting with offshore development resources, and are also working to expand our availability of consulting and training resources through alliances with these subcontractors |
| We believe that our success will depend in part on our ability to continue, expand and manage the use of offshore subcontracting resources in these and other respects |
| There are certain risks entailed in these practices, including but not limited to: those described under the topic of international operations below; the continued availability of these resources is not assured; the potential for migration of some expertise to a contractor outside of our organization; and our policies relating to development and protection of intellectual property rights may be harder or not possible to institute, manage or enforce in a subcontractor organization |
| OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED EMPLOYEES IS CRUCIAL TO OUR RESULTS OF OPERATIONS AND FUTURE GROWTH As a company focused on the development, sale and delivery of software products and related services, our personnel are our most valued assets |
| Our future success depends in large part on our ability to hire, train and retain software developers, systems architects, project managers, communications business process experts, systems analysts, trainers, writers, consultants, and sales and marketing professionals of various experience levels |
| Competition for skilled personnel is intense |
| Any inability to hire, train and retain a sufficient number of qualified employees could hinder the growth of our business |
| We also 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 |
| 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 and 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 products |
| 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 |
| -18- ______________________________________________________________________ [39]Table of Contents THE EXPANSION OF OUR PRODUCTS WITH NEW FUNCTIONALITY AND TO NEW CUSTOMER MARKETS MAY BE DIFFICULT AND COSTLY We plan to invest significant resources and management attention to expanding our products by adding new functionality and to expanding our customer base by targeting customers in markets that we have not previously served |
| We cannot be sure that expanding the footprint of our products or selling our products into new markets will generate acceptable financial results due to uncertainties inherent in entering new markets and in our ability to execute our plans |
| Costs associated with our product and market expansions may be more costly than we anticipate, and demand for our new products and in new customer markets may be lower than we expect |
| FOR SOME OF OUR PRODUCTS WE RELY ON SOFTWARE AND OTHER INTELLECTUAL PROPERTY THAT WE HAVE LICENSED FROM THIRD PARTY DEVELOPERS TO PERFORM KEY FUNCTIONS Some of our products contain software and other intellectual property that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions |
| We could lose the right to use this software and intellectual property or it could be made available to us only on commercially unreasonable terms |
| We could fail to accurately recognize or anticipate the impact of the costs of procuring this third party intellectual property |
| Although we believe that alternative software and intellectual property is available from other third party suppliers, the loss of or inability to maintain any of these licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could result in delays or reductions in product shipments by us until equivalent software could be developed internally or identified, licensed and integrated, which would harm our business |
| OUR INTERNATIONAL OPERATIONS MAY BE DIFFICULT AND COSTLY We intend to continue to devote significant management and financial resources to our international operations |
| In particular, we will have to continue to attract experienced management, technical, sales, marketing and support personnel for our international offices |
| Competition for skilled people in these areas 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 cultural differences, language barriers, and currency exchange risks |
| 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 and problems in collecting accounts receivable; • The impact of recessions in economies outside the United States; • Unexpected changes in regulatory requirements; • Variable and changing communications industry regulations; • Trade barriers and barriers to foreign investment, in some cases specifically applicable to the communications industry; • Barriers to the repatriation of capital or profits; • Political instability or changes in government policy; • 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; -19- ______________________________________________________________________ [40]Table of Contents • Requirements for a locally domiciled business entity; • Regional variations in adoption and growth of new technologies served by our products; and • Communications infrastructure that may be different from the communications infrastructure in the United States |
| OUR BUSINESS IS EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES We have business operations in numerous countries, sell our products in US and non-US denominated currencies, and have asset and liability balances in foreign currencies |
| The United States dollar value of these foreign transactions and balances fluctuates with changes in currency exchange rates or foreign interest rates |
| Fluctuations in the value of these currencies relative to the United States dollar may adversely impact our results in the future |
| A significant portion of our operations are in Canada and the United Kingdom, and we pay expenses of our international operations in local currencies, so we are particularly exposed to currency rate exchange impacts related to Canadian dollars, British pounds and Euros |
| We expect that our international revenues will continue to account for a significant portion of our total revenues in the future |
| We do not currently engage in hedging transactions with respect to our exposure to fluctuations in currency exchange rates |
