<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File Number: 000-27269
BREAKAWAY SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3285165
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 960-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
There were 35,281,002 shares of the Registrant's common stock, $0.000125 par
value per share, outstanding as of March 31, 2000.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical facts
included in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, prospects,
plans and objectives of management are forward-looking statements. When used in
this Quarterly Report on Form 10-Q, the words "will", "believe", "anticipate",
"intend", "estimate", "expect", "project" and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. We cannot guarantee future results,
levels of activity, performance or achievements and you should not place undue
reliance on our forward-looking statements. Our forward-looking statements do
not reflect the potential impact of any future acquisitions, mergers,
dispositions, joint ventures or strategic alliances. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including the risks described in "Factors that May
Affect Future Results" and elsewhere in this Quarterly Report on Form 10-Q. We
do not assume any obligation to update any of the forward-looking statements we
make.
BREAKAWAY SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999
and March 31, 2000 ..................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and March 31, 2000 ................ 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and March 31, 2000 ......... 5
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1999 and March 31, 2000 ... 6
Notes to Consolidated Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 21
Item 2. Changes in Securities and Use of Proceeds ................ 21
Item 3. Defaults upon Senior Securities .......................... 21
Item 4. Submission of Matters to a Vote of Security Holders ...... 21
Item 5. Other Information ........................................ 22
Item 6. Exhibits and Reports on Form 8-K ......................... 22
SIGNATURE ......................................................... 23
</TABLE>
-i-
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Page 3 of 23
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE-RELATED AMOUNTS)
<TABLE>
<CAPTION>
December 31, MARCH 31,
1999 2000
------------- ---------
Assets (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 3,920 $ 6,667
Short-term investments .................................................... 26,222 12,071
Accounts receivable, net of allowance for doubtful accounts of
$357 in 1999 and $1,014 in 2000, respectively ............................. 7,559 6,531
Unbilled revenues on contracts ............................................ 725 1,832
Accounts receivable from related parties .................................. 3,991 4,762
Prepaid expenses and other current assets ................................. 2,548 3,899
-------- --------
Total current assets .................................................. 44,965 35,762
Investments ............................................................... 9,705 12,366
Restricted cash ........................................................... 2,005 3,301
Property and equipment, net ............................................... 7,541 14,727
Intangible assets and deferred costs, net of accumulated depreciation ..... 12,181 17,776
Loan to officer ........................................................... -- 1,010
Loans to employees ........................................................ 568 575
Other assets .............................................................. 496 1,058
-------- --------
Total assets ........................................................ $ 77,461 $ 86,575
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Due to stockholders - current portion ..................................... $ 625 $ 625
Capital lease obligations - current portion ............................... 533 522
Accounts payable .......................................................... 2,955 3,259
Accrued compensation and related benefits ................................. 1,477 3,023
Accrued expenses .......................................................... 1,306 2,780
Deferred revenue .......................................................... 224 678
-------- --------
Total current liabilities ............................................. 7,120 10,887
-------- --------
Due to stockholders - long-term portion ...................................... 1,625 1,842
Due to investors ............................................................. -- 1,322
Capital lease obligations - long-term portion ................................ 376 254
-------- --------
Total long-term liabilities ........................................... 2,001 3,418
-------- --------
Total liabilities ................................................... 9,121 14,305
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.000125 par value, 80,000,000 shares authorized;
37,889,084 shares and 38,391,402 shares issued in 1999 and 2000,
respectively, and 34,778,684 shares and 35,281,002 shares outstanding
in 1999 and 2000, respectively .......................................... 4 4
Additional paid-in capital ................................................ 78,868 85,987
Less: deferred compensation ............................................... (253) (235)
Less: treasury stock, at cost ............................................. -- --
Accumulated deficit ....................................................... (10,367) (13,590)
Accumulated other comprehensive income:
Change in unrealized gain on investments ................................ 88 104
-------- --------
Total stockholders' equity ............................................ 68,340 72,270
-------- --------
Total liabilities and stockholders' equity .......................... $ 77,461 $ 86,575
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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Page 4 of 23
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1999 2000
-------- --------
<S> <C> <C>
Revenue, including revenue from related parties of $6,054 in 2000 $ 3,111 $ 18,147
-------- --------
Operating expenses:
Project personnel costs ...................................... 1,553 8,158
Selling, general and administrative expenses ................. 1,832 12,606
Amortization of deferred costs ............................... -- 138
Amortization of goodwill and intangible assets ............... -- 839
-------- --------
Total operating expenses ................................... 3,385 21,741
