UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 000-26263
APPNET, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-2077860
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6707 Democracy Boulevard
Bethesda, MD 20817
------------------
(Address of principal executive offices including zip code)
(301) 493-8900
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(Registrant's telephone number, including area code)
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 such 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.
Yes [X] No [ ]
As of August 2, 2000, there were 34,101,897 outstanding shares of the
Registrant's Common Stock, $0.0005 par value.
<PAGE>
APPNET, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999 and the six months
ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Unless otherwise indicated, all references to "AppNet," "we," "us" and
"our" refer to AppNet, Inc. and, after our respective acquisitions or
formations, its subsidiaries.
CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical fact in this report,
including statements regarding our competitive strengths, business strategy,
expected benefits of any acquisition, future financial position, budgets,
projected costs and plans and objectives of management are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"should," "intend," "estimate," "anticipate," "believe," "plan," "continue" or
similar terminology. We undertake no obligation to publicly update or revise any
forward-looking statements contained in this report. These forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, that
could cause actual results to differ materially from those we express or imply
in those forward-looking statements. These factors include those we describe in
"Risk Factors" in our 1999 Annual Report on Form 10-K and elsewhere in this
report, and these factors expressly qualify all written and oral forward-looking
statements attributable to us.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
APPNET, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 41,178 $ 66,549
Accounts receivable, net 47,576 31,661
Other current assets 3,344 1,300
----------- -----------
Total current assets 92,098 99,510
Property and equipment, net 14,800 8,958
Intangible assets, net 70,477 97,247
Other assets 5,031 2,111
----------- -----------
Total assets $ 182,406 $ 207,826
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,720 $ 4,830
Accrued liabilities 32,609 32,311
Current portion of long-term debt 823 1,063
----------- -----------
Total current liabilities 38,152 38,204
Long-term debt, net of current portion 3,516 3,516
Other long-term liabilities 1,410 1,264
----------- -----------
Total liabilities 43,078 42,984
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Stockholders' equity:
Common stock, $.0005 par value; 75,000,000 shares authorized, 34,188,828 shares
issued and 34,037,174 are outstanding as of June 30, 2000 and 33,625,175 shares
issued and 33,454,474 shares outstanding as of December 31, 1999 17 17
Additional paid-in capital 267,521 257,542
Treasury stock (284) (51)
Notes receivable from management (167) (503)
Deferred compensation (320) (383)
Accumulated deficit (127,439) (91,780)
----------- -----------
Total stockholders' equity 139,328 164,842
----------- -----------
Total liabilities and stockholders' equity $ 182,406 $ 207,826
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
APPNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 51,157 25,063 $ 95,888 44,706
Cost of revenues 27,174 14,220 51,936 25,677
----------- ----------- ----------- -----------
Gross profit 23,983 10,843 43,952 19,029
Operating expenses:
Selling and marketing 5,625 1,594 9,161 2,784
General and administrative 15,203 7,957 31,500 14,711
Stock-based and acquisition-related compensation 5,439 5,464 10,555 7,951
Depreciation and amortization 14,461 15,104 29,308 27,839
----------- ----------- ----------- -----------
Total operating expenses 40,728 30,119 80,524 53,285
----------- ----------- ----------- -----------
Loss from operations (16,745) (19,276) (36,572) (34,256)
Interest income (744) - (1,617) -
Interest expense 144 2,479 311 3,741
Other expense, net - 558 - 558
----------- ----------- ----------- -----------
Loss before income taxes (16,145) (22,313) (35,266) (38,555)
Income tax provision 122 50 392 150
----------- ----------- ----------- -----------
Net loss (16,267) (22,363) (35,658) (38,705)
Dividends on and accretion of preferred stock - (1,100) - (2,139)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (16,267) $ (23,463) $ (35,658) $ (40,844)
=========== =========== =========== ===========
Basic and diluted net loss per common share $ (0.48) $ (1.09) $ (1.05) $ (1.97)
=========== =========== =========== ===========
Weighted average common shares outstanding 34,067,780 21,579,874 33,955,099 20,681,104
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
APPNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Six months ended June 30,
2000 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (35,658) $ (38,705)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization 26,770 26,847
Depreciation 2,538 992
Stock-based and acquisition-related compensation 10,555 7,951
Write-off of deferred financing costs - 559
Beneficial conversion charge - 1,052
Change in assets and liabilities:
Accounts receivable, net (15,915) (9,347)
Other current assets (2,044) (100)
Accounts payable (110) (475)
Accrued liabilities 3,865 7,754
----------- -----------
Net cash used in operating activities (9,999) (3,472)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (7,878) (2,451)
Cash paid for acquired businesses, net of cash acquired (1,600) (26,181)
Payment of contingent consideration (5,294) -
Other assets (3,422) (437)
----------- -----------
Net cash used in investing activities (18,194) (29,069)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (1,057) (153)
Borrowings under credit facilities - 68,500
Repayments of credit facilities - (97,861)
Debt issue costs - (628)
Proceeds from issuance of common stock - 375
Net proceeds from initial public offering - 64,119
Proceeds from issuance of shares sold to management 89 -
Repurchase of common stock - (22)
Proceeds from issuance of preferred stock - 7,046
Proceeds from Employee Stock Purchase Plan 1,436 -
Proceeds from exercise of stock options 2,354 215
----------- -----------
Net cash provided by financing activities 2,822 41,591
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Net (decrease) increase in cash (25,371) 9,050
Cash and cash equivalents, beginning of period 66,549 2,447
----------- -----------
Cash and cash equivalents, end of period $ 41,178 $ 11,497
=========== ===========
Supplementary information:
Cash paid for income taxes $ 807 $ 156
=========== ===========
Cash paid for interest $ 77 $ 2,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
AppNet, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis Of Presentation
The accompanying consolidated financial statements of AppNet, Inc. and
its subsidiaries (the "Company") are unaudited and include all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
Company's 1999 Annual Report on Form 10-K, which includes consolidated financial
statements and the notes thereto for the years ended December 31, 1999 and 1998.
