<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
BREAKAWAY SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7389 04-3285165
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
(617) 960-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GORDON BROOKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BREAKAWAY SOLUTIONS, INC.
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
(617) 960-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID E. REDLICK, ESQ. KEITH F. HIGGINS, ESQ.
THOMAS L. BARRETTE, JR., ESQ. ROPES & GRAY
HALE AND DORR LLP ONE INTERNATIONAL PLACE
60 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 951-7000
TELEPHONE: (617) 526-6000 TELECOPY: (617) 951-7050
TELECOPY: (617) 526-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock,
$0.000125 par value 3,450,000 shares $57.25 $197,512,500 $52,144
per share
</TABLE>
(1) Includes 450,000 shares which the underwriters have options to purchase from
the Company solely to cover over-allotments if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the high and low sales prices reported
by the Nasdaq National Market on March 27, 2000.
(3) Calculated pursuant to Rule 457(c) based on an estimate of the proposed
maximum aggregate offering price.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NUMBER 333-83343
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MARCH , 2000
3,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
BREAKAWAY SOLUTIONS, INC. IS OFFERING 1,800,000 SHARES OF ITS COMMON STOCK AND
THE SELLING STOCKHOLDERS ARE OFFERING 1,200,000 SHARES OF THEIR COMMON STOCK.
-------------------
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"BWAY." ON MARCH 27, 2000, THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $57.50 PER SHARE.
-------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS BREAKAWAY STOCKHOLDERS
-------- ------------- ----------- -------------------
<S> <C> <C> <C> <C>
PER SHARE.................... $ $ $ $
TOTAL........................ $ $ $ $
</TABLE>
-------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BREAKAWAY AND THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS THE RIGHT
TO PURCHASE UP TO AN ADDITIONAL 450,000 SHARES OF COMMON STOCK TO COVER
OVER-ALLOTMENTS. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES
OF COMMON STOCK TO PURCHASERS ON , 2000.
-------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
DONALDSON, LUFKIN & JENRETTE
ROBERT W. BAIRD & CO.
C.E. UNTERBERG, TOWBIN
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
SUMMARY............................. 1
RISK FACTORS........................ 5
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS................ 13
USE OF PROCEEDS..................... 14
DIVIDEND POLICY..................... 15
PRICE RANGE OF OUR COMMON STOCK..... 15
CAPITALIZATION...................... 16
DILUTION............................ 17
SELECTED CONSOLIDATED FINANCIAL
DATA.............................. 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 19
BUSINESS............................ 27
</TABLE>
<TABLE>
MANAGEMENT.......................... 38
CERTAIN TRANSACTIONS................ 49
<CAPTION>
PAGE
--------
<S> <C>
PRINCIPAL AND SELLING
STOCKHOLDERS...................... 52
DESCRIPTION OF CAPITAL STOCK........ 54
SHARES ELIGIBLE FOR FUTURE SALE..... 57
UNDERWRITERS........................ 59
VALIDITY OF COMMON STOCK............ 61
INTERESTS OF COUNSEL................ 61
EXPERTS............................. 61
CHANGES IN INDEPENDENT AUDITORS..... 61
WHERE YOU CAN FIND MORE
INFORMATION....................... 62
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
WHICH IS CONTAINED IN THIS PROSPECTUS. WE AND THE SELLING STOCKHOLDERS ARE
OFFERING TO SELL SHARES OF COMMON STOCK AND SEEKING OFFERS TO BUY SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF THE COMMON STOCK.
i
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING BREAKAWAY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING
AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS.
BREAKAWAY SOLUTIONS
Breakaway is a full service provider of e-business solutions that allow
growing enterprises to capitalize on the power of the Internet to reach and
support customers and markets. We have designed our services specifically for
growing enterprises. These are businesses which generally fit within two broad
categories:
- companies or divisions of larger companies that have sales of up to
$500 million per year; and
- new and emerging Internet-based businesses.
Growing enterprises often face significant problems in capitalizing on the
opportunity to do business on the Internet, known as e-business. These problems
include technological complexity, costs of and time required for implementation
and support and the scarcity of qualified professionals. We enable our growing
enterprise clients to solve these problems by combining high quality,
cost-effective Internet professional services with our ability to host software
applications installed on our computers, known as application hosting. Our
combination of professional services with our application hosting ability allows
us to deliver sophisticated e-business solutions that otherwise might be
unavailable to our clients.
The three services which we offer to our clients are:
- BREAKAWAY STRATEGY SOLUTIONS. Our professionals analyze our client's
markets, business processes and existing technology and provide practical
advice on how to use the Internet and other information technology most
effectively.
- BREAKAWAY E-BUSINESS SOLUTIONS. Our professionals recommend, tailor and
integrate packaged software applications from software vendors as well as
design, develop and integrate our own custom e-business applications to
assist our clients in using the Internet in their businesses.
- BREAKAWAY APPLICATION HOSTING. We install, maintain and manage both
standard and custom software applications for our clients' use on computer
hardware which we locate in specially designed facilities.
We believe that growing enterprises demand high quality e-business solutions
which can be delivered rapidly and cost-effectively. We address these
requirements through our innovative approach, which has five key elements:
- we use our proprietary Breakthrough methodology to maintain quality and
deliver consistent results;
- we concentrate project development at centralized Breakaway Solution
Centers;
- we maintain close contact with our clients by delivering the solutions
which we develop through small groups of senior personnel based at
regional offices;
- we capture and disseminate our intellectual capital through the use of our
Breakaway Knowledge Innovation Team; and
- we provide global application hosting as part of our full service
offering, in contrast to most providers of e-business solutions who do not
have this capability.
1
<PAGE>
When we complete the acquisition of Eggrock Partners, Inc. described below,
we will employ over 430 professionals who provide strategy solutions, e-business
solutions and application hosting services. Including Eggrock, we offer services
through ten regional offices located in Boca Raton, Boston, Chicago, Dallas,
Minneapolis, New York, Orlando, Philadelphia, Redwood Shores, California and
Washington, D.C. Including Eggrock, our six Breakaway Solution Centers are
located in Boca Raton, Boston, Minneapolis, Philadelphia, Dallas and Redwood
Shores. We provide application hosting solutions through eleven facilities
located in North America, Europe, Asia and Australia.
RECENT DEVELOPMENTS
On January 26, 2000, we entered into a definitive agreement to acquire
Eggrock Partners, Inc. in an all-stock merger transaction. Eggrock is a full
service consulting and systems integration firm that focuses on delivering
customer-centered e-business solutions to emerging enterprises. Eggrock assists
growing companies in selecting and implementing software applications that will
allow companies to operate their business more effectively through use of the
Internet. We anticipate closing the transaction on March 31, 2000. We believe
that this acquisition will enhance and expand our client base, geographic
presence and our ability to provide strategy and e-business solutions to our
customers. As merger consideration, we will issue approximately 6,176,379 shares
of common stock and assume approximately 1,095,621 outstanding options.
In February 2000, we acquired DataCyr Corporation. DataCyr develops and
markets software designed to allow enterprises to seamlessly move and transform
data from multiple incompatible sources to common databases. We believe that
this acquisition will enhance our ability to link our clients' legacy systems to
their Web based systems. We issued 110,000 shares of our common stock to acquire
DataCyr.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by:
Breakaway........................................ 1,800,000 shares
Selling stockholders............................. 1,200,000 shares
Common stock to be outstanding 34,778,684 shares
after this offering..............................
Use of proceeds ................................... For general corporate purposes, including
working capital and capital expenditures and
for minority investments by our existing
wholly-owned venture capital fund, Breakaway
Capital I, LLC or by future funds. For more
detailed information, see "Use of Proceeds" on
page 14.
Nasdaq National Market symbol...................... BWAY
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering is based on the number outstanding on December 31, 1999. This number
does not include 16,050,892 shares issuable upon the exercise of outstanding
options and 169,562 shares issuable upon the exercise of outstanding warrants.
ADDITIONAL INFORMATION
Except as set forth in the financial statements and related notes or as
otherwise indicated, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option; and
- reflects a two-for-one stock dividend distributed to our stockholders on
March 23, 2000.
Our principal executive offices are located at 50 Rowes Wharf, 6(th) Floor,
Boston, Massachusetts 02110 and our telephone number is (617) 960-3400. Our
World Wide Web site address is www.breakaway.com. The information in the Web
site is not incorporated by reference into this prospectus.
We use the trademarks Breakaway Solutions, Breakthrough, Breakaway Solution
Centers and Breakaway Knowledge Innovation Team. This prospectus also contains
trademarks and trade names of other companies.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma consolidated financial data
should be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our audited consolidated financial
statements and related notes thereto included elsewhere in this prospectus. The
summary pro forma data do not purport to represent what our results would have
been if the events below had occurred at the dates indicated.
From its inception until December 31, 1998, Breakaway was an S corporation
and, accordingly, was not subject to federal and state income taxes, except for
certain Massachusetts income taxes on S corporations with annual revenues in
excess of $6 million. The pro forma net income (loss) and pro forma net income
(loss) per share--basic and diluted information presented below have been
computed as if Breakaway were subject to all federal and all applicable state
corporate income taxes since 1997, based on the statutory tax rates and the tax
laws then in effect.
The following summary pro forma consolidated statement of operations data
for Breakaway for the year ended December 31, 1999 give effect to the
acquisitions of Applica Corporation, WPL Laboratories, Inc., Web Yes, Inc. and
Eggrock Partners, Inc. as if these acquisitions had occurred on January 1, 1999.
The summary pro forma consolidated balance sheet data as of December 31, 1999
give effect to the acquisition of Eggrock Partners, Inc. as if it had occurred
on December 31, 1999. The summary pro forma as adjusted balance sheet data as of
December 31, 1999 give effect to our sale of shares of common stock in this
offering.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 PRO
1997 1998 1999 FORMA
---- ---- ---- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $6,118 $10,018 $ 25,390 $ 39,096
Income (loss) from operations............................... 1,016 (700) (10,865) (74,631)
Net income (loss)........................................... 1,074 (575) (10,367) (74,096)
Net income (loss) per share--
basic and diluted......................................... $ 0.08 $ (0.05) $ (0.59) $ (2.80)
Weighted average shares outstanding......................... 12,826 12,680 17,440 26,459
Pro forma net income (loss)................................. $ 644 $ (380)
Pro forma net income (loss) per share--
basic and diluted......................................... $ 0.05 $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------ ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,920 $ 12,213
Total assets................................................ 77,461 362,499
Total long-term liabilities................................. 2,001 2,001
Stockholders' equity........................................ 68,340 350,340
</TABLE>
4
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE
DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. WHILE THESE ARE THE RISKS AND
UNCERTAINTIES WE BELIEVE ARE MOST IMPORTANT FOR YOU TO CONSIDER, YOU SHOULD KNOW
THAT THEY ARE NOT THE ONLY RISKS OR UNCERTAINTIES FACING US OR WHICH MAY
ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OR UNCERTAINTIES
ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD
LIKELY SUFFER. IN THAT EVENT, THE MARKET PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON
STOCK.
RISKS RELATED TO OUR BUSINESS
OUR FUTURE SUCCESS IS UNCERTAIN BECAUSE WE HAVE SIGNIFICANTLY CHANGED OUR
BUSINESS
Prior to 1999, we primarily provided traditional systems integration
services along with limited strategic planning and Internet systems integration
services. In 1999, we added application hosting to our service offerings and
substantially increased our capacity to provide strategic planning and Internet
systems integration services through three acquisitions and significant hiring
of professionals. We will further expand our consulting and systems
implementation services in connection with our planned acquisition of Eggrock.
In part due to these recent significant changes, we are subject to the risk that
we will fail to successfully implement our business model and strategy. This
risk is heightened because we are operating in the new and rapidly evolving
e-business solutions market. Our historical results of operations do not reflect
our new service offerings. The pro forma financial information included in this
prospectus is based on the separate pre-acquisition financial reports of the
companies we acquired in 1999 and our planned acquisition of Eggrock.
Consequently, our historical operating results and pro forma financial
information may not give you an accurate indication of how we will perform in
the future.
OUR BUSINESS WILL SUFFER IF GROWING ENTERPRISES DO NOT ADOPT AND ACCEPT
APPLICATION HOSTING SERVICES
Our ability to increase revenues and achieve profitability depends on the
adoption and acceptance of third-party application hosting services by our
target market of growing enterprises. Information technology service providers,
including Breakaway, only recently have begun to offer third-party application
hosting services. The market for these services has only recently begun to
develop and is evolving rapidly.
OUR BUSINESS WILL SUFFER IF GROWING ENTERPRISES DO NOT ACCEPT E-BUSINESS
SOLUTIONS
Our ability to increase revenues and achieve profitability depends on the
widespread acceptance of e-business solutions by commercial users, particularly
growing enterprises. The market for e-business solutions is relatively new and
is undergoing significant change. The acceptance and growth of e-business
solutions will be limited if the Internet does not prove to be a viable
commercial market.
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO INCUR LOSSES IN THE FUTURE
AND WILL NOT BE SUCCESSFUL UNLESS WE CAN REVERSE THIS TREND
We expect to continue to incur increasing sales and marketing,
infrastructure development and general and administrative expenses. As a result,
we will need to generate significant revenues to achieve profitability. We
cannot be certain whether or when this will occur because of the significant
uncertainties with respect to our business model. We experienced net losses of
$575,175 and $10.4 million for the fiscal years ended December 31, 1998 and
1999, respectively. We expect to continue to incur significant operating losses
in the foreseeable future. If we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
5
<PAGE>
WE PLAN TO EXPAND RAPIDLY; IF WE CANNOT MANAGE OUR GROWTH SUCCESSFULLY, OUR
GROWTH MAY SLOW OR STOP
We have recently expanded our operations extensively. Our growth has placed,
and will continue to place, a significant strain on our management, operating
and financial systems, and sales, marketing and administrative resources. If we
cannot manage our expanding operations, we may not be able to continue to grow
or we may grow at a slower pace. Furthermore, our operating costs may escalate
faster than planned. In order to manage our growth successfully we must:
- improve our management, financial and information systems and controls;
- expand, train and manage our employee base effectively; and
- enlarge our infrastructure for application hosting services.
WE RELY ON A SMALL NUMBER OF CLIENTS FOR MOST OF OUR REVENUES; OUR REVENUES
WILL DECLINE SIGNIFICANTLY IF WE CANNOT KEEP OR REPLACE THESE CLIENTS
In 1998, revenues from a single client accounted for approximately 27.0% of
our total revenues, and revenues from our five largest clients accounted for
54.0% of total revenues. In 1999, while no single client accounted for more than
10% of our total revenues, Internet Capital Group, which is our largest
shareholder and has two representatives on our board of directors, and related
companies accounted for 17.9% of total revenues. Revenues from our five largest
clients accounted for approximately 26% of total revenues in 1999. If these
clients do not need or want to engage us to perform additional services for them
and we are not able to sell our services to new clients at comparable or greater
levels, our revenues will decline.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE LIKELY TO VARY, WHICH MAY
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE
Our quarterly revenues and operating results are volatile and difficult to
predict. Our quarterly operating results have varied in the past and are likely
to vary significantly from quarter to quarter in the future. It is likely that
in some future quarter or quarters our operating results will be below the
expectations of public market analysts or investors. If so, the market price of
our common stock may decline significantly. Factors that may cause our results
to fluctuate include:
- the amount and timing of demand by our clients for application hosting and
e-business solution services;
- goodwill amortization charges attributable to the acquisition of Eggrock;
- our ability to obtain new and follow-on client engagements;
- the number, size and scope of our projects;
- cancellations or reductions in the scope of major consulting and systems
integration projects;
- our ability to enter into multi-year contracts with application hosting
clients;
- our ability to collect accounts receivable from some of our growing
enterprise clients who, as a result of their short operating histories and
emerging businesses, have not paid us on a timely basis;
- cancellations of month-to-month application hosting contracts;
- the length of the sales cycle associated with our service offerings;
- the introduction of new services by us or our competitors;
- changes in our pricing policies or those of our competitors;
6
<PAGE>
- gains recognized and related compensation expenses we incur as a result of
our venture capital investments and commitments to employees based on the
performance of those investments;
- our ability to attract, train and retain skilled personnel in all areas of
our business;
- our ability in a consistent and accurate manner to manage costs, including
personnel costs and support services costs; and
- the timing and cost of anticipated openings or expansions of new regional
offices and new Solution Centers.
We derive a substantial portion of our revenues from providing professional
services. We generally recognize revenues as we provide services. Personnel and
related costs constitute a substantial portion of our operating expenses.
Because we establish the levels of these expenses in advance of any particular
quarter, underutilization of our professional services employees may cause
significant reductions in our operating results for a particular quarter.
OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL
We believe that our success depends largely on our ability to attract and
retain highly skilled technical, consulting, managerial, sales and marketing
personnel. We may not be able to hire or retain the necessary personnel to
implement our business strategy. In addition, we may need to pay higher
compensation for employees than we currently expect. Individuals with e-business
solutions skills, particularly those with the significant experience which we
generally require, are in very short supply. Competition to hire from this
limited pool is intense.
WE MAY LOSE MONEY ON FIXED-FEE CONTRACTS AND PERFORMANCE-BASED CONTRACTS
We derive a portion of our revenues from fixed-fee contracts. We
occasionally make a portion of our fees contingent on meeting performance
objectives. If we misjudge the time and resources necessary to complete a
project, or if a client does not achieve the agreed upon performance objectives,
we may incur a loss in connection with the project. This risk is heightened
because we work with complex technologies in compressed time frames.
OUR GROWTH STRATEGY WILL FAIL IF WE ARE UNABLE TO OPEN NEW REGIONAL OFFICES
SUCCESSFULLY
A key component of our growth strategy is to open regional offices in new
U.S. and foreign locations. If we do not implement this strategy successfully,
we will not grow. We devote substantial financial and management resources to
launch these offices. We may not select appropriate locations for these regional
offices. We also may not be able to open these offices efficiently or manage
them profitably.
WE FACE INCREASED RISKS IN CONDUCTING BUSINESS ABROAD WHICH MAY DAMAGE OUR
BUSINESS RESULTS
One component of our growth strategy is to expand into international
markets. We recently opened an office in London. We believe that we will face
certain risks in doing business abroad that we do not face domestically. Among
the international risks we believe are most likely to affect us are:
- costs and difficulties in staffing and managing international operations;
- strains on our financial and other systems to properly administer VAT and
other taxes, and different cost structures;
- unexpected changes in regulatory requirements;
- increased tariffs and other trade barriers;
- costs and delays of localizing products and offerings for local market and
the costs and difficulties in complying with local business customs;
7
<PAGE>
- difficulties in enforcing contractual and intellectual property rights;
- heightened risks of political and economic instability and the possibility
of nationalization or expropriation of industries or properties;
- potentially adverse tax consequences including restrictions on
repatriating earnings and the threat of "double taxation;"
- the burden of complying with a wide variety of foreign laws and
regulations, some of which may conflict with U.S. laws;
- currency issues, including fluctuations in current exchange rates and the
adoption of the Euro by many countries of the European Union by 2003; and
- restrictions on the import and export of sensitive U.S. technologies, such
as data security and encryption software and systems that we may wish to
deliver to our customers.
Any of these factors or other factors not listed here could damage our
business results. There can be no assurance that one or more of these factors
will not have a material adverse effect on our foreign operations, and,
consequentially, our business, operating results and financial condition.
IF OUR EFFORTS TO DEVELOP BRAND AWARENESS ARE NOT SUCCESSFUL, WE WILL NOT
INCREASE REVENUES AS PLANNED
An important element of our business strategy is to develop and maintain
widespread awareness of the Breakaway name. To promote our name and brand
identity, we have expended considerable amounts and may increase our marketing
expenses. These expenses have caused and may likely cause our operating margins
to decline. If these efforts are not successful, we will not experience any
increase in revenues to offset these expenses. We may nonetheless continue to
incur these expenses, possibly at higher levels. Moreover, our name may be
closely associated with the business difficulties of some of our clients, many
of whom are pursuing unproven business models in competitive markets. As a
result, the difficulties or failure of one or more of our clients could damage
our name and brand identity.
OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD
RESULT IN LOSSES AND NEGATIVE PUBLICITY
Many of our engagements involve information technology solutions that are
critical to our clients' businesses. Any defects or errors in these solutions or
failure to meet clients' specifications or expectations could result in:
- delayed or lost revenues due to adverse client reaction;
- requirements to provide additional services to a client at no charge;
- refunds of monthly application hosting fees for failure to meet service
level obligations;
- negative publicity about Breakaway and our services, which could adversely
affect our ability to attract or retain clients; or
- claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our insurance
policies and which may not be limited by the contractual terms of our
engagement.
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WE GENERATE A SIGNIFICANT PORTION OF OUR REVENUES FROM SERVICES RELATED TO
PACKAGED SOFTWARE APPLICATIONS OF A LIMITED NUMBER OF VENDORS; WE WOULD
EXPERIENCE A REDUCTION IN REVENUES IF ANY OF THOSE VENDORS CEASED DOING BUSINESS
WITH US
We derive a significant portion of our revenues from projects in which we
customize, implement or host packaged software applications developed by third
parties. We do not have contractual arrangements with most of these software
vendors. As a result, those software vendors with whom we do not have
contractual arrangements can cease making their products available to us at
their discretion. Even in the case of software vendors with whom we do have
contractual arrangements, those arrangements are either terminable at will by
either party or are for short terms. In addition, these software vendors may
choose to compete against us in providing strategic consulting, systems
integration or application hosting services. Moreover, our success is dependent
upon the continued popularity of the product offerings of these vendors and on
our ability to establish relationships with new vendors in the future. If we are
unable to obtain packaged applications from these or comparable vendors or, if
our vendors choose to compete with us or the popularity of our products
declines, our business and operating results may be adversely affected.
OUR MARKETS ARE HIGHLY COMPETITIVE AND OUR FAILURE TO COMPETE SUCCESSFULLY
WILL LIMIT OUR ABILITY TO RETAIN AND INCREASE OUR MARKET SHARE
Our markets are new, rapidly evolving and highly competitive. We expect this
competition to persist and intensify in the future. Our failure to maintain and
enhance our competitive position will limit our ability to maintain and increase
our market share, which would result in serious harm to our business. Many of
our competitors are substantially larger than we are and have substantially
greater financial, infrastructure and personnel resources than we have.
Furthermore, many of our competitors have well established, large and
experienced marketing and sales capabilities and greater name recognition than
we have. As a result, our competitors may be in a stronger position to respond
quickly to new or emerging technologies and changes in client requirements. They
may also develop and promote their services more effectively than we do.
Moreover, barriers to entry, particularly in the strategic consulting and
systems integration markets, are low. We therefore expect additional competitors
to enter these markets.
IF WE ARE UNABLE TO REUSE SOFTWARE CODE AND METHODOLOGIES, WE MAY NOT BE
ABLE TO DELIVER OUR SERVICES RAPIDLY AND COST-EFFECTIVELY
Our business model depends to a significant extent on our ability to reuse
software code and methodologies that we develop in the course of client
engagements. If we generally are unable to negotiate contracts to permit us to
reuse code and methodologies, we may be unable to provide services to our
growing enterprise clients at a cost and within time frames that these clients
find acceptable. Our clients may prohibit us from such reuse or may severely
limit or condition reuse.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO HAVE RECENTLY JOINED US
AND WHOM WE MAY NOT BE ABLE TO RETAIN
Many members of our senior management joined us in 1999. Many of these
individuals have not previously worked together and are becoming integrated as a
management team. As a result, our senior managers may not work together
effectively as a team. In addition, due to the competitive nature of our
industry, we may not be able to retain all of our senior managers.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE TO US, AND WHICH,
IF RAISED, MAY DILUTE YOUR OWNERSHIP INTEREST IN US
We may need to raise additional funds through public or private equity or
debt financings in order to:
- support additional capital expenditures;
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<PAGE>
- take advantage of acquisition or expansion opportunities;
- develop new services; or
- address additional working capital needs.
If we cannot obtain financing on terms acceptable to us or at all, we may be
forced to curtail some or all of these activities. As a result, we could grow
more slowly or stop growing. Any additional capital raised through the sale of
equity will dilute your ownership interest in us and may be on terms that are
unfavorable to holders of our common stock.
WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH MAY LIMIT OUR ABILITY TO
MANAGE AND MAINTAIN OUR BUSINESS, MAY RESULT IN ADVERSE ACCOUNTING TREATMENT AND
MAY BE DIFFICULT TO INTEGRATE INTO OUR BUSINESS
Since March 1999, we have acquired four companies and have entered into a
binding agreement to acquire Eggrock. We may undertake additional acquisitions
in the future. Acquisitions involve a number of risks, including:
- diversion of management attention;
- amortization of substantial goodwill, adversely affecting our reported
results of operations;
- inability to retain the management, key personnel and other employees of
the acquired business;
- inability to establish uniform standards, controls, procedures and
policies;
- inability to retain the acquired company's customers; and
- exposure to legal claims for activities of the acquired business prior to
acquisition.
Integrating the operations of an acquired business can be a complex process
that requires integration of service personnel, sales and marketing groups,
hosting infrastructure and service offerings and coordination of our development
efforts. Client satisfaction or performance problems with an acquired business
also could affect our reputation as a whole. In addition, any acquired business
could significantly underperform relative to our expectations. For example, if
we are unsuccessful in integrating Eggrock into our operations, or if Eggrock's
clients delay or cancel contracts as a result of our planned acquisition, our
business could be seriously harmed.
WE MAY NOT BE ABLE TO DELIVER OUR APPLICATION HOSTING SERVICES IF THIRD
PARTIES DO NOT PROVIDE US WITH KEY COMPONENTS OF OUR HOSTING INFRASTRUCTURE
We depend on other companies to supply key components of the computer and
telecommunications equipment and the telecommunications services which we use to
provide our application hosting services. Some of these components are available
only from sole or limited sources in the quantities and quality we demand.
Although we lease redundant capacity from multiple suppliers, a disruption in
our ability to provide hosting services could prevent us from maintaining the
required standards of service, which would cause us to incur contractual
penalties.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, EVEN WITHOUT MERIT,
COULD COST A SIGNIFICANT AMOUNT OF MONEY TO DEFEND AND MAY DIVERT MANAGEMENT'S
ATTENTION
As the number of e-business applications in our target market increases and
the functionality of these applications overlaps, we may become subject to
infringement claims. We cannot be certain that our services, the solutions that
we deliver or the software used in our solutions do not or will not infringe
valid patents, copyrights or other intellectual property rights held by third
parties. If there is infringement, we could be liable for substantial damages.
Any infringement claims, even if without merit, can be time consuming and
expensive to defend. They may divert management's attention and resources and
could cause service implementation delays. They also could require us to enter
into costly royalty or licensing agreements.
10
<PAGE>
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS
If third parties infringe or misappropriate our trade secrets, copyrights,
trademarks or other proprietary information, our business could be seriously
harmed. The steps that we have taken to protect our proprietary rights may not
be adequate to deter misappropriation of our intellectual property. In addition,
we may not be able to detect unauthorized use of our intellectual property and
take appropriate steps to enforce our rights. Also, protection of intellectual
property in many foreign countries is weaker and less reliable than in the
United States. Accordingly, as our business expands into foreign countries,
risks associated with protecting our intellectual property will increase.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE USE OF THE INTERNET DECLINES
Our business is dependent upon continued growth in the use of the Internet
by our clients, prospective clients and their customers and suppliers. If the
number of users on the Internet does not increase and commerce over the Internet
does not become more accepted and widespread, demand for our services may
decrease and, as a result, our revenues would decline. Factors that may affect
Internet usage or electronic commerce adoption include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic;
- inconsistent quality of service;
- increases in access costs to the Internet;
- excessive governmental regulation;
- uncertainty regarding intellectual property ownership;
- reluctance to adopt new business methods; and
- costs associated with the obsolescence of existing infrastructure.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INVESTORS PURCHASING SHARES IN THIS OFFERING
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. Prices for
our common stock will be determined in the marketplace and may be influenced by
many factors, including variations in our financial results, changes in earnings
estimates by industry research analysts, investors' perceptions of us and
general economic, industry and market conditions.
OUR EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
CURRENTLY CONTROL AND WILL CONTINUE TO CONTROL BREAKAWAY SOLUTIONS AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL THAT
STOCKHOLDERS MAY BELIEVE WILL IMPROVE MANAGEMENT AND COULD DEPRESS OUR STOCK
PRICE BECAUSE PURCHASERS CANNOT ACQUIRE A CONTROLLING INTEREST
When this offering is completed, our executive officers, directors and
stockholders who beneficially own more than 5.0% of our stock will, in the
aggregate, beneficially own shares representing approximately 71.5% of our
capital stock. As a result, these persons, acting together, will be able to
control all matters submitted to our stockholders for approval and to control
our management and affairs. For example, these persons, acting together, will
control the election and removal of directors and any merger, consolidation or
sale of all or substantially all of our assets. This control could have
11
<PAGE>
the effect of delaying or preventing a change of control of Breakaway that
stockholders may believe would result in better management. In addition, this
control could depress our stock price because purchasers will not be able to
acquire a controlling interest in us.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH
WHICH YOU MAY DISAGREE
Our management will retain broad discretion to allocate the proceeds of this
offering. Management's failure to apply these funds effectively could have an
adverse effect on our ability to implement our strategy.
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY SHARES BECOMING AVAILABLE FOR
SALE
Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION WHICH COULD RESULT IN
SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the potential volatility of our stock price, we may be the
target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources.
PURCHASERS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
OF THEIR INVESTMENT
Purchasers of common stock in this offering will pay a price per share which
substantially exceeds the per share value of our assets after subtracting our
liabilities. As a result, investors purchasing common stock in this offering
will incur immediate and substantial dilution.
WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws and provisions of
Delaware law could delay, defer or prevent an acquisition or change of control
of Breakaway or otherwise adversely affect the price of our common stock. For
example, our board of directors is staggered in three classes, so that only
one-third of the directors can be replaced at any annual meeting. Additionally,
our bylaws limit the ability of stockholders to call a special meeting. Our
certificate of incorporation also permits our board to issue shares of preferred
stock without stockholder approval. In addition to delaying or preventing an
acquisition, the issuance of a substantial number of preferred shares could
adversely affect the price of the common stock. Please refer to "Description of
Capital Stock" for a more detailed discussion of these provisions.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will" and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position or state other "forward-looking" information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control. The factors listed in the section captioned "Risk
Factors," as well as any cautionary language elsewhere in this prospectus,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our forward-
looking statements. Before you invest in our common stock you should be aware
that the occurrence of the events described in these risk factors and elsewhere
in this prospectus could have an adverse effect on our business, results of
operations and financial position.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 1,800,000 shares of
common stock offered by us will be approximately $ after deducting
estimated underwriting discounts and our estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $ . We will not receive any of the
proceeds from the sale of the shares being sold by the selling stockholders.
We expect to use the net proceeds received from this offering for working
capital and other general corporate purposes, including possible acquisitions of
businesses, products and technologies. In addition, we may use some of the
proceeds to fund investment commitments made by our existing wholly-owned
venture capital fund, Breakaway Capital I LLC, or made by future funds.
Currently, we have not made any plans, commitments or agreements with respect to
using any of the proceeds from this offering towards any investments or new
funds. For a more detailed discussion about Breakaway Capital, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview." From time to time we engage in discussions with potential
acquisition candidates. However, we have no current plans, commitments or
agreements with respect to any acquisitions, and we may not make any
acquisitions.
Except as described above, we have not identified specific uses for the net
proceeds of this offering, and we will have discretion over their use and
investment. Pending use of the net proceeds, we intend to invest these proceeds
in short-term, investment grade, interest-bearing instruments.
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<PAGE>
DIVIDEND POLICY
We intend to retain future earnings, if any, to finance our growth strategy.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our Board of Directors after taking into account various factors,
including:
- our financial condition;
- our operating results;
- our current and anticipated cash needs;
- restrictions in our financing agreements; and
- our plans for expansion.
PRICE RANGE OF OUR COMMON STOCK
Our common stock has traded on the Nasdaq National Market under the symbol
"BWAY" since October 6, 1999. Prior to that there was no public market for our
common stock. On March 23, 2000, Breakaway effected a two-for-one stock split
through a stock dividend of Breakaway common stock. The table below sets forth,
for the periods indicated, the high and low sale prices of our common stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
---------------------------
HIGH LOW
---------------- --------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter (from October 6, 1999)..................... $ 38.50 $ 18.06
FISCAL YEAR ENDING DECEMBER 31, 2000:
First Quarter (through March 27, 2000).................... $ 85.50 $ 27.50
</TABLE>
As of December 31, 1999, there were 96 holders of record of our common
stock. On March 27, 2000, the last sale price reported on the Nasdaq National
Market for our common stock was $57.50 per share.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the acquisition of Eggrock; and
- on a pro forma as adjusted basis to reflect the issuance and sale of
1,800,000 shares of common stock in this offering and the receipt of the
net proceeds after deducting the estimated underwriting discounts and our
estimated offering expenses.
The number of shares outstanding is based on the number of shares of our
common stock outstanding on December 31, 1999. It excludes 16,050,892 shares
subject to options outstanding under our 1998 stock plan and 1999 stock
incentive plans at a weighted average exercise price of $2.59 per share and
8,029,840 additional shares available for issuance under the 1999 plan. It also
excludes 169,562 shares issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $4.25 per share. You should read this table
together with our consolidated financial statements and the notes to those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including capital lease
obligations--current portion.............................. $ 1,158 $ 1,815
Long-term debt, including note payable to stockholder and
capital lease obligations--long-term portion.............. 2,001 2,001
Stockholders' equity:
Common stock, $0.000125 par value per share, 160,000,000
authorized, actual, pro forma and pro forma as adjusted:
37,889,084 issued and 34,778,684 outstanding, actual,
45,161,084 issued and 42,050,684 outstanding, pro forma,
issued and outstanding, pro forma as
adjusted................................................ 4 4
Additional paid-in-capital.................................. 78,868 360,868
Less: deferred compensation................................. (253) (253)
Retained earnings (deficit)................................. (10,367) (10,367)
Accumulated other comprehensive income...................... 88 88 88
-------- -------- ---
Total stockholders' equity............................ 68,340 350,340
-------- -------- ---
Total capitalization.................................. $ 71,499 $354,156
======== ======== ===
</TABLE>
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DILUTION
Our pro forma net tangible book value at December 31, 1999, was
approximately $66.0 million, or $1.57 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total pro forma
tangible assets (total assets less intangible assets) reduced by our total pro
forma liabilities, divided by the number of pro forma shares of common stock
outstanding. After giving effect to our sale of 1,800,000 shares of common stock
in this offering and our receipt of the net proceeds (after deducting the
underwriting discounts and our estimated offering expenses), our pro forma net
tangible book value as of December 31, 1999 would have been approximately
$ million, or $
per share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $ per share to new investors purchasing
shares in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $
Pro forma net tangible book value per share as of
December 31, 1999....................................... $
Increase in pro forma net tangible book value per share
attributable to new investors...........................
-----
Pro forma net tangible book value per share after this
offering................................................
------
Dilution per share to new investors....................... $
======
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our audited consolidated financial statements and
related notes thereto included elsewhere in this prospectus.
The selected consolidated financial data presented below as of December 31,
1997, 1998 and 1999 and for the years then ended are derived from the
consolidated financial statements of Breakaway, which consolidated financial
statements have been audited by KPMG LLP, independent certified public
accountants. The selected consolidated financial data as of December 31, 1995
and 1996 and for each of the years then ended are derived from the unaudited
consolidated financial statements of Breakaway. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations for such
periods. The selected consolidated financial data for 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000 or any other future period.
From its inception until December 31, 1998, Breakaway was an S corporation
and, accordingly, was not subject to federal and state income taxes, except for
certain Massachusetts income taxes on S corporations with annual revenues in
excess of $6 million. The pro forma net income (loss) and pro forma net income
(loss) per share--basic and diluted information presented below have been
computed as if Breakaway were subject to all federal and all applicable state
corporate income taxes since 1995, based on the statutory tax rates and the tax
laws then in effect.
The following selected unaudited pro forma consolidated statement of
operations data for Breakaway for the year ended December 31, 1999 give effect
to the acquisitions of Applica Corporation, WPL Laboratories, Inc., Web
Yes, Inc. and Eggrock Partners, Inc. as if these acquisitions had occurred on
January 1, 1999. The selected unaudited pro forma consolidated balance sheet
data as of December 31, 1999 give effect to the acquisition of Eggrock as if it
had occurred on December 31, 1999.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 PRO
1995 1996 1997 1998 1999 FORMA
---- ---- ---- ---- ---- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $1,896 $3,462 $6,118 $10,018 $ 25,390 $ 39,096
Operating expenses:
Project personnel costs................................... 967 1,430 2,543 5,904 11,850 19,289
Selling, general and administrative....................... 740 1,368 2,559 4,814 22,403 29,480
Amortization of deferred costs............................ -- -- -- -- 1,000 35,186
Amortization of goodwill and intangible assets............ -- -- -- -- 1,002 29,772
------ ------ ------ ------- -------- --------
Total operating expenses................................ 1,707 2,798 5,102 10,718 36,255 113,727
Income (loss) from operations............................... 189 664 1,016 (700) (10,865) (74,631)
Interest income (expense), net.............................. 8 (25) 60 (32) 475 512
Other income (expense)...................................... -- (21) (2) 157 23 23
------ ------ ------ ------- -------- --------
Net income (loss)........................................... $ 197 $ 618 $1,074 $ (575) $(10,367) $(74,096)
====== ====== ====== ======= ======== ========
Net income (loss) per share--
Basic and diluted......................................... $ 0.01 $ 0.05 $ 0.08 $ (0.05) $ (0.59) $ (2.80)
Weighted average shares outstanding......................... 15,360 13,282 12,826 12,680 17,440 26,459
Pro forma net income (loss)................................. $ 118 $ 371 $ 644 $ (380)
====== ====== ====== =======
Pro forma net income (loss) per share--
Basic and diluted......................................... $ 0.01 $ 0.03 $ 0.05 $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1999 PRO
1995 1996 1997 1998 1999 FORMA
---- ---- ---- ---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 94 $ 84 $ 879 $ 17 $ 3,920 $ 12,213
Total assets................................................ 740 1,120 2,533 2,743 77,461 362,499
Total long-term liabilities................................. 69 55 84 67 2,001 2,001
Stockholders' equity........................................ 332 948 1,492 913 68,340 350,340
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES AND EXCHANGE ACT
OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE INCLUDED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE THOSE SET FORTH UNDER
"RISK FACTORS" COMMENCING ON PAGE 5. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS."
OVERVIEW
Breakaway is a Delaware corporation. We were incorporated in Massachusetts
under the name The Counsell Group, Inc. in 1992, and reincorporated in Delaware
in August 1995. In October 1998, we changed our name to Breakaway
Solutions, Inc.
We are a full service provider of e-business solutions that allow growing
enterprises to capitalize on the power of the Internet to reach and support
customers and markets. Our services consist of Breakaway strategy solutions,
Breakaway e-business solutions and Breakaway application hosting. From our
inception in 1992 through 1998, our operating activities primarily consisted of
providing Internet solutions and customer relationship management solutions
services. Prior to our acquisition of Applica, we derived no revenues from
application hosting. We believe that application hosting will account for a
significantly greater portion of our total revenue in the future. As a result of
the acquisition of Applica, we began offering application hosting services in
1999.
Historically, we have offered our services to clients primarily under time
and materials contracts. For these projects, we recognize revenues based on the
number of hours worked by consultants at a rate per hour agreed upon with our
clients. We have also performed some services under fixed-fee contracts. We
recognize revenues from fixed-fee contracts on a percentage of completion method
based on the ratio of costs incurred to total estimated costs.