-------- --------
Operating loss .................................................. (274) (3,594)
Other income (expense):
Other income ................................................. 20 --
Interest income .............................................. 32 459
Interest expense ............................................. (14) (88)
-------- --------
Total other income ......................................... 38 371
-------- --------
Net loss ................................................... $ (236) $ (3,223)
======== ========
Net loss per share:
Basic and diluted ............................................. $ (0.02) $ (0.09)
======== ========
Weighted average common shares outstanding:
Basic and diluted ............................................. 9,847 35,106
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 5 of 23
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
1999 2000
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (236) $ (3,223)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 105 1,920
Compensation expense for issuance of common stock options ............. -- 18
Change in operating assets and liabilities net of impact of
acquisition of business:
Accounts receivable ................................................. (499) 1,109
Unbilled revenue on contracts ....................................... (174) (1,107)
Increase in amounts due from related parties ........................ -- (771)
Prepaid expenses and other current assets ........................... (6) (1,295)
Accounts payable .................................................... (667) (105)
Accrued compensation and related benefits ........................... 366 1,546
Accrued expenses .................................................... 68 1,370
Deferred revenue .................................................... (97) 454
-------- --------
Net cash used in operating activities ............................ (1,140) (84)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments ....................................................... -- 10,210
Purchase of property and equipment ........................................ (72) (7,393)
Increase in cash surrender value of life insurance ........................ (62) (32)
Increase in due to investors .............................................. -- 1,322
-------- --------
Net cash (used in) provided by investing activities .............. (134) 4,107
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock ................................. 8,292 --
Increase in amounts due to stockholders ................................... -- 217
Proceeds from exercise of stock options ................................... 100 367
Proceeds from credit line ................................................. 576 --
Repurchase and retirement of common stock ................................. (4,469) --
Advances to employees ..................................................... -- (1,017)
Repayments of advances to employees ....................................... 6 --
(Increase) decrease in deposits ........................................... 17 (530)
Payments of note payable .................................................. -- (180)
Payments of capital lease obligation ...................................... (59) (133)
-------- --------
Net cash provided by (used in) financing activities .............. 4,463 (1,276)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 3,189 2,747
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD .............................. 17 3,920
======== ========
CASH AND CASH EQUIVALENTS, AT END OF PERIOD .................................... $ 3,206 $ 6,667
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .................................................... $ 14 $ 88
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisition of business ....... $ 1,418 $ 6,752
======== ========
ACQUISITION OF BUSINESS:
Assets acquired ........................................................... $ 1,904 $ 7,445
Liabilities assumed ....................................................... (486) (693)
Common stock and stock options issued ..................................... (1,418) (6,752)
======== ========
Net cash paid for acquisition of business ........................ $ -- $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 6 of 23
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1999 2000
------- --------
<S> <C> <C>
Net loss ................................................. $ (236) $(3,223)
Other comprehensive income:
Change in unrealized gain on investments .............. -- 16
------- -------
Comprehensive income ..................................... $ (236) $(3,207)
======= =======
Accumulated Other Comprehensive Income
The accumulated balance for other comprehensive income is:
Balance, December 31, 1998 ............................... $ --
Change in period ......................................... --
-------
Balance, March 31, 1999 .................................. $ --
=======
Balance, December 31, 1999 ............................... $ 88
Change in period ......................................... 16
-------
Balance, March 31, 2000 .................................. $ 104
=======
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 7 of 23
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Breakaway Solutions, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1999, and
the Company's 1999 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. The accompanying financial statements include all
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for the
interim periods presented. The results of operations for the three month period
ended March 31, 2000 are not necessarily indicative of the results to be
expected for any future period or the full fiscal year.
On March 6, 2000, the Board of Directors approved a two-for-one stock dividend
distributed on March 23, 2000 to shareholders of record as of March 7, 2000. All
share data shown in the accompanying consolidated financial statements have been
retroactively restated to reflect this stock split.
In December 1999, we formed Breakaway Capital I LLC ("Breakaway Capital"), a
wholly owned venture capital fund, for the primary purpose of making
investments in clients. We intend to make total investments of approximately
$5 million through Breakaway Capital. As of March 31, 2000, Breakaway Capital
had invested approximately $3.0 million. Breakaway Capital 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. As the Company was in a net loss position for the
first three months ended March 31, 1999 and March 31, 2000, common stock
equivalents of 2,476,122 and 969,872, respectively, 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.
