<PAGE>
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
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: 333-94755
ETINUUM, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1334615
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
5619 DTC Parkway, 12th Floor
Englewood, Colorado 80111-3017
(303) 357-3000
(Address and telephone number of principal executive offices)
Indicate by check mark 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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [ ] No [X]
On May 9, 2000, 17,975,651 shares of the registrant's Common Stock were
outstanding
________________________________________________________________________________
________________________________________________________________________________
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999
and March 31, 2000..................................................... 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and March 31, 2000......................... 2
Consolidated Statements of Stockholders' Equity
(Deficit) for the Three Months Ended March 31, 2000.................... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and March 31, 2000................... 4
Notes to Consolidated Financial Statements............................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 2. Changes in Securities and Use of Proceeds....................... 18
Item 3. Defaults Upon Senior Securities................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 5. Other Information............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
Unless otherwise indicated, all references to "Etinuum," "we," "us" and
"our" refer to Etinuum, Inc., a Delaware corporation, and our predecessor
Colorado corporation. When used in the Report, the words "intend," "expects,"
"plans," "estimates," "anticipates," "projects," "believes," and similar
expressions are intended to identify forward-looking statements. Specifically,
statements included in this Report that are not historical facts, including
statements about our beliefs and expectations about our business and our
industry are forward looking statements. These statements are subject to risks
and uncertainties that could cause actual results to differ materially. Forward
looking statements included in this Report speak only as of the date of this
Report and we will not revised or update these statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
All brand names and trademarks appearing in this prospectus are the property
of their holders.Item 1. Financial Statements
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1999 2000
------- -------
CURRENT ASSETS: (unaudited)
<S> <C> <C>
Cash and cash equivalents.................................................... $ 6,204 $47,547
Restricted cash.............................................................. 407 400
Receivables, net of allowances of $464 and $261 respectively--
Trade....................................................................... 5,218 6,770
Unbilled.................................................................... 1,108 424
Other....................................................................... -- 1,454
Related party notes receivable............................................... 690 715
Prepaid expenses............................................................. 713 1,887
Other current assets......................................................... 193 1,923
------- -------
Total current assets....................................................... 14,533 61,120
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $5,223 and 7,982 9,095
$5,610, respectively.........................................................
GOODWILL AND OTHER INTANGIBLES, net of amortization of $5,062 and 2,808 2,398
$2,472, respectively.........................................................
OTHER ASSETS.................................................................. 1,055 153
------- -------
Total assets $26,378 $72,766
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable....................................................... $ 1,668 $ 4,126
Accrued compensation....................................................... 1,347 1,195
Other accrued liabilities.................................................... 2,034 698
Customer deposits............................................................ 237 237
Deferred revenue............................................................. -- 25
Current portion of notes payable and capital leases.......................... 1,316 1,195
Related party notes payable.................................................. 398 398
-------- --------
Total current liabilities.................................................. 7,000 7,874
Deferred rent................................................................ 245 227
Long-term notes payable and capital lease, net of current portion............ 1,722 1,589
-------- --------
Total liabilities.......................................................... 8,967 9,690
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)........................................
CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION, $.001 par value,
79,000,000 shares authorized (Note 6)........................................ 59,408 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value, 100,000,000 shares authorized, 1,881,444
and 17,975,276 shares issued and outstanding.............................. 1 2
Additional paid-in capital................................................... -- 113,847
Warrants for common stock.................................................. -- 1,254
Unearned compensation........................................................ (1,266) (4,677)
Accumulated deficit.......................................................... (40,732) (47,350)
-------- --------
Total stockholders' equity (deficit)....................................... (41,997) 63,076
-------- --------
Total liabilities and stockholders' equity (deficit)....................... $ 26,378 $ 72,766
======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated balance sheets.
