<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 JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO_________
Commission File Number: 000-27269
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 45,017,253 shares of the Registrant's common stock, $0.000125 par
value per share, outstanding on June 30, 2000.
<PAGE>
BREAKAWAY SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999
and June 30, 2000 3
Consolidated Statements of Operations for the three months and six
months ended June 30, 1999 and June 30, 2000 4
Consolidated Statements of Cash Flows for the six months ended June
30, 1999 and June 30, 2000 5
Consolidated Statements of Comprehensive Income for the three months
and six months ended June 30, 1999 and June 30, 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
<PAGE>
Form 10Q Page 3 of 24
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE-RELATED AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------------ -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,920 $12,424
Short-term investments 28,227 42,081
Accounts receivable, net of allowance for doubtful accounts of $357 in
1999 and $2,171 in 2000, respectively 7,559 11,418
Accounts receivable from related parties 3,991 11,127
Unbilled revenue on contracts 725 1,948
Prepaid expenses and other current assets 2,548 5,176
------------------ -------------------
Total current assets 46,970 84,174
Investments 9,705 6,463
Restricted cash -- 2,801
Property and equipment, net 7,541 26,892
Intangible assets, net of accumulated amortization 12,181 228,285
Deferred costs, net of accumulated amortization -- 75,812
Loan to officer -- 1,026
Loans to employees 568 583
Other assets 496 1,290
------------------ -------------------
Total assets $77,461 $427,326
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to stockholders - current portion $625 $625
Line of credit -- 2,019
Capital lease obligations - current portion 533 1,089
Accounts payable 2,955 5,292
Accrued compensation and related benefits 1,477 6,757
Accrued expenses 1,306 3,032
Deferred revenue 224 187
------------------ -------------------
Total current liabilities 7,120 19,001
------------------ -------------------
Due to stockholders - long-term portion 1,625 1,063
Due to investors -- 1,027
Capital lease obligations - long-term portion 376 1,921
Deferred tax liabilities -- 27,000
------------------ -------------------
Total long-term liabilities 2,001 31,011
------------------ -------------------
Total liabilities 9,121 50,012
------------------ -------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.000125 par value, 80,000,000 shares authorized; 37,889,084
shares and 48,127,653 issued in 1999 and 2000, respectively, and
34,778,684 shares and 45,017,253 shares outstanding in 1999 and
2000, respectively 4 6
Additional paid-in capital 78,868 407,748
Less: deferred compensation (253) (217)
Less: treasury stock, at cost -- --
Accumulated deficit (10,367) (30,492)
Accumulated other comprehensive income:
Change in unrealized gain on investments 88 269
------------------ -------------------
Total stockholders' equity 68,340 377,314
------------------ -------------------
Total liabilities and stockholders' equity $77,461 $427,326
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10Q Page 4 of 24
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
1999 2000 1999 2000
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue, including revenue from related parties $ 4,452 $ 35,179 $ 7,563 $ 53,326
of $14,956 and $21,289 for the three months
and six months ended June 30, 2000,
respectively
Operating expenses:
Project personnel costs 2,064 15,886 3,617 24,044
Selling, general and administrative 4,338 21,027 6,170 33,634
Amortization of deferred costs 320 7,896 320 8,034
Amortization of goodwill and intangible
assets -- 10,596 -- 11,434
-------------- -------------- ------------- ---------------
Total operating expenses 6,722 55,405 10,107 77,146
-------------- -------------- ------------ --------------
Operating loss (2,270) (20,226) (2,544) (23,820)
Other income (expense):
Other income -- -- 19 --
Interest income 28 445 60 904
Interest expense (41) (137) (54) (225)
Gain on disposal of equipment -- 16 -- 16
-------------- -------------- -------------- ---------------
Total other income (expense) (13) 324 25 695
-------------- -------------- -------------- ---------------
Loss before benefit for income taxes (2,283) (19,902) (2,519) (23,125)
Deferred income tax benefit -- 3,000 -- 3,000
-------------- -------------- -------------- ---------------
Net loss $(2,283) $(16,902) $(2,519) $(20,125)
============== ============== =============== ===============
Net loss per share:
Basic and diluted $(0.21) $(0.39) $(0.27) $(0.52)
============== ============== ============== ===============
Weighted average shares outstanding:
Basic and diluted 10,848 42,799 9,174 38,428