NOTE 3 - ACQUISITIONS
Effective February 18, 2000, the Company acquired DataCyr Corporation
("DataCyr"), 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.
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Page 8 of 23
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
NOTE 3 - ACQUISITIONS - CONTINUED
Effective at 11:59 pm on March 31, 2000, we acquired Eggrock Partners, Inc.
("Eggrock"), a full service consulting and systems integration firm that
focused on delivering customer-centered business solutions to emerging
enterprises. The total consideration for this acquisition was 7,272,000
shares of Breakaway Common Stock. Of these shares, approximately 6,176,331
shares were issued to Eggrock stockholders and approximately 1,095,621 shares
were reserved for issuance to Eggrock option holders. At closing, Eggrock
options were converted into options to acquire Breakaway Common Stock on the
same basis as Eggrock stock was converted into the right to receive Breakaway
common stock. Of the shares of our common stock issued to former Eggrock
stockholders at closing, approximately 30.5% are subject to vesting over a
four-year period from the closing date. We are accounting for this
acquisition using the purchase method of accounting, resulting in
approximately $272 million of intangible assets and deferred costs that will
be amortized over a three to five-year period from the closing of the
acquisition.
The following unaudited pro forma consolidated results of operations gives
effect to the acquisition of Eggrock as if it occurred at the beginning of 2000.
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 2000 and is not necessarily
indicative of results that may be obtained in the future (in thousands except
per share amounts):
<TABLE>
<S> <C>
Revenue .................................. $ 23,993
Net loss ................................. $ (6,230)
Net loss per share ....................... $ (0.16)
Weighted average common shares outstanding 39,366
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
INTERNET CAPITAL GROUP
As of March 31, 2000, Internet Capital Group beneficially owned 38.3% of the
outstanding shares of Breakaway common stock.
Subsequent to March 31, 1999, we began providing services to Internet Capital
Group and some of Internet Capital Group's affiliated entities. During the first
three months ended March 31, 2000, our total revenues derived from engagements
with Internet Capital Group and its affiliates were approximately $5.7 million.
KATALYST LLC
During the fourth quarter of 1999, we made an investment in Katalyst LLC of
$3.0 million, and loaned Katalyst LLC $0.8 million which is reflected as a
note receivable. During the first three months ended March 31, 2000, our
total revenues derived from engagements with Katalyst LLC and its affiliates
were approximately $0.4 million.
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Page 9 of 23
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
NOTE 4 - RELATED PARTY TRANSACTIONS - CONTINUED
Loan to officer
In February 2000, the Company made an unsecured loan to Gordon Brooks, its
President and Chief Executive Officer and director, in the amount of $1.0
million. The loan is evidenced by a promissory note which is due, together
with interest at 6.21% per annum on the first to occur of the third
anniversary of the loan, thirty days after his ceasing to be employed by the
Company 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.
NOTE 5 - OPERATING SEGMENTS
Historically, we have operated in a single segment: strategy and internet
consulting services. With the acquisitions of Applica and Web Yes, Inc.
subsequent to March 31, 1999, we expanded our 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 first quarter ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
STRATEGY AND
APPLICATION AND INTERNET
WEB HOSTING CONSULTING
SERVICES SERVICE CORPORATE TOTAL
<S> <C> <C> <C> <C>
Revenue ............... $ 2,801 $ 15,346 $ 18,147
Depreciation expense... 523 420 943
Net loss .............. (808) (2,415) (3,223)
Total assets .......... 12,906 22,856 50,813 86,575
Capital additions ..... 4,149 1,236 435 5,820
</TABLE>
Substantially all of the Company's assets are located within the United States.
During the first three months ended March 31, 2000, two customers accounted for
approximately 28.8% of the Company's Strategy and Internet Consulting Services
revenue and four customers accounted for approximately 51.1% of the Company's
Application and Web Hosting Services revenue.
<PAGE>
Page 10 of 23
BREAKAWAY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 telecommunications bandwidth required, physical space requirements in
our leased hosting facilities and the technological complexity of supporting the
hosted application.