The consolidated operating results of operations for the three and six month
periods ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2000.
2. Acquisitions
During the six months ended June 30, 1999, the Company acquired five
businesses, which included: i33 communications corp. for approximately $21.6
million with a combination of cash and promissory notes that were converted into
shares of Company common stock in December 1999; Sigma6, Inc. ("Sigma6") for
approximately $2.5 million with a combination of cash and shares of our common
stock; Salzinger & Company ("Salzinger") for approximately $8.5 million with a
combination of cash and shares of our common stock; Internet Outfitters, Inc.
for approximately $9.5 million with a combination of cash, shares of our common
stock and options to purchase shares of our common stock; and TransForm IT,
Incorporated for approximately $5.1 million with a combination of cash and
shares of our common stock. The accounts of the businesses acquired are included
in the accompanying consolidated financial statements from the date of their
respective acquisitions. The following unaudited pro forma consolidated amounts
give effect to the five acquisitions that occurred during the six months ended
June 30, 1999, as if they had occurred on January 1, 1999, by consolidating the
results of operations of the acquired businesses with the results of AppNet for
the six months ended June 30, 1999 (in thousands, except per share data). The
pro forma amounts do not purport to be indicative of the results of operations
that would have been achieved had the transactions been in effect as of the
beginning of 1999 and should not be construed as being representative of future
results of operations.
For the six
months ended
June 30, 1999
---------------
Revenues $ 47,334
Net loss attributable to common stockholders (41,194)
Basic and diluted net loss per share (1.97)
Contingent Payments
In January 2000, the Company paid a portion of the contingent
consideration related to its acquisition of New Media Publishing, Inc. ("NMP").
Of the portion paid, $5.1 million was paid in cash to the former shareholders
and employees, a note payable of approximately $0.8 million, which accrues
interest at 9% and is due January 2001, was issued for the remaining cash
portion payable to a former shareholder, 334,762 shares of the Company's common
stock were issued to the former shareholders and options to purchase 88,523
shares of the Company's common stock at $11.70 per share were issued to certain
employees. Of the remaining portion payable in cash, approximately $0.8 million
was paid in May 2000 and approximately $0.8 million was paid in June 2000.
Approximately $1.6 million, including the note payable discussed above, will be
paid in January 2001 if certain former NMP employees remain employed by AppNet
through September 2000. The remaining portion payable in stock, approximately
255,000 shares, will be issued in January 2001 if certain former NMP employees
remain employed by AppNet through September 2000. During the six months ended
June 30, 2000, the Company incurred approximately $5.4 million in stock-based
compensation expense related to these contingent payments.
6
<PAGE>
AppNet, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. Acquisitions (continued)
Contingent Payments (continued)
In connection with the Company's acquisition of Sigma6 in March 1999,
the former Sigma6 stockholders were entitled to a contingent payment of $2.8
million based on the achievement of agreed-upon performance criteria during the
12-month period ending on December 31, 1999. The contingent payment, $1.4
million in cash and $1.4 million in Company common stock, or approximately
65,000 shares, was made in April 2000. During the six months ended June 30,
2000, the Company incurred approximately $0.6 million in stock-based
compensation expense related to this contingent payment.
In connection with the Company's acquisition of Salzinger in March
1999, the Company may be required to make contingent payments of up to $5.0
million in cash or, at the seller's option, cash and Company common stock, to
the former stockholders of Salzinger if certain performance criteria are met
during any consecutive twelve-month period during the period from April 1, 1999
to September 30, 2000. The amount of this payment will depend on the level of
achievement of the operating targets. Further, the former stockholders must
remain employed by the Company through September 2000 in order to remain
eligible to receive these payments. During the six months ended June 30, 2000,
the Company incurred approximately $3.1 million in stock-based compensation
expense related to this contingent payment.
3. Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Accounts receivable $ 39,679 $ 24,777
Unbilled accounts receivable 14,543 8,831
Allowance for doubtful accounts (6,646) (1,947)
------------- -------------
Accounts receivable, net $ 47,576 $ 31,661
============= ==============
</TABLE>
In March 2000, as a result of the parent company of one of the
Company's customers discontinuing the operations of that customer, the Company
recorded a reserve of $3.4 million against amounts outstanding due from that
customer.
4. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Accrued compensation and benefits $ 6,175 $ 4,851
Payments due to former shareholders of Acquired Businesses -- 1,600
Accrued stock-based and acquisition-related compensation 12,049 16,816
Other accrued liabilities 14,385 9,044
------------- -------------
Total accrued liabilities $ 32,609 $ 32,311
============= =============
</TABLE>
7
<PAGE>
AppNet, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Earnings Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share," requires the presentation of basic and diluted earnings per share.
Basic net income (loss) per share is computed by dividing income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. The diluted net income (loss) per share data
is computed using the weighted average number of common shares outstanding plus
the dilutive effect of common stock equivalents, unless the common stock
equivalents are antidilutive. Approximately 64,000 shares of Company common
stock that are contingently payable pursuant to the acquisition agreements are
not included in the calculation of weighted average shares outstanding for the
periods presented, as circumstances may arise in which the shares would not be
issued. In addition, the impact of potentially dilutive securities, which
include approximately 7.6 million stock options outstanding, approximately
64,000 contingent shares to be issued in January 2001 and approximately 70,000
warrants are excluded from diluted earnings per share due to their antidilutive
effect as of June 30, 2000.
6. Segment Information
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 requires a business enterprise, based upon a management approach, to
disclose financial and descriptive information about its operating segments.
Operating segments are components of an enterprise about which separate
financial information is available and regularly evaluated by the chief
operating decision maker(s) of an enterprise. Under this definition, the Company
operated as a single segment for all periods presented.
7. Litigation and Claims
The Company is subject to lawsuits, investigations and claims arising
out of the ordinary course of business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management, based on all known facts, all matters are without
merit, and except as related to the claims mentioned below, are of such kind, or
involve such amounts, as would not have a material effect on the financial
position or results of operations of the Company if disposed of unfavorably.
In November 1999, a former employee filed suit against the Company and
its Chief Executive Officer in state court in Michigan. The case was removed to
the United States District Court for the Eastern District of Michigan. On March
31, 2000, the former employee filed an amended complaint alleging breach of
contract, fraud in the inducement and tortiuous interference with business
relationship and expectancy. Further, the former employee seeks to recover the
market value of all shares held as of March 2000, the market value of shares
that the Company allegedly prevented him from selling, and lost salary, bonuses
and benefits. The Company is contesting the claims vigorously. At this time, the
Company is not able to reasonably estimate the amount of costs or losses, if
any, that will be incurred as a consequence of this lawsuit.
On June 20, 2000, a purported class action was filed in the Court of
Chancery of the State of Delaware in and for New Castle County by a stockholder
of AppNet. The Class Action Complaint filed names the Company and certain
members of its Board of Directors as defendants and alleges, among other things,
that the approval of the pending transaction with Commerce One, Inc. (see Note
8) by the named directors breached their respective fiduciary duties because the
transaction provides inadequate consideration that does not reflect the true
value of the Company. The complaint requests that the Chancery Court, among
other things, declare that the action may be maintained as a class action,
enjoin the named directors from taking any action in furtherance of the pending
Commerce One transaction, and award of unspecified monetary damages and the
costs of the action, including plaintiff's reasonable
8
<PAGE>
AppNet, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Litigation and Claims (continued)
attorney, accountant and expert fees. Neither the Company nor, to its knowledge,
any of the named directors have been served with the complaint. The Company
believes the action is without merit and intends to vigorously contest the
allegations set forth in the complaint. At this time, the Company is not able to
reasonably estimate the amount of costs or losses, if any, it may incur in
connection with this lawsuit.
In July 2000, the trustee of a former customer of the Company that is
in bankruptcy proceedings filed an action to void preferential transfers by the
customer to the Company for the 90 days prior to the date the customer filed for
bankruptcy. The Company intends to contest the claims vigorously. At this time,
the Company is not able to reasonably estimate the amount of costs or losses, if
any, that will be incurred as a consequence of this lawsuit.
8. Merger Agreement
On June 20, 2000, the Company entered into an Agreement and Plan of
Merger and Reorganization, dated as of June 20, 2000 (the "Merger Agreement"),
by and among Commerce One, Inc., a Delaware Corporation ("Commerce One"),
Constitution Acquisition Corporation, a Delaware Corporation and a wholly owned
subsidiary of Commerce One ("Merger Sub"), and the Company, pursuant to which
Merger Sub will merge with and into the Company, which will survive the merger,
and become a wholly-owned subsidiary of Commerce One (the "Merger"). As a result
of the Merger, each share of the Company's common stock issued and outstanding
immediately prior to the consummation of the Merger will be automatically
converted into the right to receive 0.8 shares of Commerce One common stock.