1
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 2000
---------- ----------
(unaudited)
<S> <C> <C>
REVENUE....................................................................... $ 5,432 $ 8,468
DIRECT COST OF SERVICES....................................................... ( 3,638) (5,346)
---------- ----------
1,794 3,122
GROSS PROFIT................................................................. ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative......................................... 2,911 6,409
Depreciation and amortization............................................... 765 1,030
Research and development.................................................... 328 --
---------- ----------
Total operating expenses................................................. 4,004 7,439
---------- ----------
(2,210) (4,317)
LOSS FROM OPERATIONS.......................................................... ---------- ----------
OTHER (EXPENSES) INCOME:
Interest income............................................................. 14 64
Interest expense............................................................ (5) (81)
---------- ----------
NET LOSS...................................................................... $ (2,201) $ (4,334)
========== ==========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss.................................................................... $ (2,201) $ (4,334)
Accretion of mandatorily redeemable convertible preferred stock............. (125) (882)
Cumulative dividends to preferred stockholders.............................. -- (1,402)
Guaranteed minimum return on series F preferred stock....................... -- (13,366)
---------- ----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.................................... $ (2,326) $ (19,984)
========== ==========
BASIC AND DILUTED NET LOSS PER SHARE.......................................... $ (1.25) $ (6.06)
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--
BASIC AND DILUTED........................................................... 1,868,088 3,296,286
---------- ----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements
2
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Warrants in
Common Stock Paid-In Common Unearned
------------------
Shares Amount Capital Stock Compensation
---------- ------ ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1999.............................. 1,881,444 $1 $ $ -- $(1,266)
Accretion of preferred stock to liquidation and
redemption value................................... -- -- -- -- --
Cumulative dividends to preferred
stockholders....................................... -- -- -- -- --
Guaranteed minimum return to series F
preferred stockholders............................. -- -- (13,366) -- --
Warrants issued......................................... -- -- -- 1,254 --
Option grants........................................... -- -- 4,305 -- (4,305)
Amortization of unearned compensation................... -- -- -- -- 894
Initial public offering, net of offering costs of $6,149 4,500,000 47,851 -- --
Preferred stock converted into common stock............. 11,593,832 1 75,057 -- --
Net loss................................................ -- -- -- -- --
---------- -- -------- --------------- -------
BALANCES, March 31, 2000 (unaudited)..................... 17,975,276 $2 $113,847 $ 1,254 $(4,677)
========== == ======== =============== =======
Accumulated
Deficit Total
---------- ---------
<S> <C> <C>
BALANCES, December 31, 1999.............................. $(40,732) $(41,997)
Accretion of preferred stock to liquidation and
redemption value................................... (882) (882)
Cumulative dividends to preferred
stockholders....................................... (1,402) (1,402)
Guaranteed minimum return to series F
preferred stockholders............................. --
Warrants issued......................................... -- 1,254
Option grants........................................... -- --
Amortization of unearned compensation................... -- 894
Initial public offering, net of offering costs of $6,149 -- 47,851
Preferred stock converted into common stock............. -- 75,058
Net loss................................................ (4,334) (4,334)
-------- --------
BALANCES, March 31, 2000 (unaudited)..................... $(47,350) $ 63,076
======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
3
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 2000
------- -------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net loss................................................................... $(2,201) $(4,334)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization............................................ 765 1,030
Amortization of warrants................................................. 426
Stock compensation expense............................................... -- 894
Changes in assets and liabilities--
Receivables........................................................... 1,827 (3,170)
Prepaids and other assets............................................. (383) (326)
Accounts payable...................................................... (361) 2,458
Accrued expenses...................................................... 137 (1,488)
Other................................................................. (114) (7)
------- -------
Net cash used in operating activities..................................... (330) (4,503)
Cash flows from investing activities:
Purchase of property and equipment......................................... (272) (1,733)
Restricted cash............................................................ (8) 7
Related party loans........................................................ -- (25)
------- -------
Net cash used in investing activities..................................... (280) (1,751)
Cash flows from financing activities:
Proceeds from initial public offering, net of offering costs of 6,149...... -- 47,851
Borrowings................................................................. -- 2,750
Repayment of borrowings.................................................... (3) (3,004)
------- -------
Net cash (used in) provided by financing activities....................... (3) 47,597
Net (decrease) increase in cash and cash equivalents....................... (613) 41,343
------- -------
Cash and cash equivalents, beginning of year............................... 3,752 6,204
------- -------
Cash and cash equivalents, end of year..................................... $ 3,139 $47,547
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest..................................................... $ -- $ 75
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
4
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Business
Etinuum is an e-Business Services Provider, providing the technologies and
operations that enable its clients to maximize the ongoing value of their
customer relationships.