Our expense items include project personnel costs, sales and marketing expenses
and general and administrative expenses:
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Page 11 of 23
BREAKAWAY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
- 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues for the first quarter ended March 31, 2000 increased by
$15.0 million, or 483.3%, to $18.1 million from $3.1 million for the first
quarter ended March 31, 1999. The increase was due primarily to greater
market demand for Internet professional services and increased revenues
derived from our application hosting line of business, which generated $2.8
million, or 15.4%, of our total revenues for the first quarter ended March
31, 2000. There were no revenues derived from our application hosting service
line during the first three months of 1999. Additionally, we expanded
geographically, which increased our market presence and revenues.
PROJECT PERSONNEL COSTS. Project personnel costs for the first quarter ended
March 31, 2000 increased by $6.6 million, or 425.3%, to $8.2 million from
$1.6 million for the first quarter ended March 31, 1999. Project personnel
costs represented 45.0% of revenues for the first quarter ended March 31,
2000, as compared to 49.9% of revenues for the first quarter ended March 31,
1999. The increase in absolute dollars was due primarily to an increase in
the number of employees hired to perform the client services delivered.
Project personnel costs decreased as a percentage of revenues for the first
quarter ended March 31, 2000 due primarily to an increase in the average
hourly billable rate of our professionals over the comparable period in 1999
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 first quarter ended March 31, 2000 increased by $10.8
million, or 588.1%, to $12.6 million from $1.8 million for the first quarter
ended March 31, 1999. As a percentage of revenues, selling, general and
administrative expenses increased from 58.9% for the first quarter ended 1999
to 69.5% for the first quarter ended 2000. The increase in 2000 was due
primarily to increases in salaries and related expenses to support increased
administrative employees, outside professional fees for recruiting in
connection with the recruiting and hiring of billable consultants and the
investment in our application hosting service line infrastructure. Selling,
general and administrative expenses incurred relating to our application
hosting service line were $1.6 million for the first quarter ended March 31,
2000. Selling, general and administrative expenses incurred relating to bad
debt expense were $0.8 million for the first quarter ended March 31, 2000 as
compared to $0.01 million for the first quarter ended March 31, 1999. This
expense increased primarily as a result of increasing revenues and the
increasing risk of collections among certain of our clients.
NON-CASH CHARGES. Amortization of deferred costs, goodwill and intangible
assets increased $1.0 million or 100% for the first quarter ended March 31,
2000, representing 5.4% of revenues. The increase is attributable to
amortization related to intangible assets recorded upon the acquisitions of
Applica Corporation, WPL Laboratories, Inc., Web Yes, Inc. and DataCyr
Corporation. We amortize deferred costs and intangible assets over their
estimated useful lives, ranging from three to five years. Amortization of
deferred costs were $0.1 million in connection with the DataCyr acquisition.
INTEREST INCOME. Interest income for the first quarter ended March 31, 2000
increased to $0.5 million from $0.03 million for the first quarter ended
March 31, 1999. The increase in 2000 was due primarily to interest income
earned on the invested portion of proceeds from the October 1999 initial
public offering of Breakaway common stock.
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Page 12 of 23
BREAKAWAY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
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. In October 1999, we
issued 6,900,000 shares of our Common Stock in an initial public offering.
Our net proceeds were approximately $42.0 million.
Our cash and cash equivalents, short-term investments and long-term investments
balance was $31.1 million as of March 31, 2000 and $41.9 million at December 31,
1999. Our working capital $26.9 million as of March 31, 2000 and $39.9 million
at December 31, 1999.
Cash used in operating activities was $0.1 million for the first three months
of 2000 and $1.1 million for the first three months of 1999. Cash used in
operating activities during the first three months of 2000 primarily resulted
from a net loss, an increase in prepaid expenses and other current assets and
an increase in net accounts receivable. These increases in cash used were
partially offset by cash provided by an increase in accounts payable, accrued
compensation and related benefits, accrued expenses and deferred revenue.
Cash provided by investing activities was $4.1 million for the first three
months of 2000 and $0.1 million for the first three months of 1999. The
increase in cash used investing activities for the first three months of 2000
was primarily due to the sale of investments to be used for operating needs
and to fund our application hosting service line growth.
We used cash for capital expenditures of $7.4 million for the first three months
of 2000 and $0.1 million for the first three months of 1999. 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.
Cash used in financing activities was $1.3 million for the first three months
of 2000 and cash provided by financing activities was $4.5 million for the
first three months of 1999. Cash used in financing activities for the first
three months of 2000 primarily resulted from an increase in advances to
employees, deposits, payments of notes payable and capital lease obligations.