Commerce One will assume options and warrants to purchase the Company's capital
stock outstanding at the effective time of the Merger. As described in the
Merger Agreement, if the Merger Agreement terminates under certain
circumstances, the Company is required to pay Commerce One a termination fee of
$38.5 million plus Commerce One's expenses. Further, the Company granted
Commerce One an option to acquire shares of the Company's common stock equal to
19.9% of the number of shares of the Company's common stock outstanding as of
the first date the option becomes exercisable. The option's exercise price is
$41.15 per share and is currently not exercisable. Commerce One may only
exercise the option if the Merger Agreement is terminated in certain
circumstances similar to those in which the termination fee is payable.
Consummation of the Merger is conditioned upon obtaining the Company's
shareholders' approval, regulatory clearance and other customary closing
conditions.
9. Recent Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle in accordance with Accounting Principles Board Opinion 20, "Accounting
Changes." In March 2000, the SEC issued SAB 101A, "Amendment: Revenue
Recognition in Financial Statements," which delayed implementation of SAB 101
until the Company's second fiscal quarter of 2000. In June 2000, the SEC issued
SAB 101B, which delays the implementation date of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company believes the adoption of SAB 101, as amended by SAB 101A and 101B, will
not have a material adverse effect on its financial position or results of
operations.
9
<PAGE>
AppNet, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Recent Pronouncements (continued)
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on its
financial position or results of operations.
10
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion and analysis compares the three and six month
periods ended June 30, 2000 to the corresponding period ended June 30, 1999 for
AppNet, Inc. and its subsidiaries ("AppNet," the "Company," "we," "us" or "our")
and should be read in conjunction with the Company's consolidated financial
statements and notes thereto appearing elsewhere in this report. You are also
encouraged to review the information contained in the Cautionary Notice
Regarding Forward-Looking Statements on the Table of Contents page of this
report.
Overview
AppNet provides end-to-end e-business professional services and
solutions to Global 1000 and dot.com companies. We develop end-to-end e-business
solutions that improve communication and commerce between businesses and their
trading partners as well as among businesses and consumers. Through internal
growth and strategic acquisitions, we have built a company with the ability to
design, develop, implement and manage end-to-end e-business solutions.
The goal in founding AppNet was to build a company that could offer a
comprehensive range of e-business professional services. We began by developing
a detailed strategic plan that identified the specific professional services
that are required to provide clients with end-to-end e-business solutions. These
services were strategy consulting, interactive marketing, e-business application
development, e-business integration and e-business outsourcing. We then
identified a group of companies that excelled in providing services in one or
more of these professional services areas. After reviewing and evaluating over
100 companies, we ultimately acquired a set of companies that fit together
strategically and culturally and that, as integrated with one another, design,
develop, implement and manage end-to-end e-business solutions.
On June 20, 2000, we entered into an Agreement and Plan of Merger and
Reorganization, dated as of June 20, 2000 (the "Merger Agreement"), by and among
Commerce One, Inc., a Delaware Corporation ("Commerce One"), Constitution
Acquisition Corporation, a Delaware Corporation and a wholly owned subsidiary of
Commerce One ("Merger Sub"), and AppNet, pursuant to which Merger Sub will merge
with and into AppNet, which will survive the merger, and become a wholly-owned
subsidiary of Commerce One (the "Merger"). As a result of the Merger, each share
of our common stock issued and outstanding immediately prior to the consummation
of the Merger will be automatically converted into the right to receive 0.8
shares of Commerce One common stock. Commerce One will assume all options and
warrants to purchase our capital stock outstanding at the effective time of the
Merger. As described in the Merger Agreement, if the Merger Agreement terminates
under certain circumstances, we are required to pay Commerce One a termination
fee of $38.5 million plus Commerce One's expenses. Further, we granted Commerce
One an option to acquire shares of our common stock equal to 19.9% of the number
of shares of our common stock outstanding as of the first date the option
becomes exercisable. The option's exercise price is $41.15 per share and is
currently not exercisable. Commerce One may only exercise the option if the
Merger Agreement is terminated in certain circumstances similar to those in
which the termination fee is payable. Consummation of the Merger is conditioned
upon obtaining our shareholders' approval, regulatory clearance and other
customary closing conditions.
11
<PAGE>
Results Of Operations
Three Months Ended June 30, 2000 Compared To The Three Months Ended June 30,
1999
Revenues. Revenue for the three months ended June 30, 2000 increased
$26.1 million to $51.2 million from $25.1 million for the three months ended
June 30, 1999 due primarily to internal growth including increased billable
headcount, hourly billing rates and utilization rates for the second quarter
2000 as compared to the second quarter of 1999.
Cost of revenues. Cost of revenues for the three months ended June 30,
2000 increased $13.0 million to $27.2 million from $14.2 million for the three
months ended June 30, 1999. The increase in cost of revenues was primarily
driven by an increase in internally generated billable headcount. As a
percentage of revenues, cost of revenues for the three months ended June 30,
2000 decreased to 53.1% from 56.7% for the three months ended June 30, 1999 due
primarily to an increase in hourly bill rates and utilization in the second
quarter of 2000 compared to the second quarter of 1999.