Through our Internet Professional Services Group, we design, build and
customize the technologies that allow our clients to:
. communicate on an ongoing basis with their customers
. process e-Commerce transactions with and for their customers
. analyze their customers' behavior for more effective marketing
Our Internet Professional Services Group also provides communications
technology and customer relationship management (or CRM) hosting services that
enable our clients to manage their own customer relationship operations while
outsourcing their technology and CRM software needs.
Our Operational Service Group actually manages customer relationships for
our clients by offering:
. customer database management
. customer database analytics
. transaction processing
. e-mail, live chat, voice and other communications programs
5
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(2) Interim Financial Data
The consolidated balance sheet as of March 31, 2000, statement of
shareholders' equity (deficit) for the three months ended March 31, 2000 and the
consolidated statements of operations and cash flows for the three months ended
March 31, 1999 and 2000 have been prepared by us without audit. In our opinion,
all adjustments, consisting of normal recurring adjustments necessary to present
fairly the consolidated financial position, results of operations and cash flows
have been made. The results of operations for this interim period are not
necessarily indicative of the results for the full year.
The accompanying financial statements should be read with our consolidated
financial statements included in our Registration Statement filed on Form S-1
with the Securities and Exchange Commission on March 24, 2000.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
(3) Recently Adopted Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission issued
its Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition. SAB No. 101
provides guidance on the measurement and timing of revenue recognition in
financial statements of public companies. The adoption of SAB No. 101, had an
immaterial effect on our consolidated financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretations ("FIN") No. 44, Accounting for Certain Transactions Involving
Stock Compensation. FIN No. 44 provides clarification and guidance on applying
Accounting Principles Board ("APB") No. 25. FIN No. 44 generally provides for
prospective application for grants or modifications to existing stock options or
awards made after June 30, 2000. However, for certain transactions, the
guidance is effective after December 15, 1998 and January 12, 2000. Effective
April 1, 2000, we adopted FIN No. 44, which had no material effect on our
consolidated financial statements.
(4) Net Loss Per Share
Of our net loss per share, ($0.27) is attributable to the accretion of
mandatorily redeemable convertible preferred stock, ($0.43) is attributable to
the charge for cumulative payment-in-kind dividends accrued to preferred
stockholders, and ($4.05) is attributable to the beneficial conversion feature
of our series F preferred stock (Note 6).
6
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(5) Stockholders' Equity (Deficit)
Effective January 14, 2000, we declared a 4-for-1 reverse stock split of our
common stock. Common stock amounts and per share amounts have been adjusted
retroactively to give effect to the stock split.
Effective March 24, 2000, we completed an initial public offering of our
common stock in which 4,500,000 shares were sold at an offering price of $12.00
per share. We received approximately $47.9 million of proceeds from this
offering, net of an underwriting discount of $3.8 million and offering expenses
of $2.4 million.
Employee Stock Purchase Plan
In January 2000, we adopted the 2000 Employee Stock Purchase Plan. The plan
will be implemented in eight semiannual offering of 250,000 shares of common
stock each, commencing on July 1, 2000; 2,000,000 shares in aggregate are
available to be sold under the plan. Eligible employees may withhold up to 10%
of their base salary during the semiannual period to be used to purchase shares
under the plan in exchange for 85% of the lesser of the closing price at the
beginning or end of the purchase period.
2000 Stock Incentive Plan
In January 2000, we adopted the 2000 Stock Incentive Plan and reserved
2,750,000 shares of common stock for issuance upon stock grants or exercise of
options granted under this plan. At March 31, 2000, we had granted 327,750
options under this plan, resulting in approximately $446,000 of compensation
expense, which will be recognized over the vesting period of each grant.