Due to our use of fixed-fee contracts, our operating results may be affected
adversely by inaccurate estimates of costs required to complete projects.
Therefore, we employ a series of project review processes designed to help
provide accurate project cost and completion estimates, including a detailed
review at the end of each specified reporting period to determine project
percentage of completion to date.
We generally derive our initial pricing for a contract from our internal
cost and fixed-fee pricing model. This model helps our professionals estimate
pricing based on the scope of work and materials required. The model also takes
into account project complexity and technical risks.
We seek to mitigate our risks under fixed-fee contracts by providing
fixed-fee quotes for discrete phases of each project. Using this approach, we
are able to price more accurately the next phase of the engagement by virtue of
having greater knowledge of our client's needs and the project's complexity. We
reflect any losses on projects in process in the period in which they become
known.
We typically receive an advance payment from our strategy consulting
services clients upon contract signing, with additional payments required upon
our attainment of project milestones. Deferred revenue consists principally of
these advance payments. We recognize those payments upon performance of
services.
We price our application hosting contracts on a fixed-fee basis. We
recognize revenues from these contracts as services are provided each month. In
addition, we charge our application hosting clients a one time set-up fee, which
we recognize when set-up is complete. Pricing varies for each client based on
the prospective application to be hosted. Factors which determine pricing
generally include
19
<PAGE>
telecommunications bandwidth required, physical space requirements in our leased
hosting facilities and the technological complexity of supporting the hosted
application.
In 1998, revenues from a single client accounted for approximately 27.0% of
our total revenues, and revenues from our five largest clients accounted for
54.0% of total revenues. In 1999, while no single client accounted for more than
10% of our total revenues, Internet Capital Group, which is our largest
shareholder and has two representatives on our Board of Directors, and related
companies accounted for 17.9% of our total revenues. Revenues from our five
largest clients acccounted for approximately 26% of total revenues in 1999. If
these clients do not need or want to engage us to perform additional services
for them and we are not able to sell our services to new clients at comparable
or greater levels, our revenues will decline.
Our expense items include project personnel costs, sales and marketing
expenses and general and administrative expenses:
- Project personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments;
- Sales and marketing expenses consist primarily of salaries (including
sales commissions), consulting fees, trade show expenses, advertising and
the cost of marketing literature; and
- General and administrative expenses consist primarily of administrative
salaries, salaries for employees on the Breakaway Knowledge Innovation
Team, fees for professional services and other operating costs, such as
rent.
In December 1999, we formed Breakaway Capital I LLC, a wholly-owned venture
capital fund, for the primary purpose of making minority interest investments in
clients. We intend to make total investments of approximately $5 million through
Breakaway Capital. Breakaway Capital has invested approximately $2.0 million at
this time and continues to evaluate other investment opportunities. We intend to
distribute approximately 50% of the profits earned by Breakaway Capital to
certain employees who are not our executive officers. Those employees eligible
to receive these profits will be selected based upon performance-related
criteria determined by us. We have committed to make cash distributions to these
employees if Breakaway Capital liquidates any investment at a profit, provided
that the employee is employed by us at the time of the distribution. This
commitment by us means that we will incur compensation expense with respect to
amounts to be paid to employees.
The determination of the amount of compensation expense, due to gains in
Breakaway Capital, and the timing of when we must recognize that expense, are
subject to a number of factors, based primarily on the nature and performance of
investments by Breakaway Capital. It is therefore not possible to predict if and
when such compensation expense will occur. For the same reasons, it is not
possible to predict when we will recognize any gains from the investments of
Breakaway Capital or whether those gains will occur in the same fiscal quarter
that compensation expense occurs. If Breakaway Capital realizes large returns on
its investments, we could experience significant variations in our quarterly
results unrelated to our business operations. These variations could be due to
significant gains or to significant compensation expenses. While gains may
offset compensation expenses in a particular quarter, there can be no assurance
that related gains and compensation expenses will occur in the same quarter.
ACQUISITIONS
We completed three acquisitions in 1999. These acquisitions enabled us to
become a full service provider by substantially expanding our capabilities in
providing systems integration services for e-business and by adding the
capability to host applications. The three acquisitions were:
- APPLICA. In March 1999, we acquired all of the outstanding shares of
Applica Corporation, a New York-based application hosting service
provider. Applica had no revenues for the period
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<PAGE>
beginning on its inception, September 24, 1998 and ending on December 31,
1998. We acquired Applica for 1,447,398 shares of Breakaway common stock.
- WPL. In May 1999, we acquired WPL Laboratories, Inc., a Philadelphia,
Pennsylvania-based Web development company. WPL focused primarily on
enabling companies to conduct business using the Internet as a
distribution channel. WPL had revenues of $2.6 million for the year ended
December 31, 1998. The total acquisition consideration paid consisted of
approximately $5.0 million in cash to be paid over a four-year period and
2,728,280 shares of our common stock. Each WPL stockholder received 50% of
his cash consideration at closing and will receive the remainder
incrementally over a four-year period so long as the stockholder does not
resign and is not terminated for cause. Of the shares of our common stock
issued to the former WPL stockholders, approximately 50% are subject to
our right, which lapses incrementally over a four-year period, to
repurchase the shares of the stockholder, at their value at the time of
the acquisition, upon the stockholder's resignation or our termination of
the stockholder for cause. Also, as a part of the acquisition, we assumed
all outstanding WPL stock options, which became exercisable for 629,608
shares of our common stock at an exercise price of $1.18 per share with a
four-year vesting period.
- WEB YES. In June 1999, we acquired Web Yes, Inc., a Cambridge,
Massachusetts-based application hosting service provider. This acquisition
strengthens our application hosting capabilities, providing us with
additional domestic and international hosting facilities. Web Yes had
revenues of $288,000 for the year ended December 31, 1998. We acquired Web
Yes for 984,982 shares of our common stock. Of the shares of our common
stock issued to the former Web Yes stockholders, 685,360 are subject to
our right, which lapses incrementally over a four year period, to
repurchase the shares of a particular stockholder upon the termination of
his employment with us. The repurchase price will be either at the share
value at the time of the acquisition if the stockholder terminates
employment or we terminate for cause, or at their fair market value if we
terminate the stockholder's employment without cause.
All three acquisitions were accounted for using the purchase method of
accounting, resulting in $14.7 million of intangible assets and deferred costs.
Intangible assets and deferred costs are being amortized over a three to
five-year period from the date of each acquisition.
In the first three months of 2000, we have completed one acquisition and we
have entered into a binding agreement for another. These acquisitions are:
- EGGROCK. In January 2000, we entered into a binding agreement to acquire
Eggrock Partners, Inc. Eggrock is a full service consulting and systems
integration firm that focuses on delivering customer-centered business
solutions to emerging enterprises. Eggrock assists growing companies in
selecting and implementing software applications that will allow companies
to operate their business more effectively through use of the Internet.
The total consideration for this acquisition will be 7,272,000 shares of
Breakaway common stock. Of these shares, approximately 6,176,379 will be
issued to Eggrock stockholders and approximately 1,095,621 will be
reserved for issuance to Eggrock option holders. Eggrock options will be
converted into options to acquire Breakaway common stock on the same basis
as Eggrock stock is converted into the right to receive Breakaway common
stock. Of the shares of our common stock to be issued to the former
Eggrock stockholders on closing, approximately 30.5% will be subject to
vesting over a four year period. We will account for this acquisition
using the purchase method of accounting, resulting in approximately
$272 million of intangible assets and deferred costs that we expect to
amortize over a three to five-year period from the closing of the
acquisition.
- DATACYR. In February 2000, we acquired DataCyr Corporation. DataCyr
develops and markets software designed to allow enterprises to seamlessly
move and transform data from multiple incompatible sources to common
databases. We believe that this acquisition will enhance our ability to
link our clients' legacy systems to their Web based systems. We acquired
DataCyr for
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110,000 shares of our common stock. Of those shares, approximately 85% are
owned by two individuals who are now employed by us. These shares are
subject to our right, which lapses incrementally over a four-year period,
to repurchase the shares from the applicable employee for a nominal amount
upon the employee's resignation without good reason or our termination of
the employee for cause. The acquisition was accounted for using the
purchase method of accounting, resulting in approximately $6.6 million of
intangible assets and deferred costs that will be amortized over a three
to five-year period from the date of the acquisition.
RESULTS OF OPERATIONS
The following tables set forth certain items included in our consolidated
statements of operations as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0%
Project personnel costs.............................. 41.6 59.0 46.8
Selling, general and administrative.................. 41.8 48.0 88.2
Amortization expense................................. -- -- 7.9
Operating income (loss).............................. 16.6% (7.0)% (42.9)%
</TABLE>
The following table sets forth the revenues from our core service offerings
for the periods indicated:
<TABLE>
<CAPTION>
REVENUE FOR THE YEARS
ENDED DECEMBER 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Strategy and eBusiness
Solutions............................................ $10,018 $23,298
Percentage of revenues............................... 100.0% 91.7%
Application hosting.................................... -- $ 2,092
Percentage of revenues............................... -- 8.3%
</TABLE>
As the preceding tables indicate, our revenues in the past were derived from
providing strategy and systems integration solutions services. We developed and
began implementation of our current strategy to become a leading full service
provider of Internet solutions for businesses in late 1998. As part of this
strategy, we acquired companies which gave us the ability to provide application
hosting services and expanded our ability to provide Internet solutions services
during the first six months of 1999. We began recognizing revenues from these
services in the second quarter of 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues for the year ended December 31, 1999 increased by
$15.4 million, or 154.0%, to $25.4 million from $10.0 million for the year ended
December 31, 1998. The increase was due primarily to increased market demand for
internet professional services and the addition of our hosting line of business,
which generated $2.1 million, or 8.3%, of our total revenues for the year ended
December 31, 1999. Additionally, we expanded geographically, which increased our
market presence and revenues.
PROJECT PERSONNEL COSTS. Project personnel costs for the year ended
December 31, 1999 increased by $6.0 million, or 100.0%, to $11.9 million from
$5.9 million for the year ended December 31, 1998. Project personnel costs
represented 59.0% of revenues for the year ended December 31, 1998, as compared
to 46.8% of revenues for the year ended December 31, 1999. The increase in
absolute dollars was due primarily to an increase in the number of employees
hired to perform the client
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<PAGE>
services delivered. Project personnel costs decreased as a percentage of
revenues for the year ended December 31, 1999 due primarily to an increase in
the average hourly billable rate of our professionals over the comparable period
in 1998 and, to a lesser extent, due to an increase in the average employee
utilization rate.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the year ended December 31, 1999 increased by $17.6 million, or
366.7%, to $22.4 million from $4.8 million for the year ended December 31, 1998.
As a percentage of revenues, selling, general and administrative expenses
increased from 48.0% for the year ended 1998 to 88.2% for the year ended 1999.
The increase in 1999 was due primarily to increases in personnel-related
expenses to support increased administrative employees, outside professional
fees for recruiting, the recruiting and hiring of a senior executive management
team, the hiring of dedicated sales and marketing employees, a brand name
marketing campaign, the investment in our hosting service line infrastructure,
amortization of acquisition intangible assets and deferred costs and the opening
of additional offices. Costs incurred relating to our application hosting
service line were $4.6 million in 1999.
AMORTIZATION EXPENSE. Amortization of deferred costs, goodwill and
intangible assets increased $2.0 million or 100% for the year ended
December 31, 1999, representing 7.9% of revenues. The increase is attributable
to amortization related to intangible assets recorded upon the acquisitions of
Applica Corporation, WPL Laboratories, Inc. and Web Yes, Inc. We amortize
deferred costs and intangible assets over their estimated useful lives, ranging
from three to five years.
INTEREST INCOME. Interest income, net, for the year ended December 31, 1999
increased to $0.7 million from $11,191 for the year ended December 31, 1998. The
increase in 1999 was due primarily to interest income earned on the invested
portion of proceeds from our preferred stock financings in January and
July 1999, as well as our initial public offering of Breakaway common stock in
October 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 increased by $3.9 million, or 63.9%, to
$10.0 million from $6.1 million for 1997. The increase in revenues was
attributable primarily to a significant increase in our average revenue per
client. This increase occurred because our typical client project in 1998 was
larger and more complex than the typical client project in 1997. We attribute
this change primarily to two factors, the increased demand of businesses for
sophisticated e-business solutions and our ability to address that demand by
increasing the number of its service professionals.
PROJECT PERSONNEL COSTS. Project personnel costs for 1998 increased by
$3.4 million, or 136.0%, to $5.9 million from $2.5 million for 1997. Project
personnel costs represented 58.9% of revenues for 1998 as compared to 41.6% of
revenues in 1997. The increase, as a percentage of revenues, for 1998 was due
primarily to a decrease in average employee utilization rates from 1997 to 1998.
The utilization rate decreased because we hired a number of new professionals in
1998. Typically, utilization rates are lower at the beginning of a
professional's employment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 increased by $2.2 million, or 84.6%, to
$4.8 million from $2.6 million for 1997. As a percentage of revenues, general
and administrative expenses increased from 41.8% in 1997 to 48.0% in 1998. The
increase was due primarily to increased payroll to support additional
administrative employees, outside professional fees for recruiting and
management consultants and rent for the establishment of new office locations in
Chicago, Illinois and San Mateo, California. Additionally, we incurred moving
expenses in 1998 due to the relocation of our Boston office.
INTEREST INCOME (EXPENSE), NET. Interest expense, net, for 1998 was $32,000
as compared to interest income, net, of $60,000 in 1997. Net interest expense in
1998 is a result of increased borrowings under
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<PAGE>
our line of credit to fund growth. Positive cash flow in 1997 allowed us to make
interest-bearing investments, resulting in net interest income for that year.
OTHER INCOME. Other income in 1998 consists primarily of a payment received
in connection with the early termination of our previously leased Boston office
space. We do not expect other income to be significant in future periods.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the eight quarters ended December 31, 1999 both in
absolute dollars and as a percentage of our revenues in each quarter. These data
have been derived from our unaudited interim consolidated financial statements
which, in our opinion, have been prepared on substantially the same basis as the
audited consolidated financial statements contained elsewhere in this prospectus
and include all normal recurring adjustments necessary for a fair presentation
of the financial information for the periods presented. These unaudited
quarterly results should be read in conjunction with our consolidated financial
statements and notes thereto included elsewhere in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $2,124 $2,605 $2,749 $2,540 $3,111 $ 4,452 $7,181 $10,646
Operating expenses:
Project personnel costs............ 1,180 1,415 1,481 1,828 1,553 2,064 3,421 4,812
Selling, general and
administrative................... 791 987 1,557 1,479 1,804 4,338 7,403 8,858
Amortization expense............... -- -- -- -- -- 320 858 824
------ ------ ------ ------ ------ ------- ------ -------
Total operating
expenses....................... 1,971 2,402 3,038 3,307 3,357 6,722 11,682 14,494
------ ------ ------ ------ ------ ------- ------ -------
Income (loss) from
operations.......................... 153 203 (289) (767) (246) (2,270) (4,501) (3,848)
------ ------ ------ ------ ------ ------- ------ -------
Other income (expense)............... 4 (2) 155 (32) 11 (13) 35 465
------ ------ ------ ------ ------ ------- ------ -------
Net income (loss).................... $ 157 $ 201 $ (134) $ (799) $ (235) $(2,283) $(4,466) $(3,383)
====== ====== ====== ====== ====== ======= ====== =======
AS A PERCENTAGE OF REVENUES:
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Project personnel costs............ 55.6 54.3 53.9 72.0 49.9 46.4 47.6 45.2
Selling, general and
administrative................... 37.2 37.9 56.6 58.2 58.0 97.4 103.1 83.2
Amortization expense............... -- -- -- -- -- 7.2 12.0 7.7
------ ------ ------ ------ ------ ------- ------ -------
Total operating
expenses....................... 92.8 92.2 110.5 130.2 107.9 151.0 162.7 136.1
------ ------ ------ ------ ------ ------- ------ -------
Income (loss) from
operations.......................... 7.2 7.8 (10.5) (30.2) (7.9) (51.0) (62.7) (36.1)
------ ------ ------ ------ ------ ------- ------ -------
Other income (expense)............... 0.2 (0.1) 5.6 (1.3) 0.3 (0.3) 0.5 4.4
------ ------ ------ ------ ------ ------- ------ -------
Net income (loss).................... 7.4% 7.7% (4.9)% (31.5)% (7.6)% (51.3)% (62.2)% (31.7)%
====== ====== ====== ====== ====== ======= ====== =======
</TABLE>
Throughout 1998, we derived most of our revenues through an alliance with
one software vendor. We experienced a decrease in revenues in the quarter ended
December 31, 1998 because the vendor changed its business practices with respect
to third party service providers. In response, we modified our business strategy
to add additional service offerings and hired additional senior management. Our
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<PAGE>
revenues increased in each quarter in 1999 due to increased demand for Internet
professional services combined with incremental revenues generated by Applica,
WPL and Web Yes.
Project personnel costs for the quarter ended December 31, 1998 increased in
absolute dollars and as a percentage of revenues as we continued to hire
professional services personnel while our revenues declined in that quarter.
Other than in the quarter ended December 31, 1998, project personnel costs as a
percentage of revenues remained relatively stable.
Selling, general and administrative expenses increased both in absolute
dollars and as a percentage of revenues in the quarter ended September 30, 1998
as a result of additional costs of outside professional services that we
incurred to support our recruitment program. For the third and fourth quarters
of 1998, our selling, general and administrative expenses remained relatively
stable as a percentage of revenues. In the last three quarters of 1999, our
selling, general and administrative expenses increased primarily due to an
increase in marketing expenses and the hiring of dedicated sales and marketing
and a number of other administrative employees during recent periods and, for
the quarter ended June 30, 1999, due to the hiring of five new executive
officers and incremental expenses associated with the operations of Applica, WPL
and Web Yes, including the addition of the administrative employees of Applica,
WPL and Web Yes. In the quarter ended September 30, 1999 our selling, general
and administrative expenses also increased as a result of our geographic
expansion. In July 1999, we issued 32,000 shares of common stock in
consideration for a license of technology and, as a result incurred a non-cash
charge of approximately $130,000, as a selling, general and administrative
expense, in the quarter ended September 30, 1999.
The operating results for any quarter are not necessarily indicative of the
results that may be expected for any future period.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1998, we funded our operations primarily
through cash provided by operations and a line of credit. In 1999, we funded our
operations through the issuance of preferred and common stock, and to a lesser
extent, through a line of credit and equipment leases.
Our cash balance was $3.9 million in 1999 and $17,000 in 1998. Our working
capital was $39.9 million in 1999 and $0.4 million in 1998.
Our operating activities used cash of $14.0 million in 1999 and
$0.3 million in 1998. The increase in cash used in 1999 primarily resulted from
costs we incurred in connection with hiring a new management team and
implementing new business acquisitions and increasing overhead. In addition, we
experienced an increase in our accounts receivable resulting from both increased
days outstanding and the extended payment terms of fixed-fee contracts.
Cash used in investing activities was $45.4 million in 1999 and $493,000 in
1998. The increase in cash used in 1999 primarily reflects additional
investments funded with the proceeds of our initial public offering in
October 1999. In addition, in 1999, we used $2.1 million in cash for our
acquired businesses.
We used cash for capital expenditures of $5.9 million and $0.5 million in
the years ended December 31, 1999 and 1998, respectively. These expenditures
were primarily for computer equipment, telecommunications equipment and
furniture and fixtures to support our growth, and to build our application
hosting service line.
We have various equipment lease financing facilities. The terms of these
equipment lease financings average two years. The annual interest rates on
borrowings range from 12.7% to 13.3%.
In December 1999, we entered into a Master Lease Agreement with Silicon
Valley Bank to finance up to $4.0 million of equipment and software. Leases
under the Master Lease Agreement will have terms of 36 months. Payments under
the leases will be determined based on an annual interest rate equal to the
annual rate on U.S. treasury securities of a comparable term plus 2.5%. In
connection
25
<PAGE>
with the Master Lease Agreement, we issued Silicon Valley Bank warrants to
purchase 21,818 shares of our common stock for $5.50 per share. The warrants are
exercisable until December 21, 2002.
In January 1999, we issued 5,853,000 shares of Series A Preferred Stock for
$8.3 million. We used the proceeds to purchase common stock from an existing
stockholder and to fund our operations.
In May 1999, we borrowed $4.0 million from Internet Capital Group and issued
Internet Capital Group a promissory note for $4.0 million bearing interest at
the prime interest rate plus one percent. This promissory note converted into
shares of our Series B Preferred Stock in our July 1999 Series B Preferred Stock
financing. We used the proceeds of the borrowing to help finance our acquisition
of WPL and to fund operations.
In July 1999, we issued 2,931,849 shares of Series B Preferred Stock for
approximately $19.0 million. We used the proceeds for working capital and other
general corporate purposes.
In October 1999, we consummated an initial public offering and issued
6,900,000 shares of our common stock for approximately $42.0 million, net of
underwriter's discounts, commissions and expenses. We are using the proceeds for
working capital and other general corporate purposes.
Between the second and fourth quarters of 1999, the level of our accounts
receivable relative to our revenues has increased from 97.7% to 115.7%. This
increase was due primarily to delays in our billing process resulting from the
integration of our acquisitions and the implementation of our new billing
system.
We believe that the proceeds of our initial public offering and funds that
are available under our line of credit will be sufficient to finance our capital
requirements for at least the next 12 months. There can be no assurance,
however, that our actual needs will not exceed expectations or that we will be
able to fund our operations in the absence of other sources. There also can be
no assurance that any additional required financing will be available through
additional bank borrowings, debt or equity offerings or otherwise, or that if
such financing is available, that it will be available on terms acceptable to
us.
MARKET RISK
To date, we have not utilized derivative financial instruments or derivative
commodity instruments. We do not expect to employ these or other strategies to
hedge market risk in the foreseeable future. We invest our cash in money market
funds, which are subject to minimal credit and market risk. We believe the
market risks associated with these financial instruments are immaterial.
26
<PAGE>
BUSINESS
OVERVIEW
We are a full service provider of e-business solutions that allow growing
enterprises to capitalize on the power of the Internet to reach and support
customers and markets. Growing enterprise clients often face significant
obstacles in capitalizing on this opportunity because of technological
complexity, the costs and time required for implementation and support and the
scarcity of qualified professionals. We enable our growing enterprise clients to
overcome these obstacles by combining high quality, cost effective Internet
professional services with application hosting to deliver sophisticated
e-business solutions that otherwise might be unavailable to them.
There are five key elements of our approach to delivering e-business
solutions:
- our proprietary Breakthrough Methodology enables us to develop rapid,
cost-effective, e-business solutions that we design to maximize our
client's return on their technology investments and provide our clients
with a sustainable business model and a competitive advantage;
- we concentrate on the development of our e-business solutions at
centralized Breakaway Solution Centers where our highly skilled
information technology professionals collaborate to develop solutions more
rapidly and cost effectively than would be possible if such professionals
were geographically dispersed;
- in order to maintain close contact with our clients, we deliver the
solutions developed at our Breakaway Solution Centers through small groups
of senior personnel at our regional offices located strategically
throughout the United States;
- we have a dedicated group of professionals--the Breakaway Knowledge
Innovation Team--that captures and disseminates our intellectual capital
throughout our organization and across client engagements; and
- we offer global application hosting capabilities for both packaged and
customized e-business solutions, allowing us to provide complementary,
high quality hosting and application level support services as part of our
full service offering.
Including Eggrock, we employ over 430 professionals who provide strategy
solutions, e-business solutions and application hosting services. Including
Eggrock, we offer services through ten regional offices located in Boca Raton,
Boston, Chicago, Dallas, Minneapolis, New York, Orlando, Philadelphia, Redwood
Shores and Washington, D.C. Including Eggrock, our six Breakaway Solution
Centers are located in Boca Raton, Boston, Minneapolis, Philadelphia, Dallas and
Redwood Shores. We provide application hosting solutions through facilities in
North America, Europe, Asia and Australia. Our clients include Circles,
Commonwealth Financial Network, eRisks, iTurf, Kemper, Plan Sponsor Exchange,
StarCite.com, Sun Microsystems and VerticalNet.
INDUSTRY BACKGROUND
OVERVIEW
Businesses today are using the Internet to create new revenue opportunities
by enhancing their interactions with new and existing customers. Businesses are
also using the Internet to increase efficiency in their operations through
improved communications, both internally and with suppliers and other business
partners. This emerging business use of the Internet encompasses both
business-to-business and business-to-consumer communications and transactions.
The projected growth of these markets over the next five years is dramatic,
particularly in business-to-business e-commerce. The GartnerGroup, an
independent research firm, projects that the volume of nonfinancial goods and
services sold through business-to-business e-commerce will reach $7.23 trillion
worldwide by 2004. In order to capitalize fully on the new opportunities
presented by the
27
<PAGE>
Internet, businesses demand Internet-based applications that process
transactions and deliver information far more effectively than static Web pages.
CHALLENGES FOR GROWING ENTERPRISES
The extensive reach of the Internet can enable growing enterprises to
compete effectively with larger competitors. However, growing enterprises face
significant challenges in their efforts to capitalize on the opportunities that
the Internet offers, including:
- the need to clearly articulate an integrated business and technology
strategy;
- the need to rapidly and successfully develop and implement a successful
and sustainable business before the competition;
- the need to be aware of and implement and stay abreast of new and rapidly
changing technologies, frequently without the benefit of a substantial
internal information technology staff;
- significant integration and interoperability issues caused by the
patchwork of legacy systems that businesses often implemented without a
focused information technology strategy;
- greater budgetary constraints than large enterprises, making purchase
price, total cost of ownership and technological obsolescence key issues;
and
- the need to maintain significant technological infrastructure and to
support e-business applications 24 hours a day, seven days a week.
We believe that the needs of growing enterprises will make them a
significant factor in the overall market for Internet services. International
Data Corporation, an independent research firm, defines Internet services as the
consulting, design, systems integration, support, management and outsourcing
services associated with the development, deployment and management of Internet
sites. International Data Corporation expects the worldwide market for these
services, which includes both growing and other enterprises, to grow at a five
year compounded annual growth rate of 59% from $7.8 billion in 1998 to
$78.5 billion in 2003.
Large companies which provide services to assist businesses in using
information technology, including the Internet, have primarily focused their
service offerings on large enterprises, such as Fortune 500 companies, while
largely ignoring growing enterprises and their unique needs. These traditional
service providers generally operate by deploying large numbers of personnel to
the client's site to conduct lengthy studies before proposing a solution. We
believe that this approach does not yield effective solutions within the time
and budgetary constraints of growing enterprises. According to Forrester, 75% of
companies surveyed prefer not to utilize traditional management consultants
because these firms do not understand their e-business strategy needs.
On the other hand, many boutique information technology service providers
that direct their offerings to growing enterprises do not offer a comprehensive
suite of services. They also frequently lack the financial resources and
employees to take on full service projects or to provide follow-up support and
training. Moreover, resource limitations often prevent small service providers
from investing in internal training and research and development, which we
believe are critical to the development of innovative solutions and for the
cost-effective provision of services.
Growing enterprises need to get to market very quickly and often lack
internal information technology resources. Accordingly, they increasingly demand
a single source provider of strategy, systems integration, hosting and support
that is focused on their specific needs. We believe that neither traditional
information technology service providers nor boutique providers currently meet
this demand.
28
<PAGE>
THE BREAKAWAY SOLUTION
We have specifically tailored our service offerings for growing enterprises
seeking rapid delivery of cost-effective, high value-added, comprehensive
solutions for their e-business initiatives. Our services consist of strategy
solutions, e-business solutions and application hosting. By offering a seamless
integration of these services, we are a full service provider of e-business
solutions for growing enterprises. We deliver our services using five innovative
business processes:
- BREAKAWAY BREAKTHROUGH METHODOLOGY. This methodology divides each client
engagement into discrete phases. In the first phase, we work closely with
the client to define measurable business objectives and develop a strategy
to achieve these objectives. We then determine how the client can use
information technology solutions to implement this strategy. Based on this
determination, we define the scope of the solution and help our client to
visualize the proposed solution by creating a prototype that incorporates
the elements of the solution for our client's customers to see and use. In
the next phase, we identify milestones for the project and establish how
our client can best measure whether the project has met its objectives.
After we define the scope of the project and identify milestones, we
design, develop and implement the solution. We then assist the client in
employee training and in assimilating the changes created by the solution.
Finally, we sustain our client relationships by monitoring and reassessing
their needs on an ongoing basis, reinnovating their sites and applications
as their business models continue to evolve over time.
- BREAKAWAY SOLUTION CENTERS. We develop our e-business solutions at
centralized facilities, known as Breakaway Solution Centers, in Boston,
Philadelphia, Dallas and Redwood Shores. With the addition of Eggrock, we
have Solution Centers in Boca Raton and Minneapolis as well. We believe
that by concentrating resources at a few sites where highly skilled and
experienced information technology professionals work together, we greatly
facilitate the sharing of knowledge and implementation of best practices.
We typically perform development work at our Solution Centers, which
substantially reduces the costs and inefficiencies associated with travel
to client sites. This approach also reduces the disruption of the client's
business that frequently occurs when a large number of consultants visit
the client's site.
- BREAKAWAY REGIONAL DELIVERY. We deliver the solutions which we develop at
our Breakaway Solution Centers through regional offices located
strategically throughout the United States. We staff these offices with
small groups of senior delivery personnel who establish close working
relationships with clients in the region. Using this approach, we are able
to place senior professionals near our clients while still providing the
client with the efficiencies of centralized solution development.
- BREAKAWAY INTEGRATED APPLICATION HOSTING. Unlike most providers of
information technology consulting and systems integration services, we
offer application hosting services for e-business solutions. We believe
that this capability allows us to help our clients implement and operate
solutions more quickly and cost-effectively than service providers who do
not offer application hosting services.
- BREAKAWAY KNOWLEDGE INNOVATION TEAM. We have created a team, staffed with
senior information technology professionals, that develops and deploys
intellectual capital throughout Breakaway and across client engagements.
The Knowledge Innovation Team monitors all of our client projects on an
ongoing basis to identify best practices and innovative solutions. The
team collects and refines this knowledge, then disseminates it to our
professionals through our proprietary intranet portal, employee training
and ongoing communications. We believe that our Knowledge Innovation Team
allows us to provide our clients with high quality services quickly and in
a cost-effective manner.
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<PAGE>
We believe that our solutions provide our clients with a range of
significant benefits, including:
- BREAKAWAY SPEED. Time to market is a critical factor to the success of an
e-business initiative. We believe that our approach delivers solutions to
clients significantly more rapidly than traditional approaches.
- BREAKAWAY QUALITY. The solutions that we offer are critically important to
our clients' businesses. We have designed our business processes to
deliver to growing enterprises solutions that we believe are of equal or
superior quality to solutions provided by traditional service providers.
- BREAKAWAY VALUE. Because growing enterprises often have limited financial
resources, we seek to deliver our services in as cost effective a manner
as possible. The core focus of Breakaway's Breakthrough methodology is the
creation of measurable value for our clients.
BREAKAWAY STRATEGY
Our objective is to become the leading full service provider of
business-to-business e-business solutions that enable growing enterprises to
increase their revenues and market share. Our strategy for achieving this
objective is as follows:
FURTHER PENETRATE THE UNDERSERVED GROWING ENTERPRISE MARKET. The growing
enterprise market for e-business solutions is already a large part of the
overall market for these solutions and is expanding rapidly. We believe that the
companies in the growing enterprise market have different requirements from more
established enterprises, particularly because they often have limited internal
information technology staffs and resources. We believe this market is
underserved and that growing enterprises require the services of a full service
provider. We intend to continue to focus on the growing enterprise market as a
full service provider of strategy, e-business and application hosting solutions.
AGGRESSIVELY PROMOTE THE BREAKAWAY SOLUTIONS BRAND. Growing enterprises
comprise a large, fragmented and geographically diverse market. To leverage our
direct selling efforts and reach this market effectively, we believe it is
important to build awareness of the Breakaway Solutions brand. To promote our
brand, we intend to expand our corporate marketing and advertising efforts, with
the specific objective of targeting senior executives of growing enterprises.
Our goal is to create national recognition of Breakaway Solutions as the leading
full service provider of e-business solutions that address the specific needs of
growing enterprises.
ATTRACT, TRAIN AND RETAIN HIGH QUALITY INFORMATION TECHNOLOGY
PROFESSIONALS. We believe that attracting and retaining outstanding
professionals is essential to our growth. We perform the majority of our
development work in our Solution Centers, which greatly limits the travel
required of our professionals. We believe that extensive travel is one of the
primary causes of employee turnover in our industry. Through our Solution
Centers and regional offices, our employees participate in a unique culture that
is entrepreneurial and promotes enterprise-wide, collaborative knowledge
sharing. We believe that the combination of our lower travel requirements and
unique culture helps us to attract and retain highly-skilled, experienced senior
information technology professionals.
EXPAND ALLIANCES. We have established a number of working alliances with
independent software vendors and Internet technology providers. These
relationships provide a range of benefits, including new sales leads,
co-marketing and co-branding opportunities and discounts on software licenses.
In addition, our alliances allow us to gain access to training, product support
and technology developed by the companies with which we have alliances. These
relationships also provide an accelerated path to developing expertise regarding
hardware, software and applications. We plan to pursue alliances with both
market leading companies as well as emerging companies. In all cases, we will
seek alliances which provide us with the opportunity both to use applications in
our solutions and to host these applications.
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EXPAND CENTRALIZED DEVELOPMENT/REGIONAL DELIVERY MODEL. Our regional office
strategy enables us to place senior service delivery personnel near our clients
and to better address the particular demands of local markets with field sales
and field marketing professionals. Senior delivery professionals in each
regional office participate in the sales process for each client and play a
significant role in the design, architecting and program management of the
solution for that client. We believe that it improves our responsiveness and
client satisfaction by providing a single point of contact throughout our
relationship with the client.
We have recently opened a regional office in London and expect to add a new
Solution Center in Europe in 2000 to support our growth. Our centralized
Solution Center model, complemented by our regional office network, enables us
to operate more effectively and efficiently than service providers with a less
centralized approach.
PROVIDE APPLICATION HOSTING THROUGH STRATEGICALLY LOCATED LEASED
FACILITIES. We lease space from third party facilities, known as co-location
facilities, for the equipment which we use for our application hosting services.
We currently lease space from multiple providers at eleven co-location
facilities worldwide. We believe that leasing space and related commodity
services, such as uninterrupted power supplies and high speed telecommunications
access, permits us to expand quickly into new markets while reducing the capital
investment required for expansion. We intend to continue to pursue this approach
because geographic distribution of our hosting facilities provide our clients
with improved, lower cost telecommunications access as a result of the clients'
proximity to the facility, reduces our network costs and increases reliability
through increased diversity and redundancy.
BREAKAWAY SERVICES
As a full service provider, we offer the following services:
- strategy solutions;
- e-business solutions; and
- application hosting.
We deliver these services using business processes that we have designed to
provide rapid, high quality and cost-effective solutions. These business
processes include Breakaway's Breakthrough methodology, Breakaway Solution
Centers, Breakaway Knowledge Innovation Team and Breakaway's application hosting
capabilities. We believe that this combination provides our clients with the
greatest value when they use all of our services on an integrated basis. We
believe that we can provide our clients with particularly significant time and
cost savings if we host an application that we have designed and developed for
the client because of our knowledge of the client and the solution.
The following table is a brief summary of the services which we offer in our
three service categories.
<TABLE>
<CAPTION>
BREAKAWAY STRATEGY SOLUTIONS BREAKAWAY E-BUSINESS SOLUTIONS BREAKAWAY APPLICATION HOSTING
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
- - e-business strategy - Electronic commerce transactions - Packaged and custom application
- - Business and technology alignment systems hosting
- - Chief Information Officer - Community aggregation applications - Complex Web site management
outsourcing - Interactive marketing - High availability hosting
- - Application portfolio management - Content generation tools facilities
- - Industry and competitive reviews - Site traffic analysis and - Application performance
- - Branding strategy process, known reporting optimization and reporting
as Brand Focus - Sales force automation - Security services
- Marketing automation - Application maintenance and
- Exchanges and Auctions support services 24 hours per day
- Customer service
- Order management
- Brand experience and identity
development
</TABLE>
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<PAGE>
BREAKAWAY STRATEGY SOLUTIONS
We advise our customers on the use of e-business solutions to reach and
support customers and markets. The goal of these solutions is typically the
achievement of a quantifiable, sustainable competitive advantage within a short
time frame. Our strategy services include analyzing the client's market,
business processes, brand positioning and existing technology infrastructure,
evaluating both packaged and custom alternative solutions and formulating
recommendations for a solution or strategy. We provide a road map that our
clients can implement immediately.
BREAKAWAY E-BUSINESS SOLUTIONS
We develop and implement e-business applications for high transaction volume
revenue generation activities. We both develop custom applications and tailor
packaged applications. In developing the user interface, we focus on creating a
proprietary brand experience and identity. We deliver to our clients
applications that are flexible and easily scalable. Clients require flexibility
so that they can easily integrate our solutions with their existing systems,
upgrade solutions for technological changes and respond to developments in how
business is conducted on the Internet. Scalability is critical to our clients
because they often experience significant increases in transaction volume within
a short time period. In many cases, we base our development work on strategy and
designs that we have developed for the client in a strategy planning engagement.
BREAKAWAY APPLICATION HOSTING
We host a variety of customized and packaged applications, including
customer relationship management applications, database applications, corporate
Web sites and complex transaction-intensive e-business applications. Our
application hosting service enables clients to rent applications through payment
of a monthly service fee instead of incurring a large one-time, initial
investment. Our application hosting operations team provides active monitoring
and application level support for Internet-based applications 24 hours a day,
7 days a week. These support capabilities often reduce the client's need for a
large information technology staff.
To provide our application hosting services, we operate a high availability
global service delivery infrastructure with multiple hosting centers in key
geographic locations. Our service delivery infrastructure is designed to provide
our clients with a fast response time, reliability, scalability and security.
According to Internet Research Group, an independent market analyst, we are
now the second largest application service provider (determined by the number of
contracts).
BREAKAWAY CLIENTS
We focus our marketing and sales activity on growing enterprises. These
businesses generally fit within two broad categories:
- companies or divisions of companies that have annual sales of up to
$500 million; and
- new and emerging Internet-based businesses.
The functionality of many of our solutions is applicable across a variety of
industries. Accordingly, we provide our services to a number of types of
businesses. Our clients' industries include high technology, financial services,
health care and telecommunications.
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A representative list of our clients includes:
- Advent Software
- Citizens Financial Group
- Cruise 411
- eRisks.com
- 4Anything.com
- iTurf
- Kemper
- Open Systems Solutions
- Primavera
- SEI Investments
- Summit Partners
- VerticalNet
- Circles
- Commonwealth Financial Network
- Enterprise Risk Solutions
- Fidelity & Guaranty Life Insurance
- iParts
- JobDirect.com
- Media Bridge
- Plan Sponsor Exchange
- RealtyIQ
- StarCite.com
- Sun Microsystems
- Zymark
We offer our strategy solutions and Internet solutions services on either a
time and materials basis or a fixed price basis. Due to the challenges faced by
growing enterprises, we work closely with our prospective clients prior to
engagement to understand their business model, timing and available resources,
so that we can tailor our solution to their needs.
We provide our application hosting services for an initial set-up fee plus a
monthly service fee. The monthly service fee is subject to maintaining stated
service levels. Our hosting fees vary depending upon the scope of the client's
requirements.
BREAKAWAY REPRESENTATIVE CLIENT ENGAGEMENTS
The following examples are representative of our client engagements:
STARCITE.COM StarCite.com is a Web site targeting the meeting planning
industry allowing users to search and select meeting services from more than
50,000 suppliers, submit and receive responses to requests for proposals, plan
and manage meetings and purchase related products and services. StarCite.com
initially retained us to develop a portal to serve the meeting planning
industry. Through its Breakaway-developed Web site, StarCite.com provides its
customers with several key services, such as:
- custom individual and corporate sites;
- custom individual and company-wide online calendar features;
- Web-based meeting management, reporting and analysis tools and services,
including Internet-based registration and attendee management; and
- an extensive database of suppliers with comprehensive search capabilities.