============== ============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10Q Page 5 of 24
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 2000
-------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,519) $(20,125)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 530 22,517
Deferred tax benefit -- (3,000)
Compensation expense for issuance of common stock options 93 36
Change in operating assets and liabilities:
Accounts receivable (434) (487)
Accounts receivable from related parties -- (7,136)
Unbilled revenue on contracts (911) (1,223)
Prepaid expenses and other current assets (275) (2,543)
Accounts payable 158 1,824
Accrued compensation and related benefits 495 5,280
Accrued expenses 376 (2,924)
Deferred revenue (118) (37)
-------------- ---------------
Net cash used in operating activities (2,605) (7,818)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of businesses -- 3,837
Cash paid for acquired businesses net of cash acquired (2,103) --
Purchases of investments -- (13,231)
Purchase of property and equipment (1,397) (16,466)
Increase in due to investors -- 1,027
-------------- ---------------
Net cash used in investing activities (3,500) (24,833)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 8,292 --
Proceeds from issuance of common stock -- 39,000
Decrease in due to stockholders -- (562)
Proceeds from exercise of stock options 508 2,333
Borrowings (repayments) on credit line (281) 2,000
Issuance of note payable to stockholder 4,000 --
Repurchase and retirement of common stock (4,469) --
Loans to officer and employees (4) (1,041)
Payments of note payable -- (180)
Payments of capital lease obligation (150) (395)
-------------- ---------------
Net cash provided by financing activities 7,896 41,155
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,791 8,504
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 17 3,920
============== ===============
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $1,808 $ 12,424
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $36 $ 204
============== ===============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and stock options in connection with
acquisition of businesses $9,956 $287,549
============== ===============
Capital lease obligations 100 2,495
============== ===============
ACQUISITION OF BUSINESSES:
Cash acquired $ -- $ 3,837
Other assets acquired 16,358 319,075
Liabilities assumed (4,299) (35,363)
Common stock and stock options issued (9,956) (287,549)
============== ===============
Net cash paid in acquisition of businesses $ (2,103) $ --
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10Q Page 6 of 24
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
1999 2000 1999 2000
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(2,283) $(16,902) $(2,519) $(20,125)
Other comprehensive income:
Change in unrealized gain on investments -- 165 -- 181
------------- -------------- ------------ ------------
Comprehensive income $(2,283) $ (16,737) $(2,519) $(19,944)
============= ============== ============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of period -- $ 104 -- $ 88
Change in period -- 165 -- 181
------------- -------------- ------------ ------------
Balance, end of period -- $ 269 -- $ 269
============= ============== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10Q Page 7 of 24
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six
month periods ended June 30, 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, the Company formed Breakaway Capital I LLC, a wholly owned
venture capital fund, for the primary purpose of making minority interest
investments in clients. The Company intends to make total investments of
approximately $5.0 million through Breakaway Capital. As of June 30, 2000,
Breakaway Capital had invested approximately $3.6 million. Breakaway Capital
continues to evaluate other investment opportunities. The Company intends to
distribute approximately 50% of the profits earned by Breakaway Capital to
certain employees who are not executive officers of the Company. However,
some executive officers have invested personal funds in Breakaway Capital.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET INCOME (LOSS) PER SHARE
The provisions of Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128") require the presentation of basic and diluted net income
(loss) per share for all periods presented. The Company was in a net loss
position for the three months and six months ended June 30, 1999 and June 30,
2000. Therefore, common stock equivalents of 14,701,437 and 13,112,648 for the
three months and six months ended June 30, 1999, respectively, and 17,587,647
and 17,069,591 for the three months and six months ended June 30, 2000,
respectively, were excluded from the diluted loss per share calculation as they
would have been antidilutive. As a result, diluted loss per share is the same as
basic loss per share, and has not been presented separately.