Compensation expense related to these grants and grants under our 1998 and 1997
plans for the quarter ended March 31, 2000 was approximately $894,000.
Warrant
In January 2000, we issued to a major customer a warrant to purchase 181,250
shares of common stock at an exercise price of $8.52 per share. The value of the
warrant at the date of grant was approximately $1.1 million, determined using
the Black-Scholes pricing model, assuming volatility of 65%, and a risk free
interest rate of 6.3%, with no expected dividends and a contractual life of
three years. The warrant vested immediately upon issuance, and will be amortized
over one year. The effect of amortization for the quarter ended March 31, 2000
was approximately $276,000.
In March 2000, we issued to a former employee a warrant to purchase 20,000
shares of common stock at an exercise price of $11.00 per share. The value of
the warrant at the date of grant was approximately $150,000, determined using
the Black-Scholes pricing model, assuming volatility of 65%, and a risk free
interest rate of 6.3%,
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with no expected dividends and a contractual life of five years. The expense
related to this warrant was recognized in the quarter ended March 31, 2000.
(6) Preferred Stock
Effective March 2, 2000, we amended our Certificate of Incorporation to
change the automatic conversion of our preferred stock (other than our series A
preferred stock) to provide that all such preferred stock, including unpaid
dividends, automatically converted into common stock on a four for one basis
upon completion of an initial public offering of common stock resulting in
aggregate proceeds to Etinuum of at least $25 million and a per share price of
at least $10.00.
Our outstanding preferred stock, including unpaid dividends, automatically
converted to in the aggregate 11,034,615 shares of common stock upon the
completion of our initial public offering on March 24, 2000. Periodic charges
to net loss applicable to common stockholders of $882,000 were recognized for
the period December 31, 1999 through March 24, 2000 to accrete the value of each
series of preferred stock to its liquidation and redemption value.
The terms of the series F preferred stock financing provided that we would
issue additional shares upon conversion of the series F preferred stock to
common stock so that the price per share of series F preferred stock would not
exceed one-half of the initial public offering price. As a result, we issued
559,217 additional shares of common stock and recognized a one-time charge of
approximately $13.4 million net loss applicable to common stockholders upon
consummation of our initial public offering.
(7) Contingencies
On October 1, 1999, we acquired Acorn Information Systems, Inc. (Acorn). On
March 20, 2000, the contingent earn-out provision relating to the Acorn
acquisition was amended. As a result, four former stockholders of Acorn, who are
now our employees, will collectively receive a total of $200,000, on each of the
first and second anniversaries of the acquisition, assuming all four employees
remain employed when these amounts become due. On the third anniversary of the
Acorn acquisition, the former Acorn stockholders will be entitled to receive an
additional $400,000 aggregate payment so long as they are employed by Etinuum on
that date or, if approved by our Chief Executive Officer, at least two of them
are employed by Etinuum on that date. These payments will be accounted for as
compensation expense in the years earned. These four employees were also
granted a total of 400,000 stock options at an exercise price of $10.00 per
share one-third of which vested immediately and the remainder vesting monthly
over the next thirty months. A former stockholder of Acorn, who is not an
Etinuum employee, will be issued 10,000 shares of our common stock in the second
quarter of 2000, which will be accounted for as additional purchase
consideration.
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Additionally, we transferred 1,000,000 shares of Spider Technologies, Inc.
("Spider") common stock to the former Acorn stockholders. These shares were
acquired through our exercise of a warrant we had been granted upon completion
of the Spider spin-off in the fourth quarter of 1999. These shares are
restricted and will vest at the same rate as the stock options for the four
employee former stockholders (any unvested shares will be forfeited to us if the
vesting requirements are not satisfied). The transfer of these shares will be
charged to compensation expense over the vesting period based upon the fair
value of the shares as they vest. The one non-employee former Acorn stockholder
received his Spider shares without restriction.