We provided this complete solution within five months of our initial engagement.
This rapid implementation was due to our ability to provide all of the services
needed by StarCite.com, thus eliminating the need to manage multiple service
providers and allowing efficient coordination of the services that we provided.
Under this full service provider model, our strategy solutions group worked with
StarCite.com to design a business strategy. Our e-business solutions group then
implemented and launched the site. The site is now hosted and supported by our
application hosting service. After a few months of operation, StarCite.com had
acquired more than 1,500 customers.
ERISKS.COM/ENTERPRISE RISK SOLUTIONS. eRisks.com is an e-venture of Oliver,
Wyman & Company, a leading strategy consulting firm dedicated to the financial
services industry, that seeks to change the way companies measure and manage
risk. eRisks.com retained us to build a Web presence to take advantage of an
opportunity for eRisks.com to become the leading risk management destination on
the Internet.
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Because of the efficiencies we offered as a full service provider, we were
able to launch the eRisks.com Web site in four months. Since its launch on
October 19, 1998, eRisks.com has registered over 1,000 users and continues to
provide news, risk management tools, benchmarks and best practices in risk
management via the Internet. Key features of our services for eRisks.com
included:
- completing the e-business strategy for their services in 10 days;
- developing the strategy for the portal and the branding look and feel of
the site;
- developing and testing the business model at one of our Solutions Centers
in one month, making it possible to launch the site two months later; and
- hosting the site at one of our hosting centers.
VERTICALNET, INC. VerticalNet is a leading creator and operator of Web
sites known as vertical trade communities. These tightly focused sites attract
buyers and sellers from around the world by providing editorial content, forums
for the exchange of ideas and the ability to conduct business transactions with
similarly interested professionals. VerticalNet also offers Web site design,
management and hosting services for businesses and trade organizations.
VerticalNet retained us to assist it in developing a number of different
solutions to realize revenues from business transactions on its Web sites,
increase sales leads, enhance customer services and improve internal work flow.
We began this assignment by having our Internet solutions group design a
sales lead generation system that enables VerticalNet to monitor inquiries about
businesses requesting information from VerticalNet or its advertisers. We then
developed and implemented a virtual store to enable VerticalNet to convey its
ability to engage in electronic commerce. The store displays saleable items to
VerticalNet's more than 40 trading communities based on the particular
affiliation of the customer. We designed, developed and implemented this
solution within eight weeks after VerticalNet retained us.
Breakaway's Internet Solutions group also designed, developed and
implemented other additional significant solutions, including:
- a set of tools which permits both advertisers and VerticalNet's internal
sales force to access and use the data stored in the sales lead generation
system; and
- a comprehensive internal system for the management of customer calls,
advertising inventory, personnel scheduling and administrative oversight
functions.
We continue to work closely with VerticalNet to expand and refine these
applications.
PLAN SPONSOR EXCHANGE, INC. Plan Sponsor Exchange created
PlanSponsorExchange.com to facilitate communications and transactions between
money managers, consultants and their pension fund clients. Plan Sponsor
Exchange engaged us for assistance in developing a strategic technical plan to
deploy the concept on the Internet.
We began this project by having our strategy solutions professionals work
with the founder to create an information technology strategy, development plan
and budget. We then began production of an Internet prototype at one of our
Solution Centers. The engagement proceeded as follows:
- 14 days after our initial meeting with the client, we had developed a
functioning Internet prototype;
- 90 days after our initial meeting, we delivered a functioning beta
Internet test site on time and on budget; and
- 135 days after our initial meeting, the client had fully deployed its
PlanSponsorExchange.com site.
Because of its desire to focus on its core business, time to market
considerations and cost considerations, Plan Sponsor Exchange also contracted
with us to provide application hosting services. We believe that our full
service provider and rapid deployment capabilities played a key role in enabling
Plan Sponsor Exchange to realize the first-to-market advantage which was
critical to success as institutional investment managers increase their use of
the Internet.
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BREAKAWAY PROFESSIONAL ENVIRONMENT
Our success depends in substantial part upon our ability to recruit and
retain professionals with the high level of information technology skills and
experience needed to provide our sophisticated services. We believe that the
combination of professional support, intellectual challenge, reduced travel,
corporate culture and compensation we offer will continue to attract these
information technology professionals.
RECRUITING. Our recruitment department conducts its own direct recruiting
efforts and coordinates informal and search firm referrals. We believe that our
business model, which results in decreased travel, more interesting work,
greater opportunities for professional development and a dynamic corporate
culture, enhances our ability to attract top professionals.
PROFESSIONAL DEVELOPMENT. We believe that providing our professionals with
a wide variety of challenging projects and the opportunity to demonstrate
ability and achieve professional advancement are keys to their retention. We
create a professional development plan for each of our information technology
professionals that identifies the individual's training and education
objectives. We encourage all of our strategy and systems integration
professionals to rotate through our strategy services, e-business solutions, and
Knowledge Innovation Team groups in order to achieve exposure to the breadth of
our service offerings. This policy creates a high level of intellectual
challenge for our professionals and provides them with the opportunity to
display their capabilities across a range of disciplines. In addition, our
clients benefit from the resulting broad service experience of our
professionals. We also believe that the working relationships which develop in
our Solution Centers foster valuable formal and informal mentoring and knowledge
sharing.
CULTURE. Our culture is critically important to hiring and retaining
information technology professionals. Our culture reflects the entrepreneurial
spirit that pervades the Internet industry. Our compensation plan ties a
significant portion of compensation to the achievement of both individual
performance goals, team goals and company financial performance goals.
BREAKAWAY MARKETING AND SALES
MARKETING. Our marketing goal is to generate sales opportunities by
increasing the awareness among growing enterprises of the Breakaway Solutions
brand. Our direct marketing activities include direct mail, targeted e-mail and
seminars for senior executives of growing enterprises and other persons who make
decisions about information technology investments. In addition, to heighten our
public profile, we seek opportunities for our professionals to publish articles
and give speeches in their respective areas of expertise through a Web-based
communications portal we call our Breakaway Solutions Institute.
SALES. Our direct sales professionals employ a consultative sales approach,
working with the prospective client's senior executives to identify the client's
service requirements. The service delivery professionals who are located with
our sales professionals in our regional offices also participate in the sales
process. Once the client has engaged us, our sales professionals maintain their
relationships with the client by working collaboratively with our service
professionals who are assigned to the client.
ALLIANCES. As part of our sales and marketing efforts, we have established
working relationships with a number of companies, including Cisco Systems,
Clarify, Firstwave, InterNAP, Katalyst, Market Touch, Mercury Interactive, Onyx,
Oracle, Silknet, Sun Microsystems and Vignette. These alliances generally entail
sharing sales leads, installation services arrangements, making joint
presentations, negotiating discounts on license fees or other charges and
conducting similar activities. Our arrangements with many of these companies are
informal and are not the subject of definitive written agreements. For those
companies with whom we have written agreements, those agreements are either
terminable at will by either party or terminate in one year or less. We believe
we have been successful in establishing alliances with a strong group of
companies who are either industry leaders or well-regarded new entrants.
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BREAKAWAY COMPETITION
Our service offerings consist of strategy consulting, e-business solutions,
implementation and application hosting. We face a high level of competition in
each of these service offerings. Our competitors include consulting companies,
Internet professional services firms, systems integration firms, application
hosting firms and Web hosting firms. Barriers to entry in the strategy
consulting and systems integration markets are low. Therefore, we expect
additional competitors to enter these markets.
STRATEGY CONSULTING. We believe that the principal competitive factors in
the strategy consulting market are quality of services, technical and strategic
expertise and ability to provide services in a timely and cost-effective manner.
We believe that we compete successfully as to all of these competitive factors
because of the strong experience and expertise of our professionals and our
focus on e-business solutions. We also believe that our ability to provide
consulting services in combination with systems integration and hosting provides
us with a competitive advantage.
SYSTEMS INTEGRATION. In the systems integration market, we believe that the
principal competitive factors are the ability to implement high quality
solutions rapidly and in a cost-effective manner in terms of both implementation
and ongoing costs. Through the use of our Breakthrough methodology, Solution
Centers and the Knowledge Innovation Team, we believe that we are able to
provide high quality systems integration of e-business solutions on a rapid,
cost-effective basis. We believe our ability to offer application hosting to
systems integration clients also is a distinct competitive advantage.
APPLICATION HOSTING. We believe that the principal competitive factors in
the application hosting market are quality and reliability of service and cost.
We believe that we compete effectively as to both of these factors because of:
- the high level of expertise of our application hosting service
professionals;
- the quality, security and reliability of our application hosting
infrastructure;
- our relationships with application vendors which allow our clients to have
access to packaged applications on a cost-effective basis;
- our ability to host both complex customized applications and packaged
applications; and
- our ability to provide application hosting in combination with our
sophisticated strategy consulting and systems integration services.
BREAKAWAY INTELLECTUAL PROPERTY
We have developed proprietary methodologies, tools, processes and software
in connection with delivering our services. We rely on a combination of trade
secret, copyright and trademark laws to protect our proprietary rights. In
particular, we require each of our employees to sign an invention and
non-disclosure agreement which provides that they must maintain the
confidentiality of our intellectual property and that any intellectual property
which they develop while performing work for us is our property.
We have registered the trademark "Breakaway Solutions" with the United
States Patent and Trademark Office. We intend to make such other state, federal
and foreign filings we believe appropriate to protect our intellectual property
rights.
BREAKAWAY EMPLOYEES
As of March 16, 2000, and including Eggrock, we had approximately 565
employees, including 431 in consulting, systems integration, regional staff and
application hosting, 34 in sales and marketing and 100 in finance,
administration and support. Our continued success depends on our ability to
recruit, train and retain highly qualified technical, sales and managerial
professionals. The competition for these professionals is intense. None of our
employees is represented by a labor union, and we consider our employee
relations to be good.
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BREAKAWAY FACILITIES
Our principal executive offices are located in Boston, Massachusetts.
Including Eggrock, we perform professional services at several Boston-area
locations and at eight other offices in the United States and an office in
London. Our facilities, including Eggrock, comprise approximately
223,800 square feet in the aggregate. In addition, we support and host
e-business solutions through facilities at six locations in the United States
including Eggrock, and five locations abroad. We lease all of these facilities
either from month to month or pursuant to lease with remaining terms through
November 2002.
We signed a lease in October 1999 to occupy 80,070 square feet of office
space at the World Trade Center East in Boston. The building is under
construction, and we expect to move our permanent offices to this site in late
2000. The duration of this lease is seven years.
BREAKAWAY LEGAL PROCEEDINGS
From time to time, we are involved in litigation that arises in the normal
course of business operations. As of the date of this prospectus, we believe
that the litigation to which we are a party will not have a material adverse
effect on our business or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors who currently serve or are expected to
serve as executive officers and directors, and their respective ages and
positions as of March 28, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH BREAKAWAY
- ---- -------- ------------------------------------------------
<S> <C> <C>
Gordon Brooks................................ 42 President, Chief Executive Officer and Director
Kevin Comerford.............................. 35 Vice President, Administration, Chief Financial
Officer, Treasurer and Secretary
Maureen Ellenberger.......................... 44 Vice President, Chief Innovation Officer and
Chief People Officer
Babak Farzami................................ 32 Vice President, Corporate Development
Christopher Harding.......................... 35 Vice President, Global Field Operations
Dev Ittycheria............................... 33 Vice President, Application Hosting Services
John A. Loftus............................... 38 Vice President, e-Solutions
William Loftus............................... 36 Senior Vice President of Operations
Adam Sholley................................. 40 Vice President, Marketing
Paul K. Stedman.............................. 37 Vice President, North American Field Operations
Janet S. Tremlett............................ 44 Vice President, Strategy Solutions
Christopher H. Greendale (1)(2).............. 48 Chairman of the Board of Directors
Walter W. Buckley, III (1)(2)................ 39 Director
Frank Selldorff (1).......................... 38 Director
</TABLE>
- ------------------------
(1) Member Audit Committee
(2) Member Compensation Committee
GORDON BROOKS has served as our President and Chief Executive Officer since
October 1998 and as a member of our board of directors since January 1999. From
June 1991 to September 1998, Mr. Brooks served as Senior Vice President, Sales,
Field Marketing and Operations of Cambridge Technology Partners
(Massachusetts), Inc., an international management consulting and systems
integration company. Also, Mr. Brooks is a member of the board of directors of
Media Bridge Technologies.
KEVIN COMERFORD has served as our Vice President, Administration, Chief
Financial Officer, Treasurer and Secretary since June 1998. From April 1998
through May 1998, Mr. Comerford was engaged as an independent management
consultant. In March 1993, Mr. Comerford co-founded Boston Sales
Automation, Inc., an enterprise resource planning systems integrator where he
served in various capacities through March 1998. Mr. Comerford is a Certified
Public Accountant.
MAUREEN ELLENBERGER will become our Vice President, Chief Innovation Officer
and Chief People Officer upon approval of our board of directors and
consummation of the merger of Eggrock with a wholly-owned subsidiary of
Breakaway. From August 1997 to the date the merger is consummated,
Ms. Ellenberger has served as president and chief executive officer of Eggrock.
From 1993 to August 1997, Ms. Ellenberger served in various capacities at
Cambridge Technology Partners, most recently as Southeast Regional Business
Manager and Group Manager of the Innovations Group.
BABAK FARZAMI has served as our Vice President, Corporate Development since
our acquisition of Applica in March 1999. From December 1998 through
March 1999, Mr. Farzami served as chairman of the board of directors of Applica.
Mr. Farzami served as Director of Technology, Data Communications of AT&T Local
Services, a telecommunications enterprise, from July 1998 through
November 1998.
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From 1993 to June 1998, Mr. Farzami served in various capacities at Teleport
Communications Group, a telecommunications services provider, most recently as
Director of Technology, Data Services.
CHRISTOPHER HARDING has served as our Vice President, Global Field
Operations since March 2000. From March 1999 through March 2000, Mr. Harding
served as our Vice President, Field Operations. From 1992 to February 1999,
Mr. Harding served in various capacities at Cambridge Technology Partners, most
recently as Vice President of Sales and Field Marketing.
DEV ITTYCHERIA has served as our Vice President, Application Hosting
Services since our acquisition of Applica in March 1999. From December 1998
through March 1999, Mr. Ittycheria served as President and Chief Executive
Officer of Applica. From July 1998 through November 1998 and from 1989 through
July 1995, Mr. Ittycheria served in various capacities at AT&T Corp., most
recently as Product Director, AT&T Data Services. From August 1995 through
June 1998, Mr. Ittycheria served in various capacities, most recently as
Director, Marketing, TCG CERFnet, at Teleport Communications Group.
JOHN A. LOFTUS has served as our Vice President, e-Solutions since March
2000 and as a senior manager since May 1999 until March 2000. From 1990 through
our acquisition of WPL in April 1999, John Loftus was the Senior Vice President
of WPL. John Loftus is the brother of William Loftus, our Senior Vice President
of Operations.
WILLIAM LOFTUS has served as our Senior Vice President, Operations since
March 2000. From May 1999 through March 2000, he served as our Vice President,
e-Solutions and in various other offices. From 1990 through April 1999, William
Loftus served as President and Chief Executive Officer of WPL, which we acquired
in May 1999. William Loftus is also a member of the board of directors of Plan
Sponsor Exchange. William Loftus is the brother of John Loftus, another of our
Vice Presidents.
ADAM SHOLLEY has served as our Vice President, Marketing since
September 1999. From 1987 through August 1999, he served in various capacities,
most recently as an Executive Vice President, at Arnold Communications, Inc., an
advertising and communications firm.
PAUL K. STEDMAN has served as our Vice President, North American Field
Operations since March 2000 and as a senior manager since May 1999. From
February 1999 through May 1999, Mr. Stedman was a senior manager with
PricewaterhouseCoopers in its Dallas office. From January 1997 through February
1999, Mr. Stedman was a Vice President of Cambridge Technology Partners with
responsibilities for its Southwest Region. From January 1992 through December
1996, Mr. Stedman served as a senior manager for Business Systems Group, a
consulting and systems integrator.
JANET S. TREMLETT has served as our Vice President, Strategy Solutions since
January 1999. From July 1997 through December 1998, Ms. Tremlett served as
President at KSJ Technovations, a strategy consulting firm which she founded.
From August 1996 through June 1997, Ms. Tremlett served as Director, Consulting
Services, at The Net Collaborative, Inc., a technology consulting firm, and from
1992 through July 1996, Ms. Tremlett served in various capacities, most recently
as Vice President, Electronic Commerce, at Work/Family Directions, Inc., a
consulting firm specializing in the work-life field.
CHRISTOPHER H. GREENDALE has served as Chairman of our board of directors
and as a member of the audit committee since January 1999. Also since
January 1999, Mr. Greendale has served as a Managing Director of Internet
Capital Group, Inc., a business-to-business e-commerce company and our
affiliate. From January 1998 to December 1998, Mr. Greendale was engaged as an
independent management consultant. In 1991, Mr. Greendale co-founded Cambridge
Technology Partners, where he served in various capacities from 1991 through
December 1997, most recently as Executive Vice President, Marketing.
Mr. Greendale serves as a director of Clarify Inc. and Media Bridge
Technologies. Mr. Greendale also serves as a director of Context Integrations
Inc., a potential competitor of Breakaway.
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WALTER W. BUCKLEY, III, has served as one of our directors and a member of
the audit committee since January 1999. Mr. Buckley is a co-founder, and has
served as President and Chief Executive Officer and a director of Internet
Capital Group since March 1996. From 1991 to February 1996, Mr. Buckley served
as Vice President of Acquisitions of Safeguard Scientifics, Inc., a developer
and operator of emerging growth information technology companies. Mr. Buckley
serves as a director of VerticalNet, Inc. and Who? Vision Systems, Inc.
FRANK SELLDORFF, one of our directors, founded The Counsell Group, now
Breakaway, in 1992 and served as chairman of our board of directors and our
Chief Executive Officer from 1992 through October 1998. From November 1998
through March 1999, Mr. Selldorff served as our Executive Vice President,
Strategic Development, and from November 1998 through June 1999 he served as our
co-chairman of the board of directors. Mr. Selldorff is currently co-founder and
managing partner of Reach Internet Incubator, LLP, a venture fund and Internet
incubation focused on seed-stage, business-to-business Internet enterprises.
EXECUTIVE OFFICERS
Each officer serves at the discretion of our board of directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. John A. Loftus and William Loftus are brothers and each
of them serves as an executive officer of Breakaway.
ELECTION OF DIRECTORS
Our board of directors is divided into three classes, each of whose members
serve for a staggered three-year term. Messrs. Greendale and Brooks serve in the
class whose term expires in 2000, Mr. Selldorff serves in the class whose term
expires in 2001 and Mr. Buckley serves in the class whose term expires in 2002.
At each annual meeting of stockholders, a class of directors is elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring.
COMPENSATION OF DIRECTORS
We reimburse our directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and any meetings of its committees.
We may, in our discretion, grant stock options and other equity awards to our
non-employee directors from time to time under our stock incentive plans. We
have granted the following options to Christopher H. Greendale under our 1998
Stock Plan:
- an option to purchase 168,000 shares of common stock at an exercise price
(as adjusted for subsequent stock splits) of $0.34 on July 1, 1998, all of
which shares have vested in full; and
- an option to purchase 1,108,800 shares of common stock at an exercise
price of $.89 on February 18, 1999, all of which shares have vested in
full.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of Messrs. Greendale and
Buckley, reviews executive salaries, administers our bonus, incentive
compensation and stock plans, and approves the salaries and other benefits of
our executive officers. In addition, the Compensation Committee consults with
our management regarding our benefit plans and Compensation policies and
practices.
The Audit Committee, which consists of Messrs. Greendale, Buckley and
Selldorff, reviews the professional services provided by our independent
accountants, the independence of such accountants from our management, our
annual financial statements and our system of internal accounting controls. The
Audit Committee also reviews such other matters with respect to our accounting,
auditing and financial reporting practices and procedures as it may find
appropriate or may be brought to its attention.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1999 to our President and Chief Executive Officer
and our other four most highly compensated executive officers. We refer to all
of these officers collectively as our Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
---------------------------
NUMBER OF
ANNUAL COMPENSATION(1) SHARES OF
----------------------------------- COMMON STOCK
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gordon Brooks ......................... $310,125 $60,125 -- 350,000 --
President and Chief Executive Officer
William Loftus ........................ 133,333 24,000 -- -- $346,678(2)
Senior Vice President of Operations
Christopher Harding ................... 301,884 82,831 -- 1,212,500 --
Vice President, Strategic Growth and
Alliances
Kevin Comerford ....................... 223,325 43,325 -- 80,000 --
Vice President, Administration,
Chief Financial Officer, Treasurer
and Secretary
Janet S. Tremlett ..................... 220,720 42,720 -- 224,000 --
Vice President, Strategy Solutions
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because the aggregate amount of such perquisites and other
personal benefits constituted less than the lessor of $50,000 or 10% of the
total annual salary and bonuses for each of the executive officers for 1999.
(2) This amount represents an amount loaned to William Loftus in June 1999 by us
for the payment of taxes. William Loftus had a large tax obligation in 1999
due to his election to include in income in 1999 the fair market value of
shares of stock that he received in connection with the sale of WPL
Laboratories, Inc. to us in 1999. The loan bears interest at the rate of
8.75% per annum and is secured by William Loftus's stock in Breakaway.
William Loftus has no personal liability for the loan beyond the stock he
has pledged. All principal and accrued interest on the loan is due on the
first to occur of (i) the sale by William Loftus of any of the pledged
shares and (ii) the fourth anniversary of the note.
OPTION GRANTS IN LAST FISCAL YEAR
On June 30, 1998, we adopted our 1998 Stock Plan and began granting stock
options under this plan. See "Benefit Plans--1998 Stock Plan." Our 1999 Stock
Incentive Plan was adopted by our board of directors and approved by our
stockholders in July 1999. See "Benefit Plans--1999 Stock Incentive Plan." The
following table contains information concerning the stock option grants made to
each of the Named Executive Officers in 1999. The per share exercise price of
all options granted to our Named Executive Officers represents the fair market
value of our common stock on the grant date.
Amounts described in the following table under the heading "Potential
Realizable Value at Assumed Rates of Stock Price Appreciation for Option Term"
represent hypothetical gains that could be achieved for the options if exercised
at the end of the option term. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the options
41
<PAGE>
were granted at their expiration date. Actual gains, if any, on stock option
exercises will depend on the future performance of our common stock and the date
on which the options are exercised. No gain to the optionees is possible without
an appreciation in stock price, which will benefit all stockholders
commensurately.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
-------------------------------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF SHARES % OF TOTAL EXERCISE FAIR MARKET STOCK PRICE APPRECIATION FOR
OF COMMON STOCK OPTIONS GRANTED PRICE/ VALUE ON OPTION TERM(1)
UNDERLYING OPTIONS TO EMPLOYEES IN PER DATE OF EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR SHARE GRANT DATE 5% 10%
- --------------------- ------------------ --------------- -------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon Brooks 350,000 (2) 4.2% $28.93 $28.93 12/10/99 $6,372,623 $16,144,722
William Loftus -- -- -- -- -- -- --
Christopher Harding 1,212,500 (3) 14.5 .89 .89 02/18/09 675,222 1,711,144
Kevin Comerford 80,000 (6) 1.0 5.07 5.07 09/03/09 254,702 645,466
Janet Tremlett 144,000 (5) 1.7 .89 .89 04/01/09 80,741 205,056
80,000 (6) 1.0 5.07 5.07 09/03/09 210,728 648,960
</TABLE>
- ------------------------
(1) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that our
common stock will appreciate in value from the date of grant to the end of
the option term at rates (compounded annually) of 5% and 10%, respectively,
and therefore are not intended to forecast possible future appreciation, if
any, in the price of our common stock.
(2) 25% of these options will vest on December 10, 2000 with the remaining
shares vesting at a rate of 2.08% per month over 36 months.
(3) All of these options vested on the closing of our initial public offering in
October 1999.
(4) 25% of these options will vest on September 3, 2000 with the remaining
shares vesting at a rate of 2.08% per month.
(5) 25% of these options, or 36,000 shares, vested on April 1, 1999 with the
remaining shares vesting at a rate of 2.08% per month over the 36 month
period following April 1, 1999.
(6) 25% of these options will vest on September 3, 2000 with the remaining
shares vesting at a rate of 2.08% per month.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option holdings
through December 31, 1999 by each of the Named Executive Officers. Amounts set
forth in the following table under the heading "Value Realized" are based on the
fair market value of the common stock on the date of exercise. Amounts set forth
in the following table under the heading "Value of Unexercised In-the-Money
Options at Year End" are based upon the fair market value of the common stock as
of December 31, 1999, which was $36.50.
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<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
UNDERLYING UNEXERCISABLE VALUE OF UNEXERCISED IN-THE-
SHARES EXERCISE OPTIONS AT YEAR END MONEY OPTIONS AT YEAR END
ACQUIRED ON PRICE PER VALUE --------------------------- ------------------------------
NAME EXERCISE SHARE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ---------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon Brooks........ 112,940 $ .89 $ 10,165 4,780,660 350,000 $170,239,303 $2,651,250
William Loftus....... -- -- -- -- -- -- --
Christopher
Harding............ -- -- -- 1,212,500 -- 43,177,125 --
Kevin Comerford...... -- -- -- 54,000 242,000 4,553,190 8,367,810
Janet Tremlett....... -- -- -- 78,000 218,000 3,051,945 8,465,735
</TABLE>
BENEFIT PLANS
1998 STOCK PLAN. Our 1998 stock plan was adopted by our board of directors
and approved by our stockholders in June 1998. As amended, the 1998 plan
authorizes the issuance of up to 16,240,536 shares of our common stock pursuant
to stock options and other awards. No additional grants of stock options or
other awards will be made under the 1998 plan.
1999 STOCK INCENTIVE PLAN. Our 1999 Stock Incentive Plan was adopted by our
board of directors and approved by our stockholders in July 1999. The 1999 plan
is intended to replace our 1998 plan. The 1999 Plan authorizes the issuance of
up to 9,600,000 shares of our common stock (subject to adjustment in the event
of stock splits and other similar events).
As of December 31, 1999, options to purchase an aggregate of 16,050,892
shares of our common stock at a weighted average exercise price of $2.59 per
share were outstanding under the 1998 plan and 1999 plan.
The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.
Our officers, employees, directors, consultants and advisors and those of
our subsidiaries are eligible to receive awards under the 1999 plan. Under
present law, however, incentive stock options may only be granted to employees.
No participant may receive any award for more than 1,280,000 shares in any
calendar year.
Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair market
value of our common stock on the date of grant. Under present law, incentive
stock options and options intended to qualify as performance-based compensation
under Section 162(m) of the Internal Revenue Code may not be granted at an
exercise price less than the fair market value of the common stock on the date
of grant or less than 110% of the fair market value in the case of incentive
stock options granted to optionees holding more than 10% of the voting power of
Breakaway. The 1999 plan permits our board of directors to determine how
optionees may pay the exercise price of their options, including by cash, check
or in connection with a "cashless exercise" through a broker, by surrender to us
of shares of common stock, by delivery to us of a promissory note, or by any
combination of the permitted forms of payment.
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<PAGE>
As of December 31, 1999, approximately 310 persons were eligible to receive
awards under the 1999 plan, including nine executive officers and three
non-employee directors. The granting of awards under the 1999 plan is
discretionary.
Our board of directors administers the 1999 plan and has the authority to
adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions. It may delegate authority
under the 1999 plan to one or more committees of the board of directors and,
subject to certain limitations, to one or more of our executive officers.
Subject to any applicable limitations contained in the 1999 plan, our board of
directors or a committee of the board of directors or executive officers to whom
our board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:
- the number of shares of common stock covered by options and the dates upon
which such options become exercisable;
- the exercise price of options;
- the duration of options; and
- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to provide for:
- the assumption or substitution of all outstanding options by the acquiror;
- the termination of all unexercised options immediately prior to the
closing of the acquisition event;
- appropriate cash payments to option holders, if our stockholders would
receive cash payments as consideration in the acquisition event; and
- the vesting in full of outstanding options prior to the acquisition event.
No award may be granted under the 1999 plan after July 19, 2009, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
1999 plan, except that no award granted after an amendment of the 1999 plan and
designated as subject to Section 162(m) of the Internal Revenue Code by our
board of directors shall become exercisable, realizable or vested, to the extent
the amendment was required to grant the award, unless and until the amendment is
approved by our stockholders.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our 1999 Employee Stock Purchase Plan
was adopted by our board of directors and approved by our stockholders in
July 1999. The purchase plan authorizes the issuance of up to a total of 800,000
shares of our common stock to participating employees. As of December 31, 1999
no shares of our common stock have been issued under the purchase plan.
The following employees, including our directors who are employees and
employees of any participating subsidiaries, are eligible to participate in the
purchase plan:
- employees who are customarily employed for more than 20 hours per week and
for more than five months per year; and
- employees employed for at least one month prior to enrolling in the
purchase plan.
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<PAGE>
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of our stock or any subsidiary are not eligible
to participate. As of December 31, 1999, approximately 246 of our employees
would have been eligible to participate in the purchase plan.
On the first day of a designated payroll deduction period (which is referred
to as the offering period), we grant to each eligible employee who has elected
to participate in the purchase plan an option to purchase shares of our common
stock as follows: the employee may authorize between 1% to 10% of his or her
base pay to be deducted by us from his or her base pay during the offering
period. On the last day of the offering period, the employee is deemed to have
exercised the option, at the option exercise price, to the extent of accumulated
payroll deductions. Under the terms of the purchase plan, the option price is an
amount equal to 85% of the per share closing price of our common stock on either
the first day or the last day of the offering period, whichever is lower. In no
event may an employee purchase under the purchase plan in any year a number of
shares which exceeds the number of shares determined by dividing $25,000 by the
average market price of a share of common stock on the commencement date of the
offering period. The board of directors has the authority to choose the timing
and length of subsequent offering periods.
An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option, and the employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or when
the employee ceases employment for any reason.
EMPLOYMENT ARRANGEMENTS
On November 13, 1998, we entered into an employment agreement with
Mr. Brooks. Mr. Brooks receives a base salary of $25,000 per month and is
eligible to receive an annual performance bonus of up to $125,000. If
Mr. Brooks' employment is terminated by us without cause, he will continue to
receive his base salary for a period of twelve months. In December 1999, we
granted Mr. Brooks additional options to purchase 350,000 shares of our common
stock at a per share exercise price of $28.93.
On May 29, 1998, we entered into an employment agreement with
Mr. Comerford. Mr. Comerford receives a monthly salary of $15,000 and is
eligible to receive a bonus of up to 30% of his base salary. In addition, in
1999 we granted to Mr. Comerford options to purchase 80,000 shares of our common
stock at a per share exercise price of $5.07.
On January 26, 2000, we entered into an employment agreement with
Ms. Ellenberger which provides that, effective upon closing of the Eggrock
acquisition, Ms. Ellenberger will be our Vice President, Chief Innovation
Officer and Chief People Officer. Ms. Ellenberger's agreement provides for a
base salary of $15,000 per month and she is eligible to receive an annual bonus
of up to 25% of her annual salary. If Ms. Ellenberger's employment is
terminated:
- by us without cause;
- by Ms. Ellenberger for good reason;
- by Ms. Ellberger following a change in control of our company, or a sale
of all or substantially all of our assets;
- by mutual agreement; or
- by us in the event of Ms. Ellenberger's death or disability,
then Ms. Ellenberger will continue to be paid her salary for six months and she
will be paid any bonus for which she is eligible at such time. Ms. Ellenberger
will receive 1,151,662 shares of our common stock upon the closing of the
Eggrock acquisition.
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<PAGE>
On April 28, 1999, pursuant to the terms of a separation agreement of the
same date, Mr. Selldorff resigned as our Executive Vice President, Strategic
Development, in which capacity he coordinated our acquisition strategy and
planned corporate development initiatives. Under the terms of this agreement,
Mr. Selldorff agreed to continue to serve as one of our directors and agreed to
waive his right under his December 11, 1998 employment agreement to receive
severance payments equal to one year's salary. In connection with
Mr. Selldorff's resignation, his employment agreement terminated. Prior to his
resignation, we granted Mr. Selldorff stock options to purchase 2,400,000 shares
of our common stock at a per share exercise price of $0.34.
On February 11, 1999, we entered into a one year employment agreement with
Ms. Tremlett. This agreement will automatically renew itself for successive one
year periods unless Ms. Tremlett resigns or we terminate her employment.
Ms. Tremlett receives a base salary of $14,833 per month and is eligible to
receive a performance bonus of up to 30% of her annual salary, subject to
meeting specified performance targets. If Ms. Tremlett is terminated by us
without cause, she will continue to receive her salary for an additional seven
and one-half months. Pursuant to her employment agreement we granted to
Ms. Tremlett stock options to purchase 144,000 shares of our common stock at a
per share exercise price of $0.89. In September 1999 we granted Ms. Tremlett
options to purchase 80,000 shares of our common stock at a per share exercise
price of $5.07 per share.
On February 17, 1999, we entered into an employment agreement with
Mr. Harding. Under the terms of this agreement, Mr. Harding's employment shall
continue until March 2001, and the agreement will renew itself for a two year
term expiring March 2003 unless Mr. Harding resigns or we terminate his
employment. Mr. Harding received a bonus of $50,000 upon commencing his
employment and receives a base salary of $18,333 per month. In addition, he is
eligible to receive a target bonus equal to 30% of his base salary based on our
profitability. Pursuant to his employment agreement we granted to Mr. Harding
stock options to purchase 1,212,500 shares of our common stock, at a per share
exercise price of $0.89, all of which vested upon the closing of our initial
public offering in October 1999. If Mr. Harding is terminated by us without
cause or if Mr. Harding terminates his employment for good reason, he will be
entitled to receive payments in amount up to one year's salary.
On March 25, 1999, we entered into an employment agreement with
Mr. Farzami. Mr. Farzami receives a base salary of $15,833 per month and is
eligible to receive a bonus of up to 30% of his annual salary, subject to
meeting specified performance targets. In addition, we granted to Mr. Farzami
stock options to purchase 676,816 shares of our common stock at a per share
exercise price of $0.98. If Mr. Farzami's employment is terminated by us without
cause, he will be entitled to:
- payments equal to six months of his base salary;
- payments equal to his most recent cash bonus; and
- acceleration of vesting with respect to shares of our common stock and
options to purchase our common stock held by Mr. Farzami at the time of
his termination which would have vested if his employment with us had
continued uninterrupted for an additional 12 months.
On March 25, 1999, we entered into an employment agreement with
Mr. Ittycheria. Mr. Ittycheria receives a base salary of $15,833 per month and
is eligible to receive a bonus of up to 30% of his annual salary, subject to
meeting specified performance targets. In addition, we granted to
Mr. Ittycheria stock options to purchase 507,612 shares of our common stock at a
per share exercise price of $0.98. If Mr. Ittycheria's employment is terminated
by us without cause, he will be entitled to:
- payments equal to six months of his base salary;
- a payment equal to his most recent cash bonus; and
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<PAGE>
- acceleration of vesting with respect to shares of our common stock and
options to purchase our common stock held by Mr. Ittycheria at the time of
his termination which would have vested if his employment with us had
continued uninterrupted for an additional twelve months.
On May 14, 1999, we entered into an employment agreement with William
Loftus. William Loftus receives a base salary of $16,667 per month and is
eligible to receive a bonus of up to 30% of his annual salary, subject to
meeting specified performance targets. Upon the occurrence of a change of
control of Breakaway, any options granted to William Loftus to purchase our
common stock will automatically vest in full. If William Loftus' employment is
terminated by us without cause or if his compensation and benefits are
materially reduced, he will be entitled to:
- payments equal to nine months of his base salary;
- payments equal to the pro rated amount of his quarterly profit sharing
payment; and
- acceleration of vesting of options to purchase our common stock held by
Mr. Loftus at the time of his termination which would have vested if his
employment with us had continued uninterrupted for an additional
12 months.
On September 12, 1999, we entered into an employment agreement with
Mr. Sholley. The agreement is for one year and automatically renews unless
Mr. Sholley resigns or we terminate his employment. Mr. Sholley receives a base
salary of $16,667 per month and is eligible to receive a bonus of up to 30% of
his annual salary. In connection with his employment, Mr. Sholley has been
granted stock options to purchase 220,000 shares of our common stock at a per
share exercise price of $5.50. If after one year we terminate Mr. Sholley's
employment without cause, he will be entitled to payments equal to six months of
his base salary. In addition, after one year Mr. Sholley may resign and treat
his resignation as a termination by us without cause, upon the occurrence of any
of the following events:
- his salary or bonus eligibility is materially reduced; or
- a change in control of us or sale of all or substantially all of our
assets.
On March 6, 2000, our board of directors appointed John Loftus as its Vice
President, e-Solutions. On May 14, 1999 we entered into an employment agreement
with Mr. Loftus. Mr. Loftus receives a base salary of $16,667 per month.
Mr. Loftus is eligible to receive a bonus of up to 25% of his annual salary,
subject to meeting specified performance targets. In addition, in May 1999 we
granted to Mr. Loftus stock options to purchase 33,812 shares of our common
stock at a per price share of $1.18. John Loftus is the brother of William
Loftus, our Senior Vice President of Operations.
On March 6, 2000, our board of directors appointed Mr. Stedman as our Vice
President, North American Field Operations. In addition, in May 1999, we granted
Mr. Stedman stock options to purchase 80,000 shares of our common stock at a per
price share of $1.09. In December 1999, we granted Mr. Stedman stock options to
purchase 30,000 shares of our common stock at a per price share of $28.80. In
March 2000, we granted Mr. Stedman stock options to purchase 70,000 shares of
our common stock at a per price share of $62.78.
401(K) PLAN. In September 1995, we adopted an employee savings and
retirement plan qualified under Section 401 of the Internal Revenue Code and
covering all of our employees. Pursuant to the 401(k) plan, employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit and have the amount of such reduction contributed to the 401(k) plan. We
may make matching or additional contributions to the 401(k) plan in amounts to
be determined annually by our board of directors. For 1999, the board of
directors has determined that we will contribute up to 25% of our employee's
initial 6% of eligible contributions. Prior to 1999, we did not match or
contribute to employee's 401(k) plans.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Through September 1999, decisions concerning compensation of executive
officers were made by our board of directors which included Mr. Brooks, our
President and Chief Executive Officer, and Frank Selldorff, a former executive
officer of Breakaway. In October 1999, we established a compensation committee
consisting of Mr. Greendale and Mr. Buckley. Thereafter, decisions concerning
compensation of executive officers were made by our compensation committee. None
of our executive officers have served as a director or member of the
compensation committee (or other committee serving an equivalent function) of
any other entity, whose executive officers served on our board of directors or
compensation committee.
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CERTAIN TRANSACTIONS
INTERNET CAPITAL GROUP
Internet Capital Group beneficially owns 38.3% of our common stock. Our
chairman of the board of directors, Christopher H. Greendale, serves as a
Managing Director of Operations of Internet Capital Group and another of our
directors, Walter W. Buckley, is a co-founder and serves as President, Chief
Executive Officer and a director of Internet Capital Group. Internet Capital
Group held approximately 13.5% of the outstanding capital stock of Applica
immediately prior to our acquisition of Applica and received 193,938 shares of
our common stock in exchange for its Applica stock.