NOTE 3 - NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). This bulletin,
as amended, established guidelines for revenue recognition and originally was
effective for periods beginning after March 15, 2000. In June 2000, the SEC
announced that the effective date of SAB 101 was being delayed until no later
than the quarter ending December 31, 2000. The Company does not expect that the
adoption of the guidance required by SAB 101 will have a material impact on its
financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation",
an interpretation of APB Opinion No. 25, "Accounting for Stock Issued to
<PAGE>
Form 10Q Page 8 of 24
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000
Employees". This interpretation clarified the application of Opinion 25, among
other issues: (a) the definition of an employee for purposes of applying Opinion
25, (b) the criteria for determining whether a stock ownership plan qualifies as
noncompensatory, (c) the accounting implications of various modifications to the
terms of a previously fixed stock option or award, and (d) the accounting for
the exchange of stock compensation awards in a business combination. The
Interpretation is effective July 1, 2000 and the effects of applying the
Interpretation are recognized on a prospective basis. The Company does not
expect that the adoption will have a material impact on its financial condition
or results of operations.
NOTE 4 - 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.
Effective April 1, 2000, the Company acquired Eggrock Partners, Inc., a full
service consulting and systems integration firm that focuses 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, 6,176,331 shares were issued to Eggrock stockholders
and 1,095,669 shares were reserved for issuance to Eggrock option holders.
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. The Company accounted for this acquisition using the
purchase method of accounting, which resulted in approximately $305 million
of intangible assets and deferred costs, and $30 million of deferred tax
liability. These will be amortized over a three to five-year period.
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 .............................................. $ 59,172
Net loss ............................................. $(23,132)
Net loss per share ................................... $ (0.60)
Weighted average common shares outstanding ........... 38,428
</TABLE>
NOTE 5 - PRIVATE PLACEMENT OF COMMON STOCK
In May 2000, the Company issued and sold 1,500,000 shares of its common stock
through a private placement to five mutual funds managed by either Putnam
Investment Management, Inc. or The Putnam Advisory Company, Inc. The gross
proceeds of the offering were $39.0 million. These proceeds will be used for
general corporate purposes.
NOTE 6 - RELATED PARTY TRANSACTIONS
INTERNET CAPITAL GROUP
As of June 30, 2000, Internet Capital Group beneficially owned approximately
33.5% of the outstanding shares of Breakaway common stock. Subsequent to June
30, 1999, the Company began providing services to Internet Capital Group and
some of Internet Capital Group's affiliated entities. During the three months
and six months ended June 30, 2000, total revenues derived from engagements with
Internet Capital Group and its affiliates were approximately $14.8 million and
$20.6 million, respectively. Accounts receivable from Internet Capital Group
and its affiliates totaled $10.9 million at June 30, 2000.
KATALYST LLC
During the fourth quarter of 1999, the Company made an investment in Katalyst
LLC of $3.0 million, and loaned Katalyst LLC $0.8 million, which has been
recorded as a note receivable. During the three months and six months ended June
30, 2000, total revenues derived from engagements with Katalyst LLC and its
affiliates were approximately $0.1 and $0.4 million, respectively. Accounts
receivable from Katalyst LLC and its affiliates totalled $0.2 million at June
30, 2000.
<PAGE>
Form 10Q Page 9 of 24
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000
MEDIABRIDGE TECHNOLOGIES, INC
The Chief Executive Officer of the Company, Gordon Brooks, currently is a
member of the Board of Directors of MediaBridge Technologies, Inc.
("MediaBridge"), a customer of the Company. The Chairman of the Board of
Directors of the Company, Christopher H. Greendale, also serves as the
Chairman of the Board of Directors of MediaBridge. In addition, in May 2000,
Breakaway Capital purchased approximately $250,000 of MediaBridge common
stock, which represents less than 1% of the common stock outstanding. During
the three months and six months ended June 30, 2000, total revenues derived
from engagements with MediaBridge and were approximately $0.1 million and
$0.3 million, respectively. Accounts receivable from MediaBridge totaled
$40,000 at June 30, 2000.
NOTE 7 - OPERATING SEGMENTS
Historically, the Company has operated in a single segment: Strategy and
Internet Consulting Services. With the acquisitions of Applica and Web Yes,
Inc. in 1999, the Company expanded its operations to include a second
segment: Application and Web Hosting Services, whose operations were
immaterial for the three months and six months ended June 30, 1999.