(8) Borrowings
During 1999, we entered into a revolving credit facility agreement that
provides for maximum borrowings of the lesser of $5 million or 80% of eligible
receivables. This facility matures on May 31, 2001 and bears interest at the
prime rate plus 1.5%. During the first quarter of 2000, we borrowed and repaid
approximately $2.8 million under this facility. The borrowings under this
facility are collateralized by our receivables and other assets. Among other
restrictions, this facility requires us to maintain, a tangible net worth of at
least $8 million.
9
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction our consolidated financial
statements and accompanying notes included elsewhere in this Quarterly Report.
This discussion and analysis contains certain forward-looking statements that
are based on current expectations and involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of the uncertainty of several
factors.
Overview
Etinuum is an e-Business Services Provider, providing the technologies and
operations that enable its clients to maximize the ongoing value of their
customer relationships.
Through our Internet Professional Services Group, we design, build and
customize the technologies that allow our clients to:
. communicate on an ongoing basis with their customers
. process e-Commerce transactions with and for their customers
. analyze their customers' behavior for more effective marketing
Our Internet Professional Services Group also provides communications
technology and customer relationship management (or CRM) hosting services that
enable our clients to manage their own customer relationship operations while
outsourcing their technology and CRM software needs.
Our Operational Service Group actually manages customer relationships for
our clients by offering:
. customer database management
. customer database analytics
. transaction processing
. e-mail, live chat, voice and other communications programs
Description of Financial Components
To date, a substantial majority of our revenue has come from our e-
Operations and from Technology Solutions services. We expect additional revenue
to be generated based on the fulfillment of client needs outside of our standard
contracts. In the fourth quarter of 1999, we began billing for our Strategic
Consulting services, including our database
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marketing and analysis services, which we had previously provided primarily as a
way to attract new clients for Technology Solutions and e-Operations services.
We expect these revenues to increase as we focus on expanding the bundling of
our services, and using our existing client relationships to provide additional
services.
Direct cost of services consists primarily of compensation and benefits to
our employees engaged in the direct delivery of professional services related to
the development, implementation and support of programs for our clients. Direct
cost of services also includes materials, training, and telecommunications
expenses necessary for execution of our clients' programs.
Selling, general and administrative expenses have increased, and we expect
them to continue to increase as we recruit additional support personnel for
continued growth. These expenses consist primarily of salaries, commissions,
benefits, and related expenses for personnel engaged in sales and client
support; salaries and related expenses of executive management, human resources,
finance and administrative personnel; expenses related to our facilities;
marketing and branding expenses, including trade shows and promotional events;
and other general corporate expenses. During the first quarter 2000, we
recognized $426,000, $200,000 and $894,000 in compensation expense related to
warrants, signing bonuses, and stock option grants, respectively.
Depreciation and amortization expenses consist of the depreciation of
equipment used in our operations, including phone switches and computer
equipment at our facilities. These expenses will continue to increase as we
build out our additional operations service centers in Modesto, California and
Yukon, Oklahoma. Depreciation and amortization also consists of amortization of
goodwill and other intangibles. We had $2.4 million of goodwill and other
intangibles, net of amortization at March 31, 2000. We amortize our goodwill
over five years and our other intangibles over three years.
Research and development expenses consist of charges, including labor and
materials, related to the development and enhancement of software and technology
platforms used in providing services to our clients. In 2000 and going forward,
we anticipate these expenses to be immaterial as a result of our transferring
the rights to the proprietary software that we had developed to a newly formed
subsidiary, Spider, and spinning off the stock of Spider to our stockholders in
the fourth quarter of 1999 to form a separate company.
Interest income is primarily earned on cash balances in our bank accounts
and short-term investments and will decrease as we use the proceeds of our
initial public offering for working capital requirements. Interest expense is
incurred on our debt and capital lease obligations that we use to finance a
portion of our capital expenditures.