Selling and marketing. Selling and marketing expenses for the three
months ended June 30, 2000 increased $4.0 million to $5.6 million from $1.6
million for the three months ended June 30, 1999. As a percentage of revenue,
selling and marketing expenses for the three months ended June 30, 2000
increased to 11.0% from 6.4% for the three months ended June 30, 1999. The
increase in selling and marketing expenses is a result of the development of our
corporate sales and marketing staff, the expansion of our marketing strategy and
the promotion of our brand identity during the second quarter of 2000.
General and administrative. General and administrative expenses for
the three months ended June 30, 2000 increased $7.3 million to $15.2 million
from $7.9 million for the three months ended June 30, 1999. The increase in
general and administrative expenses is a result of the build up of corporate
infrastructure to support the growth of the Company. As a result of anticipated
additional hiring costs associated with the continued growth of our business,
our general and administrative expenses are expected to continue to increase
during 2000, although they may decline as a percentage of revenues. As a
percentage of revenue, general and administrative expenses for the three months
ended June 30, 2000 decreased to 29.7% from 31.7% for the three months ended
June 30, 1999.
Stock-based and acquisition-related compensation. Stock-based and
acquisition-related compensation expense of $5.4 million for the three months
ended June 30, 2000 remained consistent with the three months ended June 30,
1999. The compensation charges during the three months ended June 30, 2000 were
primarily attributable to contingent payments due to former shareholders of
acquired businesses that must remain employed by AppNet through specified future
dates to receive the contingent payments.
Depreciation and amortization. Depreciation and amortization expense
for the three months ended June 30, 2000 decreased $0.6 million to $14.5 million
from $15.1 million for the three months ended June 30, 1999. The decrease was
primarily due to certain intangible assets, related to acquisitions made during
1999, being fully amortized during the three months ended June 30, 2000. Our
goodwill and related amortization may increase in future periods if AppNet is
required to pay additional consideration for its acquisitions based on the
attainment of certain operating targets.
Interest income. Interest income for the three months ended June 30,
2000 was $0.7 million and is attributable to higher cash balances during 2000 as
a result of our public stock offerings in June and November 1999.
Interest expense. Interest expense for the three months ended June 30,
2000 decreased $2.4 million to $0.1 million from $2.5 million for the three
months ended June 30, 1999 due to the repayment of borrowings under our credit
facility with proceeds from our public stock offerings in June and November 1999
and the repayment or conversion during 1999 and the first quarter of 2000 of
notes payable issued to sellers of businesses acquired. In connection with our
initial public offering in June 1999, we recorded an interest charge of $1.1
million during the three months ended June 30, 1999 related to beneficial
conversion
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rights of convertible notes because the notes contained conversion features
requiring their conversion at a discount from the initial public offering price
of the common stock.
Other expense, net. Other expense of $0.6 million for the three months
ended June 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of our credit facilities during the period.
Income tax provision. The provision for income taxes for the three
months ended June 30, 2000 increased $72,000 to $122,000 from $50,000 for the
three months ended June 30, 1999. The provision for income taxes for the three
months ended June 30, 2000 and 1999 relates to state income taxes and the
increase for the three months ended June 30, 2000 from the three months ended
June 30, 1999 is attributable to the growth of our business.
Six Months Ended June 30, 2000 Compared To The Six Months Ended June 30, 1999
Revenues. Revenue for the six months ended June 30, 2000 increased
$51.2 million to $95.9 million from $44.7 million for the six months ended June
30, 1999, primarily due to internal growth and the inclusion of a full six
months of operations of the companies we acquired during the first half of 1999.
Cost of revenues. Cost of revenues for the six months ended June 30,
2000 increased $26.3 million to $52.0 million from $25.7 million for the six
months ended June 30, 1999. The increase in cost of revenues was primarily
driven by an increase in billable headcount resulting from the acquisitions that
occurred during 1998 and 1999, as well as internally generated headcount growth.
As a percentage of revenues, cost of revenues for the six months ended June 30,
2000 decreased to 54.2% from 57.4% for the six months ended June 30, 1999 due to
an increase in utilization and hourly bill rates in the first half of 2000
compared to the first half of 1999.
Selling and marketing. Selling and marketing expenses for the six
months ended June 30, 2000 increased $6.4 million to $9.2 million from $2.8
million for the six months ended June 30, 1999. As a percentage of revenue,
selling and marketing expenses for the six months ended June 30, 2000 increased
to 9.6% from 6.2% for the six months ended June 30, 1999. The increase in
selling and marketing expenses is a result of the development of our corporate
sales and marketing staff, the expansion of our marketing strategy and the
promotion of our brand identity during the first half of 2000, as well as the
inclusion of a full six months of operations of the companies we acquired in the
first half of 1999.