On May 13, 1999, in connection with Internet Capital Group providing us a
$4.0 million loan, we issued it a warrant to purchase up to 147,744 shares of
our common stock at a per share exercise price of $4.07, as adjusted from time
to time. Internet Capital Group subsequently converted this promissory note into
shares of our Series B Preferred Stock. The warrant expires on September 30,
2006. The shares issuable upon exercise of this warrant are subject to
antidilution protection, including for issuances of our securities at a per
share price below the warrant exercise price. Shares issued upon exercise of the
warrant have the benefit of the registration rights agreement between us,
Internet Capital Group and other investors.
We provide services to Internet Capital Group and some of its affiliated
entities. In 1999, our total revenues derived from engagements with Internet
Capital Group and its affiliates were approximately $4,548,000.
All of the above transactions with Internet Capital Group were approved
unanimously by our board of directors and were on terms no less favorable to us
than could be obtained from unaffiliated third parties.
ACQUISITIONS
APPLICA CORPORATION. On March 25, 1999, we entered into an Agreement and
Plan of Reorganization with Applica Corporation pursuant to which Applica merged
with and into us. Under the terms of the agreement, we issued an aggregate of
1,447,398 shares of our common stock to the former stockholders of Applica,
including:
- 193,938 shares to Internet Capital Group;
- 331,230 shares to our Vice President, Corporate Development, Babak
Farzami; and
- 248,424 shares to our Vice President, Application Hosting Services, Dev
Ittycheria; and
- 72,368 shares of our common stock are being held in escrow to secure
indemnification obligations to us under the agreement.
WPL LABORATORIES, INC. On May 17, 1999, we entered into an Agreement and
Plan of Reorganization with WPL Laboratories, Inc., Celtic Acquisition Corp.,
William Loftus, John Loftus, David Perme and Kevin Sheehan pursuant to which WPL
merged with and into Celtic Acquisition. Celtic Acquisition is a wholly owned
subsidiary of Breakaway formed for the purpose of acquiring WPL. William Loftus
is our Senior Vice President of Operations and John Loftus, William Loftus'
brother, is our Vice President, e-Solutions.
Our purchase price consisted of cash in the aggregate amount of $4,999,860
and 2,728,280 shares of our common stock, of which $3,399,905 in cash and
1,855,232 shares were issued to William Loftus and $999,972 in cash and 545,656
shares were issued to John Loftus. One-half of the aggregate cash consideration
was paid at the closing of the acquisition. Twenty-five percent of the cash
consideration will be paid pro rata to the stockholders on May 17, 2000 and the
remaining 75% will be paid pro rata
49
<PAGE>
to the stockholders in equal monthly installments over the next 36 months for as
long as the recipient does not voluntarily terminate his employment with us and
is not terminated by us for cause.
713,548 of the shares of our common stock issued to William Loftus and
209,866 of the shares of our common stock issued to John Loftus are subject to
the terms of Restricted Stock Agreements, granting us a repurchase right for
these shares in the event William Loftus' or John Loftus' employment at
Breakaway is terminated voluntarily by William Loftus or John Loftus, as
appropriate, or for cause by us. Our right of repurchase expires as to 25% of
the shares subject to each agreement on May 14, 2000 and as to the remaining 75%
of the shares ratably over the ensuing 36 months. Our repurchase rights under
these agreements terminate upon a change in control of Breakaway or if William
Loftus or John Loftus, as appropriate, is terminated by us for reasons other
than for cause.
We agreed to loan $346,785 to William Loftus and $104,809 to John Loftus at
the prime interest rate plus one percent in order to fund their tax liabilities
associated with this transaction. Each of William Loftus and John Loftus issued
to us a promissory note secured by a pledge of 685,008 and 201,472 shares of our
common stock, respectively, as security for these loans.
Pursuant to our acquisition of WPL, we assumed WPL options held by Daniel
Loftus, John Loftus, Sr. and Veena Loftus, each of whom are members of William
Loftus' and John Loftus' immediate family. These options became exercisable
pursuant to their terms in the following amounts:
- Daniel Loftus' option became exercisable for 8,452 shares of our common
stock at a per share exercise price of $1.18;
- John Loftus, Sr.'s option became exercisable for 8,452 shares of our
common stock at a per share exercise price of $1.18; and
- Veena Loftus' option became exercisable for 16,904 shares of our common
stock at a per share exercise price of $1.18.
EGGROCK PARTNERS, INC.
On January 26, 2000, we entered into an Agreement and Plan of Merger with
Eggrock Partners, Inc. Eggrock is a full service consulting and systems
integration firm that focuses on delivering customer-centered e-business
solutions to emerging enterprises. Eggrock assists growing companies in
selecting and implementing software applications that will allow companies to
operate their business more effectively through use of the Internet. We
anticipate closing the transaction on March 31, 2000. We believe that this
acquisition enhances and expands our client base, geographic presence and our
ability to provide strategy and e-business solutions to our customers. As
consideration for the acquisition we will issue approximately 6,176,379 shares
of common stock to the Eggrock stockholders and we will assume options for
approximately 1,095,621 shares of our common stock.
Maureen Ellenberger, the President of Eggrock, will become our Vice
President, Chief Innovation Officer and Chief People Officer on closing of the
aquisition of Eggrock by Breakaway. Of the 7,272,000 shares of Breakaway common
stock to be issued or reserved for issuance in the acquisition of Eggrock,
Ms. Ellenberger will receive 1,151,662 shares of Breakaway common stock. Half of
Ms. Ellenberger's shares are subject to the terms of a restricted stock
agreement, granting us a repurchase right for the shares in the event
Ms. Ellenberger's employment at Breakaway is terminated voluntarily by
Ms. Ellenberger without good reason or for cause by us. Our right to repurchase
expires as to 25% of the shares subject to the agreement one year after the
closing of the acquisition of Eggrock and as to the remaining 75% of the shares
ratably over the ensuing 36 months. Our repurchase rights under these agreements
terminate upon a change of control of Breakaway or if Ms. Ellenberger is
terminated by us for reasons other than for cause.
50
<PAGE>
FRANK SELLDORFF
Frank Selldorff is our founder, a former chairman of our board of directors,
a former Chief Executive Officer and executive officer of Breakaway, and
presently serves as one of our directors. He currently beneficially owns 20.4%
of our common stock.
On May 26, 1999, Mr. Selldorff exercised a stock option to purchase
1,200,000 shares of our common stock at a per share purchase price of $0.34 per
share.
On January 4, 1999, we changed our federal income tax status from an S
corporation to a C corporation. In connection with this change, we entered into
an agreement with Mr. Selldorff to facilitate our change in tax status. Pursuant
to this agreement, Mr. Selldorff agreed to indemnify us for all income tax
liability prior to January 4, 1999 related to our failure to qualify as an S
corporation, up to a maximum of $365,000.
GORDON BROOKS
Gordon Brooks, our President and Chief Executive Officer and a director,
presently beneficially owns 12.9% of our common stock. On March 5, 1999,
Mr. Brooks exercised a stock option to purchase 112,940 shares of our common
stock at a per share purchase price of $0.89. In December 1999, the Board
authorized an unsecured loan to Mr. Brooks in the amount of $1 million. This
loan is evidenced by a promissory note which is due, together with interest at a
rate of 6.21% per annum, upon the first to occur of:
- 30 days after he ceases to be employed by us for any reason other than his
death or disability;
- February 16, 2003; or
- an event of default by Mr. Brooks which includes, among other things, any
violation of the non-competition, non-solicitation or confidentiality
provisions of his employment agreement.
If Mr. Brooks dies or becomes permanently disabled, the loan becomes due,
together with accrued and unpaid interest, six months thereafter.
EMPLOYMENT ARRANGEMENTS AND REGISTRATION RIGHTS
We have entered into employment arrangements with many of our executive
officers. See "Executive Compensation--Employment Arrangements." We have also
granted to Internet Capital Group registration rights relating to its shares.
See "Description of Capital Stock--Registration Rights."
STOCK OPTIONS
As of December 31, 1999, there were outstanding options under our 1998 Stock
Plan and 1999 Stock Incentive Plan to purchase an aggregate of 11,012,982 shares
of our common stock held by our directors and executive officers at a per share
weighted average exercise price of $1.96. In addition, effective March 19, 1999
we issued to Thomas Harding, a member of Christopher Harding's immediate family,
an option to purchase 24,000 shares of our common stock at a per share exercise
price of $0.98.
AFFILIATE TRANSACTION POLICY
We have adopted a policy providing that all material transactions between
Breakaway and our officers, directors and other affiliates must be:
- approved by a majority of the members of our board of directors and by a
majority of the disinterested members of our board of directors; and
- on terms no less favorable to us than could be obtained from unaffiliated
third parties.
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the security ownership of our common stock,
as of March 15, 2000, by (a) each person known to us to be the beneficial owner
of more than 5% of the outstanding shares of our common stock, (b) each of the
named executive officers and directors, (c) each selling stockholder, and
(d) all directors and executive officers as a group. Unless otherwise indicated,
each person's address is in care of Breakaway, 50 Rowes Wharf, Boston,
Massachusetts 02110. To our knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of our stock shown as
beneficially owned by them, except as noted in the footnotes to the table.
Beneficial ownership is determined according to the rules of the SEC. Shares of
our common stock subject to options currently exercisable or exercisable within
sixty days from the date of this table are deemed outstanding when determining
the number of shares and percentage ownership by the person holding these
options.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING OWNED AFTER OFFERING
--------------------- NUMBER OF SHARES ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------ ---------- -------- ---------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Christopher H. Greendale(1)........... 15,239,474 40.4 % 74,237 15,165,237 38.4 %
Internet Capital Group, Inc.(2)....... 13,962,674 38.3 -- 13,962,674 36.5
Walter W. Buckley, III(3)............. 13,962,674 38.3 -- 13,962,674 36.5
William Loftus........................ 1,855,232 5.1 107,869 1,747,363 4.6
Frank Selldorff(4).................... 6,194,400 16.5 175,000 6,019,400 15.3
Gordon Brooks(5)...................... 5,348,312 12.9 304,879 5,043,431 11.6
Kevin Comerford(6).................... 54,000 * 17,210 36,790 *
Janet Tremlett(7)..................... 93,000 * 17,210 75,790 *
All executive officers and directors
as a group (16 persons, including
two former executive officers)(8)... 32,766,422 71.5 931,937 31,834,485 66.9
<CAPTION>
OTHER SELLING STOCKHOLDERS
- --------------------------
Babak Farzami(9). 519,346 1.4 59,624 459,722 1.2
<S> <C> <C> <C> <C> <C>
Christopher Harding(10)............... 1,212,500 3.2 70,490 1,142,002 2.9
Dev Ittycheria(11).................... 407,052 1.1 44,718 362,334 1.0
John Loftus(12)....................... 554,110 1.5 33,692 520,418 1.4
Maureen Ellenberger................... 1,151,662 3.2 27,000 1,124,662 3.0
GE Capital Equity Investment
Inc.(13)............................ 1,231,222 3.4 184,683 1,046,539 2.8
Crosslink Capital(14)................. 615,613 1.7 61,562 554,051 1.5
Silicon Valley Bank(15)............... 21,818 * 21,818 -- --
</TABLE>
- ------------------------
* Represents less than 1% of the total.
(1) Consists of 1,276,800 shares subject to outstanding stock options that are
exercisable within the 60-day period following March 15, 2000 and 13,962,674
shares beneficially owned by Internet Capital Group. Mr. Greendale is a
Managing Director of Internet Capital Group. Mr. Greendale disclaims
beneficial ownership of all shares held by Internet Capital Group.
(2) Includes 147,744 shares issuable upon the exercise of a warrant. The address
of Internet Capital Group, Inc. is 800 The SafeGuard Building, 435 Devon
Park Drive, Wayne, Pennsylvania 19087.
52
<PAGE>
(3) Consists of 13,962,674 shares beneficially owned by Internet Capital Group.
Mr. Buckley is President, Chief Executive Officer and a director of Internet
Capital Group. Mr. Buckley disclaims beneficial ownership of all shares held
by Internet Capital Group.
(4) Includes 1,200,000 shares subject to outstanding options that are
exercisable within the 60-day period following March 15, 2000.
(5) Consists of 4,780,660 shares subject to outstanding stock options that are
exercisable within the 60-day period following March 15, 2000 and 112,940
shares directly owned by Mr. Brooks.
(6) Consists of 54,000 shares subject to outstanding options that are
exerciseable within the 60-day period following March 15, 2000.
(7) Consists of 38,000 shares subject to outstanding options that are
exercisable within the 60-day period following March 15, 2000.
(8) Includes an aggregate of 9,541,214 shares issuable upon the exercise of
outstanding stock options held by such executive officers and directors
within the 60-day period following March 15, 2000. Includes 147,744 shares
issuable upon the exercise of a warrant held by Internet Capital Group and
13,814,930 shares held by Internet Capital Group, all of which are
attributable to two of our directors.
(9) Includes 186,916 shares exercisable within the 60-day period following
March 15, 2000.
(10) Consists of 1,212,500 shares exercisable within the 60-day period following
March 15, 2000.
(11) Consists of 156,428 shares exercisable within the 60-day period following
March 15, 2000.
(12) Consists of 8,454 shares exercisable within the 60-day period following
March 15, 2000.
(13) The address of GE Capital Equity Investment Inc. is 120 Long Ridge Road,
Stamford, Connecticut 06902.
(14) Includes 21,866 shares held by Cross Omega Ventures III, LLC,
34,097 shares held by Crosslink Offshore Omega Ventures III and 5,598 shares
held by Crosslink Crossover Fund II, LP. The address of the Crosslink Funds
is c/o Crosslink Capital, 555 California Street, San Francisco, California
94104.
(15) Includes 21,818 shares issuable upon the exercise of a warrant. The address
of Silicon Valley Bank is 20 William Street, Wellesley, Massachusetts 02481.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will consist of 160,000,000 shares of common
stock, $0.000125 par value per share and 5,000,000 shares of preferred stock,
$0.0001 par value per share. As of December 31, 1999, we had outstanding:
- 34,778,684 shares of common stock held by 96 stockholders of record;
- options to purchase an aggregate of 16,050,892 shares of our common stock
with a weighted average per share exercise price of $2.59; and
- warrants to purchase up to 169,562 shares of our common stock at a
weighted average exercise price of $4.25 per share.
Based on the number of shares outstanding as of December 31, 1999, there
will be 36,578,684 shares of common stock outstanding upon the closing of this
offering.
The following summary is not intended to be complete and is qualified by
reference to the provisions of applicable law and to our third amended and
restated certificate of incorporation and amended and restated bylaws included
as exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our Board of Directors,
subject to any preferential dividend rights of outstanding preferred stock. Upon
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive proportionately our net assets available after the payment
of all debts and other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. Our outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
PREFERRED STOCK
Under the terms of our certificate of incorporation, our Board of Directors
is authorized to issue shares of preferred stock in one or more series without
stockholder approval. Our Board of Directors has the discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing our Board of Directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or could discourage a third party from acquiring, a
majority of our outstanding voting stock. We have no present plans to issue any
additional shares of preferred stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination"
54
<PAGE>
with an "interested stockholder" for a period of three years after the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the prior
three years did own, 15% or more of the corporation's voting stock.
Our certificate of incorporation divides our Board of Directors into three
classes with staggered three-year terms. See "Management." In addition, our
certificate of incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of two-thirds of our shares of
capital stock entitled to vote. Under our certificate of incorporation, any
vacancy on our Board of Directors, including a vacancy resulting from an
enlargement of our Board of Directors, may only be filled by vote of a majority
of our directors then in office. The classification of our Board of Directors
and the limitations on the removal of directors and filling of vacancies could
make it more difficult for a third party to acquire, or discourage a third party
from acquiring, control of Breakaway.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before such
meeting and may not be taken by written action in lieu of a meeting. Our
certificate of incorporation further provides that special meetings of the
stockholders may only be called by our Chairman of the Board, President or Board
of Directors. Under our by-laws, in order for any matter to be considered
"properly brought" before a meeting, a stockholder must comply with certain
advance notice requirements. These provisions could have the effect of delaying
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of our outstanding voting securities. These provisions
may also discourage a third party from making a tender offer for our common
stock, because even if it acquired a majority of our outstanding voting
securities, the third party would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholders' meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our certificate of incorporation and by-laws
require the affirmative vote of the holders of at least 75% of the shares of our
capital stock issued and outstanding and entitled to vote to amend or repeal any
of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains certain provisions permitted under
the General Corporation Law of Delaware relating to the liability of directors.
The provisions eliminate a director's liability for monetary damages for a
breach of fiduciary duty, except in certain circumstances involving wrongful
acts, such as the breach of a director's duty of loyalty or acts or omissions
that involve intentional misconduct or a knowing violation of law. Further, our
certificate of incorporation contains provisions to indemnify our directors and
officers to the fullest extent permitted by the General Corporation Law of
Delaware. We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
REGISTRATION RIGHTS
After this offering, the holders of approximately 12,868,035 shares of
common stock and rights to acquire common stock will be entitled to rights with
respect to the registration of those shares under the Securities Act. Under the
terms of the agreement between us and the holders of those registrable shares,
if we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, those holders are entitled to notice of and to include
shares of common stock in the registration. Additionally, the holders are also
entitled to specified demand registration rights pursuant to which they may
require us
55
<PAGE>
on up to two occasions to file a registration statement under the Securities Act
with respect to our shares of common stock, and we are required to use our best
efforts to effect that registration. Further, holders may require us to file an
unlimited number of additional registration statements on Form S-3. All of these
registration rights are subject to various conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in a registration and our right not to effect a requested registration
more than once in any one year period or within 180 days of this offering. We
will bear all of the expenses incurred in connection with all exercises of these
registration rights, other than expenses incurred in connection with requested
registrations on Form S-3 after the fourth request. We do not expect that the
expenses we will incur in connection with any exercise of these registration
rights will exceed the expenses customarily incurred by companies registering
their securities. If the holders of registration rights request that we withdraw
a requested registration statement, those holders will bear the expenses of that
registration.
In addition, the holders of 1,531,838 shares of common stock to be issued in
connection with the Eggrock acquisition will be entitled to require us to
register those shares for resale to the public under the Securities Act at any
time after November 1, 2000.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that our directors and officers
shall be indemnified by us to the fullest extent authorized by Delaware law.
This indemnification covers all expenses and liabilities reasonably incurred in
connection with their services for or on behalf of us. In addition, our
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to us or our stockholders,
acted in bad faith, knowingly or intentionally violated the law, authorized
illegal dividends or redemptions or derived an improper personal benefit from
their action as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based upon the number of shares of common
stock outstanding at December 31, 1999, there will be 36,578,684 shares of our
common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants to
purchase common stock). Of these outstanding shares, all of the 3,000,000 shares
sold in this offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, except that any shares purchased
by our "affiliates", as that term is defined in Rule 144 under the Securities
Act, may generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining shares of common stock held by existing stockholders are
"restricted securities" under Rule 144 other than shares issued upon exercise of
options after the date of our initial public offering. Generally, restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144 or 701 under the
Securities Act, which are summarized below. Approximately 23,893,861 shares are
subject to "lock-up" agreements expiring on either 91 days after the date of
this offering. Sales of these restricted securities in the public market, or the
availability of these shares for sale, could cause the trading price of our
common stock to decline.
We estimate that the additional shares of common stock that will be
available for sale in the public market, subject in some cases to the volume
limitations and other restrictions of Rule 144, will be as follows:
<TABLE>
<CAPTION>
APPROXIMATE
SHARES
ELIGIBLE FOR
DATES FUTURE SALE COMMENT
- ----- ------------ -------
<S> <C> <C>
Currently.................................... Freely tradable shares sold in our
initial public offering
On effectiveness of this prospectus.......... Shares sold in this offering
Between , 2000 and 91 days after
the date of this prospectus................ Shares become salable under Rule 144
On the 91st day after the date of this
prospectus................................. 90 day lock-up expires; shares salable
under Rule 144 or 701
Between , 2000 and ,
2000....................................... Shares become salable under Rule 144
</TABLE>
Shares issued upon exercise of options granted by us prior to the date of
our initial public offering will be available for sale in the public market
under Rule 701 of the Securities Act. Rule 701 permits resales of these shares
in reliance upon Rule 144 but without compliance with various restrictions,
including the holding period requirement, imposed under Rule 144. In general,
under Rule 144, beginning 90 days after the date of our initial public offering,
a person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares not to exceed the greater of (1) one
percent of the then outstanding shares of common stock or (2) the average weekly
trading volume of our common stock during the four calendar weeks preceding the
filing of a Form 144 with respect to the sale. Sales under Rule 144 are also
subject to manner of sale and notice requirements, as well as to the
availability of current public information about us. Under Rule 144(k), a person
who is not deemed to have been an affiliate at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years is entitled to sell the shares without complying with the
manner of sale, public information, volume information or notice provisions of
Rule 144.
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<PAGE>
STOCK OPTIONS
We intend to file registration statements on Form S-8 under the Securities
Act to register an aggregate of 25,840,536 shares of common stock issuable under
our 1998 plan and the 1999 plan. We have filed a registration statement on
Form S-8 with respect to an aggregate of 800,000 shares of common stock issuable
under our employee stock purchase plan. Shares issued upon the exercise of stock
options after the effective date of the Form S-8 registration statements will be
eligible for resale in the public market without restriction, subject to
Rule 144 limitations applicable to affiliates.
WARRANTS
Upon the closing of this offering, there will be a warrant outstanding to
purchase 147,744 shares of common stock at a per share exercise price of $4.07.
On May 13, 2000, any shares purchased pursuant to the "cashless exercise"
feature of this outstanding warrant may be sold, subject to the requirements of
Rule 144.
LOCK-UP AGREEMENTS
In connection with our initial public offering in October 1999, our
officers, directors, the selling stockholders and other principal stockholders
agreed with Morgan Stanley & Co. Incorporated not to sell or otherwise dispose
of any of their shares for a period expiring on April 6, 2000. In addition, the
officers, directors, selling stockholders and certain other stockholders of
Breakaway have agreed not to sell or otherwise dispose of an aggregate of
approximately 23,893,861 shares until 90 days after the date of this offering.
Morgan Stanley & Co. Incorporated, however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to either
of these lock-up agreements.
EFFECT OF SALES OF SHARES
Our common stock has traded on the Nasdaq National Market since October 6,
1999. Prior to our initial public offering, there was no public market for our
common stock. No prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares for sale will have
on the market price of our common stock prevailing from time to time. Sales of
significant numbers of shares of our common stock in the public market could
adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
58
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Lehman Brothers Inc., Dain Rauscher Incorporated, Donaldson,
Lufkin & Jenrette, Robert W. Baird & Co. Incorporated and C.E. Unterberg, Towbin
are acting as representatives, have severally agreed to purchase, and we and the
selling stockholders have agreed to sell to them, the respective number of
shares of common stock set forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Lehman Brothers Inc.........................................
Dain Rauscher Incorporated..................................
Donaldson, Lufkin & Jenrette................................
Robert W. Baird & Co. Incorporated..........................
C.E. Unterberg, Towbin......................................
---------
Total.....................................................
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and the selling stockholders and subject to
prior sale. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered in this offering are subject to the approval of various legal
matters by their counsel and to other delineated conditions. The underwriters
are obligated to take and pay for all of the shares of common stock offered in
this offering, other than those covered by the over-allotment option described
below, if any shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to dealers at a price that represents a concession not in
excess of $ a share under the public offering price. Any underwriters may
allow, and the dealers may reallow, a concession not in excess of $ a share to
other underwriters or to other dealers. After the initial offering of the shares
of common stock, the offering price and other selling terms may from time to
time be varied by the representatives of the underwriters.
We and the selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of 450,000 additional shares of common stock at the public offering
price set forth on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered in this offering. To the extent
such option is exercised, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares of
common stock set forth next to the names of all underwriters in the preceding
table. If the underwriter's over-allotment option is exercised in full, the
total price to public would be $ , the total underwriters' discounts
and commissions would be $ , and the total proceeds to us would be
$ before deducting estimated offering expenses.
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $ million.
We, our directors and executive officers, the selling stockholders and
certain other of our stockholders and option holders have each agreed that,
without the prior written consent of Morgan
59
<PAGE>
Stanley & Co. Incorporated on behalf of the underwriters, during the period
ending 90 days after the date of this prospectus, he, she or it will not,
subject to limited exceptions, directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock (whether such shares
or any such securities are then owned by such person or are thereafter
acquired directly from us); or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Our common stock is listed on the Nasdaq National Market under the symbol
"BWAY."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases the previously
distributed shares of common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Two entities affiliated with Morgan Stanley & Co. Incorporated hold an
aggregate of 246,245 shares of our common stock.
60
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts and for the underwriters
by Ropes & Gray, Boston, Massachusetts.
INTERESTS OF COUNSEL
An investment partnership comprised of partners and senior executives of
Hale and Dorr LLP owns 15,390 shares of our common stock.
EXPERTS
The consolidated financial statements at December 31, 1998 and 1999 and for
each of the years in the three year period ended December 31, 1999, have been
included herein in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in auditing and accounting.
The financial statements of Applica Corporation as of December 31, 1998 and
from September 24, 1998 (inception) through December 31, 1998, have been
included herein in reliance upon the reports of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in auditing and accounting.
The financial statements of WPL Laboratories, Inc. as of December 31, 1997
and 1998, and for each of the years then ended, have been included herein in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Web Yes, Inc. and subsidiary as of
December 31, 1997 and 1998 and for each of the years then ended, have been
included herein in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in auditing and accounting.
The financial statements of Eggrock Partners, Inc. as of December 31, 1998,
September 30, 1999 and December 31, 1999, included herein have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon said firm
as experts in giving said reports.
CHANGES IN INDEPENDENT AUDITORS
We retained our current independent auditors, KPMG LLP, and replaced
Brown & Brown, LLP in May 1999. Brown & Brown, LLP had been retained to audit
our financial statements as of and for the year ended December 31, 1998. In
January 1999, we retained Brown & Brown, LLP as our independent auditors,
replacing Arthur Andersen LLP. Arthur Andersen LLP had been retained to audit
our financial statements as of and for the year ended December 31, 1997. Our
board of directors approved each of the changes in its independent auditors.
KPMG LLP has reaudited our financial statements as of and for the years ended
December 31, 1998 and December 31, 1997.
During the years in which we retained Brown & Brown, LLP and Arthur Andersen
LLP and through the periods prior to each of their replacement, we had no
disagreements with either of Brown & Brown, LLP or Arthur Andersen LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Brown & Brown, LLP or Arthur Andersen LLP, as appropriate, would
have caused either of them to make reference thereto in their report on the
financial statements for such years. The reports on our financial statements of
Brown & Brown LLP, as of December 31, 1998 and for the year then ended, and of
Arthur Andersen LLP, as of December 31, 1997 and for the year then ended, did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
61
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and special reports, prospectuses and other
information with the SEC. We filed with the SEC a registration statement on
Form S-4 under the Securities Act of 1933, as amended to register with the SEC
our common stock issuable pursuant to the merger agreement. This consent
solicitation statement/prospectus does not include all of the information
contained in the registration statement. You should refer to the registration
statement and its exhibits for additional information. Whenever we make
reference in this consent solicitation statement/prospectus to any of our
contracts, agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other document.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, Suite
1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BREAKAWAY SOLUTIONS,
INC.
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
FINANCIAL STATEMENTS OF APPLICA CORPORATION
Independent Auditors' Report................................ F-23
Balance Sheet as of December 31, 1998....................... F-24
Statement of Operations from September 24, 1998 (inception)
through December 31, 1998................................. F-25
Statement of Stockholders' Equity from September 24, 1998
(inception) through December 31, 1998..................... F-26
Statement of Cash Flows from September 24, 1998 (inception)
through December 31, 1998................................. F-27
Notes to Financial Statements............................... F-28
FINANCIAL STATEMENTS OF WPL LABORATORIES, INC.
Independent Auditors' Report................................ F-31
Balance Sheets as of December 31, 1997 and 1998 and
March 31, 1999 (unaudited)................................ F-32
Statements of Income for the years ended December 31, 1997
and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited).......................................... F-33
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998 and for the three months ended
March 31, 1999 (unaudited)................................ F-34
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the three months ended March 31,
1998 and 1999 (unaudited)................................. F-35
Notes to Financial Statements............................... F-36
FINANCIAL STATEMENTS OF WEB YES, INC.
Independent Auditors' Report................................ F-41
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-42
Consolidated Statements of Income for the years ended
December 31, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited)....................... F-43
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1998 and for the three
months ended March 31, 1999 (unaudited)................... F-44
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited)....................... F-45
Notes to Consolidated Financial Statements.................. F-46
FINANCIAL STATEMENTS OF EGGROCK PARTNERS, INC.
Report of Independent Public Accountants.................... F-51
Balance Sheets as of December 31, 1998, September 30, 1999
and December 31, 1999..................................... F-52
Statements of Operations for the Year Ended December 31,
1998, the Nine Months Ended September 30, 1999 and the
Three Months Ended December 31, 1999...................... F-53
Statements of Redeemable Convertible Preferred Stock and
Members'/Stockholders' Equity (Deficit) for the Year Ended
December 31, 1998, the Nine Months Ended September 30,
1999 and the Three Months Ended December 31, 1999 F-54
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Statements of Cash Flows for the Year Ended December 31,
1998, the Nine Months Ended September 30, 1999 and the
Three Months Ended December 31, 1999...................... F-55
Notes to Financial Statements............................... F-56
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS FOR
BREAKAWAY SOLUTIONS, INC.
Basis of Presentation....................................... F-67
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1999......................................... F-68
Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1999.......................... F-69
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-70
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Breakaway Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Breakaway
Solutions, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Breakaway
Solutions, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
February 7, 2000, except for paragraph
five of note 6, which is
as of March 7, 2000
F-3
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17 $ 3,920
Short-term investments.................................... -- 28,227
Accounts receivable, net of allowance for doubtful
accounts of $131 in 1998 and $357 in 1999,
respectively............................................ 1,446 7,559
Unbilled revenue on contracts............................. 626 725
Due from related parties.................................. -- 3,991
Prepaid expenses and other current assets................. 59 2,548
------ -------
Total current assets.................................... 2,148 46,970
Investments................................................. -- 9,705
Property and equipment, net................................. 554 7,541
Intangible assets and deferred costs, net of accumulated
amortization.............................................. -- 12,181
Loans to employees.......................................... -- 568
Other assets................................................ 40 496
------ -------
Total assets............................................ $2,742 $77,461
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 426 $ --
Due to stockholders-current portion....................... -- 625
Capital lease obligations-current portion................. 149 533
Accounts payable.......................................... 813 2,955
Accrued compensation and related benefits................. 178 1,477
Accrued expenses.......................................... -- 1,306
Deferred revenue.......................................... 196 224
------ -------
Total current liabilities............................... 1,762 7,120
------ -------
Due to stockholders--long-term portion...................... -- 1,625
Capital lease obligations-long-term portion................. 67 376
------ -------
Total long-term liabilities............................. 67 2,001
------ -------
Total liabilities..................................... 1,829 9,121
------ -------
Commitments and contingencies
Stockholders' Equity:
Preferred stock........................................... -- --
Common stock, $.000125 par value, 160,000,000 shares
authorized; 15,360,000 shares and 37,889,084 shares
issued in 1998 and 1999, respectively, and 12,249,600
shares and 34,778,684 shares outstanding in 1998 and
1999, respectively...................................... 1 4
Additional paid-in capital................................ -- 78,868
Less: deferred compensation............................... -- (253)
Less: treasury stock, at cost............................. -- --
Retained earnings (accumulated deficit)................... 912 (10,367)
Accumulated other comprehensive income.................... -- 88
------ -------
Total stockholders' equity.............................. 913 68,340
------ -------
Total liabilities and stockholders' equity............ $2,742 $77,461
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue, including revenue from related parties of $4,548 in
1999...................................................... $ 6,118 $10,018 $ 25,390
------- ------- --------
Operating expenses:
Project personnel costs................................... 2,543 5,904 11,850
Selling, general and administrative expenses.............. 2,559 4,814 22,403
Amortization of deferred costs............................ -- -- 1,000
Amortization of goodwill and intangible assets............ -- -- 1,002
------- ------- --------
Total operating expenses................................ 5,102 10,718 36,255
------- ------- --------
Income (loss) from operations........................... 1,016 (700) (10,865)
Other income (expense):
Other income.............................................. -- 160 23
Interest income........................................... 93 11 673
Interest expense, including $128 to related parties in
1999.................................................... (33) (43) (198)
Loss on disposal of equipment............................. (2) (3) --
------- ------- --------
Total other income...................................... 58 125 498
------- ------- --------
Net income (loss)....................................... $ 1,074 $ (575) $(10,367)
======= ======= ========
Net income (loss) per share:
Basic and diluted......................................... $ 0.08 $ (0.05) $ (0.59)
======= ======= ========
Weighted average common shares outstanding:
Basic and diluted......................................... 12,826 12,680 17,440
======= ======= ========
Pro forma information (unaudited) (note 11)
Income (loss) before taxes, as reported................... $ 1,074 $ (575)
Pro forma income taxes (benefit)............................ 430 (195)
------- -------
Pro forma net income (loss)................................. $ 644 $ (380)
======= =======
Pro forma net income (loss) per share:
Basic and diluted......................................... $ 0.05 $ (0.03)
======= =======
Pro forma weighted average common shares outstanding:
Basic and diluted......................................... 12,826 12,680
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------- ------------------- PAID-IN DEFERRED --------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT
-------- --------- -------- -------- ---------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... -- $ -- 15,360 $2 $ -- -- (2,534) $ --
Distributions to
stockholders................ -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
------ --------- ------- -- ------- ----- ------ ---------
BALANCE, DECEMBER 31, 1997.... -- -- 15,360 2 -- -- (2,534) --
Purchase of treasury stock.... -- -- -- -- -- -- (576) --
Distributions to
stockholders................ -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
------ --------- ------- -- ------- ----- ------ ---------
BALANCE, DECEMBER 31, 1998.... -- -- 15,360 2 -- -- (3,110) --
S Corporation termination..... -- -- -- -- 911 -- -- --
Issuance of preferred stock... 5,853 1 -- -- 8,291 -- -- --
Repurchase and retirement of
common stock................ -- -- (5,048) (1) (4,468) -- -- --
Issuance of common stock for
acquired businesses......... -- -- 5,089 1 9,192 -- -- --
Issuance of stock options..... -- -- -- -- 856 -- -- --
Issuance of common stock for
services.................... -- -- 104 -- 419 (289) -- --
Exercise of stock options..... -- -- 1,376 -- 533 -- -- --
Issuance of Series B preferred
stock....................... 2,932 -- -- -- 19,050 -- -- --
Amortization of deferred
compensation................ -- -- -- -- -- 36 -- --
Conversion of Series A and B
preferred stock to common
stock....................... (8,785) (1) 14,056 1 -- -- -- --
Issuance of common stock in
connection with initial
public offering, net of
$2,980 in offering costs.... -- -- 6,900 1 41,967 -- -- --
Issuance of common stock in
connection with
investment.................. -- -- 52 -- 1,413 -- -- --
Issuance of warrants.......... -- -- -- -- 704 -- -- --
Change in unrealized gains on
investments................. -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
------ --------- ------- -- ------- ----- ------ ---------
Comprehensive income..........
BALANCE, DECEMBER 31, 1999.... -- $ -- 37,889 $4 $78,868 $(253) (3,110) $ --
====== ========= ======= == ======= ===== ====== =========
<CAPTION>
ACCUMULATED
OTHER RETAINED TOTAL
COMPREHENSIVE EARNINGS STOCKHOLDERS' COMPREHENSIVE
INCOME (DEFICIT) EQUITY INCOME (LOSS)
-------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... $-- $ 946 $ 948
Distributions to
stockholders................ -- (530) (530)
Net income.................... -- 1,074 1,074 1,074
--- -------- -------- ========
BALANCE, DECEMBER 31, 1997.... -- 1,490 1,492
Purchase of treasury stock.... -- -- --
Distributions to
stockholders................ -- (4) (4)
Net loss...................... -- (575) (575) (575)
--- -------- -------- ========
BALANCE, DECEMBER 31, 1998.... -- 911 913
S Corporation termination..... -- (911) --
Issuance of preferred stock... -- -- 8,292
Repurchase and retirement of
common stock................ -- -- (4,469)
Issuance of common stock for
acquired businesses......... -- -- 9,193
Issuance of stock options..... -- -- 856
Issuance of common stock for
services.................... -- -- 130
Exercise of stock options..... -- -- 533
Issuance of Series B preferred
stock....................... -- -- 19,050
Amortization of deferred
compensation................ -- -- 36
Conversion of Series A and B
preferred stock to common
stock....................... -- -- --
Issuance of common stock in
connection with initial
public offering, net of
$2,980 in offering costs.... -- -- 41,968
Issuance of common stock in
connection with
investment.................. -- -- 1,413
Issuance of warrants.......... -- -- 704
Change in unrealized gains on
investments................. 88 -- 88 88
Net loss...................... -- (10,367) (10,367) (10,367)
--- -------- -------- --------
Comprehensive income.......... $ (9,780)
========
BALANCE, DECEMBER 31, 1999.... $88 $(10,367) $ 68,340
=== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $1,074 $(575) $(10,367)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 255 332 3,285
Compensation expense for issuance of common stock
options................................................ -- -- 223
Loss on disposal of fixed assets........................ 2 3 --
Change in operating assets and liabilities, net of
impact of acquisition of businesses:
Accounts receivable................................... (472) (485) (5,182)
Unbilled revenues on contracts........................ -- (393) (99)
Increase in amounts due from related parties............ -- -- (3,991)
Prepaid expenses and other current assets............. 69 (18) (1,546)
Accounts payable...................................... 222 568 1,943
Accrued compensation and other related benefits....... 63 94 604
Accrued expenses and deferred revenue................. -- 196 1,134
------ ----- --------
Net cash provided by (used in) operating
activities.......................................... 1,213 (278) (13,996)
------ ----- --------
Cash flows from investing activities:
Purchase of investments................................. -- -- (37,360)
Purchase of property and equipment...................... (133) (503) (5,886)
Cash paid for acquired businesses net of cash
acquired............................................... -- -- (2,103)
Increase in cash surrender value of life insurance...... -- -- (26)
Proceeds from disposals of fixed assets................. 13 10 --
------ ----- --------
Net cash used in investing activities............... (120) (493) (45,375)
------ ----- --------
Cash flows from financing activities:
Repurchase and retirement of common stock................. -- -- (4,469)
Proceeds from issuances of preferred stock................ -- -- 23,289
Proceeds from note payable to stockholders................ -- -- 4,000
Proceeds from exercise of stock options................... -- -- 533
Proceeds from issuance of common stock, net of offering
costs................................................... -- -- 41,968
Advances to employees..................................... -- (13) (554)
Payments on current portion of long-term debt............. -- (10) (67)
Proceeds from (repayments of) credit line................. -- 426 (426)
Increase in deposits...................................... (18) (5) (767)
Payments on capital lease obligations..................... (184) (50) (233)
Distribution to stockholders.............................. (96) (439) --
------ ----- --------
Net cash provided by (used in) financing
activities.......................................... (298) (91) 63,274
------ ----- --------
Net increase (decrease) in cash and cash
equivalents......................................... 795 (862) 3,903
Cash and cash equivalents, at beginning of year............. 84 879 17
------ ----- --------
Cash and cash equivalents, at end of year................... $ 879 $ 17 $ 3,920
====== ===== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 33 $ 43 $ 105
====== ===== ========
Supplemental disclosures of non-cash investing and financing
activities:
Issuance of common stock in connection with investment in
Internet services company............................... $ -- $ -- $ 1,413
====== ===== ========
Issuance of warrants in connection with capital lease
obligations............................................. $ -- $ -- $ 704
====== ===== ========
Issuance of note payable to stockholders.................. $ -- $ -- $ 2,175
====== ===== ========
Conversion of notes payable and accrued interest to common
stock................................................... $ -- $ -- $ 4,053
====== ===== ========
Capital lease obligations................................. $ 332 $ 14 $ 1,632
====== ===== ========
Distributions payable to stockholders..................... $ 434 $ -- $ --
====== ===== ========
Conversion of preferred stock to common stock............. $ -- $ -- $ 27,289
====== ===== ========
Issuance of common stock in connection with acquisition of
businesses.............................................. $ -- $ -- $ 9,193
====== ===== ========
Acquisition of businesses:
Assets acquired......................................... $ -- $ -- $ 16,358
Liabilities assumed and issued.......................... -- -- (4,299)
Common stock and stock options issued................... -- -- (9,956)
------ ----- --------
Net cash paid for acquisition of businesses......... $ -- $ -- $ (2,103)
====== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. NATURE OF BUSINESS
Breakaway Solutions, Inc. (the "Company"), formerly The Counsell Group,
Inc., was established in 1992. The Company is a full service provider of
e-business solutions that allow growing enterprises to capitalize on the power
of the Internet to reach and support customers and markets. The Company has
designed its services specifically for growing enterprises. These are businesses
which generally fit within two broad categories; companies or divisions of
larger companies that have sales of up to $1 billion per year; and new and
emerging Internet-based businesses.