| WE HAVE ACQUIRED OTHER BUSINESSES AND WE MAY MAKE ADDITIONAL ACQUISITIONS OR ENGAGE IN JOINT BUSINESS VENTURES THAT COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS We have acquired other businesses and may make additional acquisitions, or engage in joint business ventures in the future that may be difficult to integrate, disrupt our business, dilute stockholder value, complicate our management tasks and affect our operating results |
| Acquisitions and investments in businesses involve significant risks, and our failure to successfully manage acquisitions or joint business ventures could seriously harm our business |
| Our past acquisitions and potential future acquisitions or joint business ventures create numerous risks and uncertainties including: • Risk that the industry may develop in a different direction than anticipated and that the technologies we acquire will not prove to be those needed to be successful in the industry; • Potential difficulties in completing in process research and development projects; • Difficulty integrating new or acquired products and operations in an efficient and effective manner; • Risk that we have inaccurately evaluated or forecasted the benefits, opportunities, liabilities, or costs of the acquired businesses; • Risk of our customers or customers of the acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition on our future product strategy; • Risk that we may not properly determine or account for risks and benefits under acquired customer contracts; • Potential loss of key employees of the acquired businesses; • Risk of diverting the attention of senior management from the operation of our business; • Risk of entering new markets in which we have limited experience; • Risk of increased costs related to expansion and compensation of indirect sales channels; • Difficulty in integrating our internal controls and procedures with acquired businesses and joint ventures; • Risk of increased costs related to royalties for third party products that may be included with our own software products and services; and • Future revenues and profits from acquisitions and investments may fail to achieve expectations |
| -20- ______________________________________________________________________ [41]Table of Contents Our inability to successfully integrate acquisitions or to otherwise manage business growth effectively could have a material adverse effect on our results of operations and financial condition |
| Also, our existing stockholders may be diluted if we finance the acquisitions by issuing equity securities |
| FUTURE SALES OF OUR COMMON STOCK WOULD BE DILUTIVE TO OUR STOCKHOLDERS AND COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK We cannot predict the effect, if any, future sales of our common stock by us, or the availability of shares of our common stock for future sale, will have on the market price of our common stock prevailing from time to time |
| Sales of substantial amounts of our common stock (including shares issued upon the exercise of warrants or stock options), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock |
| 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 network resources, 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 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 customer support, engineering and other resources to a customer at a reduced charge or at no charge; • Claims for substantial damages against us, regardless of our responsibility for any failure; • Increased insurance costs; and • Diversion of development and management time and resources |
| Our licenses with customers generally contain provisions designed to limit our exposure to potential claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages |
| In addition, our license agreements usually cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or services giving rise to the damages |
| However, we cannot be sure that these contractual provisions will protect us from additional liability |
| Furthermore, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims or the insurer may disclaim coverage as to any future claim |
| The successful assertion of any large claim against us could adversely affect our operating results and financial condition |
| OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE, AND WE MAY BE FOUND TO INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS Our success depends in part on our proprietary software technology |
| We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our technology |
| We cannot guarantee that the steps we have taken to assess and 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 -21- ______________________________________________________________________ [42]Table of Contents appropriate steps to enforce our intellectual property rights |
| Software and process patent rights are subject to higher uncertainty as a relatively undeveloped area of legal precedent |
| 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 |
| Patent rights are currently being acquired by some businesses expressly for the purpose of making infringement claims against technology companies |
| These risks may be increased by the addition of intellectual property assets through business or product acquisitions |
| Claims against us, either successful or unsuccessful, could result in significant legal and other costs and may be a distraction to management |
| We currently focus on intellectual property protection within the United States |
| These risks may also be increased by our use or others’ use with our products of software made available under open source software licenses, the terms of which may be subject to varying or commercially unfavorable interpretations, and the enforcement and application of which have not been extensively tested or settled in applicable judicial systems |
| 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 |
| As our business expands into foreign countries, costs and risks associated with protecting our intellectual property abroad will increase |
| We also may choose to forgo the costs and related benefits of certain intellectual property benefits in some of these jurisdictions |