General and administrative. General and administrative expenses for
the six months ended June 30, 2000 increased $16.8 million to $31.5 million from
$14.7 million for the six months ended June 30, 1999. The increase in general
and administrative expenses is a result of the build up of corporate
infrastructure to support the growth of the Company. Further, in March 2000,
AppNet recognized a bad debt charge of approximately $3.4 million to fully
reserve against a receivable due from a customer because the parent company of
the customer discontinued the operations of the customer. We intend to
aggressively pursue all legal opportunities available to collect the receivable.
As a result of anticipated additional hiring costs associated with the continued
growth of our business, our general and administrative expenses are expected to
continue to increase during 2000, although they may decline as a percentage of
our revenues. As a percentage of revenue, general and administrative expenses
for the six months ended June 30, 2000, excluding the $3.4 million bad debt
charge, decreased to 29.3% from 32.9% for the six months ended June 30, 1999.
Stock-based and acquisition-related compensation. Stock-based and
acquisition-related compensation expense for the six months ended June 30, 2000
increased $2.6 million to $10.6 million from $8.0 million for the six months
ended June 30, 1999. The compensation charges during the six months ended June
30, 2000 were primarily attributable to contingent payments due to former
shareholders of acquired businesses that must remain employed by AppNet through
specified future dates to receive the contingent payments.
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Depreciation and amortization. Depreciation and amortization expense
for the six months ended June 30, 2000 increased $1.5 million to $29.3 million
from $27.8 million for the six months ended June 30, 1999. The increase was
primarily due to the amortization of intangible assets resulting from the
acquisitions made during 1999. Further, the increase in amortization expense for
the six months of June 30, 2000 as compared to the six months of June 30, 1999
was due to an increase in goodwill related to the recording of certain
contingent payments as additional purchase price. Our goodwill and related
amortization may increase in future periods if AppNet is required to pay
additional consideration for its acquisitions based on the attainment of certain
operating targets.
Interest income. Interest income for the six months ended June 30,
2000 was $1.6 million and is attributable to higher cash balances during 2000 as
a result of our public stock offerings in June and November 1999.
Interest expense. Interest expense for the six months ended June 30,
2000 decreased $3.4 million to $0.3 million from $3.7 million for the six months
ended June 30, 1999 due to the repayment of borrowings under our credit facility
with proceeds from our public stock offerings in June and November 1999 and the
repayment or conversion during 1999 and the first quarter of 2000 of notes
payable issued to sellers of businesses acquired. In connection with our initial
public offering in June 1999, we recorded an interest charge of $1.1 million
during the second quarter of 1999 related to beneficial conversion rights of
convertible notes because the notes contained conversion features requiring
their conversion at discount from the initial public offering price of the
common stock.
Other expense, net. Other expense of $0.6 million for the six months
ended June 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of our credit facilities during the second
quarter of 1999.
Income tax provision. The provision for income taxes for the six
months ended June 30, 2000 increased $0.3 million to $0.4 million from $0.1
million for the six months ended June 30, 1999. The provision for income taxes
for the six months ended June 30, 2000 and 1999 relates to state income taxes
and the increase for the six months ended June 30, 2000 from the six months
ended June 30, 1999 is attributable to the growth of our business.
Liquidity And Capital Resources
At June 30, 2000, we had approximately $41.2 million in cash and cash
equivalents. We have financed our operations and acquisitions primarily through
the issuance of common stock, borrowings under credit facilities and the
issuance of preferred stock. For the six months ended June 30, 2000, cash used
by operations was $10.0 million. For the six months ended June 30, 1999, cash
used by operations was $3.5 million.
For the six months ended June 30, 2000 and 1999, cash used in
investing activities was $18.2 million and $29.1 million, respectively. The
principal use of cash in investing activities during the six months of June 30,
2000 was as follows: to make approximately $6.7 million in payments for
contingent consideration related to our acquisition of New Media Publishing,
Inc. ("NMP"), of which $3.9 million is included in investing activities because
it is considered additional purchase price and the remaining $2.8 is included in
accrued liabilities in operating activities; to make approximately $1.4 million
in payments for contingent consideration related to our acquisition of Sigma 6;
to repay $1.6 million withheld from owners of other acquired businesses due to
the resolution of certain employment contingencies; to make purchases of
property and equipment to build the infrastructure to support our growth; and to
make purchases of other assets to support our growth. The principal use of cash
in investing activities during the six months of June 30, 1999 was to finance
the acquisitions that occurred in the first quarter of 1999. As we continue to
grow our business and build the infrastructure to support our growth, we expect
to use cash from operations to fund the continued growth and to fund selling and
marketing activities.
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Net cash provided by financing activities was $2.8 million and $41.6
million for the six months ended June 30, 2000 and 1999, respectively. Financing
activities for the first half of 1999 included net proceeds from our initial
public offering in June 1999 of $64.1 million, proceeds from issuance of
preferred stock, common stock and exercise of stock options of $7.6 million,
additional borrowings under our credit facility of $68.5 million, offset, in
part, by debt repayments of $98.0 million. Financing activities during the first
half of 2000 included proceeds from the exercise of stock options, proceeds from
shares purchased through our Employee Stock Purchase Plan and proceeds from
issuance of shares sold to management of $3.9 million, offset by debt repayments
of $1.1 million.