In December 1999, the Company formed Breakaway Capital I LLC, a wholly-owned
venture capital fund, for the primary purpose of making minority interest
investments in clients. Breakaway intends to make total investments of
$5.0 million; however, no investments have been made as of December 31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Breakaway Securities Corporation, Breakaway
Capital I LLC, Celtic Acquisition Corporation and WYI Acquisition Corporation.
All intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable
securities at the time of acquisition and re-evaluates such designation at each
balance sheet date. At December 31, 1999, the Company's investments in
marketable securities are classified as available-for-sale and, as such, are
carried at fair value, with unrealized gains and losses, net of deferred taxes
reported as a separate component of stockholders' equity (see Note 3).
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable, and debt instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and
F-8
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such losses have been within management's expectations. Write-offs of accounts
receivable have not been material for any of the periods presented. The
Company's customers are headquartered primarily in North America. At
December 31, 1998, amounts due from three customers represented $0.7 million or
33% of total accounts receivable. At December 31, 1999, no amounts due from
customers exceeded 10% of total accounts receivable.
The fair market values of cash and cash equivalents, accounts receivable and
debt instruments at both December 31, 1998 and 1999 approximate their carrying
amounts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is recorded on the
straight-line basis over the estimated useful life of the related assets which
range from three to five years. Equipment held under capital leases is stated at
the present value of minimum lease payments at the inception of the lease and
amortized using the straight-line method over the lease term. Maintenance and
repairs are charged to operations when incurred.
LOANS TO EMPLOYEES
Loans have been made to employees of the acquired company WPL Laboratories,
Inc. totaling $0.5 million in the form of promissory notes which bear interest
at 8.0% annually. The principal amount of these promissory notes and interest
accrued thereon shall be payable upon the earlier to occur of: (i) the date on
which the debtor receives any proceeds from the debtor's sale of Breakaway
capital stock pledged to Breakaway under a stock pledge agreement, to the extent
of such proceeds (net of any taxes payable in connection with such sale) and
(ii) the fourth anniversary of the date of the stock pledge agreement to the
full extent of any remaining principal and interest that is outstanding on such
date.
In December 1999, the Company authorized an unsecured loan to its Chief
Executive Officer in the amount of $1.0 million, which loan is due together with
interest at 6.21% annually on the first to occur of the third anniversary of the
loan or thirty days after his ceasing to be employed by the Company. The loan is
evidenced by a February 2000 Promissory Note.
The Company also periodically makes short term loans to employees.
INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs primarily relate to the Company's
acquisitions and include customer base, workforce in place and goodwill.
Deferred costs primarily represent deferred compensation costs arising from cash
and stock issued in connection with business acquisitions, for which continuing
employment of individuals is required. In connection with acquisitions accounted
for under the purchase method of accounting (see Note 3), the Company recorded
these intangible assets and deferred costs based on the excess of the purchase
price over the identifiable tangible net assets of the acquiree on the date of
the purchase. Intangible assets and deferred costs are reported at cost, net of
accumulated amortization and are being amortized over their useful lives,
ranging from three to five
F-9
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years. At December 31, 1999, intangible assets and deferred costs were comprised
of the following (in thousands):
<TABLE>
<S> <C>
Customer base............................................... $ 1,463
Workforce in place.......................................... 852
Goodwill.................................................... 4,875
-------
Intangible assets......................................... 7,190
Deferred costs.............................................. 6,993
-------
14,183
Less accumulated amortization............................... 2,002
-------
Intangible assets and deferred costs, net................. $12,181
=======
</TABLE>
For the year ended December 31, 1999, amortization of deferred costs totaled
$1.0 million and amortization of intangible assets totaled $1.0 million.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line bases over the expected
periods to be benefited of five years. The Company evaluates whether changes
have occurred that would require revision of the remaining estimated useful life
or impact the recoverability of the goodwill. If such changes occur, the Company
would use an estimate of the undiscounted future operating cash flows to
determine the recoverability of the goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
REVENUE RECOGNITION
Revenues pursuant to fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues pursuant to time and
material contracts are recognized as services are provided. Unbilled revenues on
contracts are comprised of costs plus earnings. Billings in excess of costs plus
earnings are classified as deferred revenues.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such losses
are determined.
PROJECT PERSONNEL COST
Project personnel costs consist of payroll and payroll-related expenses for
personnel dedicated to client assignments.
F-10
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Prior to 1999, the Company was taxed under the provisions of Subchapter S of
the Internal Revenue Code, whereby the corporate income is taxed to the
individual shareholders based on their proportionate share of the Company's
taxable income. Massachusetts taxes profits on S corporations with receipts
exceeding $6 million.
Effective January 1, 1999, the Company terminated its S Corporation election
and is subject to corporate-level federal and certain additional state income
taxes. Accordingly, the accompanying consolidated statements of operations
include a pro forma income tax adjustment (see Note 11) for the income taxes
that would have been recorded if the Company had been a C Corporation for all
periods presented.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION. As permitted by SFAS 123,
the Company measures compensation costs in accordance with Accounting Principles
Board Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. Accordingly, no accounting recognition is given to
stock options issued to employees that are granted at fair market value until
they are exercised. Stock options issued to non-employees are recorded at the
fair value of the stock at the date of grant. Upon exercise, net proceeds,
including income tax benefits realized, are credited to equity. Therefore, the
adoption of SFAS 123 was not material to the Company's financial condition or
results of operations; however, the pro forma impact on income (loss) per share
has been disclosed in the notes to the consolidated financial statements as
required by SFAS 123 (see Note 6).
SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131) which requires companies to present financial
descriptive segment information (see Note 12).
NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 requires
the presentation of basic and diluted net income (loss) per share for all
periods presented. There were no common stock equivalents outstanding in 1997.
As the Company has been in a net loss position for the years ended December 31,
1998, and 1999, common stock equivalents of 1,348,948 for the year ended
December 31, 1998 and 15,262,340 for the year ended December 31, 1999 were
excluded from the diluted loss per share calculation as they would be
antidilutive. As a result, diluted loss per share is the same as basic loss per
share, and has not been presented separately.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flows.
F-11
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
3. INVESTMENTS
During 1999, the Company made a 19.9% equity investment in a privately held
Internet services company, including an advance of $0.8 million. The carrying
value of this investment and advance was approximately $3.7 million at
December 31, 1999, which approximates fair value. The advance, which bears
interest at 8% and is payable on December 15, 2000, is classified as a component
of prepaid expenses and other current assets in the accompanying consolidated
balance sheet as of December 31, 1999.
The cost of available-for-sale marketable securities carried at fair value
was $34.9 million at December 31, 1999. There were no investments held as
available-for-sale as of December 31, 1998. Gross unrealized gains and losses
related to securities held as available-for-sale for the year ended
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Gross unrealized gains...................................... $94
Gross unrealized losses..................................... (6)
---
Net unrealized gains...................................... $88
===
</TABLE>
At December 31, 1999, $28.2 million in marketable securities were classified
as short-term and $6.8 million were recorded as long-term.
4. ACQUISITIONS
During 1999, the Company acquired the following companies:
<TABLE>
<CAPTION>
DATE COMPANY LOCATION
- ---- ------- --------
<S> <C> <C>
March 25, 1999....................... Applica Corporation New York, NY
May 17, 1999......................... WPL Laboratories, Inc. Haverford, PA
June 10, 1999........................ Web Yes, Inc. Somerville, MA
</TABLE>
The aggregate purchase price paid in connection with the acquisitions made
in 1999 consisted of (i) 5,089,494 shares of common stock of the Company (ii)
$2.2 million in promissory notes, and (iii) $2.5 million of cash.
The total acquisition consideration paid for WPL Laboratories, Inc.
consisted of approximately $5.0 million in cash to be paid over a four-year
period and 2,728,280 shares of Breakaway common stock. Each WPL stockholder
received 50% of his cash consideration at closing and will receive the remainder
incrementally over a four-year period so long as the stockholder does not resign
and is not terminated for cause. Of the shares of Breakaway common stock issued
to the former WPL stockholders, approximately 50% are subject to Breakaway's
right, which lapses incrementally over a four-year period, to repurchase the
shares of the stockholder, at their value at the time of the acquisition, upon
the stockholder's resignation or Breakaway's termination of the stockholder for
cause.
The total consideration paid for Web Yes, Inc. consisted of 984,982 shares
of Breakaway common stock. Of the shares of Breakaway common stock issued to the
former Web Yes stockholders, 685,360 are subject to Breakaway's right, which
lapses incrementally over a four year period, to repurchase the shares of a
particular stockholder upon the termination of his employment with Breakaway.
The
F-12
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
4. ACQUISITIONS (CONTINUED)
repurchase price will be either at the share value at the time of the
acquisition if the stockholder terminates employment or Breakaway terminates for
cause, or at their fair market value if Breakaway terminates the stockholder's
employment without cause.
The acquisitions have all been accounted for using the purchase method of
accounting. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Results of operations
for the acquired companies have been included with those of the Company for
periods subsequent to the date of acquisition. The excess of the total purchase
price for each acquired company over the allocation of fair values to the net
assets has been recorded as intangible assets, as follows (in thousands):
<TABLE>
<S> <C>
Working capital............................................. $ 508
Other non-current assets.................................... 706
Non-current liabilities..................................... (134)
-------
1,080
-------
Intangible assets and deferred costs:
Assembled workforce....................................... 852
Customer base............................................. 1,463
Goodwill.................................................. 4,875
Deferred costs............................................ 6,993
-------
Total intangible assets and deferred costs.............. 14,183
-------
Purchase price $15,263
=======
</TABLE>
The following unaudited pro forma results of operations give effect to the
acquisitions accounted for as purchases as if the transactions had occurred at
the beginning of 1998. Such pro forma financial information reflects certain
adjustments, including amortization of goodwill, income tax effects and an
increase in the weighted average shares outstanding. This pro forma information
does not necessarily reflect the results of operations that would have occurred
had the acquisitions taken place at the beginning of 1998 and is not necessarily
indicative of results that may be obtained in the future (in thousands, except
for per share amounts):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Total revenue............................................. $12,957 $27,358
Net loss.................................................. (2,787) (11,641)
Net loss per share........................................ ($ 0.16) ($ 0.61)
Weighted average common shares outstanding................ 17,770 19,098
</TABLE>
Subsequent to December 31, 1999 the Company entered into agreements to
acquire Eggrock Partners, Inc. and DataCyr Corporation (See Note 13).
F-13
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computer equipment.......................................... $1,117 $8,541
Office equipment............................................ 12 137
Furniture and fixtures...................................... 70 699
Construction-in-progress.................................... -- 214
------ ------
1,199 9,591
Less: Accumulated depreciation and amortization............. (645) (2,050)
------ ------
$ 554 7,541
====== ======
</TABLE>
The cost and related accumulated amortization of property and equipment held
under capital leases is as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Cost........................................................ $ 395 $1,787
Less: Accumulated amortization.............................. (332) (450)
----- ------
$ 63 $1,337
===== ======
</TABLE>
6. CAPITAL STOCK
PREFERRED STOCK
In October 1998, the Company's stockholders authorized 5,853,000 shares of
Series A Preferred Stock. In January 1999 the Company issued 5,853,000 shares of
Series A Preferred Stock at $1.42 per share. The Series A Preferred Stock was
converted into common stock upon the completion of the Company's initial public
offering in October 1999.
SERIES B PREFERRED STOCK
In July 1999, the Company issued 2,931,849 shares of Series B Preferred
Stock, $.0001 par value, for $6.50 per share. The Series B Preferred Stock was
converted into common stock upon the completion of the Company's initial public
offering in October 1999.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan was adopted in July 1999. The purchase
plan authorizes the issuance of up to a total of 800,000 shares of common stock
to participating employees.
STOCK SPLITS
In June and December 1998 and in September 1999, the Board of Directors
approved a 2-for-1, 3-for-1 stock splits effected through stock dividends and a
4-for-5 stock split of the Company's common
F-14
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. CAPITAL STOCK (CONTINUED)
stock, respectively. All prior periods have been restated to reflect these stock
splits effected as a recapitalization.
In March 2000, the Board of Directors approved a 2-for-1 stock split
effected through a stock dividend of the Company's common stock. All prior
periods have been restated to reflect the split effected as a recapitalization.
STOCK PLANS
The Company's 1998 Stock Plan (the "Stock Plan") authorizes the Company to
grant options to purchase common stock, to make awards of restricted common
stock, and to issue certain other equity-related awards to employees and
directors of, and consultants to, the Company. The total number of shares of
common stock which may be issued under the Stock Plan is 16,240,536 shares. The
Stock Plan is administered by the Board of Directors, which selects the persons
to whom stock options and other awards are granted and determines the number of
shares, the exercise or purchase prices, the vesting terms and the expiration
date. Non-qualified stock options may be granted at exercise prices which are
above, equal to, or below the grant date fair market value of the common stock.
The exercise price of options qualifying as incentive stock options may not be
less than the grant date fair market value of the common stock.
Stock options granted under the Stock Plan are nontransferable, generally
become exercisable over a four-year period, and expire ten years after the date
of grant (subject to earlier termination in the event of the termination of the
optionee's employment or other relationship with the Company).
The 1999 Stock Incentive Plan was adopted in July 1999. The 1999 plan is
intended to replace the 1998 plan. Up to 9,600,000 shares of common stock
(subject to adjustment in the event of stock splits and other similar events)
may be issued pursuant to awards granted under the 1999 plan.
The 1999 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards.
F-15
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. CAPITAL STOCK (CONTINUED)
The following table presents the combined activity of the two option plans
in which offerings have occurred for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Outstanding options at beginning of year......... -- $ -- 9,588 $0.63
Granted........................................ 9,792 $0.62 8,378 $4.39
Exercised...................................... -- $ -- (1,398) $0.39
Cancelled...................................... (204) $0.38 (518) $1.30
----- ----- ------ -----
Outstanding options at end of year............... 9,588 $0.63 16,050 $2.59
===== ===== ====== =====
Exercisable options at end of year............... 4,178 $0.50 10,054 $0.78
===== ===== ====== =====
Weighted average fair value of options granted
during the year................................ $ .25 $ 4.18
===== ======
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -------------------------
NUMBER REMAINING WEIGHTED
OF CONTRACTUAL AVERAGE
OPTIONS LIFE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISABLE PRICE
- ----------------------------------------------- -------------- ----------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
$0.34........................................ 2,998 8.50 2,244 $0.34
$0.51........................................ 188 8.75 68 $0.51
$0.88........................................ 7,104 9.03 7,102 $0.88
$0.89........................................ 300 9.08 68 $0.89
$0.98........................................ 1,998 9.23 542 $0.98
$1.09........................................ 2,052 9.45 30 $1.09
$5.50........................................ 622 9.72 -- --
$21.33....................................... 94 9.81 -- --
$28.72....................................... 358 9.94 -- --
$28.94....................................... 336 9.94 -- --
------ ----- ------ -----
16,050 9.08 10,054 $ .77
====== ===== ====== =====
</TABLE>
F-16
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. CAPITAL STOCK (CONTINUED)
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for its Stock Plan, and, accordingly, compensation cost
is recognized in the financial statements for stock options granted to employees
only when the fair value on the grant date exceeds the exercise price. The
Company granted no stock options during 1996 and 1997. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123 for 1998 and 1999 grants, the net loss would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss (in thousands)........................... $ (575) $ (687) $(10,367) $(17,713)
Net loss per share................................ $(0.05) $(0.05) $ (0.59) $ (1.02)
</TABLE>
The fair value of options at the date of grant were estimated using the
Black-Scholes model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTION
-------------------
1998 1999
-------- --------
<S> <C> <C>
Volatility.................................................. 70.0% 135.0%
Expected option life (years)................................ 10 9
Interest rate (risk free)................................... 7.0% 6.5%
</TABLE>
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to in the foreseeable future.
7. COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT
The Company had a $0.7 million bank revolving line of credit (increased to
$1.3 million in February 1999) at prime plus 1/2% (8.25% at December 31, 1998)
which terminated in 1999. At December 31, 1998, the Company borrowed
$0.4 million under this line of credit. At December 31, 1999, there were no
borrowings.
OPERATING LEASES
The Company leases its facilities under various operating leases expiring in
2003. Such leases include provisions that may require the Company to pay its
proportionate share of operating costs, which exceed specific thresholds. Rent
expense for the years ended December 31, 1997, 1998 and 1999 was $0.2 million,
$0.6 million and $1.5 million, respectively.
Other income in 1998 consists primarily of a payment received by the Company
in connection with the early termination of its existing office lease.
F-17
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL LEASES
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for two years, with annual
interest rates ranging from 12.7% to 13.3%. The leased equipment secures all
leases.
In September 1999, the Company entered into a Master Lease Agreement with
Silicon Valley Bank to finance up to $4.0 million of equipment and software.
Leases under the Master Lease Agreement have terms of thirty-six months.
Payments are determined based on an annual interest rate equal to the annual
rate on U.S. Treasury securities of a comparable term plus 2.5% (5.5 % at
December 31, 1999). The leased equipment secures all leases. In connection with
the Master Lease Agreement Breakaway issued Silicon Valley Bank warrants to
purchase 21,818 shares of Breakaway common stock for $5.50 per share. The
warrants are exercisable until December 21, 2002.
The following is a schedule of future minimum rental payments required under
the above leases as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
2000...................................................... $ 3,604 $ 708
2001...................................................... 5,292 588
2002...................................................... 5,956 646
2003...................................................... 6,074 --
2004...................................................... 6,159 --
thereafter................................................ 15,591 --
------- ------
$42,676 1,942
=======
Less: amount representing interest........................ (1,033)
------
Net present value of minimum lease payments............... 909
Less: current portion of capital lease obligations........ (533)
------
Capital lease obligations, net of current portion......... $ 376
======
</TABLE>
8. SIGNIFICANT CUSTOMERS
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Customer A................................................. 19% 27% --
Customer B................................................. 10% -- --
Customer C................................................. 13% -- --
</TABLE>
F-18
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
9. RELATED PARTIES
In May 1999, Internet Capital Group ("ICG"), holder of the Company's
Series A Preferred Stock, provided $4.0 million in advances which were converted
into equity in July 1999 during the Company's Series B Preferred Stock offering.
In connection with this transaction, the Company issued ICG a warrant to
purchase 147,744 shares of common stock at an exercise price of $4.07 per share.
The Company's acquisition of WPL Laboratories, Inc. in May 1999 included
$5.0 million in cash which was payable to the former stockholders as follows:
(a) one half at closing and (b) the remainder incrementally over a four-year
period so long as the stockholder does not voluntarily terminate his employment
and is not terminated for cause. This amount, which has been discounted at 7%,
is reflected as due to stockholders in the accompanying consolidated balance
sheet.
Interest expense for the above arrangements was approximately $0.1 million
for the year ended December 31, 1999.
In October 1999, ICG's holdings in the Series A Preferred Stock and the
Series B Preferred Stock were converted to common stock upon the completion of
the Company's initial public offering. At December 31, 1999, ICG holds
approximately 40% of the Company's outstanding common stock.
During 1999, the Company provided information technology consulting services
to ICG and to companies in which ICG holds equity interests ("ICG Partner
Companies"). Amounts related to services provided to and amounts due from ICG
and ICG Partner Companies are separately classified in the accompanying
consolidated financial statements.
10. DEFERRED COMPENSATION PLAN
The Company sponsors a qualified 401(k) deferred compensation plan (the
"Plan"), which covers substantially all of its employees. Participants are
permitted, in accordance with the provisions of Section 401(k) of the Internal
Revenue Code, to contribute up to 15% of their earnings into the Plan. The
Company may make matching contributions at its discretion. The Company elected
not to contribute to the Plan for the years ended December 31, 1997 and 1998.
During 1999, the Company made a contribution of $0.1 million to the Plan.
11. INCOME TAXES
As discussed in Note 2, effective January 1, 1999, the Company terminated
its S Corporation election and is subject to corporate-level federal and certain
state income taxes. Upon termination of the S Corporation status, deferred
income taxes are recorded for the tax effect of cumulative temporary differences
between the financial reporting and tax bases of certain assets and liabilities,
primarily deferred revenue that must be recognized currently for tax purposes,
accrued expenses that are not currently deductible, cumulative differences
between tax depreciation and financial reporting allowances, and the impact of
the conversion from the cash method to the accrual method of reporting for tax
purposes.
No provision for federal or state income taxes has been recorded in 1999 as
the Company incurred a net operating loss for the year ended December 31, 1999.
The Company has recorded a valuation allowance against its deferred tax assets
since management believes that, after considering all the
F-19
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
11. INCOME TAXES (CONTINUED)
available objective evidence, historical and prospective, with greater weight
given to historical evidence, it is more likely than not that these assets will
not be realized. No income tax benefit has been recorded for the current year
presented because of the valuation allowance.
A reconciliation of the statutory Federal income tax rates to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory Federal tax rate (benefit)............. (34.0%) (34.0%) (34.0%)
State income taxes, (net of Federal tax
benefits)...................................... -- -- (7.9%)
Valuation reserve movement....................... -- -- 36.1%
S Corporation effect............................. 34.0% 34.0% --
Amortization..................................... -- -- 5.0%
Other differences................................ -- -- 0.8%
----- ----- -----
Effective income tax rate........................ 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts......................................... $ 199
Deferred revenue............................................ 97
Accrued liability relating to compensation-related
expenses.................................................. 120
Other accrued liabilities................................... 4
Fixed assets, principally attributable to differences in
depreciation methods...................................... 5
Operating loss and credit carryforwards..................... 3,294
------
Total gross deferred tax assets............................. 3,719
Less valuation allowance.................................. (2,560)
------
Net deferred tax assets..................................... 1,159
------
Deferred tax liabilities:
Intangible assets / cash to accrual......................... (1,159)
------
Total gross deferred tax liabilities...................... (1,159)
------
Net deferred tax asset.................................... $ --
======
</TABLE>
At December 31, 1999, the Company had a net operating loss carryforward for
income tax reporting purposes of over $7.5 million. This net operating loss
carryover will expire in 2019.
F-20
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
11. INCOME TAXES (CONTINUED)
Income tax expense (benefit), assuming the Company had been a C Corporation
and applying the tax laws in effect during the periods presented, for each of
the two years in the period ended December 31, 1998 would have been as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Federal tax................................................. $ 366 $(195)
State taxes, net of federal................................. 64 --
----- -----
$ 430 $(195)
===== =====
</TABLE>
12. OPERATING SEGMENTS
Historically, the Company has operated in a single segment: strategy and
internet consulting services. With the acquisitions of Applica Corporation and
Web Yes, Inc. during 1999, the Company expanded its operations to include a
second segment: Application and Web Hosting Services.
The following table sets forth certain components of the Application and Web
Hosting Services segment and the Strategy and Internet Consulting Services
segment as of and for the year ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
STRATEGY AND
APPLICATION AND INTERNET
WEB HOSTING CONSULTING
SERVICES SERVICE CORPORATE TOTAL
--------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Revenue....................................... $ 2,092 $ 23,298 $ 25,390
Depreciation expense.......................... 823 432 1,255
Net loss...................................... (2,515) (7,852) (10,367)
Total assets.................................. 11,546 20,451 45,464 77,461
Capital additions............................. 4,428 3,603 8,031
</TABLE>
Substantially, all of the Company's assets are located within the United
States. During 1998, one customer accounted for approximately 27% of the
Company's Strategy and Internet Consulting Services revenue. During 1999, no
single customer accounted for 10% or more of either Strategy and Internet
Consulting Services revenue or Application and Web Hosting Services revenue.
13. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITIONS
Subsequent to December 31, 1999, the Company entered into the following
acquisition, which will be accounted for under the purchase method of
accounting:
- EGGROCK PARTNERS, INC.
On January 26, 2000, the Company entered into an Agreement and Plan Of
Merger to acquire all the outstanding capital stock of Eggrock Partners, Inc.
("Eggrock"), a provider of system integration,
F-21
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
website design, and application hosting services. The acquisition is pending
regulatory and Eggrock shareholder approval. The Agreement and Plan of Merger
provides that all of Eggrock's outstanding shares of preferred stock and common
stock be exchanged for shares of Breakaway's common stock based on a conversion
ratio and options to purchase Eggrock common stock to be assumed by Breakaway
and converted into options to purchase Breakaway common stock on the same basis.
The total number of Breakaway will issue up to 7,272,000 shares of common stock
in connection with the acquisition of Eggrock. The transaction contemplates
that, of the shares issued to the former Eggrock Partners, Inc. shareholders,
1,916,160 shares issued to the three founders and other members of senior
management will be subject to the Company's right, which lapses incrementally
over a four-year period, to repurchase the shares at the original price paid
therefor by the former shareholder upon the termination of his or her employment
with the Company, subject to conditions described in the agreement.
The following unaudited pro forma consolidated results of operations gives
effect to the acquisition of Eggrock as if it occurred at the beginning of 1999.
Such pro forma consolidated financial information reflects certain adjustments,
including amortization of goodwill and deferred costs, income tax effects and an
increase in the weighted average shares. This pro forma information does not
necessarily reflect the results of operations that would have occurred had the
acquisition taken place at the beginning of 1999 and is not necessarily
indicative of results that may be obtained in the future (in thousands except
per share amounts):
<TABLE>
<S> <C>
Revenue..................................................... $ 39,096
Net loss.................................................... $(74,096)
Net loss per share.......................................... $ (2.80)
Weighted average common shares outstanding.................. 26,459
</TABLE>
- DATACYR CORPORATION
In February 2000, the Company acquired DataCyr Corporation, a software
development company for 110,000 shares of Breakaway common stock. Of these
shares, approximately 85% are owned by individuals who are now employed by
Breakaway. These shares are subject to Breakaway's right, which lapses
incrementally over a four-year period, to repurchase the shares from the
applicable employees for a nominal amount upon the resignation of the employee
who owns the shares on Breakaway's termination of the employee for cause. The
acquisition was accounted for using the purchase method of accounting.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Applica Corporation:
We have audited the accompanying balance sheet of Applica Corporation (the
"Company"), a development-stage company, as of December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows from
September 24, 1998 (inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Applica Corporation at
December 31, 1998 and the results of its operations and its cash flows from
September 24, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 30, 1999
F-23
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $474,205
Subscriptions receivable.................................. 3,000
--------
Total current assets.................................... 477,205
Property and equipment, net................................. 43,259
Deposits.................................................... 7,332
--------
Total assets............................................ $527,796
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 61,775
--------
Total liabilities....................................... 61,775
Commitments and contingencies
Stockholders' equity:
Preferred stock $0.001 par value, 5,000,000 shares
authorized, 500,000 shares issued and outstanding
(liquidation preference of $500,000).................... 500,000
Common stock $0.001 par value, 10,000,000 shares
authorized, 3,000,000 shares issued and outstanding..... 3,000
Deficit accumulated during development stage.............. (36,979)
--------
Total stockholders' equity.............................. 466,021
--------
Total liabilities and stockholders' equity.............. $527,796
========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF OPERATIONS
FROM SEPTEMBER 24, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Operating expenses:
Organization costs........................................ $ 25,911
Occupancy................................................. 7,331
Depreciation.............................................. 1,483
Other..................................................... 2,254
----------
Total operating expenses................................ 36,979
----------
Net loss................................................ $ (36,979)
==========
Net loss per share--basic and diluted....................... $ (0.01)
Weighted average shares outstanding......................... 3,000,000
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK DURING TOTAL
------------------- -------------------- DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STAGE EQUITY
-------- -------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 24, 1998..... -- $ -- -- $ -- $ -- $ --
Subscription of common
stock....................... -- -- 3,000,000 3,000 -- 3,000
Issuance of preferred stock... 500,000 500,000 -- -- -- 500,000
Net loss...................... -- -- -- -- (36,979) (36,979)
------- -------- --------- ------ -------- --------
Balance, December 31, 1998...... 500,000 $500,000 3,000,000 $3,000 $(36,979) $466,021
======= ======== ========= ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF CASH FLOWS
FROM SEPTEMBER 24, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(36,979)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................ 1,483
Changes in operating assets and liabilities:
Accounts payable...................................... 61,775
Deposits.............................................. (7,332)
--------
Net cash provided by operating activities........... 18,947
--------
Cash flows from investing activities:
Additions to property and equipment....................... (44,742)
--------
Net cash used in investing activities............... (44,742)
--------
Cash flows from financing activities:
Issuance of preferred stock............................... 500,000
--------
Net cash provided by financing activities........... 500,000
--------
Net increase in cash................................ 474,205
Cash at beginning of period................................. --
--------
Cash at end of period....................................... $474,205
========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY
Applica Corporation (the "Company") was founded in September 1998 and
provides application hosting services. The Company has experienced losses since
inception and is subject to those risks associated with development-stage
companies. Activities since inception have consisted of development of a
business plan. Since inception and through December 31, 1998, the Company
operated with no salaried employees. Therefore, recurring operating expenses,
such as salaries and fringe benefits, are not reflected in the accompanying
financial statements. Financial statements in subsequent periods will reflect
salaries and fringe benefits.
On March 25, 1999, the Company was acquired by Breakaway Solutions, Inc.
(see Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from five to seven years.
Equipment under capital leases is stated at the net present value of minimum
lease payments. Equipment held under capital leases and leasehold improvements
are amortized straight-line over the shorter of the lease term or estimated
useful life of the asset.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-28
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 requires
the presentation of basic and diluted net loss per share for all periods
presented. Basic loss per share is based on the weighted average number of
shares outstanding during the period. Diluted net loss per share reflects the
per-share effect of dilutive stock options and other dilutive common stock
equivalents. As the Company is in a net loss position for the period ended
December 31, 1998, common stock equivalents of 500,000 for the period ended
December 31, 1998 were excluded from the diluted loss per share calculation as
they would be antidilutive. As a result, diluted loss per share is the same as
basic loss per share and has not been presented separately.
REPORTING COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), REPORTING COMPREHENSIVE INCOME. This statement requires
that all components of comprehensive loss be reported in the financial
statements in the period in which they are recognized. For the period presented,
comprehensive loss under SFAS 130 was equivalent to the Company's net loss
reported in the accompanying statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial condition or cash flows.
3. PROPERTY AND EQUIPMENT
At December 31, 1998, property and equipment consists of the following:
<TABLE>
<S> <C>
Office equipment............................................ $41,683
Computer equipment.......................................... 3,059
-------
44,742
Less: accumulated depreciation.............................. (1,483)
-------
Property and equipment, net............................. $43,259
=======
</TABLE>
4. PREFERRED STOCK
The Company's stockholders have authorized 5,000,000 shares of Series A
preferred stock. The Series A preferred stock is entitled to receive dividends
at a rate of $0.05 per share per annum. The Series A preferred stock is voting
and is convertible into shares of common stock on a share-for-share basis,
subject to certain adjustments. In the event of any liquidation, dissolution or
winding up of the Company, the Series A preferred stock has a liquidation
preference of $1.00 per share. The Series A
F-29
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. PREFERRED STOCK (CONTINUED)
preferred stock is convertible into common stock immediately at the option of
the holder, and automatically converts into common stock upon the completion of
a qualified public offering.
5. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Intangible assets, principally due to differences in
amortization............................................ $5,372
Net operating loss carryforward........................... 195
------
Total gross deferred tax assets......................... 5,567
======
Valuation allowance......................................... (5,567)
------
Net deferred tax assets................................. $ --
======
</TABLE>
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into an operating lease for its office space which
expires in August 1999. Future minimum rental commitments under the lease in
1999 are $36,000. The Company is currently exploring alternatives for new space.
7. SUBSEQUENT EVENTS
LOAN AGREEMENT
On March 15, 1999, the Company entered into a Loan and Security Agreement
with a bank for a $150,000 equipment credit line which expires on June 15, 2002.
This agreement terminated upon the purchase of the Company (see Note 7).
AGREEMENT AND PLAN OF REORGANIZATION
On March 25, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all the outstanding stock of the Company in a transaction accounted for
under the purchase method of accounting. The purchase price was comprised of
723,699 shares of Breakaway common stock issued in exchange for all of the
outstanding shares of the Company's common stock.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
WPL Laboratories, Inc.:
We have audited the accompanying balance sheets of WPL Laboratories, Inc. as
of December 31, 1997 and 1998, and the related statements of income,
stockholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 30, 1999
F-31
<PAGE>
WPL LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash..................................................... $ 81,232 $ 240,310 $ 415,368
Accounts receivable...................................... 371,869 746,982 983,462
Employee advances........................................ -- 103,300 103,300
-------- ---------- ----------
Total current assets................................... 453,101 1,090,592 1,502,130
Property and equipment
Office and computer equipment............................ 103,703 169,668 203,230
Software................................................. 5,000 9,512 10,334
Automobile............................................... 7,500 -- --
-------- ---------- ----------
116,203 179,180 213,564
Less: Accumulated depreciation and amortization.......... (64,556) (83,737) (94,647)
-------- ---------- ----------
Net property and equipment............................. 51,647 95,443 118,917
-------- ---------- ----------
Other assets............................................... 1,915 103,909 244,503
-------- ---------- ----------
$506,663 $1,289,944 $1,865,550
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Related-party advance and accrued interest............... $ 23,333 $ 25,000 $ --
Accounts payable......................................... 10,947 8,278 11,862
Accrued compensation and related benefits................ 68,341 206,192 266,689
Other accrued expenses................................... 19,469 23,052 12,500
-------- ---------- ----------
Total current liabilities.............................. 122,090 262,522 291,051
Commitments and contingencies
Stockholders' equity:
Common stock $0.01 par value, 10,000,000 shares
authorized, 1,248,980 shares issued and outstanding in
1997 and 1,800,000 shares issued and outstanding in
1998 and 1999.......................................... 12,490 18,000 18,000
Additional paid-in capital............................... 99 242,589 242,589
Retained earnings........................................ 371,984 766,833 1,313,910
-------- ---------- ----------
Total stockholders' equity............................. 384,573 1,027,422 1,574,499
-------- ---------- ----------
Total liabilities and stockholders' equity............. $506,663 $1,289,944 $1,865,550
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
WPL LABORATORIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -----------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $1,611,284 $2,650,415 $ 434,585 $1,087,678
Operating expenses:
Project personnel costs..................... 1,191,193 1,719,664 193,316 446,109
Selling, general and administrative......... 232,040 534,235 64,604 95,418
---------- ---------- ---------- ----------
Total operating expenses.................. 1,423,233 2,253,899 257,920 541,527
---------- ---------- ---------- ----------
Operating income.......................... 188,051 396,516 176,665 546,151
Other income (expense):
Interest expense............................ (2,250) (1,667) -- --
Interest income............................. -- -- -- 926
Other income................................ -- -- -- --
---------- ---------- ---------- ----------
Total other income (expense).............. (2,250) (1,667) -- 926
---------- ---------- ---------- ----------
Net income.................................... $ 185,801 $ 394,849 $ 176,665 $ 547,077
========== ========== ========== ==========
Net income per share--basic................... $ 0.15 $ 0.24 $ 0.14 $ 0.30
Net income per share--diluted................. $ 0.15 $ 0.24 $ 0.14 $ 0.29
Weighted average common shares outstanding.... 1,248,980 1,664,132 1,248,980 1,800,000
Weighted average common stock equivalents..... -- -- -- 66,415
---------- ---------- ---------- ----------
Weighted average common shares outstanding and
common stock equivalents.................... 1,248,980 1,664,132 1,248,980 1,866,415
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
WPL LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997................ 1,248,980 $12,490 $ 99 $ 267,993 $ 280,582
Stockholders' distributions........... -- -- -- (81,810) (81,810)
Net income............................ -- -- -- 185,801 185,801
--------- ------- -------- ---------- ----------
Balance, December 31, 1997.............. 1,248,980 12,490 99 371,984 384,573
Common stock issued to employees for
services rendered................... 551,020 5,510 242,490 -- 248,000
Net income............................ -- -- -- 394,849 394,849
--------- ------- -------- ---------- ----------
Balance, December 31, 1998.............. 1,800,000 18,000 242,589 766,833 1,027,422
Net income............................ -- -- -- 547,077 547,077
--------- ------- -------- ---------- ----------
Balance, March 31, 1999 (Unaudited)..... 1,800,000 $18,000 $242,589 $1,313,910 $1,574,499
========= ======= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
WPL LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-------- --------- -------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income....................................... $185,801 $ 394,849 $176,665 $ 547,077
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 14,300 26,681 6,671 10,910
Common stock issued to employees for services
rendered..................................... -- 248,000 -- --
Changes in operating assets and liabilities:
Accounts receivable.......................... (68,745) (375,113) 30,936 (236,480)
Employee advances............................ -- (103,300) -- --
Accounts payable............................. (2,902) (2,669) 868 3,584
Accrued compensation and related benefits.... 59,033 137,851 (87,810) 60,497
Accrued expenses............................. -- 3,583 -- (10,552)
-------- --------- -------- ---------
Net cash provided by operating
activities............................... 187,487 329,882 127,330 375,036
Cash flows from investing activities:
Purchases of property and equipment.............. (41,106) (70,477) (1,025) (34,384)
Increase in other assets......................... (1,240) (101,994) (1,119) (140,594)
-------- --------- -------- ---------
Net cash used in investing activities...... (42,346) (172,471) (2,144) (174,978)
Cash flows from financing activities:
Proceeds from (repayment of) related party
advance........................................ -- 1,667 -- (25,000)
Stockholders' distribution....................... (81,810) -- -- --
-------- --------- -------- ---------
Net cash provided by (used in) financing
activities............................... (81,810) 1,667 -- (25,000)
-------- --------- -------- ---------
Net increase in cash....................... 63,331 159,078 125,186 175,058
Cash at beginning of period........................ 17,901 81,232 81,232 240,310
-------- --------- -------- ---------
Cash at end of period.............................. $ 81,232 $ 240,310 $206,418 $ 415,368
======== ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 584 $ -- $ -- $ --
======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
1. THE COMPANY
WPL Laboratories, Inc. (the "Company") provides advanced software
development services to businesses. The Company's projects include sales force
automation, distribution, management, personnel management, e-commerce
application development, product analysis and Internet enabling applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North America.
The fair market values of cash and accounts receivable at both December 31,
1997 and 1998 approximate their carrying amounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over three years for office and computer equipment and
software and five years for the automobile.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
STOCKHOLDERS' EQUITY
On April 1, 1998, the Company amended its articles of incorporation to
change the par value of its common stock from $1.00 to $0.01 and adjust the
number of authorized shares. In addition, the Company approved a stock dividend
of 1,248,880 shares. All related share information for all periods presented has
been restated to reflect this amendment.