These increases were partially offset by cash provided by proceeds from
exercise in stock options and an increase in amounts due to stockholders.
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%.
Our accounts receivable relative to our revenues has decreased from 115.7% for
the fourth quarter of 1999 to 72.3% for the first quarter of 2000. This decrease
was due primarily to improvements in our billing and collection process.
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 the balance of this fiscal year. 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.
<PAGE>
Page 13 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We caution you that the following important factors, among others, in the future
could cause our actual results to differ materially from those expressed in
forward-looking statements made by or on behalf of Breakaway in filings with the
Securities and Exchange Commission, press releases, communications with
investors, and oral statements.
Any or all of our forward-looking statements in this report, and in any other
public statements we make may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in the discussion below will be important
in determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially. We undertake no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however,
to consult any further disclosures we make in our reports filed with the
Securities and Exchange Commission.
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 $0.6 million and $10.4 million for the fiscal years ended December 31, 1998
and 1999, respectively and a net loss of $3.2 million for the first three
months ended March 31, 2000. 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, or raise capital.
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:
o the amount and timing of demand by our clients for application hosting
and e-business solution services;
<PAGE>
Page 14 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
o goodwill amortization charges attributable to the acquisition of
Eggrock;
o 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, may pay us only a portion
of what we are owed, or may delay paying us for an extended period;
o our ability to obtain new and follow-on client engagements;
o the number, size and scope of our projects;
o cancellations or reductions in the scope of major consulting and
systems integration projects;
o our ability to enter into multi-year contracts with application hosting
clients;
o cancellations of month-to-month application hosting contracts;
o the length of the sales cycle associated with our service offerings;
o the introduction of new services by us or our competitors;
o changes in our pricing policies or those of our competitors;
o 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;
o our ability to attract, train and retain skilled personnel in all
areas of our business;
o our ability in a consistent and accurate manner to manage costs,
including personnel costs and support services costs; and
o 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.
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:
o improve our management, financial and information systems and controls;
<PAGE>
Page 15 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
o expand, train and manage our employee base effectively; and
o 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
companies related to or owned in part by Internet Capital Group 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 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 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. 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 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.
<PAGE>
Page 16 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
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:
o support additional capital expenditures;
o take advantage of acquisition or expansion opportunities;
o develop new services; or
o 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
From January 1, 1999 to date, we have acquired five companies. We anticipate
undertaking additional acquisitions in the future. Acquisitions involve a
number of risks, including:
o diversion of management attention;
o amortization of substantial goodwill, adversely affecting our reported
results of operations;
o inability to retain the management, key personnel and other employees
of the acquired business;
o inability to establish effective and uniform standards, controls,
procedures and policies;
o inability to retain the acquired company's customers; and
o 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 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 and anticipate opening other offices
outside the United States. 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:
o costs and difficulties in staffing and managing international
operations;
o strains on our financial and other systems to properly administer VAT
and other taxes, and different cost structures;
o unexpected changes in regulatory requirements;
o increased tariffs and other trade barriers;
o costs and delays of localizing products and offerings for local market
and the costs and difficulties in complying with local business
customs;
o difficulties in enforcing contractual and intellectual property rights;
o heightened risks of political and economic instability and the
possibility of nationalization or expropriation of industries or
properties;
o potentially adverse tax consequences including restrictions on
repatriating earnings and the threat of "double taxation;"
o the burden of complying with a wide variety of foreign laws and
regulations, some of which may conflict with U.S. laws;
o currency issues, including fluctuations in current exchange rates and
the adoption of the Euro by many countries of the European Union by
2003; and
o 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.
<PAGE>
Page 17 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
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:
o delayed or lost revenues due to adverse client reaction;
o requirements to provide additional services to a client at no charge;
o refunds of monthly application hosting fees for failure to meet service
level obligations;
o negative publicity about Breakaway and our services, which could
adversely affect our ability to attract or retain clients; or
o 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.
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.
<PAGE>
Page 18 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
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 and 2000. 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.
<PAGE>
Page 19 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
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.
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:
o actual or perceived lack of security of information and the actual
or threatened threat of computer "viruses" or other malicious code;
<PAGE>
Page 20 of 23
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS - CONTINUED
o lack of access and ease of use;
o congestion of Internet traffic;
o inconsistent quality of service;
o increases in access costs to the Internet;
o excessive governmental regulation or the imposition of
taxation on Internet transactions;
o uncertainty regarding intellectual property ownership;
o reluctance to adopt new business methods; and
o costs associated with the obsolescence of existing infrastructure.