The terms of the series F preferred stock financing provided that we would
issue additional shares upon conversion of the series F preferred stock to
common stock so that the price per share of series F preferred stock would not
exceed one-half of the initial
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public offering price. As a result, we issued 559,217 additional shares of
common stock and recognized a one-time charge of approximately $13.4 million net
loss applicable to common stockholders upon consummation of our initial public
offering.
Results of Operations
The following table sets forth data for the three months ended March 31,
1999 and 2000 taken from our consolidated statements of operations. We evaluate
our business based on numerous factors, including revenue and gross profit as a
percentage of our revenues.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 % of revenue 2000 % of revenue
------- --------------- ------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenue...................................... $ 5,432 100% $ 8,468 100%
Direct cost of services...................... (3,638) 67% (5,346) 63%
------- --- ------- ---
Gross profit................................. 1,794 33% 3,122 37%
Operating expenses:
Selling, general and administrative........ 2,911 54% 6,409 76%
Depreciation and amortization.............. 765 14% 1,030 12%
Research and development................... 328 6% -- --
------- --- ------- ---
Total operating expenses................ 4,004 74% 7,439 88%
------- --- ------- ---
Loss from operations......................... (2,210) 41% (4,317) 51%
Other (expense) income:
Interest income............................ 14 -- 64 --
Interest expense........................... (5) -- (81) 1%
------- --- ------- ---
Net loss..................................... $(2,201) 41% $(4,334) 52%
======= === ======= ===
</TABLE>
Revenue. Revenue for the first quarter of 2000 was $ 8.5 million, which was
56% greater than revenue for the first quarter of 1999. More than half of the
increase was due to growth in initiatives for major existing clients related to
our e-Operations and Technology Solutions services. For two major clients, we
increased our revenue by approximately $2.1 million in total for the first
quarter of 2000, compared to the first quarter of 1999. We also supplemented
our core services through consulting engagements that resulted in approximately
$900,000 in incremental revenues.
Direct cost of services. Direct cost of services for the first quarter of
2000 was $5.3 million, compared to $3.6 million for the first quarter of 1999.
Direct costs as a percentage of revenue decreased from 67% to 63% as a result of
our efforts to consolidate our services for any one particular client into the
same operations service center and our increased focused on servicing larger,
more established companies allowed us to reduce employee turnover at our
operations service centers, which also reduced costs. The increase in direct
cost of services was almost directly related to the increase in overall services
we provided to new and existing clients.
12
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Selling, general and administrative expenses. Selling, general and
administrative expenses were $6.4 million, or 76% of revenue, in first quarter
of 2000, compared to $2.9 million, or 54% of revenue, in the first quarter of
1999. Most of this increase resulted from hiring additional management and
support personnel in the areas of finance, legal, sales and marketing. In
addition, we incurred approximately $894,000 in compensation expense for
incentive stock options, $426,000 for warrant grants and approximately $200,000
of one-time hiring bonuses.
Depreciation and amortization expenses. Depreciation and amortization
expenses in the first quarter of 2000 were $1 million, compared to $765,000 in
the first quarter of 1999. The increase resulted primarily from $4 million of
capital expenditures from April 1, 1999 to March 31, 2000.
Research and development expenses. Research and development expenses in the
first quarter of 2000 were negligible compared to $328,000 in the first quarter
of 1999. The decrease in research and development expenses was a result of our
transferring proprietary software used in the EtinuumWebDirect System to Spider
prior to our spin-off of Spider in the fourth quarter of 1999. Nearly all of
our research and development expenses were attributable to the development of
this proprietary software.
Interest income. Interest income in the first quarter of 2000 was $64,000,
compared to $14,000 in the first quarter of 1999. Fluctuations in interest
income from year to year are due to varying rates of interest when we invest our
cash in short-term financial instruments. The slight increase for the first
quarter of 2000 compared to the same period in 1999 resulted largely from the
investment of the proceeds of our initial public offering in March 2000.
Interest expense. Interest expense in the first quarter of 2000 was $81,000,
compared to $5,000 in the first quarter of 1999. Interest expense in both
quarters resulted from our borrowings under our credit facilities and
capitalized leases for office equipment and furniture.