F-36
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generally recognizes revenue on projects as work is performed
based on hourly billable rates. In addition, a limited number of projects are
performed under fixed-price contracts. Revenue from these contracts is
recognized on the percentage of completion method based on the percentage that
incurred costs to date bear to the most recently estimated total costs. Amounts
billed to clients in excess of revenue recognized are classified as deferred
revenue. Anticipated losses on uncompleted contracts, if any, are recognized in
full when determined.
PROJECT PERSONNEL COSTS
Project personnel costs consist of payroll and payroll-related expenses for
personnel dedicated to client assignments.
INCOME TAXES
The Company has elected to be taxed under the provisions of subchapter S of
the Internal Revenue Code, whereby the corporate income is taxed to the
individual shareholders based on their proportionate share of the Company's
taxable income.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION. As permitted by
SFAS 123, the Company measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. Accordingly, no accounting recognition
is given to stock options issued to employees that are granted at fair market
value until they are exercised. Stock options issued to non-employees are
recorded at the fair value of the stock at the date of grant. Upon exercise, net
proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations.
NET INCOME PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), EARNINGS PER SHARE during 1997. This
statement requires the presentation of basic and diluted net income per share
for all periods presented. Under SFAS 128, the Company presents both basic net
income per share and diluted net income per share. Basic net income per share is
calculated based on weighted average common shares outstanding. Diluted net
income per share reflects the per-share effect of dilutive stock options and
other dilutive common stock equivalents.
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), REPORTING COMPREHENSIVE INCOME. This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are
F-37
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized. For each period reported, comprehensive income under SFAS 130 was
equivalent to the Company's net income reported in the accompanying statements
of income.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial statements for the interim periods have been
included. Results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for the full fiscal
year or any future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial condition or cash flows.
3. RELATED-PARTY ADVANCE AND ACCRUED INTEREST
In 1996, the Company received a working capital advance of $20,000, with no
defined terms, from a relative of its major stockholder. The advance has been
accruing interest at 8.3% per year. Interest expense on the advance was $2,250
and $1,667 for the years ended December 31, 1997 and 1998, respectively, and
$417 and $0 for the three months ended March 31, 1998 and 1999, respectively.
4. COMMON STOCK
In April 1998, the Company awarded 551,020 shares of common stock to certain
employees for services rendered. Accordingly, the Company recorded compensation
expense of $248,000, which represented the estimated fair value of the common
stock issued. In connection with the award, the Company advanced $103,300 to the
employees to pay certain personal income taxes. These advances are outstanding
as of December 31, 1998.
5. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers all
full-time employees of the Company. Participants may contribute up to the
greater of 15% of their total compensation or $10,000 to the plan, with the
Company matching on a discretionary basis. For the years ended December 31, 1997
and 1998, the Company did not contribute to the plan.
F-38
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
6. SIGNIFICANT CUSTOMERS
The following table summarizes revenues from significant customers (revenues
in excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-- -- -- --
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A...................................... 52% 38% 53% 32%
Customer B...................................... -- 18 31 --
Customer C...................................... -- 15 -- 22
Customer D...................................... 25 -- -- --
Customer E...................................... -- -- -- 12
Customer F...................................... -- -- -- 12
</TABLE>
7. LEASE COMMITMENTS
The Company has entered into operating leases for its office facility and
equipment that expire through July 2000. Rent expense for the years ended
December 31, 1997 and 1998 was $43,613, and $43,893, respectively. Future
minimum lease payments under the operating leases as of December 31, 1998 are
$119,054 in 1999, $167,064 in 2000, $164,664 in 2001 and $41,166 in 2002.
8. SUBSEQUENT EVENTS
STOCK OPTION PLAN
On January 1, 1999, the Company instituted the WPL Laboratories, Inc. 1999
Stock Option Plan (the "Plan") which authorizes the Company to grant options to
purchase common stock, to make awards of restricted common stock, and to issue
certain other equity-related awards to employees and directors of, and
consultants to, the Company. The total number of shares of common stock which
may be issued under the Plan is 200,000 shares. The Plan is administered by the
Board of Directors, which selects the persons to whom stock options and other
awards are granted and determines the number of shares, the exercise or purchase
prices, the vesting terms and the expiration date. Non-qualified stock options
may be granted at exercise prices which are above, equal to, or below the grant
date fair market value of the common stock. The exercise price of options
qualifying as incentive stock options may not be less than the grant date fair
market value of the common stock. Stock options granted under the Plan are
nontransferable, generally become exercisable over a four-year period, and
expire ten years after the date of grant (subject to earlier termination in the
event of the termination of the optionee's employment or other relationship with
the Company). Subsequent to December 31, 1998 and through May 14, 1999, the
Company granted 186,208 options under the Plan to purchase common stock at $4.00
per share.
F-39
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
LINE OF CREDIT
On February 22, 1999, the Company entered into a line of credit agreement
with a commercial bank under which it may borrow up to $750,000 at the bank's
prime rate plus 0.5%. Borrowings under the line are secured by substantially all
assets of the Company and are subject to certain financial and nonfinancial
covenants which include, among other things, maintenance of a ratio of debt to
cash flow, minimum tangible net worth and a ratio of current assets to current
liabilities. The line of credit expires on April 15, 2000. This agreement
terminated upon the purchase of the Company (see Note 8).
CONSULTING AGREEMENT
On March 17, 1999, the Company signed a consulting agreement with
Plansponsor.com, Inc. ("PlanSponsor"). The agreement calls for the Company to
provide 3,000 hours of services, including work previously performed for
PlanSponsor in exchange for shares of common stock in PlanSponsor. As of
December 31, 1998, the Company had performed $100,875 of services based on the
agreement's contractual rates. This amount is included in other assets on the
accompanying balance sheets and will ultimately be settled by issuance of shares
of PlanSponsor common stock. In May 1999, the Company declared a dividend of the
PlanSponsor stock to the stockholders of the Company.
REORGANIZATION AGREEMENT
On May 17, 1999, the Company entered into a Reorganization Agreement with
Breakaway Solutions, Inc. ("Breakaway"), a provider of information technology
consulting services. Under the agreement, Breakaway acquired all the outstanding
stock of the Company in a transaction accounted for under the purchase method of
accounting. The purchase price was comprised of $5 million in cash, 1,364,140
shares of common stock and the assumption of all outstanding WPL stock options,
which became exercisable for 314,804 shares of the Company's common stock at an
exercise price of $2.98 per share with a four-year vesting period. The WPL
stockholders received one half of their cash consideration at closing and will
receive the remainder incrementally over a four-year period so long as the
stockholder does not voluntarily terminate his employment and is not terminated
for cause. Of the shares of common stock issued to the former WPL stockholders,
approximately fifty-percent are subject to our right, which lapses incrementally
over a four-year period, to repurchase the shares of a particular stockholder at
their value at the time of the acquisition upon the stockholder's resignation or
our termination of the stockholder for cause.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Web Yes, Inc.:
We have audited the accompanying consolidated balance sheets of Web
Yes, Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Web
Yes, Inc. and subsidiary as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 30, 1999
F-41
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 4,729 $ 10,204 $ 1,480
Accounts receivable....................................... 15,415 13,899 31,764
------- -------- --------
Total current assets.................................. 20,144 24,103 33,244
Computer equipment.......................................... 56,509 190,948 221,142
Less: Accumulated depreciation and amortization............. 6,667 26,095 37,601
------- -------- --------
Net computer equipment................................ 49,842 164,853 183,541
------- -------- --------
Deposits.................................................... 100 2,281 2,281
------- -------- --------
Total assets.......................................... $70,086 $191,237 $219,066
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 4,782 $ 18,633 $ 19,951
Loans and advances payable to stockholders................ 45,007 29,251 42,296
Accounts payable.......................................... 12,652 49,414 30,563
Accrued expenses.......................................... 2,010 14,925 28,134
------- -------- --------
Total current liabilities............................. 64,451 112,223 120,944
Capital lease obligations, net of current portion........... 13,652 43,056 37,344
------- -------- --------
Total liabilities..................................... 78,103 155,279 158,288
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 200,000 shares authorized,
none issued and outstanding in 1997 and 70,000 shares
issued and outstanding (liquidation preference of $1 per
share) in 1998 and 1999................................. -- 70,000 70,000
Common stock, no par value, 1,000,000 shares authorized,
13,395 shares issued and outstanding in 1997 and 691,897
shares issued and outstanding in 1998 and 1999.......... 134 6,919 6,919
Additional paid in capital................................ -- 55,985 55,985
Accumulated deficit....................................... (8,151) (90,726) (65,906)
Less: Subscriptions receivable............................ -- (6,220) (6,220)
------- -------- --------
Total stockholders' equity............................ (8,017) 35,958 60,778
------- -------- --------
Total liabilities and stockholders' equity............ $70,086 $191,237 $219,066
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-------- -------- ------- --------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................. $108,669 $288,512 $54,464 $141,828
Operating expenses:
Direct personnel costs............................. -- 38,750 -- 37,067
Other direct costs................................. 39,163 111,650 9,529 15,051
Selling, general and administrative expenses....... 70,894 214,238 23,375 57,953
-------- -------- ------- --------
Total operating expenses......................... 110,057 364,638 32,904 110,071
-------- -------- ------- --------
Income (loss) from operations.................... (1,388) (76,126) 21,560 31,757
Interest expense................................... (4,182) (6,449) (916) (6,937)
-------- -------- ------- --------
Net income (loss)................................ $ (5,570) $(82,575) $20,644 $ 24,820
======== ======== ======= ========
Net income (loss) per share--basic and diluted....... $ (0.42) $ (0.37) $ 1.52 $ 0.04
Weighted average shares outstanding.................. 13,395 223,452 13,595 691,897
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
------------------- ------------------- PAID IN ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EQUITY
-------- -------- -------- -------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997.................... 13,395 $ 134 -- $ -- $ -- $ (2,581) $ -- $ (2,447)
Net loss................ -- -- -- -- -- (5,570) -- (5,570)
------- ------ ------ ------- ------- -------- ------- --------
Balance, December 31,
1997.................... 13,395 134 -- -- -- (8,151) -- (8,017)
Issuance of common stock
to founders........... 621,952 6,220 -- -- -- -- (6,220) --
Issuance of common
shares in exchange for
services rendered..... 56,550 565 -- -- 55,985 -- -- 56,550
Issuance of preferred
shares................ -- -- 70,000 70,000 -- -- -- 70,000
Net loss................ -- -- -- -- -- (82,575) -- (82,575)
------- ------ ------ ------- ------- -------- ------- --------
Balance, December 31,
1998.................... 691,897 6,919 70,000 70,000 55,985 (90,726) (6,220) 35,958
Net income
(Unaudited)........... -- -- -- -- -- 24,820 -- 24,820
------- ------ ------ ------- ------- -------- ------- --------
Balance, March 31, 1999
(Unaudited)............. 691,897 $6,919 70,000 $70,000 $55,985 $(65,906) $(6,220) $ 60,778
======= ====== ====== ======= ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
------- -------- -------- --------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $(5,570) $(82,575) $ 20,644 $ 24,820
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 6,018 20,023 3,000 11,507
Common stock issued to employees for services
rendered........................................ -- 56,550 -- --
Changes in operating assets and liabilities:
Accounts receivable............................. (14,552) 1,516 1,634 (17,865)
Accounts payable................................ 11,346 36,762 (9,426) (18,851)
Accrued expenses................................ 1,716 12,915 500 13,209
------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................. (1,042) 45,191 16,352 12,820
------- -------- -------- --------
Cash flows from investing activity:
Purchase of computer equipment...................... (19,724) (78,286) (6,147) (30,195)
------- -------- -------- --------
Net cash used in investing activity........... (19,724) (78,286) (6,147) (30,195)
------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock........... -- 55,000 5,000 --
Increase in deposits................................ (100) (2,181) -- --
Proceeds from loans and advances payable to
stockholders...................................... 37,007 15,033 22,543 8,651
Repayment of capital lease obligations.............. (750) (8,967) -- --
Proceeds (repayment) of loans payable............... (11,008) (20,315) (30,007) --
------- -------- -------- --------
Net cash provided by financing activities..... 25,149 38,570 (2,464) 8,651
------- -------- -------- --------
Increase (decrease) in cash........................... 4,383 5,475 7,741 (8,724)
Cash, beginning of period............................. 346 4,729 4,729 10,204
------- -------- -------- --------
Cash, end of period................................... $ 4,729 $ 10,204 $ 12,470 $ 1,480
======= ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 2,466 $ 8,460 $ 916 $ 1,796
======= ======== ======== ========
Supplemental disclosures of non-cash investing and
financing activities:
Issuance of preferred stock in exchange for advances
from stockholders................................. $ -- $ 15,000 $ -- $ --
======= ======== ======== ========
Capital lease obligations........................... $19,150 $ 56,748 $ -- $ --
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
1. THE COMPANY
Web Yes, Inc. (the "Company"), which was incorporated in July 1996, provides
application hosting services. Since inception and through September 1998, the
Company operated with no salaried employees. Therefore, recurring operating
expenses, such as salaries and fringe benefits, are not reflected in the
accompanying financial statements during the applicable periods. Financial
statements for periods subsequent to September 30, 1998 reflect salaries and
fringe benefits.
Web Developers Network, Inc., a wholly owned subsidiary of the Company, has
been inactive since inception.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Web Developers Network, Inc. All
significant intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of contingent
assets and liabilities to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
COMPUTER EQUIPMENT
Computer equipment is recorded at cost. Depreciation is recorded on the
straight-line basis over the estimated useful life of the related assets (three
to five years). Equipment held under capital leases is stated at the net present
value of minimum lease payments at the inception of the lease and amortized
using the straight-line method over the lease term. Maintenance and repairs are
charged to operations when incurred.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, accounts receivable and debt
instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North America.
The fair market values of cash, accounts receivable and debt instruments at
both December 31, 1997 and 1998 approximate their carrying amounts.
F-46
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
REVENUE RECOGNITION
Revenues pursuant to time and materials contracts are recognized as services
are provided. Revenues from application hosting agreements are recognized
ratably over the terms of the agreements.
DIRECT PERSONNEL COSTS AND OTHER DIRECT COSTS
Direct personnel costs consist of payroll and payroll-related expenses for
personnel dedicated to client assignments. Other direct costs consist of
hardware.
INCOME TAXES
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share were calculated based on the weighted
average common shares outstanding. There were no common stock equivalents
outstanding for any of the periods presented; accordingly, basic and fully
diluted net income (loss) per share are the same. As the Company has been in a
net loss position for the years ended December 31, 1997 and 1998, common stock
equivalents of zero and 200,000 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
REPORTING COMPREHENSIVE INCOME
Effective July 1, 1996, the Company adopted SFAS No. 130 ("SFAS 130)",
REPORTING COMPREHENSIVE INCOME. This statement requires that all components of
comprehensive income (loss) be reported in the consolidated financial statements
in the period in which they are recognized. For each period presented,
comprehensive income (loss) under SFAS 130 was equivalent to the Company's net
loss reported in the accompanying consolidated statements of operations.
F-47
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial statements for
the interim periods have been included. Results of operations for the interim
periods presented are not necessarily indicative of the results that may be
expected for the full fiscal year or any other future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial condition or cash flows.
3. LOANS AND ADVANCES PAYABLE TO STOCKHOLDERS
The Company has various loans and advances payable to stockholders for
working capital purposes. The loans, which accrue interest at 8%, have no
definitive repayment terms.
4. STOCKHOLDERS' EQUITY
COMMON STOCK
In September 1998, the Company amended its articles of incorporation to
adjust the number of authorized shares of common stock from 20,000 shares to
1,000,000 shares. The Company then issued 621,952 shares of common stock at $.01
per share to the founders of the Company in order to adjust the equity ownership
to planned percentages. Subsequent to their issuance the founders began to draw
salaries.
During 1998 the Company issued shares of common stock to non-employees in
exchange for services rendered. The Company recorded expense of $56,550 for the
fair value of the stock issued.
PREFERRED STOCK
In September 1998, the Company authorized 200,000 shares of preferred stock
and issued an 70,000 shares of preferred stock at $1.00 per share. The preferred
stock is voting and is convertible into one share of common stock immediately at
the option of the holder, and automatically converts into common stock upon the
completion of a qualifying initial public offering. The preferred stock has a
$1.00 per share liquidation preference.
5. CAPITAL LEASES
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for four years, with
interest rates ranging from 12.9% to 21.6%. The leased equipment secures all
leases.
F-48
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
5. CAPITAL LEASES (CONTINUED)
The following is a schedule by year of future minimum lease payments due
under the capitalized leases, and the net present value of the minimum lease
payments as of December 31, 1998:
<TABLE>
<S> <C>
1999...................................................... $27,184
2000...................................................... 26,228
2001...................................................... 17,146
2002...................................................... 7,459
-------
Total minimum lease payments............................ 78,017
Less: amount representing interest.......................... 16,328
-------
Net present value of minimum lease payments............. 61,689
Less: current portion of capital lease obligations.......... 18,633
-------
Capital lease obligations, net of current portion....... $43,056
=======
</TABLE>
6. SIGNIFICANT CUSTOMERS
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-- -- -- --
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A................................. 29% 24% 22% 49%
Customer B................................. -- 35 10 22
</TABLE>
7. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses........................................ $ 492 $ 978
Net operating loss carryforwards........................ 714 3,735
------- -------
Total gross deferred tax assets..................... 1,206 4,713
Valuation allowance....................................... (1,206) (4,713)
------- -------
Net deferred tax assets............................. $ -- $ --
======= =======
</TABLE>
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
F-49
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
8. SUBSEQUENT EVENT
On June 10, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all the outstanding capital stock of the Company in a transaction
accounted for under the purchase method of accounting. The total purchase price
was comprised of 571,135 shares of common stock of Breakaway. Of the shares of
common stock issued to the former Web Yes stockholders, 428,351 are subject to
the Company's right, which lapses incrementally over a four-year period, to
repurchase the shares of the particular stockholder upon the termination of his
employment with Breakaway. The repurchase price shall be either at the share
value at the time of the acquisition if the stockholder terminates employment or
is terminated for cause, or at their fair market value if stockholder's
employment is terminated without cause.
F-50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eggrock Partners, Inc.:
We have audited the accompanying balance sheets of Eggrock Partners, Inc. (a
Delaware corporation formerly known as Eggrock Partners, LLC a Delaware limited
liability company) as of December 31, 1998, September 30, 1999, and
December 31, 1999, and the related statements of operations, redeemable
convertible preferred stock and members'/stockholders' equity (deficit) and cash
flows for the year ended December 31, 1998, the nine months ended September 30,
1999 and the three months ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards of the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eggrock Partners, Inc. as of
December 31, 1998, September 30, 1999 and December 31, 1999, and the results of
its operations and its cash flows for the year ended December 31, 1998, the nine
months ended September 30, 1999 and the three months ended December 31, 1999, in
conformity with generally accepted accounting principles of the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 9, 2000
(except with respect to the matter
discussed in footnote 1, as to which
the date is March 7, 2000)
F-51
<PAGE>
EGGROCK PARTNERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 127,343 $ 271,277 $ 8,292,860
Accounts receivable, net of allowance for doubtful
accounts of $100,000 and $130,000 at September 30,
1999 and December 31, 1999, respectively........... 1,470,838 2,060,529 3,033,633
Prepaid expenses and other current assets............ 44,243 111,171 166,304
---------- ----------- -----------
Total current assets............................... 1,642,424 2,442,977 11,492,797
PROPERTY AND EQUIPMENT, NET (Notes 3 and 10)........... 173,290 388,088 990,257
DEPOSITS............................................... 32,407 35,944 360,944
---------- ----------- -----------
$1,848,121 $ 2,867,009 $12,843,998
========== =========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND MEMBERS'/STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 5).................... $ 100,000 $ 1,050,000 $ 657,528
Accounts payable..................................... -- 152,926 229,849
Accrued expenses (Note 10)........................... 539,870 1,107,167 1,952,641
Deferred revenue..................................... 105,000 -- 10,000
Deferred income taxes................................ -- -- 188,000
---------- ----------- -----------
Total current liabilities.......................... 744,870 2,310,093 3,038,018
COMMITMENTS (Note 9)
SERIES A REDEEMABLE, CONVERTIBLE PREFERRED STOCK, $.01
PAR VALUE:
Authorized--5,000,000 shares
Issued and outstanding--3,000,000 shares at December
31, 1999........................................... -- -- 10,000,000
MEMBERS'/STOCKHOLDERS' EQUITY (DEFICIT):
Members' capital..................................... 359,454 6,635,994 --
Common stock, $.01 par value--
Authorized--30,000,000 shares
Issued and outstanding--9,100,692 shares at
December 31, 1999................................ -- -- 91,007
Additional paid-in capital........................... -- -- 16,467,424
Deferred compensation................................ -- -- (9,303,005)
Retained earnings (accumulated deficit).............. 743,797 (6,079,078) (7,449,446)
---------- ----------- -----------
Total members'/stockholders' equity (deficit)...... 1,103,251 556,916 (194,020)
---------- ----------- -----------
$1,848,121 $ 2,867,009 $12,843,998
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-52
<PAGE>
EGGROCK PARTNERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED DECEMBER
1998 1999 31, 1999
------------ ----------------- --------------
<S> <C> <C> <C>
REVENUES:
Service........................................ $4,608,388 $ 7,521,888 $ 3,942,257
Royalties...................................... -- 253,000 21,000
---------- ----------- -----------
Total revenues............................... 4,608,388 7,774,888 3,963,257
OPERATING EXPENSES:
Project personnel costs........................ 2,121,559 4,386,236 2,045,862
Selling, general and administrative............ 1,494,289 3,110,179 2,589,864
Compensation related to issuance of membership
units and other equity issuances (Note 2(a)ii
and 7)....................................... 281,554 7,108,255 541,277
---------- ----------- -----------
Total operating expenses..................... 3,897,402 14,604,670 5,177,003
---------- ----------- -----------
Income (loss) from operations................ 710,986 (6,829,782) (1,213,746)
INTEREST INCOME, NET............................. 13,779 6,907 107,305
---------- ----------- -----------
Income (loss) before income tax provision.... 724,765 (6,822,875) (1,106,441)
INCOME TAX PROVISION............................. -- -- 226,000
---------- ----------- -----------
NET INCOME (LOSS)................................ 724,765 (6,822,875) (1,332,441)
PRO FORMA INCOME TAX PROVISION................... 578,000 615,000 --
---------- ----------- -----------
PRO FORMA NET INCOME (LOSS)...................... $ 146,765 $(7,437,875) $(1,332,441)
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-53
<PAGE>
EGGROCK PARTNERS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND MEMBERS'/STOCKHOLDERS'
EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------ ---------------------------
NUMBER OF REDEMPTION MEMBER NUMBER OF ADDITIONAL
SHARES VALUE CAPITAL SHARES $.01 PAR VALUE PAID- IN CAPITAL
---------- ----------- ---------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997..... -- $ -- $ 234,000 -- $ -- $ --
Members' distributions......... -- -- (156,100) -- -- --
Issuance of membership units... -- -- 281,554 -- -- --
Net income..................... -- -- -- -- -- --
--------- ----------- ---------- --------- ------- -----------
BALANCE AT DECEMBER 31, 1998..... -- -- 359,454 -- -- --
Members' distributions......... -- -- (831,715) -- -- --
Issuance of membership units... -- -- 7,108,255 -- -- --
Net loss....................... -- -- -- -- -- --
--------- ----------- ---------- --------- ------- -----------
BALANCE AT SEPTEMBER 30, 1999.... -- -- 6,635,994 -- -- --
Merger and reorganization (Note
2)........................... -- -- (6,635,994) 8,994,387 89,944 6,546,050
Issuance of Series A redeemable
convertible preferred stock
(issuance costs of $37,927).. 3,000,000 10,000,000 -- -- -- --
Exercise of stock options...... -- -- -- 6,305 63 3,092
Deferred compensation related
to the issuance of stock
options...................... -- -- -- -- -- 8,319,282
Issuance of restricted common
stock and related deferred
compensation................. -- -- -- 100,000 1,000 1,599,000
Amortization of deferred
compensation related to
issuance of stock options and
restricted stock............. -- -- -- -- -- --
Net loss....................... -- -- -- -- -- --
--------- ----------- ---------- --------- ------- -----------
BALANCE AT DECEMBER 31, 1999... 3,000,000 $10,000,000 $ -- 9,100,692 $91,007 $16,467,424
========= =========== ========== ========= ======= ===========
<CAPTION>
RETAINED TOTAL
EARNINGS MEMBERS'/
DEFERRED (ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT) EQUITY (DEFICIT)
------------- ------------ ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997..... $ -- $ 19,032 $ 253,032
Members' distributions......... -- -- (156,100)
Issuance of membership units... -- -- 281,554
Net income..................... -- 724,765 724,765
----------- ----------- ----------
BALANCE AT DECEMBER 31, 1998..... -- 743,797 1,103,251
Members' distributions......... -- -- (831,715)
Issuance of membership units... -- -- 7,108,255
Net loss....................... -- (6,822,875) (6,822,875)
----------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1999.... -- (6,079,078) 556,916
Merger and reorganization (Note
2)........................... -- -- --
Issuance of Series A redeemable
convertible preferred stock
(issuance costs of $37,927).. -- (37,927) (37,927)
Exercise of stock options...... -- -- 3,155
Deferred compensation related
to the issuance of stock
options...................... (8,319,282) -- --
Issuance of restricted common
stock and related deferred
compensation................. (1,525,000) -- 75,000
Amortization of deferred
compensation related to
issuance of stock options and
restricted stock............. 541,277 -- 541,277
Net loss....................... -- (1,332,441) (1,332,441)
----------- ----------- ----------
BALANCE AT DECEMBER 31, 1999... $(9,303,005) $(7,449,446) $ (194,020)
=========== =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-54
<PAGE>
EGGROCK PARTNERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 724,765 $(6,822,875) $(1,332,441)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Noncash compensation expense related to issuance of
membership units and other equity issuances...... 281,554 7,108,255 541,277
Depreciation and amortization...................... 27,559 69,387 41,799
Deferred income taxes.............................. -- -- 188,000
Changes in current assets and liabilities--
Accounts receivable.............................. (1,258,802) (589,691) (973,104)
Prepaid expenses and other current assets........ (34,767) (66,928) (55,133)
Accounts payable................................. -- 152,926 76,923
Accrued expenses................................. 531,157 567,297 845,474
Deferred revenue................................. 105,000 (105,000) 10,000
---------- ----------- -----------
Net cash provided by (used in) operating
activities................................... 376,466 313,371 (657,205)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (175,746) (284,185) (643,968)
Increase in deposits................................. (26,363) (3,537) (325,000)
---------- ----------- -----------
Net cash used in investing activities.......... (202,109) (287,722) (968,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit..................... 100,000 950,000 (392,472)
Exercise of stock options............................ -- -- 3,155
Issuance of Series A redeemable convertible preferred
stock, net of issuance costs....................... -- -- 9,962,073
Issuance of restricted common stock.................. -- -- 75,000
Members' distributions............................... (156,100) (831,715) --
---------- ----------- -----------
Net cash (used in) provided by financing
activities................................... (56,100) 118,285 9,647,756
---------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS.................. 118,257 143,934 8,021,583
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 9,086 127,343 271,277
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 127,343 $ 271,277 $ 8,292,860
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ -- $ 8,092 $ 7,139
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-55
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) OPERATIONS
Eggrock Partners, Inc. (the Company) is the successor to Eggrock Partners,
LLC, which was formed in Delaware on September 2, 1997 as a limited liability
company. The Company is a leading full-service provider of e-business solutions
for emerging companies in the Internet Economy. The Company provides strategic
consulting, systems integration and application hosting solutions to the
emerging enterprise primarily located in North America. In addition, the Company
has begun to offer application hosting services to its customers. On October 1,
1999, the Company entered into the Agreement and Plan of Reorganization and
Merger (the Merger Agreement) to convert from a limited liability company to a
corporation (see Note 2(b)).
The Company is subject to risks common to rapidly growing, technology-based
companies, including limited operating history, dependence on key personnel,
rapid technological change, competition from substitute services and larger
companies and the need for continued market acceptance of the Company's
services.
On January 26, 2000, the Company entered into an agreement to be acquired by
Breakaway Solutions, Inc. (Breakaway). The agreement provides for all of the
Company's outstanding shares of common stock and preferred stock to be exchanged
for shares of Breakaway common stock based on a conversion ratio and options to
purchase Eggrock common stock to be assumed by Breakaway and converted into
options to purchase Breakaway common stock on the same basis. The conversion
ratio is determined by dividing 7,272,000 (adjusted for the stock split) by the
total number of shares of Eggrock capital stock outstanding and underlying stock
options as of the closing date. Based on the number of shares and stock options
currently outstanding, the conversion ratio should be approximately 0.51185008.
(2) FORMATION AND REORGANIZATION
(A) FORMATION
In September 1997, the Company entered into an operating agreement (the
Agreement). The Agreement included the following terms and conditions.
(I) MANAGEMENT
The members of the Company had designated three members as managing
directors (the Managing Directors) of the Company. The Managing Directors
were responsible for overseeing the operations of the Company and had
certain governance and liquidation rights and privileges as defined in
the partnership agreement. In addition, these Managing Directors did not
receive compensation in the form of payroll for their services.
Compensation for their services was paid in the form of member
distributions as a reduction of members' equity and was $156,100 and
$617,021 for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively. Upon the conversion to a corporation on
October 1, 1999 (see Note 2(b)), these individuals began to receive
payroll compensation for their services.
(II) MEMBERSHIP INTERESTS
Interests of members in profits and losses of the Company and the rights
of members to distributions and allocations were evidenced by units of
interest in the Company. There were
F-56
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) FORMATION AND REORGANIZATION (CONTINUED)
two classes of membership interests: Class A Common Units (Class A Units)
and Class B Common Units (Class B Units). Class A Units had the right to
vote on all matters on which the members are entitled to vote, as defined
by the Agreement. Class B Units had no voting rights under the Agreement.
Class B Units were divided into vested Class B Units and unvested
Class B Units. The vesting schedule affected the allocations and
distributions of profits and losses of the Company. Distributions were
made to the members of the Company in proportion to their vested units at
such times as the Managing Directors determined.
Throughout the Company's existence new and existing employees were
granted Phantom units. Phantom units represented a non-equity based right
to share in the profits of the Company. Phantom unit holders were
evaluated on an annual basis as to whether they would be allowed to
convert their Phantom units into Class B Units. The Phantom unit holder
was not required to pay for Class B Units. In connection with the
reorganization (see Note 2(b)), vested Phantom units and Class B Units
were converted into nonvoting common stock and unvested Class B Units and
Phantom units were converted into options to purchase nonvoting common
stock (see Note 7). The Company accounted for the equity component of
this plan as a variable award plan similar to a junior stock plan.
Accordingly, the equity awards were marked to fair market value each
reporting period until they were converted on October 1, 1999. The
associated compensation was recorded as compensation expense related to
the issuance of membership units in the accompanying statements of
operations and as an increase in members' equity.
As of September 30, 1999, the following membership interests were issued
and vested:
<TABLE>
<CAPTION>
MEMBERSHIP INTERESTS UNITS ISSUED VESTED UNVESTED
- -------------------- ------------ --------- --------
<S> <C> <C> <C>
Class A Units........................ 6,000,000 6,000,000 --
Class B Units........................ 1,772,500 1,201,380 571,120
Phantom Units........................ 2,019,000 1,043,007 975,993
</TABLE>
(B) MERGER AND REORGANIZATION
On September 24, 1999, Eggrock Partners, Inc. was formed. Eggrock
Partners, Inc. has the authority to issue 35,000,000 shares of stock of
which 5,000,000 shares have been designated as Series A redeemable
convertible preferred stock, par value $.01 per share, and 30,000,000
have been designated as common stock, par value $.01 per share of which
20,000,000 shall be designated voting common stock (Voting Common Stock)
and 10,000,000 shall be designated non-voting common stock (Non-Voting
Common Stock).
On October 1, 1999, Eggrock Partners, LLC and Eggrock Partners, Inc.
entered into the Merger Agreement whereby the Class A and Class B Unit
holders as well as Phantom unit owners converted their interests in the
Company into common stock and/or options to purchase common stock of
Eggrock Partners, Inc. As of the effective date of the Merger Agreement,
the identity and separate existence of Eggrock Partners, LLC ceased and
all of the rights, titles, privileges, powers, franchises, properties and
assets of Eggrock Partners, LLC of any kind vested in Eggrock
Partners, Inc., and all debts, liabilities, duties and other obligations
of Eggrock Partners, LLC attach to Eggrock Partners, Inc., and Eggrock
F-57
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) FORMATION AND REORGANIZATION (CONTINUED)
Partners, Inc. shall continue its existence as a corporation and the
identity, rights, titles, privileges, powers, franchises, properties and
assets of the Company shall continue unaffected and unimpaired by the
merger. This transaction was treated as a merger between entities under
common control.
Membership interests were converted as follows: (i) Class A Units then
outstanding converted into the right to receive 1.125 fully paid shares
of the Company's Voting Common Stock, and (ii) each vested Class B Unit
and vested Phantom unit then outstanding converted into the right to
receive one fully paid share of the Company's Non-Voting Common Stock.
In addition, each unvested Class B Unit or unvested Phantom unit was
granted an option to purchase Non-Voting Common Stock for each unvested
Class B Unit or unvested Phantom unit held. These options were granted
under the Company's 1999 Stock Option and Grant Plan (the 1999 Plan) (see
Note 7) and have a vesting schedule identical to the vesting schedule of
the original Class B Unit or Phantom unit and a per share exercise price
equal to $0.50 per share.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of the
accounting policies as described below and elsewhere in these notes to financial
statements.
(A) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(B) REVENUE RECOGNITION
The Company derives substantially all revenues from professional service
agreements. Revenues pursuant to time and materials contracts are
generally recognized as services are performed. Revenues pursuant to
fixed-fee contracts are generally recognized as services are rendered and
are determined based on the percentage-of-completion method of accounting
(based on the ratio of costs incurred to total estimated project costs).
Revenues exclude reimbursable expenses charged to and collected from
clients.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such
losses become probable and can be reasonably estimated. During the period
from inception to December 31, 1999, the Company has not had a material
revision for estimated losses related to uncompleted contracts.
The Company has entered into a royalty agreement with a customer related
to certain technology that the Company had developed. The agreement
requires the customer to pay $294,000 in royalty payments to the Company
over a 15-month period. Royalties are due from the customer based on a
per unit amount as it sells the technology through to its customers.
F-58
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company is recording revenue on this agreement based on its shipments
to the end user or when the payments become due whichever is later.
(C) PROJECT PERSONNEL COSTS
Project personnel costs consist primarily of compensation and benefits
of the Company's employees engaged in the delivery of professional
services and non-reimbursable expenses related to client projects.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
(E) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with
high-credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from clients located in the
United States. The Company performs ongoing credit evaluations of its
clients' financial condition and maintains reserves for potential credit
losses based on the expected collectibility of total accounts receivable.
To date, the Company has not experienced any material credit losses.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and/or total accounts
receivable and their aggregate percentage of the Company's total revenues
and accounts receivable.
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
REVENUES ----------------------
---------------------- PERCENT OF
PERCENT OF TOTAL
NUMBER OF TOTAL NUMBER OF ACCOUNTS
CUSTOMERS REVENUES CUSTOMERS RECEIVABLE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998......... 2 69% 5 79%
Nine months ended September 30,
1999............................... 2 46% 4 68%
Three months ended December 31,
1999............................... 4 73% 4 74%
</TABLE>
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and revolving line of
credit are carried at carrying value, which approximates their fair value
because of the short-term nature of these instruments.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. The Company provides for depreciation and amortization
by charges to operations using the straight-line method, which allocates
the cost of property and equipment over their estimated useful lives of
three years for computer equipment and software, five years for furniture
and fixtures, office equipment and the life of the related lease for
leasehold improvements.
F-59
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment as events and
circumstances indicate the carrying amounts of an asset may not be
recoverable. The Company evaluates the realizability of its long-lived
assets based on profitability and cash flow expectations for the related
asset. Management believes that as of December 31, 1998 and 1999 and
September 30, 1999, none of the Company's long-lived assets were
impaired.
(I) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events
and circumstances from non-owner sources. The Company's comprehensive
income (loss) is equal to reported net income (loss) for all periods
presented.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVES AND HEDGING ACTIVITIES. SFAS No. 133, as amended by SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, is
effective for all fiscal quarters beginning with the quarter ending
June 30, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company will adopt SFAS No. 133 in its quarter ending June 30, 2000 and
does not expect that such adoption will have a material impact on the
Company's results of operations, financial position or cash flows.
(4) INCOME TAXES
The Company accounts for income taxes, including pro forma computations, in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between financial statement carrying amounts and the tax
basis of assets and liabilities.
The Company was taxed from inception to September 30, 1999 as a partnership.
As such, the members were liable for individual federal and state income taxes
related to the Company's taxable income. Payments to the members to fund these
tax liabilities were recorded as distributions in the accompanying statements of
redeemable convertible preferred stock and members'/stockholders' equity
(deficit).
In connection with the merger and reorganization discussed in Note 2(b), the
Company is now subject to federal and state income taxes at prevailing corporate
rates. Accordingly, the accompanying statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999 include a pro
forma tax adjustment for income taxes that would have been recorded if the
Company had been a corporation for those periods.
F-60
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(4) INCOME TAXES (CONTINUED)
In accordance with SFAS No. 109, the Company analyzed its deferred tax
position upon this change in tax status. Based on this analysis, the Company has
determined that it had a deferred tax liability of approximately $464,000 as of
October 1, 1999. This deferred tax liability represented the cumulative effect
of all its temporary differences between financial reporting and tax basis of
its assets and liabilities, primarily accounts receivable, accounts payable,
accrued expenses and certain reserves. The Company recorded this deferred tax
liability as a one-time increase in its tax provision during the three months
ended December 31, 1999.
The components of the historical and pro forma income tax provision are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED
1998 1999 DECEMBER 31,
(PRO FORMA) (PRO FORMA) 1999
------------ ------------- ------------
<S> <C> <C> <C>
Current--
Federal.............................................. $250,000 $438,000 $ 32,000
State................................................ 44,000 78,000 6,000
Deferred--
Federal.............................................. 241,000 84,000 (235,000)
State................................................ 43,000 15,000 (41,000)
Change in tax status................................... -- -- 464,000
-------- -------- --------
$578,000 $615,000 $226,000
======== ======== ========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED
1998 1999 DECEMBER 31,
(PRO FORMA) (PRO FORMA) 1999
------------ ------------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
rate................................................. 34% (34%) (34%)
Increase (decrease) resulting from--
State tax provision net of federal................... 6 (6) (6)
Nondeductible equity based compensation.............. 40 49 18
Change in tax status................................. -- -- 42
-- --- ---
80% 9% 20%
== === ===
</TABLE>
F-61
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(4) INCOME TAXES (CONTINUED)
Deferred income asset (liability) taxes as of September 30, 1999 and
December 31, 1999 related to the following temporary differences:
<TABLE>
<CAPTION>
NINE MONTHS THREE
ENDED MONTHS
SEPTEMBER 30, ENDED
1999 DECEMBER 31,
(PRO FORMA) 1999
------------- ------------
<S> <C> <C>
Nondeductible reserve and accruals.......................... $ 345,000 $ 397,000
Change in accounting method from cash to accrual method of
accounting................................................ (824,000) (618,000)
Other....................................................... 15,000 33,000
--------- ---------
$(464,000) $(188,000)
========= =========
</TABLE>
(5) REVOLVING LINE OF CREDIT
The Company has a credit agreement with a bank. Under this agreement, as
amended during September 1999, the Company may borrow up to the lesser of
$2,000,000 or 80% of qualifying accounts receivable, as defined. The revolving
line of credit bears interest at the bank's prime rate (8.5% at December 31,
1999) and expires on September 30, 2000. Borrowings under the revolving line of
credit are collateralized by substantially all assets of the Company. There was
$1,342,472 available for borrowing under this line at December 31, 1999. The
Company is also subject to certain financial covenants under this agreement
including current ratio and net income covenants. As of September 30, 1999 and
December 31, 1999 the Company was not in compliance with the net income covenant
in this agreement and has not received a waiver of this non-compliance.