| OUR STOCK PRICE HAS BEEN AND MAY REMAIN VOLATILE, WHICH EXPOSES US TO THE RISK OF SECURITIES LITIGATION The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following: • Revenues or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community; • Announcements of technological innovations by us or our competitors; • Acquisitions of new products or significant customers or other significant transactions by us or our competitors; • Developments with respect to our patents, copyrights or other proprietary rights or those of our competitors; • Changes in recommendations or financial estimates by securities analysts; • Rumors or dissemination of false and/or unofficial information; • Changes in management; • Stock transactions by our management or businesses with whom we have a relationship; • Conditions and trends in the software and communications industries; • Capital raising transactions in which we issue our equity securities; • Adoption of new accounting standards affecting the software industry; and • General market conditions, including geopolitical events |
| Fluctuations in the price of our common stock may expose us to the risk of securities lawsuits |
| Defending against such lawsuits could result in substantial costs and divert management’s attention and resources |
| In addition, any settlement or adverse determination of these lawsuits could subject us to significant liabilities |
| -22- ______________________________________________________________________ [43]Table of Contents IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO DETECT FRAUD OR REPORT OUR FINANCIAL RESULTS ACCURATELY, WHICH COULD HARM OUR BUSINESS Effective internal controls support our provision of reliable financial reports, as well as prevention and detection of fraud |
| We review and evaluate our internal controls systems periodically, to determine their effectiveness and identify potential areas of improvement |
| These evaluations and reports may indicate that enhancements or changes to these systems of internal controls are advisable |
| Furthermore, we may from time to time acquire businesses which have limited infrastructure and systems of internal controls |
| Assessing internal controls, making needed changes, and keeping internal controls processes effective is costly and consumes significant management time, especially with newly acquired entities |
| Even the best internal control systems are based in part on assessments of probability, and can give reasonable but not complete assurance that the system is working successfully |
| Given the inherent limitations of control systems, there can be no assurance that any design will achieve its stated goals under all potential future conditions |
| If we do not implement and maintain an effective system of internal controls or prevent fraud, we may incur losses or be subject to costly litigation |
| In those cases investors could lose confidence in our financial reporting |
| Our reputation and our operating results could be harmed, which could lower the trading price of our common stock |
| WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES PURSUANT TO OUR PRIVATE PLACEMENT PURCHASE AGREEMENTS On October 26, 2005, we entered into purchase agreements in connection with the private placement of common stock and warrants with each of Bonanza Master Fund Ltd, Brookside Capital Partners Fund, LP, Shea Ventures, LLC, Special Situations Fund III, LP, Special Situations Cayman Fund, LP, SRB Greenway Capital, LP, SRB Greenway Capital (QP), LP, SRB Greenway Offshore Operating Fund, LP, WS Opportunity Fund, LP, WS Opportunity Fund (QP), LP, WS Opportunity Fund International, Ltd, Walker Smith Capital, LP, Walker Smith Capital (QP), LP and Walker Smith International Fund, Ltd |
| The purchase agreements provide for payment of liquidated damages in the event of a failure to cause a registration statement to be declared effective within specified timeframes or to remain effective for a specified period, covering the shares of common stock acquired by the purchasers and the shares of common stock issuable upon exercise of the warrants |
| On February 8, 2006, we entered into amendments to the purchase agreements with each purchaser to provide a maximum cap on the liquidated damages |
| Each amendment provides that the liquidated damages shall in no event exceed an amount equal to ten percent of the aggregate purchase price for the purchaser’s common stock and warrants |
| Our failure to cause a registration statement to be declared effective within specified timeframes or to remain effective for a specified period, covering the shares of common stock acquired by the purchasers and the shares of common stock issuable upon exercise of the warrants, could trigger the payment of liquidated damages and as a result adversely effect our financial position |
| PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND OUR STOCKHOLDER RIGHTS PLAN COULD DISCOURAGE A TAKEOVER YOU MAY CONSIDER FAVORABLE OR THE REMOVAL OF OUR CURRENT MANAGEMENT Some provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that you may consider favorable or the removal of our current management |
| These provisions: • Authorize the issuance of “blank check” preferred stock; • Provide for a classified board of directors with staggered, three-year terms; • Prohibit cumulative voting in the election of directors; • Prohibit our stockholders from acting by written consent without the approval of our board of directors; • Limit the persons who may call special meetings of stockholders; and • Establish advance notice requirements for nominations for election to the board of directors or for proposing matters to be approved by stockholders at stockholder meetings |
| -23- ______________________________________________________________________ [44]Table of Contents Delaware law may also discourage, delay or prevent someone from acquiring or merging with us |
| In addition, purchase rights distributed under our stockholder rights plan will cause substantial dilution to any person or group attempting to acquire us without conditioning the offer on our redemption of the rights |
| As a result, our stock price may decrease and you might not receive a change of control premium over the then-current market price of the common stock |