Operating results for any quarter are not necessarily indicative of results
for any future period. The following factors have affected our operations in
the past and may affect our operations in the future, which could cause
quarterly fluctuations:
. beginning, ending or deferring of significant services for clients during
a quarter, particularly when we must add personnel and other resources in
advance of new client initiatives;
. variations in the number, size and scope of our clients' direct-to-
customer initiatives, which in the past have ranged from small pilot
programs involving only a few of our employees to nationwide programs
using many new employees;
13
<PAGE>
. utilization of our employees and operational facilities, which can be
affected significantly, for example, by reassigning or terminating
personnel following the completion of a client's initiative or by opening
a new facility in anticipation of future business;
. fluctuations in demand for our clients' products, which are beyond our
control but which directly affect our revenue as a substantial portion of
our client billings depends upon the time our personnel devote to a
client's customers or, under a new contract with a major client, are
based on the client's sales generated from our operation of its direct-
to-customer initiative;
. expenses incurred in connection with acquisitions, such as our recent
acquisition of Acorn, which are part of our strategy to broaden and
expand our service offerings; and
. expenses related to our sales and marketing efforts, which are expected
to increase in 2000.
Liquidity and Capital Resources
Since we were first capitalized, we have raised $98.9 million of equity
capital from the sale of common and preferred stock, including $47.9 million in
proceeds, net of offering costs, from our initial public offering completed on
March 24, 2000.
Cash and cash equivalents at the end of the first quarter of 2000 were $48
million, compared to $3 million at the end of the first quarter of 1999. This
increase is primarily attributable to the net proceeds of our initial public
offering.
Cash used in operations for the first quarter of 2000 was $4.5 million,
compared to $330,000 for the first quarter of 1999. Our change in operating cash
flow resulted primarily from increases in our accounts receivable balances in
2000. During these periods we also continued to hire key management and other
personnel.
Cash used in investing activities for the first quarter of 2000 was $1.8
million compared to $280,000 for the first quarter of 1999. This increase is
primarily due to our continued focus on investing in and expanding our
infrastructure to provide services for our increasing client base and additional
service opportunities for contracts. Additionally, in the first quarter of 2000
we added internal infrastructure as a consequence of our increase in management
and support personnel. During the first quarter of 1999, we began preparing to
open our operations service center in Fort Scott, Kansas and moved our
headquarters, which resulted in some capital investments in computer systems,
facility expansion, and furniture and fixtures, but to a significantly lesser
extent than in first quarter 2000.
14
<PAGE>
Our financing activities have generated cash of $48 million and expended
cash of $3,000 for the periods ended March 31, 2000 and 1999, respectively. The
majority of this increase resulted from the net proceeds of our initial public
offering.
Our business plan will continue to require substantial capital to fund
expansion. Our business plan includes the following:
. developing our sales organization and marketing initiatives;
. continuing to develop our operational support system;
. expanding internal infrastructure related to our operations centers in
Modesto, California and Yukon, Oklahoma;
. evaluating potential acquisitions and investments; and
. funding operating losses.
We believe that the proceeds from our initial public offering, together with
our cash from operations and investments and borrowing capacity will be
sufficient to fund our activities for at least the next 12 months. We could,
however, require capital funding sooner, if we have shortfalls in operating and
financial performance or expand more quickly than currently anticipated. If
this occurs, we may need to seek additional financing sources to fund our
planned business expansion efforts, which may be dilutive to existing investors.
Recent Accounting Pronouncements
See note 3 to the consolidated financial statements.
Income Taxes
We have historically concluded that there exists substantial doubt as to the
recoverability of our deferred tax assets. As a result, we have recorded a full
valuation allowance against those deferred tax assets. Our view as to the
ultimate recoverability of our deferred tax assets may change in the near term
based principally upon the successful execution of our business plan.
Year 2000 Issue
The "Year 2000" issue has been a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery after December 31, 1999.