(6) PREFERRED STOCK
On October 1, 1999, the Company issued 3,000,000 shares of Series A
Redeemable Convertible Preferred Stock (Series A Preferred Stock) for aggregate
proceeds for $10,000,000.
The rights, preferences, and privileges of the Series A Preferred Stock are
as follows:
DIVIDENDS
No dividends will accrue or be paid to the holders of Series A Preferred
Stock unless declared by the Board of Directors.
LIQUIDATION
In the event of any voluntary, or involuntary, liquidation, dissolution, or
winding up of the Company, as defined, the holders of each share of the
Series A Preferred Stock shall be paid an amount equal to $3.33 per share plus
all accrued and unpaid dividends. After such payments have been made, the
remaining assets of the Company available for distribution shall be distributed
among the holders of the Series A Preferred Stock and common stock in an amount
per share as would have been payable had each share of Series A Preferred Stock
been converted to Voting Common Stock.
F-62
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(6) PREFERRED STOCK (CONTINUED)
OPTIONAL REDEMPTION
With the approval of the holders of the majority of the outstanding shares
of Series A Preferred Stock, the Company will be required to redeem, subject to
certain conditions, on October 1, 2004 and October 1, 2005 one-half of the
shares of Series A Preferred Stock held by the holders requesting such
redemption at a price equal to the greater of the fair market value of such
shares on the first redemption date or $3.33 per share, plus any accrued and
unpaid dividends from the original issue date to the redemption date.
CONVERSION
The holder of any share or shares of Series A Preferred Stock shall have the
right, at its option at any time, to convert any such shares of Series A
Preferred Stock (except that upon any liquidation of the Corporation the right
of conversion shall terminate at the close of business on the business day fixed
for payment of the amount distributable on the Series A Preferred Stock) into
such number of shares of Voting Common Stock as is obtained by (i) multiplying
the number of shares of Series A Preferred Stock to be converted by $3.33 and
(ii) dividing the product by the conversion price of $3.33 per share adjusted
for certain dilutive events, as defined.
VOTING
Except as otherwise provided in the Certificate of Incorporation or as
required by law, the holders of Series A Preferred Stock shall vote together
with all other classes of stock of the Company as a single class on all actions.
Each share of Series A Preferred Stock shall entitle the holder to such number
of votes per share into which each shares of Series A Preferred stock is then
convertible.
(7) STOCK OPTION PLAN
On September 27, 1999, the Company adopted the 1999 Plan, which provides for
the granting of incentive stock options (ISOs), nonqualified stock options, and
restricted stock grants to purchase Non-Voting Common stock, to employees,
directors and consultants. ISOs may be granted to employees only, with an
exercise price of not less than 100% of the fair market value on the date of
grant, or in the case of a 10% or greater stockholders, not less than 110% of
the fair market value on the date of grant. All stock options will have a life
as determined by the board of directors but will expire within ten years from
the date of grant, or in the case of 10% or greater stockholders, within five
years. The vesting period of stock options is also determined by the board of
directors. A total of 3,047,113 shares has been reserved for issuance under the
1999 Plan. In some instances, options have been granted at exercise prices below
the fair market value on the date of grant. The difference, if any, between the
fair market value of shares of the Company's Non-Voting Common Stock, as
determined by the Company's Board of Directors, and the exercise price of the
option is recognized as compensation expense over the vesting term. During the
three months ended December 31, 1999, the Company recorded approximately
$9.8 million in deferred compensation.
During 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee
F-63
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(7) STOCK OPTION PLAN (CONTINUED)
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the method of accounting
prescribed by the Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Entities electing to remain with the accounting
in APB No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value based method of accounting defined in SFAS No. 123
had been applied.
The Company has elected to account for its stock-based employee compensation
plans under APB No. 25. However, for pro forma disclosure purposes, the Company
has computed the compensation expense in 1999 for all options granted, using the
Black-Scholes option pricing model as prescribed by SFAS No. 123. The fair value
of the 1999 options granted is estimated on the date of grant using the
following assumptions: a dividend yield of 0%, an expected volatility of 0% and
an expected life of 10 years for each year, and a risk-free interest rate
between 6.11% and 6.28%. The weighted average fair value of options granted
during the year at fair market value was $4.75.
If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's net income would have been reduced and net loss would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
Net income (loss)--
As reported.......................................... $724,765 $(6,822,875) $(1,332,441)
Pro forma............................................ 724,765 (6,822,875) (1,376,267)
</TABLE>
Stock option activity from the inception of the 1999 Plan, to December 31,
1999 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- --------------- ---------
<S> <C> <C> <C>
Granted..................................................... 1,850,113 $ .50--.75 $.54
Exercised................................................... (6,305) .50 .50
Canceled.................................................... (189,355) .50--.75 .51
--------- --------------- ----
Outstanding at December 31, 1999............................ 1,654,453 $ .50--.75 $.54
========= =============== ====
Exercisable at December 31, 1999............................ 59,237 .50 .50
========= =============== ====
</TABLE>
Options outstanding at December 31, 1999 had a weighted average contractual
life of 9.79 years. Options to purchase 1,197,000 of common stock were available
for future grant as of December 31, 1999.
(8) EGGROCK PARTNERS 401(K) SAVING PLAN
On January 1, 1998 the Company established the Eggrock Partners 401(k)
Savings Plan (the 401(k) Plan). The 401(k) Plan is a defined contribution plan
established under the provisions of Section 401(k)
F-64
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(8) EGGROCK PARTNERS 401(K) SAVING PLAN (CONTINUED)
of the Internal Revenue Code. All employees are eligible to participate after
reaching the age of 21 and completing three months of service with the Company.
Under the 401(k) Plan, employees are allowed to defer up to 20% of their annual
compensation. For the year ended December 31, 1998, the nine months ended
September 30, 1999 and the three months ended December 31, 1999, the Company did
not make any contributions to the 401(k) Plan.
(9) COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements through December 2005. Future minimum lease payments under the
Company's operating leases at December 31, 1999 are approximately as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Years ending December 31,
2000........................................................ $ 854,000
2001........................................................ 1,044,000
2002........................................................ 983,000
2003........................................................ 980,000
2004........................................................ 982,000
Thereafter.................................................. 912,000
----------
$5,755,000
==========
</TABLE>
During December 1999, the Company entered into a lease for its new
headquarters. Future minimum lease payments under the new facility lease are
approximately $5,038,000 through December 2005, which are included in the
commitments above. The Company will be released from its obligation under its
current facility lease as of March 31, 2000.
(10) CERTAIN BALANCE SHEET ACCOUNTS
(A) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
Computer equipment and software......................... $139,097 $336,879 $ 833,566
Furniture and fixtures.................................. 19,271 99,430 191,016
Office equipment........................................ 32,471 35,944 62,346
Leasehold improvements.................................. 10,634 13,403 42,698
-------- -------- ---------
201,473 485,656 1,129,626
Less--Accumulated depreciation and amortization......... (28,183) (97,568) (139,369)
-------- -------- ---------
$173,290 $388,088 $ 990,257
======== ======== =========
</TABLE>
F-65
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(10) CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)
(B) ACCRUALS
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
Payroll and payroll related............................. $322,317 $ 555,471 $1,115,178
Other................................................... 217,553 551,696 837,463
-------- ---------- ----------
Total................................................... $539,870 $1,107,167 $1,952,641
======== ========== ==========
</TABLE>
(C) BAD DEBT RESERVE
Rollforward of the allowance for doubtful accounts:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS(A) END OF PERIOD
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998.................. $ -- $ -- $ -- $ --
Nine months ended September 30, 1999.......... $ -- $100,000 $ -- $100,000
Three months ended December 31, 1999.......... $100,000 $ 39,925 $9,925 $130,000
</TABLE>
- ------------------------
(A) UNCOLLECTIBLE ACCOUNTS RECEIVABLE WRITTEN OFF AGAINST THE ALLOWANCE,
NET OF RECOVERIES.
F-66
<PAGE>
BREAKAWAY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited proforma consolidated financial statements give
effect to the acquisition by Breakaway Solutions, Inc. (the "Company") of all of
the stock of Applica Corporation on March 25, 1999, (ii) all of the stock of WPL
Laboratories, Inc. on May 17, 1999 and (iii) all of the stock of Web Yes, Inc.
on June 10, 1999 and (iv) all of the stock of Eggrock Partners, Inc. (together
the Acquired Companies). The unaudited proforma consolidated statement of
operations gives effect to the acquisitions of the Acquired Companies as if they
had occurred on January 1, 1999. The unaudited pro forma consolidated balance
sheet gives effect to the acquisition of Eggrock Partners, Inc. as if it had
occurred on December 31, 1999. These statements are based on the historical
financial statements of the Company and the Acquired Companies, and the
estimates and assumptions set forth below and in the notes to the unaudited pro
forma consolidated financial statements.
The effects of the acquisition of Eggrock Partners, Inc. has been presented
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets and liabilities assumed based upon management's best
preliminary estimate of fair value with any excess purchase price being
allocated to goodwill, deferred costs or other identifiable intangible assets.
The preliminary allocation of the purchase price will be subject to further
adjustments, which are not anticipated to be material, as the Company finalizes
the allocations of the purchase price in accordance with generally accepted
accounting principles. The pro forma adjustments related to the purchase price
allocation of the acquisition of Eggrock Partners, Inc. represents management's
best estimate of the effects of the acquisition.
The pro forma adjustments are based upon estimates, currently available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial data presented herein are not
necessarily indicative of the results the Company would have obtained had such
events occurred on January 1, 1999, as assumed, or the future results of the
Company. The unaudited pro forma consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included elsewhere in this Prospectus.
F-67
<PAGE>
BREAKAWAY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BREAKAWAY EGGROCK PRO FORMA PRO FORMA
SOLUTIONS, INC. PARTNERS, INC. ADJUSTMENTS (1) CONSOLIDATED
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 3,920 $ 8,293 $ -- $ 12,213
Short-term investments.......................... 28,227 -- -- 28,227
Accounts receivable, net........................ 7,559 3,034 -- 10,593
Unbilled revenues on contracts.................. 725 -- -- 725
Due from related parties........................ 3,991 -- -- 3,991
Prepaid expenses and other current assets....... 2,548 166 -- 2,714
-------- ------- -------- --------
Total current assets.......................... 46,970 11,493 -- 58,463
-------- ------- -------- --------
Investments....................................... 9,705 -- -- 9,705
Property and equipment, net....................... 7,541 990 -- 8,531
Intangible assets and deferred costs, net of
accumulated amortization........................ 12,181 -- 272,194 (b) 284,375
Loans to employees................................ 568 -- -- 568
Other assets...................................... 496 361 -- 857
-------- ------- -------- --------
Total assets.................................. $ 77,461 $12,844 $272,194 $362,499
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit........................ -- 657 -- 657
Due to stockholders-current portion............. 625 -- -- 625
Capital lease obligations-current portion....... 533 -- -- 533
Accounts payable................................ 2,955 230 -- 3,185
Accrued compensation and related benefits....... 1,477 -- -- 1,477
Accrued expenses................................ 1,306 1,953 -- 3,259
Deferred revenue................................ 224 10 -- 234
Deferred income taxes........................... -- 188 -- 188
-------- ------- -------- --------
Total current liabilities..................... 7,120 3,038 -- 10,158
-------- ------- -------- --------
Due to stockholders............................... 1,625 -- -- 1,625
Capital lease obligations- long-term.............. 376 -- -- 376
-------- ------- -------- --------
Total long-term liabilities................... 2,001 -- -- 2,001
-------- ------- -------- --------
Total liabilities............................. 9,121 3,038 -- 12,159
-------- ------- -------- --------
Stockholders' equity:
Series A preferred stock........................ -- 10,000 (10,000)(a) --
Series B preferred stock........................ -- -- -- --
Common stock.................................... 4 91 (91)(a) 4
Additional paid-in-capital...................... 78,868 16,467 (16,467)(a) 360,868
282,000 (b)
Less: treasury stock, at cost -- -- -- --
Less: deferred compensation....................... (253) (9,303) 9,303 (a) (253)
Retained earnings (accumulated deficit)........... (10,367) (7,449) 7,449 (a) (10,367)
Accumulated other comprehensive income............ 88 -- -- 88
-------- ------- -------- --------
Total stockholders' equity...................... 68,340 9,806 272,194 350,340
-------- ------- -------- --------
Total liabilities and stockholders' equity...... $ 77,461 $12,844 $272,194 $362,499
======== ======= ======== ========
</TABLE>
- ------------------------------
(1) See Note 1 to unaudited pro forma consolidated financial statements.
F-68
<PAGE>
BREAKAWAY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BREAKAWAY PRO FORMA EGGROCK
SOLUTIONS, INC. APPLICA WPL WEB YES ADJUSTMENTS (1) SUBTOTAL PARTNERS, INC.
--------------- -------- -------- -------- --------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $ 25,390 -- 1,679 289 -- $27,358 11,738
Operating expenses:
Project personnel
costs............ 11,850 175 721 111 -- 12,857 6,432
Compensation
related to equity
issuances........ -- -- -- -- -- -- 7,650
Selling, general
and admin
expenses......... 22,403 152 631 54 -- 23,240 5,700
Amortization of
deferred costs... 1,000 -- -- -- 748 (a) 1,748 --
Amortization of
goodwill and
intangible
assets........... 1,002 -- -- -- 573 (a) 1,575 --
-------- ----- ------ ---- ------ -------- -------
Total operating
expenses....... 36,255 327 1,352 165 1,321 39,420 19,782
-------- ----- ------ ---- ------ -------- -------
Income (loss) from
operations......... (10,865) (327) 327 124 (1,321) (12,062) (8,044)
Other income
(expense):
Other income......... 23 -- -- -- -- 23 --
Interest income...... 673 -- 2 -- -- 675 114
Interest expense..... (198) -- -- (14) (65 ) (b) (277) --
-------- ----- ------ ---- ------ -------- -------
498 -- 2 (14) (65) 421 114
-------- ----- ------ ---- ------ -------- -------
Net loss............. (10,367) (327) 329 110 (1,386) $(11,641) (7,930)
======== ===== ====== ==== ====== ======== =======
Net loss per share-
basic and diluted.. $ (0.59)
Weighted average
shares
outstanding........ 17,440
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS (1) CONSOLIDATED
--------------- ------------
<S> <C> <C>
Revenue.............. -- $ 39,096
Operating expenses:
Project personnel
costs............ -- 19,289
Compensation
related to equity
issuances........ (7,650)(d) --
Selling, general
and admin --
expenses......... 540 (c) 29,480
Amortization of
deferred costs... 33,438 35,186
Amortization of
goodwill and
intangible
assets........... 28,197 29,772
------- --------
Total operating
expenses....... 54,525 113,727
------- --------
Income (loss) from
operations......... (54,525) (74,631)
Other income
(expense):
Other income......... -- 23
Interest income...... -- 789
Interest expense..... -- (277)
------- --------
-- 535
------- --------
Net loss............. (54,525) (74,096)
======= ========
Net loss per share-
basic and diluted.. $ (2.80)
Weighted average
shares
outstanding........ 26,459
</TABLE>
- ------------------------------
(1) See Note 1 to unaudited pro forma consolidated financial statements.
F-69
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
During 1999, the Company completed its acquisitions of Applica Corporation,
WPL Laboratories, Inc. and Web Yes, Inc. (the Acquired Companies) for total
consideration valued at approximately $15.3 million. Accordingly, the assets and
liabilities of the Acquired Companies are included in the Company's consolidated
balance sheet as of December 31, 1999 and no pro forma adjustments are necessary
to the pro forma consolidated balance sheet related to the acquisitions of the
Acquired Companies. The following represents the allocation of the purchase
price for the Company's acquisitions of the Acquired Companies over the fair
values of the acquired assets and assumed liabilities of the Acquired Companies
as of the allocation date:
<TABLE>
<S> <C>
(in thousands)
Working capital deficit, including cash acquired............ $ 508
Other non-current assets.................................... 706
Non-current liabilities..................................... (134)
Intangible assets and deferred costs:
Assembled workforce....................................... 852
Customer base............................................. 1,463
Goodwill.................................................... 2,374
Deferred costs.............................................. 9,494
-------
Total intangible assets and deferred costs.................. 14,183
-------
Purchase price.............................................. $15,263
=======
</TABLE>
The pro forma consolidated financial information also reflects the pending
acquisition of Eggrock Partners, Inc. for consideration preliminarily valued at
approximately $282.0 million. For the purpose of the pro forma consolidated
financial information, the number of shares of Breakaway Solutions, Inc. common
stock assumed issued in the acquisition is approximately 7.2 million which
includes conversion of outstanding stock options of Eggrock Partners, Inc. The
estimated acquisition related costs consist primarily of investment banker,
legal and accounting fees to be incurred directly related to the acquisition of
Eggrock Partners, Inc.
The acquisition of Eggrock Partners, Inc. will be accounted for as a
purchase. The purchase price will be allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Intangible assets will
be amortized over a period up to five years. Results of operations for Eggrock
Partners, Inc. will be included with those of the Company for periods subsequent
to the date of acquisition.
F-70
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS (CONTINUED)
The pro forma consolidated balance sheet adjustments as of December 31, 1999
consist of the following:
(a) Represents the elimination of historical equity balances of Eggrock
Partners, Inc.
(b) The purchase price for Eggrock Partners, Inc. is expected to be
allocated as follows:
<TABLE>
<S> <C>
(in thousands)
Intangible assets and deferred costs:
Workforce in place........................................ $ 3,815
Goodwill.................................................. 134,627
Deferred costs............................................ 133,752
--------
272,194
Tangible assets............................................. 12,844
Liabilities assumed......................................... (3,038)
--------
$282,000
========
</TABLE>
Intangible assets will be amortized over the useful lives of three years for
assembled workforce and five years for goodwill.
1,916,160 shares of the common stock issued to the former Eggrock
Partners, Inc. shareholders are subject to the Company's right, which lapses
incrementally over a four year period, to repurchase the shares of a particular
shareholder at the original price paid by the former shareholder upon the
termination of his or her employment with the Company subject to conditions
described in the merger agreement. The fair value of these shares will be
recorded as deferred compensation cost and amortized over the four-year vesting
period.
2. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The pro forma consolidated statement of operations adjustments for the year
ended December 31, 1999 consist of the following:
(a) General and administrative expense has been adjusted to reflect the
amortization of intangible assets and deferred costs associated with the
acquisitions of the Acquired Companies for the period from January 1,
1999 until the date acquired and Eggrock Partners, Inc for the entire
year ending December 31, 1999.
(b) This represents the adjustment for interest expense relating to the
remaining cash consideration payable to each WPL stockholder for the
period January 1, 1999 to May 17, 1999.
(c) During 1999 certain Eggrock employees did not draw salaries.
Compensation expense has been adjusted to reflect the compensation and
benefits for those employees that are specified in the employment
contracts entered into at the date of acquisition.
(d) This represents the adjustment for compensation expense related to
issuance of stock options by Eggrock Partners, Inc.
F-71
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 52,144
NASD filing fee............................................. 20,252
Nasdaq National Market listing fee.......................... 17,500
Blue Sky fees and expenses.................................. 10,000
Transfer Agent and Registrar fees........................... 5,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses..................................... 300,000
Printing and mailing expenses............................... 100,000
Miscellaneous............................................... 45,104
--------
Total..................................................... $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article SEVENTH of the Registrant's Certificate of Incorporation provides
that no director of the Registrant shall be personally liable for any monetary
damages for any breach of fiduciary duty as a director, except to the extent
that the Delaware General Corporation Law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that a director or officer of the Registrant:
(a) shall be indemnified by the Registrant against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement incurred
in connection with any litigation or other legal proceeding (other than an
action by or in the right of the Registrant) brought against him by virtue
of his position as a director or officer of the Registrant if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful and
(b) shall be indemnified by the Registrant against all expenses (including
attorneys' fees) and amounts paid in settlement incurred in connection with
any action by or in the right of the Registrant brought against him by
virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, except that no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the Registrant, unless a
court determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses.
Notwithstanding the foregoing, to the extent that a director or officer has been
successful, on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, he is required to be indemnified by
the Registrant against all expenses (including attorneys' fees) incurred in
connection therewith. Expenses shall be advanced to a director or officer at his
request, provided that
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<PAGE>
he undertakes to repay the amount advanced if it is ultimately determined that
he is not entitled to indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article EIGHTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
STOCK SPLITS. Except as otherwise indicated, the information set forth in this
Item 15 reflects the following two-for-one stock split of the Registrant's
common stock.
The Registrant will effect a two-for-one stock dividend to record holders as
of March 7, 2000. In connection with such stock split, on March 23, 2000 the
Registrant will issue to its stockholders of record as of March 7, 2000, one
share of common stock for each one share of common stock of record by such
stockholders. No underwriters will be involved in this sale of securities. These
securities will be exempt from the registration provisions of the Securities Act
pursuant to Section 3(a)(9) thereof relative to exchanges by an issuer with its
existing security holders where no commission or other remuneration is paid or
given directly or indirectly for soliciting such exchange.
CERTAIN SALES OF SECURITIES. Since January 1, 1997, the Registrant has
issued the following securities that were not registered under the Securities
Act, as summarized below.
(a) Issuances of capital stock.
1. On January 6, 1999, the Registrant issued and sold 5,853,000 shares
of its Series A Preferred Stock, $0.0001 par value per share, to
Internet Capital Group, LLC for an aggregate purchase price of
$8,291,750 pursuant to a Series A Preferred Stock Purchase Agreement.
II-2
<PAGE>
2. On March 5, 1999, the Registrant issued and sold 112,938 shares of
its common stock to Gordon Brooks for an aggregate purchase price of
$100,000 pursuant to the exercise, in part, of a stock option.
3. On March 25, 1999, the Registrant issued and sold an aggregate of
1,447,398 shares of its common stock to the former stockholders of
Applica Corporation as consideration for the merger of Applica
Corporation with and into the Registrant pursuant to an Agreement and
Plan of Merger. 72,368 of these shares are held by an escrow agent
pursuant to an Escrow Agreement.
4. On May 17, 1999, the Registrant issued and sold an aggregate of
2,728,280 shares of its common stock to the former stockholders of
WPL Laboratories, Inc. as consideration for the merger of WPL
Laboratories, Inc. into a wholly owned subsidiary of the Registrant
pursuant to an Agreement and Plan of Merger.
5. On May 26, 1999, the Registrant issued and sold 1,200,000 shares of
its common stock to Frank Selldorff for an aggregate purchase price
of $407,250 pursuant to the exercise, in part, of a stock option.
6. On June 10, 1999, the Registrant issued and sold an aggregate of
913,816 shares of its common stock to the former stockholders of Web
Yes, Inc. as consideration for the merger of Web Yes, Inc. into a
wholly owned subsidiary of the Registrant pursuant to an Agreement
and Plan of Merger. 86,632 of these shares are held by an escrow
agent pursuant to an Escrow Agreement. In addition, the registrant
issued 71,166 shares of its common stock to employees of Web Yes.
7. On July 2, 1999 and July 12, 1999, the Registrant issued and sold an
aggregate of 2,931,849 shares of its Series B Preferred Stock,
$0.0001 par value per share, to a group of investors for an aggregate
purchase price of approximately $19,049,982 pursuant to a Series B
Preferred Stock Purchase Agreement. Approximately $4,053,427 of such
purchase price was paid by conversion of a convertible promissory
note issued by the Registrant on May 13, 1999.
8. On July 30, 1999, the Registrant issued 32,000 shares of its common
stock to The General Hospital Corporation in consideration for a
license of technology to the Registrant. The deemed value of the
shares paid for the license was $130,000.
9. Effective February 2000, the Registrant issued and sold an aggregate
of 110,000 shares of its common stock to the former stockholders of
DataCyr Corporation, as consideration for the acquisition of DataCyr.
(b) Stock option grants.
1. The Registrant has issued the following stock options to its
executive officers and directors:
(a) Effective July 1, 1998 the Registrant issued to Kevin Comerford
options to purchase up to 144,000 shares of its common stock at a
per share exercise price of $0.34.
(b) Effective July 1, 1998 the Registrant issued to Christopher H.
Greendale options to purchase up to 168,000 shares of its common
stock at a per share exercise price of $0.34.
(c) Effective July 1, 1998 the Registrant issued to Frank Selldorff
options to purchase up to 2,400,000 shares of its common stock at
a per share exercise price of $0.34.
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<PAGE>
(d) Effective July 1, 1998 the Registrant issued to Janet Tremlett
options to purchase up to 72,000 shares of its common stock at a
per share exercise price of $0.34.
(e) Effective October 1, 1998 the Registrant issued to Kevin
Comerford options to purchase up to 72,000 shares of its common
stock at a per share exercise price of $0.51.
(f) Effective December 23, 1998 the Registrant issued to Gordon
Brooks options to purchase up to 1,223,400 shares of its common
stock at a per share exercise price of $0.89.
(g) Effective January 22, 1999 the Registrant issued to Janet
Tremlett options to purchase up to 36,000 shares of its common
stock at a per share exercise price of $0.89.
(h) Effective February 18, 1999 the Registrant issued to Christopher
H. Greendale options to purchase up to 1,108,800 shares of its
common stock at a per share exercise price of $0.89.
(i) Effective February 18, 1999 the Registrant issued to Christopher
Harding options to purchase up to 1,212,496 shares of its common
stock at a per share exercise price of $0.89.
(j) Effective March 19, 1999 the Registrant issued to Wayne B.
Saunders options to purchase up to 352,000 shares of its common
stock at a per share exercise price of $0.98.
(k) Effective March 25, 1999 the Registrant issued to Babak Farzami
options to purchase up to 676,816 shares of its common stock at a
per share exercise price of $0.98.
(l) Effective March 25, 1999 the Registrant issued to Dev Ittycheria
options to purchase up to 507,612 shares of its common stock at a
per share exercise price of $0.98.
(m) Effective September 3, 1999, the Registrant issued to Kevin
Comerford options to purchase up to 80,000 shares of its common
stock at a per share exercise price of $5.07.
(n) Effective September 3, 1999, the Registrant issued to Janet
Tremlett options to purchase up to 80,000 shares of its common
stock at a per share exercise price of $5.07.
(o) Effective September 20, 1999, the Registrant issued to Joseph
Johnson options to purchase up to 400,000 shares of its common
stock at a per share exercise price of $5.50.
(p) Effective September 20, 1999, the Registrant issued to Adam
Sholley options to purchase up to 220,000 shares of its common
stock at a per share exercise price of $5.50.
(q) Effective December 10, 1999, the Registrant issued to Gordon
Brooks options to purchase up to 350,000 shares of its common
stock at a per share exercise price of $28.93.
(r) Effective March 6, 2000, the Registrant issued to Paul Stedman
options to purchase up to 70,000 shares of its common stock at a
per share exercise price of $62.78.
2. Through March 15, 2000, the Registrant granted options to purchase an
aggregate of 17,222,482 shares of its common stock, net of
cancellations of 826,000 options, exercises
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<PAGE>
of 1,775,858 options and the options described in paragraph (b)1
above, at a per share weighted average exercise price of $6.76 to
employees of the Registrant.
(c) Grants of other securities.
1. On May 13, 1999, the Registrant issued to Internet Capital
Group, Inc. a Convertible Promissory Note in the principal amount of
$4,000,000 bearing interest at an adjustable rate of the prime
interest rate plus one percent and convertible into convertible
preferred stock.
2. On May 13, 1999, the Registrant issued to Internet Capital
Group, Inc. a Stock Purchase Warrant which, upon the Registrant's
Series B financing in July 1999, was established as a right to
purchase 147,744 shares of common stock at a per share exercise price
of $4.07.
3. On September 29, 1999 the Registrant issued to Silicon Valley Bank a
warrant to purchase stock for 21,818 shares of common stock at a per
share exercise price of $5.50.
No underwriters were involved in any of the foregoing sales of securities.
Such sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
sales by an issuer not involving any public offering or the rules and
regulations thereunder, or, in the case of the options to purchase common stock
described in paragraph (b)2 above, Rule 701 of the Securities Act. All of the
foregoing securities are deemed restricted securities for the purposes of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1(++) Agreement and Plan of Merger, dated as of January 26, 2000,
by and among the Registrant, Benedict Acquisition Corp. and
Eggrock Partners, Inc. ("Eggrock").
3.1 Reserved.
3.2 Reserved.
3.3(+) Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.4(+) Amended and Restated Bylaws of the Registrant.
4.1(+) Specimen certificate for shares of the Registrant's common
stock.
5.1 Opinion of Hale and Dorr LLP.
10.1(+) 1998 Stock Incentive Plan.
10.2(+) 1999 Stock Incentive Plan.
10.3(+) 1999 Employee Stock Purchase Plan.
10.4(+)(+) Promissory Note in favor of the Registrant, made by John
Loftus payable to the Registrant, dated June 23, 1999.
10.5(+) Employment Agreement, dated November 13, 1998, by and
between the Registrant and Gordon Brooks.
10.6(+) Employment Agreement, dated December 11, 1998, by and
between the Registrant and Frank Selldorff.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.7(+) Employment Agreement, dated February 11, 1999, by and
between the Registrant and Janet Tremlett.
10.8(+) Employment Agreement, dated March 25, 1999, by and between
the Registrant and Babak Farzami.
10.9(+) Employment Agreement, dated March 25, 1999, by and between
the Registrant and Dev Ittycheria.
10.10(+) Employment Agreement, February 17, 1999, by and between the
Registrant and Christopher Harding.
10.11 Employment letter, dated January 26, 2000, by and between
the Registrant and Maureen Ellenberger.
10.12(+) Employment Agreement, dated May 29, 1998, by and between the
Registrant and Kevin Comerford.
10.13(++) Form of Escrow Agreement to be entered into at closing of
the Merger, by and among the Registrant, Eggrock, Maureen
Ellenberger, as Indemnification Representative, and State
Street Bank and Trust Company, as Escrow Agent.
10.14(+) Separation Agreement, dated as of April 28, 1999, by and
between the Registrant and Frank Selldorff.
10.15(+) Employment Agreement, dated May 14, 1999, by and between the
Registrant and William Loftus.
10.16(+) Option Agreement, by and between the Registrant and Frank
Selldorff, effective July 1, 1998.
10.17(+) Option Agreement, by and between the Registrant and Kevin
Comerford, effective July 1, 1998.
10.18(+) Option Agreement, by and between the Registrant and
Christopher Greendale, effective July 1, 1998.
10.19(+) Option Agreement, by and between the Registrant and Janet
Tremlett, effective July 1, 1998.
10.20(+) Amendment No. 1 to Option Agreement, by and between Janet
Tremlett and the Registrant, dated January 22, 1999.
10.21(+) Option Agreement, by and between the Registrant and Kevin
Comerford, effective October 1, 1998.
10.22(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.23(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.24(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.25(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.26(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.27(+) Option Agreement, by and between the Registrant and Janet
Tremlett, effective January 22, 1999.
10.28(+) Option Agreement, by and between the Registrant and
Christopher Greendale, effective February 18, 1999.
10.29(+) Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.30(+) Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.31(+) Option Agreement, by and between the Registrant and Babak
Farzami, effective March 25, 1999.
10.32(+) Option Agreement, by and between the Registrant and Dev
Ittycheria, effective March 25, 1999.
10.33 Promissory Note in favor of the Registrant, made by William
Loftus payable to the Registrant, dated June 23, 1999.
10.34 Restricted Stock Agreement, dated January 26, 2000, by and
between the Registrant and Maureen Ellenberger.
10.35(+) Lease Agreement dated as of July 22, 1998, by and between
the Registrant and Equity Office Properties Trust.
10.36* Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 1999.
10.37(+) Warrant to purchase the Registrant's common stock, dated May
13, 1999, issued by the Registrant to Internet Capital
Group.
10.38(+) Stock Pledge Agreement, dated as of May 14, 1999, by and
between the Registrant and William Loftus.
10.39(+) Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and William Loftus.
10.40(+) Amended and Restated Investors' Rights Agreement, dated as
of July 2, 1999, by and between the Registrant and the
investors named therein.
10.41 Promissory Note in favor of the Registrant, made by Gordon
Brooks payable to the Registrant, dated February 6, 2000.
10.42(+) Employment Agreement, dated September 12, 1999, by and
between the Registrant and Adam Sholley.
10.43(+) Master Lease Agreement, dated as of September 29, 1999, by
and between the Registrant and Silicon Valley Bank.
10.44(+) Warrant to purchase the Registrant's common stock, dated
September 29, 1999, issued by the Registrant to Silicon
Valley Bank.
10.45(++) Form of Registration Rights Agreement to be entered into at
closing of the Merger, by and among the Company and the
stockholders of Eggrock named therein.
10.46(++) Stockholder Agreement, dated as of January 26, 2000, by and
between the Registrant, Benedict Acquisition Corp. and
certain stockholders of Eggrock named therein.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.47(++) Promissory Note in favor of the Registrant, made by John
Loftus payable to the Registrant, dated June 23, 1999.
10.48(++) Offer letter to John Loftus from the Registrant, dated
May 14, 1999.
10.49(++) Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and John Loftus.
21.1 Schedule of subsidiaries of the Registrant.
23.1 Consent of Hale and Dorr LLP (contained in exhibit 5.1).
23.2 Consent of KPMG LLP regarding Breakaway Solutions, Inc.
23.3 Consent of KPMG LLP regarding Applica Corporation.
23.4 Consent of KPMG LLP regarding WPL Laboratories, Inc.
23.5 Consent of KPMG LLP regarding Web Yes, Inc.
23.6 Consent of Arthur Andersen LLP.
24.1 Power of Attorney with respect to the Registrant (included
on Page II-10).
27.1 Financial Data Schedule for the year ended December 31,
1999.
99.1(+) Letter of Arthur Andersen LLP.
99.2(+) Letter of Brown & Brown LLP.
</TABLE>
- ------------------------
(+) Incorporated by reference to the registration statement on Form S-1 (File
No. 333-83343) as declared effective by the Securities and Exchange
Commission on October 5, 1999.
(++) Incorporated by reference to the registration statement on Form S-4 (File
No. 333-31194) as declared effective by the Securities and Exchange
Commission on March 10, 2000.
* To be filed by Amendment.
(B) FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are not required or
because the required information is given in the Registrant's consolidated
financial statements or notes to those statements.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Amended and Restated
Certificate of Incorporation of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Boston, Commonwealth of
Massachusetts, on March 29, 2000.
<TABLE>
<S> <C> <C>
BREAKAWAY SOULTIONS, INC.
By: /S/ KEVIN COMERFORD
-----------------------------------------
VICE PRESIDENT, ADMINISTRATION, CHIEF
FINANCIAL OFFICER, TREASURER AND SECRETARY
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear
below, constitute and appoint Gordon Brooks, President and Chief Executive
Officer and Director, and Kevin Comerford, Vice President, Administration, Chief
Financial Officer, Treasurer and Secretary, and each of them individually, as
their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for them in their names, places and steads, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and the other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ GORDON BROOKS President and Chief Executive
------------------------------------ Officer (Principal Executive
Gordon Brooks Officer) and Director March 29, 2000
Vice President, Administration,
/S/ KEVIN COMERFORD Chief Financial Officer,
------------------------------------ Treasurer and Secretary
Kevin Comerford (Principal Financial Officer and
Principal Accounting Officer) March 29, 2000
/S/ CHRISTOPHER H. GREENDALE
------------------------------------ Chairman of the Board of Directors
Christopher H. Greendale March 29, 2000
/S/ FRANK SELLDORFF
------------------------------------ Director
Frank Selldorff March 29, 2000
/s/ WALTER W. BUCKLEY, III
------------------------------------ Director
Walter W. Buckley, III March 29, 2000
</TABLE>
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1(++) Agreement and Plan of Merger, dated as of January 26, 2000,
by and among the Registrant, Benedict Acquisition Corp. and
Eggrock.
3.1 Reserved.
3.2 Reserved.
3.3(+) Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.4(+) Amended and Restated Bylaws of the Registrant.
4.1(+) Specimen certificate for shares of the Registrant's common
stock.
5.1 Opinion of Hale and Dorr LLP.
10.1(+) 1998 Stock Incentive Plan.
10.2(+) 1999 Stock Incentive Plan.
10.3(+) 1999 Employee Stock Purchase Plan.
10.4(++) Promissory Note, in favor of the Registrant, made by John
Loftus payable to the Registrant, dated June 23, 1999.
10.5(+) Employment Agreement, dated November 13, 1998, by and
between the Registrant and Gordon Brooks.
10.6(+) Employment Agreement, dated December 11, 1998, by and
between the Registrant and Frank Selldorff.
10.7(+) Employment Agreement, dated February 11, 1999, by and
between the Registrant and Janet Tremlett.
10.8(+) Employment Agreement, dated March 25, 1999, by and between
the Registrant and Babak Farzami.
10.9(+) Employment Agreement, dated March 25, 1999, by and between
the Registrant and Dev Ittycheria.
10.10(+) Employment Agreement, February 17, 1999, by and between the
Registrant and Christopher Harding.
10.11 Employment letter, dated January 26, 2000, by and between
the Registrant and Maureen Ellenberger.
10.12(+) Employment Agreement, dated May 29, 1998, by and between the
Registrant and Kevin Comerford.
10.13(++) Form of Escrow Agreement to be entered into at closing of
the Merger, by and among the Registrant, Eggrock, Maureen
Ellenberger, as Indemnification Representation, and State
Street Bank and Trust Company, as Escrow Agent.
10.14(+) Separation Agreement, dated as of April 28, 1999, by and
between the Registrant and Frank Selldorff.
10.15(+) Employment Agreement, dated May 14, 1999, by and between the
Registrant and William Loftus.
10.16(+) Option Agreement, by and between the Registrant and Frank
Selldorff, effective July 1, 1998.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.17(+) Option Agreement, by and between the Registrant and Kevin
Comerford, effective July 1, 1998.
10.18(+) Option Agreement, by and between the Registrant and
Christopher Greendale, effective July 1, 1998.
10.19(+) Option Agreement, by and between the Registrant and Janet
Tremlett, effective July 1, 1998.
10.20(+) Amendment No. 1 to Option Agreement, by and between Janet
Tremlett and the Registrant, dated January 22, 1999.
10.21(+) Option Agreement, by and between the Registrant and Kevin
Comerford, effective October 1, 1998.
10.22(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.23(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.24(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.25(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.26(+) Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.27(+) Option Agreement, by and between the Registrant and Janet
Tremlett, effective January 22, 1999.
10.28(+) Option Agreement, by and between the Registrant and
Christopher Greendale, effective February 18, 1999.
10.29(+) Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.30(+) Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.31(+) Option Agreement, by and between the Registrant and Babak
Farzami, effective March 25, 1999.
10.32(+) Option Agreement, by and between the Registrant and Dev
Ittycheria, effective March 25, 1999.
10.33 Promissory Note in favor of the Registrant, made by William
Loftus payable to the Registrant, dated June 23, 1999.
10.34 Restricted Stock Agreement, dated January 26, 2000, by and
between the Registrant and Maureen Ellenberger.
10.35(+) Lease Agreement dated as of July 22, 1998, by and between
the Registrant and Equity Office Properties Trust.
10.36* Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 1999.