In January 2000, we paid a portion of the contingent consideration
related to our acquisition of New Media Publishing. Of the portion paid, $5.1
million was paid in cash to the former shareholders and employees, a note
payable of approximately $0.8 million, which accrues interest at 9% and is due
January 2001, was issued for the remaining cash portion payable to a former
shareholder, 334,762 shares of the our common stock were issued to the former
shareholders and options to purchase 88,523 shares of the our common stock at
$11.70 per share were issued to certain employees. Of the remaining portion
payable in cash, approximately $0.8 million was paid in May 2000 and
approximately $0.8 million was paid in June 2000. Approximately $1.6 million,
including the note payable discussed above, will be paid in January 2001 if
certain former NMP employees remain employed by AppNet through September 2000.
The remaining portion payable in stock, approximately 255,000 shares, will be
issued in January 2001 if certain former NMP employees remain employed by AppNet
through September 2000. During the three and six months ended June 30, 2000, we
incurred approximately $2.6 million and $5.4 million in stock-based compensation
expense related to these contingent payments, respectively.
In connection with the our acquisition of Sigma6, Inc. ("Sigma6") in
March 1999, the former Sigma6 stockholders were entitled to a contingent payment
of $2.8 million based on the achievement of agreed-upon performance criteria
during the 12-month period ending on December 31, 1999. The contingent payment,
$1.4 million in cash and $1.4 million in our common stock, or approximately
65,000 shares, was made in April 2000. During the six months ended June 30,
2000, we incurred approximately $0.6 million in stock-based compensation expense
related to this contingent payment.
In connection with our acquisition of Salzinger & Co. ("Salzinger") in
March 1999, we may be required to make contingent payments of up to $5.0 million
in cash or, at the seller's option, cash and our common stock, to the former
stockholders of Salzinger if certain performance criteria are met during any
consecutive twelve-month period during the period from April 1, 1999 to
September 30, 2000. The amount of this payment will depend on the level of
achievement of the operating targets. Further, the former stockholders must
remain employed by AppNet through September 2000 in order to remain eligible to
receive these payments. During the three and six months ended June 30, 2000, we
incurred approximately $1.9 million and $3.1 million in stock-based compensation
expense related to this contingent payment, respectively.
Our capital expenditures for the six months ended June 30, 2000 and
1999 were approximately $7.9 million and $2.5 million, respectively.
Historically, capital expenditures have been used to make leasehold improvements
to our leased office space, to purchase computer hardware and software and
furniture and fixtures. We do not have any material commitments for capital
expenditures for the foreseeable future. However, we do plan to make capital
expenditures, which may include expenditures for leasehold improvements to
office space, computer equipment, software and furniture and fixtures.
On June 30, 2000, we entered into an amendment under our credit
facility whereby certain terms were modified, including increasing our days
sales outstanding and capital expenditure limitations. The amendment has been
included as an exhibit to this report.
Based upon current expectations, we believe our available cash
balances, amounts that may be borrowed under our credit facility ($20.0 million
as of June 30, 2000) and cash flow from our operations will be adequate for us
to meet our capital requirements, to finance the cash portion of our contingent
payments and pursue our business strategy for the next 18 months. To the extent
we are unable to fund our operations from our available cash balances, cash
flows and existing credit facility during or following the next 18 months, we
may need to obtain financing from external sources either by issuing additional
equity or incurring additional indebtedness, although additional financing may
not be available.
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Recent Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle in accordance with Accounting Principles Board Opinion 20, "Accounting
Changes." In March 2000, the SEC issued SAB 101A, "Amendment: Revenue
Recognition in Financial Statements," which delays implementation of SAB 101
until the Company's second fiscal quarter of 2000. In June 2000, the SEC issued
SAB 101B, which delays the implementation date of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We
believe the adoption of SAB 101, as amended by SAB 101A and 101B, will not have
a material adverse effect on our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to lawsuits, investigations and claims arising out of
the ordinary course of our business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management, based on all known facts, all matters are without
merit, and except as related to the claims mentioned below, are of such kind, or
involve such amounts, as would not have a material effect on the financial
position or results of operations of the Company if disposed of unfavorably. In
addition to the information provided below, information with respect to legal
proceedings involving the Company is included in the Company's Quarterly report
on Form 10-Q for the quarter ended March 31, 2000 and the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
On November 11, 1999, Robert Harvey, a former employee, filed suit
against AppNet, Inc. and Ken Bajaj (our Chief Executive Officer) in state court
in Michigan. The case has been removed to the United States District Court for
the Eastern District of Michigan. On March 31, 2000, Mr. Harvey filed an amended
complaint alleging breach of contract, fraud in the inducement and tortiuous
interference with business relationship and expectancy. Further, Mr. Harvey
seeks to recover the market value of all his shares as of March 2000, the market
value of shares that we allegedly prevented him from selling, and lost salary,
bonuses and benefits. We intend to contest the claims vigorously. At this time,
we are not able to reasonably estimate the amount of costs or losses, if any,
that will be incurred as a consequence of this lawsuit.