<PAGE>
Page 21 of 23
BREAKAWAY SOLUTIONS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
On February 18, 1999, Breakaway issued and sold an aggregate of 110,000 shares
of its common stock to the former stockholders of DataCyr Corporation as
consideration for the merger of DataCyr into a wholly owned subsidiary of
Breakaway pursuant to an Agreement and Plan of Merger.
We are furnishing the following information with respect to the use of proceeds
from our initial public offering of common stock in October 1999:
(1) The effective date and Commission file number of the
registration statement for the offering were October 5, 1999
and 333-83343, respectively.
(2) The offering commenced on October 6, 1999.
(3) Not applicable.
(4)(i) The offering terminated on October 6, 1999 after all of the
shares were sold.
(4)(ii) The managing underwriters for the offering were Morgan Stanley &
Co. Incorporated, Lehman Brothers Inc. and Deutsche Bank
Securities, Inc.
(4)(iii) We registered shares of our common stock in the offering.
(4)(iv) All of the 6,900,000 shares of common stock (as adjusted to reflect
the above described stock split) registered for the account of
Breakaway
were sold in the offering. The aggregate offering price of the
shares registered and sold for the account of Breakaway in the
offering was $48,300,000.
(4)(v) From October 5, 1999 through March 31, 2000, the actual expenses
incurred are as follows:
<TABLE>
<S> <C>
Underwriting discount ............ $3,381,000
SEC registration fee ............. 11,510
NASD filing fee .................. 4,640
Nasdaq National Market listing fee 104,328
Blue Sky fees and expenses ....... 10,000
Transfer Agent and Registrar fees 15,000
Accounting fees and expenses ..... 563,199
Legal fees and expenses .......... 679,663
Printing and mailing expenses .... 366,275
Roadshow and branding expenses ... 1,198,071
----------
Total ............................ $6,333,686*
=========
</TABLE>
<PAGE>
Page 22 of 23
BREAKAWAY SOLUTIONS, INC.
Item 2. Changes in Securities and Use of Proceeds - continued
Payments of expenses were to persons other than directors, officers,
general partners of Breakaway or their associates, persons owning 10%
or more of the equity securities of Breakaway or affiliates of
Breakaway.
* $2,952,686 of the above expenses (excluding the underwriting
discount) incurred were recorded as offering expenses netted against
the proceeds.
(4)(vi) The net offering proceeds to Breakaway after expenses were
approximately $41,966,314.
(4)(vii) From October 5, 1999 through March 31, 2000, approximately
$7,000,000 of the offering proceeds were used to develop the
sales and marketing organization, approximately $8,000,000 of
the offering proceeds were used for the establishment and
development of regional offices and solutions' labs and
approximately $2,200,000 to fund Breakaway Capital. The balance
of the offering proceeds ($27,966,314) were invested in cash
equivalents and other marketable securities. All payments of
the offering proceeds were to persons other than directors,
officers, general partners of Breakaway or their associates,
persons owning 10% or more of the equity securities of
Breakaway or affiliates of Breakaway.
(4)(viii) Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of fiscal 2000, there were no matters submitted to a
vote of security holders.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
We did not file a current report on Form 8-K during the three month period ended
March 31, 2000.
<PAGE>
Page 23 of 23
BREAKAWAY SOLUTIONS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BREAKAWAY SOLUTIONS, INC.
Date: May 15, 2000 /S/ KEVIN COMERFORD
------------------------------
KEVIN COMERFORD
Vice President, Administration,
Chief Financial Officer,
Treasurer and Secretary
(Principal financial officer and
chief accounting officer)
<PAGE>
BREAKAWAY SOLUTIONS, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,667
<SECURITIES> 12,071
<RECEIVABLES> 7,545
<ALLOWANCES> 1,014
<INVENTORY> 0
<CURRENT-ASSETS> 35,762
<PP&E> 17,720
<DEPRECIATION> (2,993)
<TOTAL-ASSETS> 86,575
<CURRENT-LIABILITIES> 10,887
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 85,987
<TOTAL-LIABILITY-AND-EQUITY> 86,575
<SALES> 18,147
<TOTAL-REVENUES> 18,147
<CGS> 8,158
<TOTAL-COSTS> 21,741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> (3,223)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,223)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