10.37(+) Warrant to purchase the Registrant's common stock, dated May
13, 1999, issued by the Registrant to Internet Capital
Group.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.38(+) Stock Pledge Agreement, dated as of May 14, 1999, by and
between the Registrant and William Loftus.
10.39(+) Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and William Loftus.
10.40(+) Amended and Restated Investors' Rights Agreement, dated as
of July 2, 1999, by and between the Registrant and the
investors named therein.
10.41 Promissory Note in favor of the Registrant, made by Gordon
Brooks payable to the Registrant, dated February 6, 2000.
10.42(+) Employment Agreement, dated September 12, 1999, by and
between the Registrant and Adam Sholley.
10.43(+) Master Lease Agreement, dated as of September 29, 1999, by
and between the Registrant and Silicon Valley Bank.
10.44(+) Warrant to purchase the Registrant's common stock, dated
September 29, 1999, issued by the Registrant to Silicon
Valley Bank.
10.45(++) Form of Registration Rights Agreement to be entered into at
the closing of the Merger, by and among the Company and the
stockholders of Eggrock named therein.
10.46(++) Stockholder Agreement, dated January 26, 2000, by and
between the Registrant, Benedict Acquisition Corp. and
certain stockholders of Eggrock named therein.
10.47(++) Promissory Note in favor of the Registrant, made by John
Loftus payable to the Registrant, dated June 23, 1999.
10.48(++) Offer letter to John Loftus from the Registrant, dated
May 14, 1999.
10.49(++) Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and John Loftus.
21.1 Schedule of subsidiaries of the Registrant.
23.1 Consent of Hale and Dorr LLP (contained in exhibit 5.1).
23.2 Consent of KPMG LLP regarding Breakaway Solutions, Inc.
23.3 Consent of KPMG LLP regarding Applica Corporation.
23.4 Consent of KPMG LLP regarding WPL Laboratories, Inc.
23.5 Consent of KPMG LLP regarding Web Yes, Inc.
23.6 Consent of Arthur Andersen LLP regarding Eggrock Partners,
Inc.
24.1* Power of Attorney with respect to the Registrant (included
on Page II-10).
27.1 Financial Data Schedule for the year ended December 31,
1999.
99.1(+) Letter of Arthur Andersen LLP.
99.2(+) Letter of Brown & Brown LLP.
</TABLE>
- ------------------------
(+) Incorporated by reference to the registration statement on Form S-1 (File
No. 333-83343) as declared effective by the Securities and Exchange
Commission on October 5, 1999.
(++) Incorporated by reference to the registration statement on Form S-4 (File
No. 333-31194) as declared effective by the Securities and Exchange
Commission on March 10, 2000.
* To be filed by Amendment.
<PAGE>
EXHIBIT 5.1
HALE AND DORR LLP
Counsellors At Law
60 State Street, Boston, Massachusetts 02109
TEL 617-526-6000 * FAX 617-526-5000
March 29, 2000
Breakaway Solutions, Inc.
50 Rowes Wharf
Boston, Massachusetts 02110
Re: Breakaway Solutions, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
This opinion is furnished to you in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Act"), in connection with a Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"Commission") under the Act.
We are acting as counsel for Breakaway Solutions, Inc., a Delaware
corporation (the "Company"), in connection with the public offering by the
Company and certain selling stockholders of the Company (the "Selling
Stockholders") of up to 3,450,000 shares (the "Shares") of the Company's
common stock, par value $0.000125 per share (the "Common Stock"). Of the
Shares, up to 2,070,000 shares of Common Stock will be sold by the Company,
including shares issuable upon exercise of an over-allotment option granted
by the Company, and up to 1,380,000 shares of Common Stock will be sold by
the Selling Stockholders.
The Shares are to be sold by the Company and the Selling Stockholders
pursuant to an Underwriting Agreement (the "Underwriting Agreement"), by and
among the Company, the Selling Stockholders and Morgan Stanley & Co.
<PAGE>
Incorporated, Lehman Brothers, Dain Rauscher Wessels, Donaldson, Lufkin &
Jenrette and C.E. Unterberg Towbin, as representatives of the several
underwriters named in the Underwriting Agreement, the form of which will be
filed as Exhibit 1.1 to the Registration Statement.
We have examined and relied upon the certificate of incorporation and
by-laws of the Company, each as amended and/or restated to date, records of
meetings of stockholders and of the Board of Directors of the Company, corporate
proceedings of the Company in connection with the authorization and issuance of
the Shares, the corporate and stock record books of the Company as provided to
us by the Company, the Registration Statement, the Underwriting Agreement,
certificates of representatives of the Company, certificates of public officials
and such other documents as we have deemed necessary as a basis for the opinions
hereinafter expressed.
Insofar as this opinion relates to factual matters, information with
respect to which is in the possession of the Company, we have relied upon
certificates, statements and representations of officers and other
representatives of the Company and upon statements contained in the Registration
Statement.
In our examination of the documents referred to above, we have assumed the
genuineness of all signatures, the legal capacity of each individual signing
such documents, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as copies,
and the authenticity of the originals of such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we are
opining herein, we have assumed that such laws are identical to the laws of the
Commonwealth of Massachusetts, and we are expressing no opinion herein as to
whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that (i) the
Shares to be issued and sold by the Company have been duly authorized for
issuance and, when such Shares are issued and paid for in accordance with the
terms and conditions of the Underwriting Agreement, such Shares will be validly
issued, fully paid and nonassessable and (ii) the Shares to be sold by the
Selling Stockholders have been duly authorized and are validly issued, fully
paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
<PAGE>
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the use of our name therein and in
the related prospectus included in the Registration Statement under the caption
"Legal Matters." In giving such consent, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE>
Exhibit 10.11
[Breakaway Solutions, Inc. logo]
January 26, 2000
Ms. Maureen Ellenberger
Eggrock Partners, Inc.
30 Monument Square
Concord, MA 01742
Dear Maureen:
Breakaway Solutions Inc. (the "Company") is pleased to offer to employ
you as Vice President, Chief Innovation Officer, effective as of the closing of
the merger of the Company and Eggrock Partners, Inc. pursuant to that certain
Agreement and Plan of Merger (the "Merger Agreement") by and between the
Company, Benedict Acquisition Corp., and Eggrock Partners, Inc. ("Eggrock")
dated as of the date hereof (the "Merger"). You will undertake the duties and
responsibilities inherent in the position and such other duties and
responsibilities as the Company's Board of Directors shall from time to time
reasonably assign to you. In addition, you agree to devote your entire business
time, attention and energies to the business and interests of the Company during
your employment; provided, however, that you may engage in religious, charitable
or other community nonprofit activities that do not materially impact in any
respect your ability to fulfill your duties and responsibilities to the Company.
You are to abide by the rules, regulations, instructions, personnel
practices and policies of the Company (as amended from time to time in the
Company's sole discretion).
Your salary for this position will be paid at the rate of $7,500 per
pay period (which is equivalent to an annual base salary of $180,000 paid out
over 24 pay periods per year), in accordance with the semi-monthly payment
schedule now being employed by the Company. The Company will make such
deductions, withholdings and other payments from sums payable to you which are
required by law for taxes, or which you request pursuant to payroll deductions
chosen by you. In the event of your death, the Company will make all salary
payments which are accrued and not yet paid as of the date of your death to your
legal representative. All dollar amounts stated herein refer to United States
currency.
In addition, you will participate in the Breakaway Profit Sharing Plan
on the same basis as other executives at your level. The company has put a plan
into effect that would make you and all other such executives eligible for an
annual bonus of 25% of your annual salary at the specified profit target. The
actual bonus dollar amounts will thus be tied to the Company's performance based
on the targets attached hereto as Exhibit A.
You will be eligible to participate in the employee benefit programs
and policies
<PAGE>
Ms. Maureen Ellenberger
January 26, 2000
Page 2
maintained by the Company, as in effect from time to time, to the same extent as
other members of senior management of the Company, with you receiving credit for
your past service with Eggrock prior to the consummation of the Merger and prior
to the time you became a participant for all purposes under such programs and
policies. Without limitation of the foregoing, to the extent permitted under the
terms of the Company's employee benefit programs and policies, you shall not be
subject to any waiting periods or limitations on benefits for pre-existing
conditions and shall be given credit for amounts paid under corresponding plans
during the appropriate period prior to consummation of the Merger. A summary of
the Company's benefit plans is included with this letter. Full descriptions of
the benefit plans currently being offered are available in our Human Resources
Department. These plans may, from time to time, be amended or terminated by the
Company in its sole discretion with or without prior notice.
In addition, the Company will provide to you parking adjacent to the
Company's office where you work at, at the Company's expense. You will be
reimbursed in accordance with standard company policy for expenses incurred in
the performance of your work, including without limitation portable phone
charges, gas and mileage incurred on company business, and travel and
subsistence on business trips. During your employment under this agreement, you
will be entitled to three weeks paid vacation, accrued in accordance with the
Company policies, and Company holidays in accordance with the Company's holiday
policies, as they may be amended from time to time. Without limitation of the
foregoing, you will be given credit for all accrued but unused vacation time
credited to you by Eggrock as of the consummation of the Merger.
Attached for your review, as ATTACHMENT A, is the Company's
Non-Disclosure, Non-Solicitation & Assignment Agreement (the "NDA"). This offer
of employment is conditioned on your signing that agreement. In making this
offer, you have expressly represented and warranted to the Company, and the
Company understands, that you are not under any obligation to any former
employer or any person, firm, or corporation which would prevent, limit, or
impair in any way the performance by you of your duties as an employee of the
Company.
This Agreement shall be effective upon the closing of the Merger and
shall continue until your employment with the Company is terminated by your
resignation, or by mutual decision, or by the Company with or without "Cause,"
subject to the terms and conditions set forth below; provided that this
Agreement shall be of no force and effect if the Plan and Agreement of Merger is
terminated in accordance with its terms.
Without limitation, you may at your election resign your position at
any time by mutual agreement or unilaterally by you for any reason.
TERMINATION BY COMPANY WITHOUT "CAUSE"; TERMINATION BY MUTUAL DECISION;
TERMINATION FOR "GOOD REASON"; TERMINATION FOR DEATH OR DISABILITY: If (i) your
employment is terminated by the Company without "Cause" as defined below, or
(ii) if you terminate for "Good Reason" as
<PAGE>
Ms. Maureen Ellenberger
January 26, 2000
Page 3
defined below, or (iii) if you terminate following a change in control of the
Company, or a sale of all or substantially all of the Company's assets or (iv)
if it is terminated by mutual agreement, or (v) if it is terminated by the
Company in the event of your death or disability, (a) your obligations under
this Agreement and the NDA will terminate except for those provisions which
expressly survive by their terms, (b) you will continue to be paid your salary
as is in effect immediately prior to the termination date, for six months, (c)
you will receive any bonus payable under any plan in which you were
participating or for which you were eligible immediately prior to the
termination date, but to the extent that any period for the calculation of a
bonus ends after the termination date, your bonus shall be pro-rated
accordingly, (d) you will be paid any accrued vacation pay and any salary or
other benefits accrued as of the termination date but not yet paid, and (e) you
will be eligible to continue to receive any benefits under any plans then in
effect, according to the terms of such plans, which may require that continuance
be done at your own expense after termination. For this purpose, "disability"
shall mean the inability of the Employee, due to a medical reason, to carry out
his duties as an employee of the Company for a period of six consecutive months.
TERMINATION BY THE COMPANY WITH "CAUSE": The Company may terminate your
employment for "Cause" as defined below if it first gives you written notice of
the alleged "Cause" and if you have not remedied the Cause within thirty (30)
days after such notice. If your employment is terminated for Cause or if you
terminate without Good Reason and not following a change in control of the
Company or a sale of all or substantially all of the Company's assets, (a) your
obligations under this Agreement and the NDA agreement will terminate except for
those provisions which expressly survive by their terms, (b) you will be paid
any accrued vacation pay and any salary or other benefits accrued as of the
termination date but not yet paid, and (c) you will be eligible to continue to
receive any benefits under any plans then in effect, according to the terms of
such plans, which may require that continuance be done at your own expense after
termination.
For the purposes of this Agreement, the term "Cause" means: (a) your
substantial and continuing failure, after written notice thereof (describing in
reasonable detail such failure) and a 30-day period following the notice to cure
such failure, to perform your duties and responsibilities as an employee of the
Company other than due to death or disability; (b) commission by you of an
action which constitutes intentional misconduct or a knowing violation of law if
such action in either event results either in an improper substantial personal
benefit or a material injury to the Company; (c) your deliberate disregard of
material rules, regulations, instructions, personnel practices and policies of
the Company (as amended from time to time in the Company's sole discretion)
which results in substantial loss, damage or injury to the Company; (d) your
material breach of the NDA; or (e) your conviction or plea of guilty or nolo
contendre to any crime which constitutes a felony in the jurisdiction involved.
For the purposes of this Agreement, the term "Good Reason" means: (a) any
involuntary change in your position as Vice President, Chief Innovation Officer,
with the Company; (b) the assignment to you by the Board of any duties, scope of
authority or responsibilities that are materially inconsistent with
<PAGE>
Ms. Maureen Ellenberger
January 26, 2000
Page 4
your then current status, title or position; (c) layoff or involuntary
termination of your employment, except in connection with the termination of
your employment for Cause; (d) a reduction by the Company in your base salary or
bonus eligibility, other than in the case of reductions in salary or bonus
eligibility with respect to similarly situated employees of the Company
generally; (e) any action or inaction by the Company that would adversely affect
your continued participation in any benefit plan maintained by the Company on at
least as favorable a basis as was the case at the time of such action or
inaction, or that would materially reduce your benefits in the future under any
such benefit plan or deprive you of any material benefits that you then enjoyed,
except to the extent that such action or inaction by the Company (i) is also
taken or not taken, as the case may be, in respect of covered employees
generally, (ii) is required by the terms of any such benefit plan as in effect
immediately before such action or inaction, or (iii) is necessary to comply with
applicable law or to preserve the qualification of any such benefit plan under
Section 401(a) of the Internal Revenue Code; (f) the Company's failure to obtain
the express assumption of this Agreement by any successor to the Company
(including by operation of law); or (g) a demand that the Employee work at an
office that is outside a 50-mile radius of Concord, Massachusetts.
The Company reserves the right to review the compensation (including
salary and bonus) and benefits it offers to you and to adjust them from time to
time in its sole discretion. It is understood that you are not being offered
employment for a definite period of time and that either you or the Company may
terminate the employment relationship at any time, without liability, except as
otherwise provided above. Nothing in the Company's offer to you of compensation
(including salary or bonus), stock options or benefits should be interpreted as
creating anything other than an at-will employment relationship. This agreement
and the NDA Agreement are executed as instruments "under seal" under
Massachusetts law and they and your employment relationship with the Company are
governed by the laws of the Commonwealth of Massachusetts, without regard to the
choice of law rules. You expressly consent to submit to jurisdiction and venue
in the Massachusetts state or federal courts, where any matters arising related
to your employment shall be litigated.
This letter and the NDA constitute the entire agreement between you and
the Company with respect to your employment. In the event of any conflict
between those documents and the rules, regulations, instructions, personnel
practices and policies of the Company (as amended from time to time in the
Company's sole discretion), this letter and the NDA agreement shall control, and
in the event of any conflict between the terms of this letter and the NDA, the
terms of this letter shall control.
This letter may not be amended, modified, changed or discharged in any
respect except as agreed in writing and signed by you and the Company. A waiver
by either party of any of the terms or conditions of this letter in any instance
shall not be deemed or construed to be a waiver of such term or condition for
the future, or of any subsequent breach thereof. All remedies, rights,
undertakings, obligations and agreements contained in this letter shall be
cumulative and
<PAGE>
Ms. Maureen Ellenberger
January 26, 2000
Page 5
none of them shall be in limitation of any other remedy, right, undertaking,
obligation, or agreement of either party. The ninth, tenth, eleventh and twelfth
paragraphs of this letter shall survive termination of this letter.
<PAGE>
Ms. Maureen Ellenberger
January 26, 2000
Page 6
Notwithstanding anything in this Agreement to the contrary, this
Agreement shall be of no force and effect if the Merger Agreement is terminated
in accordance with its terms.
Please indicate your acceptance of this offer by signing and dating
below.
Very truly yours,
BREAKAWAY SOLUTIONS, INC.
By: /s/ Gordon Brooks
--------------------------------
Name: Gordon Brooks
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Accepted and Agreed this 26th day of
January, 2000:
/s/ Maureen Ellenberger
- ---------------------------------
Maureen Ellenberger
<PAGE>
Exhibit 10.33
PROMISSORY NOTE
$346,678.00 King of Prussia, Pennsylvania
June 23, 1999
William P. Loftus ("DEBTOR") hereby promises to pay to the order of
BREAKAWAY SOLUTIONS, INC. ("LENDER"), its successors and assigns, in lawful
money of the United States of America, the lesser of Three hundred forty six
thousand six hundred seventy eight dollars ($346,678.00) or the principal
balance outstanding under this Promissory Note, together with accrued and
unpaid interest thereon, at the rate or rates set forth below, and on the
dates and in the amounts set forth below.
The unpaid principal amount of this Promissory Note shall bear interest
at a rate per annum equal to eight and three-quarters percent (8.75%) calculated
on the basis of a 365 day year and the actual number of days elapsed. If any
interest is determined to be in excess of the then legal maximum rate, then that
portion of each interest payment representing an amount in excess of the then
legal maximum rate shall be deemed a payment of principal and applied against
the principal of the obligations evidenced by this Note.
The principal amount of this Promissory Note and interest accrued
thereon shall be payable upon the earlier to occur of: (i) the date on which
Debtor receives any proceeds from his sale of Lender capital stock pledged to
Lender under the Stock Pledge Agreement (described below), to the extent of such
proceeds (net of any taxes payable in connection with such sale) and (ii) the
fourth anniversary of the date of the Stock Pledge Agreement (as defined below)
to the full extent of any remaining principal and interest that is outstanding
on such date.
In the event that Debtor shall fail to pay when due (whether at
maturity, by reason of acceleration or otherwise) any principal of or interest
on this Promissory Note, then (i) if such payment of principal or interest is
not made within 5 days of the due date, Lender may declare all obligations
(including without limitation, outstanding principal and accrued and unpaid
interest thereon) under this Promissory Note to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived and (ii) such overdue amounts shall bear
interest at a rate per annum equal to the otherwise applicable rate pursuant to
paragraph 2 above PLUS five percent (5%) per annum.
This Promissory Note is secured pursuant to that certain Stock Pledge
Agreement, dated as of May 14, 1999, by and between Debtor and Lender.
Notwithstanding anything to the contrary contained hereon or in the Stock Pledge
Agreement, but without in any manner impairing the validity of this Promissory
Note, the Stock Pledge Agreement or any security interest created thereby, in
the event of any default under the terms of this Promissory Note, Lender will
not hold Debtor personally liable for payment of the obligations evidenced by
this Promissory Note or for any other sums due as a result of any defaults under
this Promissory Note, and the sole recourse of Lender for any and all such
defaults shall be by exercise of the remedies provided in the Stock Pledge
Agreement.
<PAGE>
Debtor hereby waives presentment, demand, notice of dishonor, protest,
notice of protest and all other demands, protests and notices in connection with
the execution, delivery, performance, collection and enforcement of this
Promissory Note. Debtor shall pay all costs of collection when incurred,
including reasonable attorneys' fees, costs and expenses.
This Promissory Note is being delivered in, is intended to be performed
in, shall be construed and interpreted in accordance with, and be governed by
the internal laws of, the State of Delaware, without regard to principles of
conflict of laws.
This Promissory Note shall not be transferred without the express
written consent of Lender, provided that if Lender consents to any such transfer
or if notwithstanding the foregoing such a transfer occurs, then the provisions
of this Promissory Note shall inure to the benefit of and be binding upon any
successor to Debtor and shall be extended to any holder thereof.
WILLIAM P. LOFTUS
/s/ William P. Loftus
------------------
<PAGE>
Exhibit 10.34
RESTRICTED STOCK AGREEMENT
--------------------------
AGREEMENT made this 26th day of January 2000, between Breakaway
Solutions, Inc., a Delaware corporation (the "Company"), and Maureen Ellenberger
(the "Employee").
For valuable consideration, receipt of which is acknowledged, the
parties hereto agree as follows:
1. PURCHASE OF SHARES. In connection with the merger of Eggrock
Partners, Inc. ("Eggrock") with and into the Company pursuant to that certain
Agreement and Plan of Merger dated as of January 26, 2000 (the "Merger"), the
Employee will be issued shares of common stock, $0.000125 par value per share,
of the Company (the "Common Stock") in exchange for all of his/her shares of
capital stock of Eggrock in accordance with the terms of such agreement. Subject
to the consummation of the Merger, the Employee has agreed that one-half of the
shares of Common Stock received in the Merger shall be subject to the purchase
option set forth in Section 2 of this Agreement and the restrictions on transfer
set forth in Section 4 of this Agreement (the shares subject to such
restrictions, hereinafter referred to as the "Shares").
2. PURCHASE OPTION.
(a) In the event that the Employee ceases to be employed by the Company
as a result of having been terminated by the Company for Cause (as defined
below) or if the Employee terminates his/her employment for any reason other
than Good Reason (as defined below), prior to the fourth anniversary of the date
hereof, the Company shall have the right and option (the "Purchase Option") to
purchase from the Employee, for a sum of $0.50 per share divided by the "Common
Conversion Ratio" as defined in the Agreement and Plan of Merger relating to the
Merger (the "Option Price"), some or all of the Unvested Shares (as defined
below). For the purposes of this Agreement, the term "Cause" means: (1) the
Employee's substantial and continuing failure, after written notice thereof
(describing in reasonable detail such failure) and a 30-day period following the
notice to cure such failure, to perform his or her duties and responsibilities
as an employee of the Company other than due to death or disability; (2)
commission by the Employee of an action which constitutes intentional misconduct
or a knowing violation of law if such action in either event results either in
an improper substantial personal benefit or a material injury to the Company;
(3) the Employee's deliberate disregard of material rules, regulations,
instructions, personnel practices and policies of the Company (as amended from
time to time in the Company's sole discretion) which results in substantial
loss, damage or injury to the Company; (4) the Employee's failure to enter into
a, or material breach of the, Non-Disclosure, Non-Solicitation and Assignment
Agreement between the Employee and the Company attached hereto as Exhibit A; or
(5) the Employee's conviction of, or plea of guilty or nolo contendre to, any
crime which constitutes a felony in the jurisdiction involved. For the purposes
of this Agreement, the term "Good Reason means: (a) any involuntary change in
the Employee's position as Vice President, Chief Innovation Officer with the
Company; (b) the assignment to the Employee by the Board of any duties, scope of
authority or responsibilities that are materially inconsistent with the
Employee's then current status, title or position; (c) layoff or involuntary
termination of the Employee's employment, except in connection with the
<PAGE>
termination of Employee's employment for Cause; (d) a reduction by the Company
in the Employee's base salary or bonus eligibility, other than in the case of
reductions in salary or bonus eligibility with respect to similarly situated
employees of the Company generally; (e) any action or inaction by the Company
that would adversely affect the Employee's continued participation in any
benefit plan maintained by the Company on at least as favorable a basis as was
the case at the time of such action or inaction, or that would materially reduce
the Employee's benefits in the future under any such benefit plan or deprive him
of any material benefits that he then enjoyed, except to the extent that such
action or inaction by the Company (i) is also taken or not taken, as the case
may be, in respect of covered employees generally, (ii) is required by the terms
of any such benefit plan as in effect immediately before such action or
inaction, or (iii) is necessary to comply with applicable law or to preserve the
qualification of any such benefit plan under Section 401(a) of the Internal
Revenue Code; (f) the Company's failure to obtain the express assumption of this
Agreement by any successor to the Company (including by operation of law); or
(g) a demand that the Employee work at an office that is outside of a 50-mile
radius of Concord, Massachusetts.
"Unvested Shares" means the total number of Shares multiplied by the
Applicable Percentage at the time the Purchase Option becomes exercisable by the
Company. The "Applicable Percentage" shall be (i) 100% until the first
anniversary of the date hereof, (ii) on and after the first anniversary of the
date hereof and prior to the fourth anniversary of the date hereof, 40% less
1.11% for each one month of employment completed by the Company from and after
the first anniversary of the date hereof, and (iii) zero on or after the fourth
anniversary of the date hereof.
(b) In the event that the Employee's employment with the Company is
terminated by reason of death or disability or by the Company without Cause or
if the Employee terminates his/her employment for Good Reason, the Purchase
Option shall terminate and be of no further effect, the Company shall have no
right to purchase any of the Shares and any other restrictions or conditions on
the Shares pursuant to the Agreement shall be deemed waived. For this purpose,
"disability" shall mean the inability of the Employee, due to a medical reason,
to carry out his duties as an employee of the Company for a period of six
consecutive months.
(c) For purposes of this Agreement, employment with the Company shall
include employment with a parent, subsidiary or other affiliate of the Company.
(d) Notwithstanding anything herein to the contrary, the Board of
Directors of the Company (or a duly constituted committee thereof) shall retain
the ability to accelerate the vesting schedule specified in this Section 2 at
any time in its discretion.
3. EXERCISE OF PURCHASE OPTION AND CLOSING.
(a) The Company may exercise the Purchase Option by delivering or
mailing to the Employee (or his/her estate), within 30 days after the
termination of the employment of the Employee with the Company, a written notice
of exercise of the Purchase Option. Such notice shall specify the number of
Shares to be purchased. If and to the extent the Purchase Option is not so
exercised by the giving of such a notice within such 30 day period, the Purchase
Option shall automatically expire and terminate effective upon the expiration of
such 30 day period.
<PAGE>
(b) Within 10 business days after delivery to the Employee of the
Company's notice of the exercise of the Purchase Option pursuant to subsection
(a) above, the Employee (or his or her estate) shall, pursuant to the provisions
of the Joint Escrow Instructions referred to in Section 6, tender to the Company
at its principal offices the certificate or certificates representing the Shares
which the Company has elected to purchase in accordance with the terms of this
Agreement, duly endorsed in blank or with duly endorsed stock powers attached
thereto, all in form suitable for the transfer of such Shares to the Company.
Upon receipt of such certificate or certificates, the Company shall pay to the
Employee the aggregate Option Price for such Shares.
(c) After the time at which any Shares are required to be delivered to
the Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Employee on account of such Shares or
permit the Employee to exercise any of the privileges or rights of a stockholder
with respect to such Shares, but shall, in so far as permitted by law, treat the
Company as the owner of such Shares. It being understood that, prior to the time
at which any Shares are required to be delivered to the Company for transfer to
the Company pursuant to subsection (b) above, the Company shall pay any and all
dividends or other distributions currently to the Employee.
(d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of the Employee
to the Company or in cash (by check) or both.
(e) The Company shall not purchase any fraction of a Share upon
exercise of the Purchase Option, and any fraction of a Share resulting from a
computation made pursuant to Section 2 of this Agreement shall be rounded to the
nearest whole Share (with any one-half Share being rounded upward).
4. RESTRICTIONS ON TRANSFER.
(a) The Employee shall not sell, assign, transfer, pledge, hypothecate
or otherwise dispose of, by operation of law or otherwise, other than by will or
the laws of descent and distribution (collectively "transfer"); any Unvested
Shares, or any interest therein, that are subject to the Purchase Option, except
that the Employee may transfer such Shares to or for the benefit of any spouse,
child (natural or adopted) or grandchild, or to a trust for their benefit,
PROVIDED that such Shares shall remain subject to this Agreement (including
without limitation the restrictions on transfer set forth in this Section 4, and
the Purchase Option) and such permitted transferee shall, as a condition to such
transfer, deliver to the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions of this Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, the
parties hereto acknowledge and agree that the Employee may, at any time and
without the prior consent of the Company, transfer any Shares, or any interest
therein, that are no longer subject to the Purchase Option.
5. ESCROW. The Employee shall, upon the execution of this Agreement,
execute Joint Escrow Instructions attached to this Agreement. The Joint Escrow
Instructions shall be
<PAGE>
delivered to State Street Bank and Trust Company, as escrow agent thereunder.
The Employee hereby instructs the Company to deliver to such escrow agent, on
behalf of the Employee, the certificate(s) evidencing the Shares subject to the
Purchase Option. Such materials shall be held by such escrow agent pursuant to
the terms of such Joint Escrow Instructions.
6. RESTRICTIVE LEGENDS. All certificates representing shares subject to
the Purchase Option shall have affixed thereto legends in substantially the
following form, in addition to any other legends that may be required under
federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Restricted Stock Agreement between the corporation and the
registered owner of these shares (or his or her predecessor in
interest), and such Agreement is available for inspection without
charge at the office of the Secretary of the corporation."
7. ADJUSTMENTS FOR STOCK SPLITS, STOCK DIVIDENDS, ETC.; MERGERS AND
OTHER SALE EVENTS.
(a) If from time to time there is any stock split, stock dividend,
stock distribution or other reclassification of the Common Stock of the Company,
any and all new, substituted or additional securities to which the Employee is
entitled by reason of his ownership of the Unvested Shares shall be immediately
subject to the Purchase Option, the restrictions on transfer and the other
provisions of this Agreement in the same manner and to the same extent as the
Unvested Shares, and the Option Price shall be appropriately adjusted.
(b) In the case of and subject to the consummation of (i) the
dissolution or liquidation of the Company, (ii) the sale of all or substantially
all of the assets of the Company on a consolidated basis to an unrelated person
or entity, (iii) a merger, reorganization or consolidation in which the holders
of the Company's outstanding voting power immediately prior to such transaction
do not own a majority of the outstanding voting power of the surviving or
resulting entity immediately upon completion of such transaction, (iv) the sale
of all of the capital stock of the Company to an unrelated person or entity, or
(v) any other transaction in which the owners of the Company's outstanding
voting power prior to such transaction do not own at least a majority of the
outstanding voting power of the relevant entity after the transaction (in each
case, regardless of the form thereof, a "Sale Event"), all Unvested Shares as of
the effective date of the Sale Event shall automatically become vested as of
such date, the Purchase Option shall be deemed terminated and of no further
effect and any other restrictions or conditions on the Shares pursuant to this
Agreement shall be deemed waived.
8. REGISTERED NATURE OF ISSUANCE OF THE SHARES. The parties hereto
covenant and agree that the Shares will be issued to the Employee in a
transaction registered pursuant to Section 5 of the Securities Act of 1933, as
amended.
9. SECTION 83(b) ELECTION. The Employee acknowledges that he has been
informed of the availability of making an election in accordance with 83(b) of
the Internal Revenue Code of 1986, as amended; that such election must be filed
with the Internal Revenue Service within 30 days of the transfer of shares to
the Employee; and that the Employee is solely responsible for
<PAGE>
making such election. The Company agrees to take all reasonable actions to
assist the Employee in determining an appropriate valuation of the Shares for
purposes of filing such election, including without limitation providing access
to any information useful in determining such valuation.
10. NO RIGHTS TO EMPLOYMENT. Nothing contained in this Agreement shall
be construed as giving the Employee any right to be retained, in any position,
as an employee of the Company.
11. SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and each other provision of this Agreement shall be
severable and enforceable to the extent permitted by law.
12. WAIVER. Any provision for the benefit of the Company contained in
this Agreement may be waived, either generally or in any particular instance, by
the Board of Directors of the Company.
13. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Company and the Employee and their respective heirs,
executors, administrators, legal representatives, successors and assigns,
subject to the restrictions on transfer set forth in Sections 4 and 5 of this
Agreement.
14. NOTICE. All notices required or permitted hereunder shall be in
writing and deemed effectively given upon personal delivery or five days after
deposit in the United States Post Office, by registered or certified mail,
postage fees prepaid, addressed to the other party hereto at the address shown
beneath his or its respective signature to this Agreement, or at such other
address or addresses as either party shall designate to the other by 10 days
advance written notice in accordance with this Section 14.
15. PRONOUNS. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
16. ENTIRE AGREEMENT. This Agreement and the Joint Escrow Instructions
attached hereto constitute the entire agreement between the parties, and
supersede all prior agreements and understandings, relating to the subject
matter of this Agreement.
17. AMENDMENT. This Agreement and the Joint Escrow Instructions
attached hereto may be amended or modified only by a written instrument executed
by both the Company and the Employee (and with respect to the Joint Escrow
Instructions only, with the consent of the Escrow Agent).
<PAGE>
18. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the internal laws of the State of Delaware without
regard to any applicable conflicts of laws.
19. EFFECTIVENESS. This Agreement shall be effective upon the closing
of the Merger, provided that this Agreement shall be of no force and effect if
the Agreement and Plan of Merger is terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BREAKAWAY SOLUTIONS, INC.
By: /s/ Gordon Brooks
-------------------------------
Name: Gordon Brooks
Title: President and Chief
Executive Officer
Address: 50 Rowes Wharf
Boston, MA 02110
Maureen Ellenberger
/s/ Maureen Ellenberger
---------------------------
Address:
<PAGE>
Exhibit 10.41
PROMISSORY NOTE
February 6, 2000
$1,000,000 Boston, Massachusetts
FOR VALUE RECEIVED, Gordon Brooks (the "MAKER"), promises to pay to Breakaway
Solutions, Inc. (the "Company"), or order, at the offices of the Company or at
such other place as the holder of this Note may designate, the principal sum of
$1,000,000, together with interest on the unpaid principal balance of this Note
from time to time outstanding at the rate of 6.21% per year until paid in full.
All principal and interest under this Note shall be due and payable in full on
the first to occur of (i) the date 30 days subsequent to the date the Maker
ceases to be employed by the Company and (ii) February 15, 2003.
Interest on this Note shall be computed on the basis of a year of 365 days for
the actual number of days elapsed. All payments by the Maker under this Note
shall be in immediately available funds.
This Note shall become immediately due and payable without notice or demand upon
the occurrence at any time of any of the following events of default
(individually, on "Event of Default" and collectively, "Events of Default");
PROVIDED, THAT, solely with respect to clause (b) below, no Event of Default
shall be deemed to have occurred until the date six months after the first
occurrence of the event(s) described in such clause (b):
(a) If the Maker is not paying his debts as they become due,
becomes insolvent, files a petition under any chapter of the
United States Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ.
(or any similar petition under any insolvency law of any
jurisdiction), has filed against him a petition under any
chapter of the United States Bankruptcy Code, 11 U.S.C.
Section 101 ET SEQ. (or any similar petition under any
insolvency law of any jurisdiction) not dismissed within
90 days, proposes any liquidation, composition or financial
reorganization with his creditors, makes an assignment or
trust mortgage for the benefit of creditors, or if a
receiver, trustee, custodian or similar agent is appointed
or takes possession with respect to any property or business
of the Maker;
(b) If the Maker dies or becomes incapacitated, or if a
conservator or guardian of the Maker is appointed, or if the
Maker suffers any other legal disability;
(c) Default in the payment or performance of this or any other
liability or obligation of the Maker to the holder,
including the payment when due of
<PAGE>
any principal, premium or interest under this Note; or
(d) If the Maker violates the non competition, non-solicitation
or confidentiality provisions of any employment or other
agreement between the Maker and the holder.
Upon the occurrence of an Event of Default, the holder shall have then, or at
any time thereafter, all of the rights and remedies afforded by the Uniform
Commercial Code as from time to time in effect in the Commonwealth of
Massachusetts or afforded by other applicable law.
Every amount overdue under this Note shall bear interest from and after the date
on which such amount first became overdue at an annual rate which is two (2)
percentage points above the rate per year specified in the first paragraph of
this Note. Such interest on overdue amounts under this Note shall be payable on
demand and shall accrue and be compounded monthly until the obligation of the
Maker with respect to the payment of such interest has been discharged (whether
before or after judgment).
In no event shall any interest charged, collected or reserved under this Note
exceed the maximum rate then permitted by applicable law and if any such payment
is paid by the Maker, then such excess sum shall be credited by the holder as a
payment of principal.
All payments by the Maker under this Note shall be made without set-off or
counterclaim and be free and clear and without any deduction or withholding for
any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law. The Maker shall pay and save the
holder harmless from all liabilities with respect to or resulting from any delay
or omission to make any such deduction or withholding required by law.
Whenever any amount is paid under this Note, all or part of the amount paid may
be applied to principal, premium or interest in such order and manner as shall
be determined by the holder in its discretion.
No reference in this Note to the Security Agreement shall impair the obligation
of the Maker, which is absolute and unconditional, to pay all amounts under this
Note strictly in accordance with the terms of this Note.
The Maker agrees to pay on demand all costs of collection, including reasonable
attorneys' fees, incurred by the holder in enforcing the obligations of the
Maker under this Note.
No delay or omission on the part of the holder in exercising any right under
this Note shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Maker and every indorser or guarantor of this Note regardless of the time, order
or place of signing waives presentment, demand, protest and notices of every
kind and assents to any extension or postponement of the time of payment or any
other indulgence, to any substitution, exchange or release of collateral, and to
the addition or release of any other party or person primarily or secondarily
liable.
<PAGE>
This Note may be prepaid in whole or in part at any time or from time to time.
Any such prepayment shall be without premium or penalty.
None of the terms or provisions of this Note may be excluded, modified or
amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Massachusetts and this Note is executed as an instrument under
seal.
ATTEST: MAKER:
Kevin Comerford /s/ Gordon Brooks
- ----------------------- -------------------------
Print Name: Gordon Brooks
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Name Jurisdiction
---- ------------
Benedict Acquisition Corp. Delaware
Breakaway Capital I LLC Delaware
Breakaway Capital Inc. Delaware
Breakaway Securities Corporation Massachusetts
Breakaway Solutions Ltd. England
Celtic Acquisition Corp. Pennsylvania
Data Cyr Corporation Delaware
Donald Acquisition Corp. Delaware
Web Yes, Inc. Massachusetts
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Breakaway Solutions, Inc.:
We consent to the use of our report on the consolidated financial statements
of Breakaway Solutions, Inc. as of December 31, 1998 and 1999 and for each of
the years in the three-year period ended December 31, 1999 dated February 7,
2000, except for paragraph five of note 6, which is as of March 7, 2000,
included herein and to the reference to our firm under the headings "Selected
Consolidated Financial Data" and "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 29, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Applica Corporation:
We consent to the use of our report on the financial statements of Applica
Corporation as of December 31, 1998 and from September 24, 1998 (inception)
through December 31, 1998 dated June 30, 1999 included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 29, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
WPL Laboratories, Inc.:
We consent to the use of our report on the financial statements of WPL
Laboratories, Inc. as of December 31, 1997 and 1998 and for each of the years
then ended dated June 30, 1999 included herein and to the reference to our firm
under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 29, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Web Yes, Inc.:
We consent to the use of our report on the consolidated financial statements of
Web Yes, Inc. and subsidiary as of December 31, 1997 and 1998 and for each of
the years then ended dated June 30, 1999 included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 29, 2000
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 9, 2000 related to Eggrock Partners, Inc.'s financial statements
as of and for the periods ended December 31, 1999, September 30, 1999 and
December 31, 1998 included in this registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,920
<SECURITIES> 28,227
<RECEIVABLES> 12,632
<ALLOWANCES> 357
<INVENTORY> 0
<CURRENT-ASSETS> 46,970
<PP&E> 9,591
<DEPRECIATION> 2,050
<TOTAL-ASSETS> 77,461
<CURRENT-LIABILITIES> 7,120
<BONDS> 2,001
0
0
<COMMON> 4
<OTHER-SE> 68,336
<TOTAL-LIABILITY-AND-EQUITY> 77,461
<SALES> 0
<TOTAL-REVENUES> 25,390
<CGS> 0
<TOTAL-COSTS> 36,255
<OTHER-EXPENSES> 696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (198)
<INCOME-PRETAX> (10,367)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,367)
<EPS-BASIC> (0.59)
<EPS-DILUTED> 0
</TABLE>