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On February 4, 2000, Counsel Corporation (US) and JewelryOnly.com, LLC
filed suit against AppNet Inc., one of its subsidiaries, Drew Rayman (a former
employee) and David Levin (a current employee) in the Supreme Court of the State
of New York, County of New York. The plaintiffs in the suit allege breach of
contract and misrepresentation related to services performed by AppNet. They are
seeking direct damages, plus punitive damages, costs and fees. We intend to
vigorously contest these claims and have filed counterclaims against the
defendants alleging monies due for services performed. We are not able to
reasonably estimate the amount of costs or losses, if any, that will be incurred
as a consequence of this lawsuit.
On June 20, 2000, a purported class action was filed in the Court of
Chancery of the State of Delaware in and for New Castle County by a stockholder
of AppNet. The Class Action Complaint filed names AppNet and certain members of
its Board of Directors as defendants and alleges, among other things, that the
approval of the pending transaction with Commerce One, Inc. by the named
directors breached their respective fiduciary duties because the transaction
provides inadequate consideration that does not reflect the true value of
AppNet. The complaint requests that the Chancery Court, among other things,
declare that the action may be maintained as a class action, enjoin the named
directors from taking any action in furtherance of the pending Commerce One
transaction, and award of unspecified monetary damages and the costs of the
action, including plaintiff's reasonable attorney, accountant and expert fees.
Neither AppNet nor, to our knowledge, any of the named directors have been
served with the complaint. We believe the action is without merit and intend to
vigorously contest the allegations set forth in the complaint. At this time, we
are not able to reasonably estimate the amount of costs or losses, if any, that
we may incur in connection with this lawsuit.
In July 2000, the trustee of Affinity Partners.com filed an action in
United States Bankruptcy Court, Eastern District of Virginia, Alexandria
Division seeking to void preferential transfers by Affinity to us for the 90
days prior to the date Affinity filed for bankruptcy. We intend to contest the
claims vigorously. At this time, we are not able to reasonably estimate the
amount costs or losses, if any, that will be incurred as a consequence of this
lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held on May 19, 2000,
the following directors were elected to terms expiring at the Company's annual
meeting of stockholders in 2001:
Name of Director Shares Voted For Shares Voted Against
---------------- ---------------- --------------------
Ken S. Bajaj 23,941,880 518,294
John Cross 23,539,025 921,154
Phillip A. Canfield 23,961,636 498,543
Edward C. Meyer 23,961,416 498,863
Richard N. Perle 23,962,216 497,963
Bruce V. Rauner 23,962,347 497,832
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Description
------- -----------
10.1 Fifth Amendment to Revolving Credit Agreement,
dated as of June 30, 2000, by and among AppNet,
Inc., Fleet National Bank (formerly known as
BankBoston, N.A.) and Antares Capital Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the six months ended
June 30, 2000:
The Company filed a Form 8-K dated March 30, 2000 to file the
audited financial statements of i33 communications corp.,
Salzinger & Company, Inc. and Internet Outfitters, Inc., which
were acquired by AppNet in 1999. These financial statements were
filed under Item 7 of Form 8-K pursuant to the requirements of
Staff Accounting Bulletin No. 80 ("SAB No. 80"). As permitted by
SAB No. 80, the audited financial statements for these
corporations for the periods from January 1, 1999 through their
respective acquisition dates were not included in the Company's
Registration Statements on Form S-1 filed in connection with the
Company's June 1999 initial public offering and its November 1999
follow-on offering.
The Company filed a Form 8-K dated June 20, 2000 to file under
Item 5 the Agreement and Plan of Merger and Reorganization, dated
June 20, 2000, by and among, Commerce One, Inc., Constitution
Acquisition Corporation and AppNet, Inc., pursuant to which
AppNet will become a wholly-owned subsidiary of Commerce One.
Upon the consummation of the merger, each issued and outstanding
share of AppNet common stock will be automatically converted into
the right to receive 0.8 shares of Commerce One common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned on its behalf by the undersigned thereunto duly authorized.
APPNET, INC.
Date: August 11, 2000 By: /s/ Jack Pearlstein
----------------------------------------
Jack Pearlstein
Senior Vice President,
Chief Financial Officer and Treasurer
(On behalf of the registrant and
as principal financial officer)
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APPNET, INC.
Exhibit Index to Quarterly Report
On Form 10-Q for the Quarterly Period
Ended June 30, 2000
Exhibit Description
------- -----------
10.1 Fifth Amendment to Revolving Credit Agreement, dated as
of June 30, 2000, by and among AppNet, Inc., Fleet
National Bank (formerly known as BankBoston, N.A.) and
Antares Capital Corporation.
27 Financial Data Schedule.
20