These problems arise from the inability of hardware and software to distinguish
dates in the "2000s" from dates in the "1900s" and from other sources such as
the use of special codes and conventions in software that make use of a date
field. We have not experienced any significant disruptions or any material
costs from the Year 2000 rollover; however, we recognize the need to continue to
ensure that our operations will not be adversely affected by still undiscovered
Year 2000 software failures. We will continue to
15
<PAGE>
evaluate any new software and hardware systems that we may acquire to determine
whether they are Year 2000 compliant.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Market risks represent the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. We are exposed to market risks from changes in United
States interest rates. Historically, and as of March 31, 2000, we have not used
derivative instruments or engaged in hedging activities.
We had long-term borrowings, including current maturities, of $2.8 million
as of March 31, 2000. Of this amount, $2 million bears interest at a fixed rate
of 13.9%. The fair value of the fixed-rate debt would change approximately
$12,000 for a 0.50% change in the level of interest rates.
We temporarily invest our excess cash in money market funds. Changes in
interest rates would not significantly affect the fair value of these temporary
cash investments because they are repriced on a daily basis.
17
<PAGE>
PART II
Item 1. Legal Proceedings.
We are involved in legal proceedings from time to time, none of which we
believe, if decided adversely to us, would have a material adverse effect on our
business, financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
(c) Securities sold
<TABLE>
<CAPTION>
Number of
Underwriters or Shares of
Class of Common Common Stock Other
Date Purchasers Stock Warrants/Options Securities
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 24, 2000 Paid in kind 11,034,615
dividends and
preferred stock
conversion
- ---------------------------------------------------------------------------------------------
March 24, 2000 Guaranteed minimum 559,217
return on series F
preferred stock
- ---------------------------------------------------------------------------------------------
March 24, 2000 Initial public 4,500,000
offering
- ---------------------------------------------------------------------------------------------
</TABLE>
Pursuant to our initial public offering of our common stock, we issued
4,500,000 shares of common stock on March 24, 2000. The shares are registered
pursuant to a registration statement on Form S-1 (No. 333-78483) with the
Securities and Exchange Commission which was declared effective on March 24,
2000. The offering was underwritten by a syndicate of underwriters led by Chase
Securities Inc, FleetBoston Robertson Stephens, Inc., U.S. Bancorp Piper
Jaffray, Inc., and SoundView Technology Group, Inc. After deducting discounts
and commissions of $3.8 million and expenses of $2.4 million, we received net
proceeds of $47.9 million, of which through March 31, 2000, approximately
$300,000 had been used for working capital.
The balance of the proceeds is currently being invested in financial
instruments and used for general working capital purposes.
Item 3. Defaults Upon Senior Securities.
None
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Warrant issued to Sony Electronics, Inc. dated January 14, 2000
(incorporated by reference to our Registration Statement No. 333-
78483 dated March 24, 2000)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ETINUUM, INC.
By: /s/ TIMOTHY C. O'CROWLEY
Timothy C. O'Crowley
Chairman and Chief Executive
Officer
Signature Title Date
---------- ----- -----
/s/ TIMOTHY C. O'CROWLEY Chairman and
--------------------------- Chief Executive, May 12,2000
Timothy C. O'Crowley Officer
(Principal
Executive Officer)
/s/ STEVEN Q. HANSEN Chief Financial
--------------------------- Officer (Principal May 12,2000
Steven Q. Hansen Financial and
Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 47,547
<SECURITIES> 0
<RECEIVABLES> 6,770
<ALLOWANCES> 261
<INVENTORY> 0
<CURRENT-ASSETS> 61,120
<PP&E> 14,705
<DEPRECIATION> 5,610
<TOTAL-ASSETS> 72,766
<CURRENT-LIABILITIES> 7,874
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 63,076
<TOTAL-LIABILITY-AND-EQUITY> 72,766
<SALES> 0
<TOTAL-REVENUES> 8,468
<CGS> 0
<TOTAL-COSTS> (5,346)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (159)
<INTEREST-EXPENSE> (88)
<INCOME-PRETAX> (4,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,334)
<EPS-BASIC> 6.06
<EPS-DILUTED> 6.06
</TABLE>