The following tables sets forth certain components of the Application and Web
Hosting Services and the Strategy and Internet Consulting Services segments as
of and for the three months and six months ended June 30, 2000 (in thousands):
THREE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
STRATEGY AND
APPLICATION AND INTERNET
WEB HOSTING CONSULTING
SERVICES SERVICE TOTAL
-------- ------- -----
<S> <C> <C> <C>
Revenue $ 5,158 $ 30,021 $ 35,179
Depreciation expense 977 985 1,962
Net loss (1,389) (15,513) (16,902)
Capital additions 5,714 7,427 13,141
SIX MONTHS ENDED JUNE 30, 2000
STRATEGY AND
APPLICATION AND INTERNET
WEB HOSTING CONSULTING
SERVICES SERVICE TOTAL
-------- ------- -----
Revenue $ 7,959 $ 45,367 $ 53,326
Depreciation expense 1,499 1,405 2,904
Net loss (2,450) (17,675) (20,125)
Capital additions 9,863 9,098 18,961
</TABLE>
Substantially all of the Company's assets are located within the United
States. Of the Company's total assets, $15.4 million are specifically related
to the Application and Web Hosting business, $91.9 million are specifically
related to the Strategy and Internet Consulting business, and the remaining
$320.0 million are general corporate assets.
During the three months ended June 30, 1999, no customer accounted for more
than 10% of the Company's Strategy and Internet Consulting Services revenue.
During the six months ended June 30, 1999, two customers accounted for
approximately 25% and 11% of the Company's Strategy and Internet Consulting
Services revenue.
<PAGE>
Form 10Q Page 10 of 24
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2000
During the three months ended June 30, 2000, two customers accounted for
approximately 14% and 12% of the Company's Application and Web Hosting Services
revenue and one customer accounted for approximately 23% of the Company's
Strategy and Internet Consulting Services revenue. During the six months ended
June 30, 2000, two customers accounted for approximately 11% and 12% of the
Company's Application and Web Hosting Services revenue and one customer
accounted for approximately 20% of the Company's Strategy and Internet
Consulting Services revenue.
NOTE 8 - SUBSEQUENT EVENTS
In July 2000, the Company acquired all of the issued and outstanding share
capital of Zartis.com Limited ("Zartis"), a Dublin, Ireland-based e-business
consultancy. Zartis is a full service consulting and systems integration firm
that focuses on delivering customer-centered e-business solutions to emerging
enterprises. The Company believes that this acquisition will allow us to
expand our business presence in Europe. As consideration for the share
purchase, the Company issued 430,456 shares of our common stock, assumed
64,440 outstanding options and paid the former Zartis shareholders $2 million
in cash. Of the shares of the common stock issued to the former Zartis
shareholders, approximately 75% will be subject to vesting over a four year
period.
In August 2000, the Company acquired all of the issued and outstanding share
capital of Norsec, Inc. ("Norsec"), a Massachusetts based e-business security
consultancy. The Company believes that this acquisition will allow it to
enhance and expand its service offerings in the Application and Web Hosting
business. As consideration for the share purchase, the Company issued 273,019
shares of our common stock to the former Norsec shareholders and assumed
30,299 outstanding options. Of the shares of the common stock issued to the
former Norsec shareholders, approximately 75% will be subject to vesting over
a four year period.
<PAGE>
Form 10Q Page 11 of 24
BREAKAWAY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
REVENUES. Revenues for the three months ended June 30, 2000 increased by
$30.7 million, or 690.2%, to $35.2 million from $4.5 million for the second
quarter ended June 30, 1999. The increase was due to our acquisition of
Eggrock Partners, Inc. ("Eggrock Partners") as well as greater market demand
for Internet professional services, which generated $30.0 million, or 85.3%,
of our total revenues for the three months ended June 30, 2000, as compared
to $4.4 million, or 97.9%, of total revenues for the three months ended June
30, 1999. The increase was also due to increased demand for our application
hosting services, which generated $5.2 million, or 14.7%, of our total
revenues for the three months ended June 30, 2000, as compared to $0.1
million, or 2.2%, of total revenues for the three months ended June 30, 1999.
Revenues for the six months ended June 30, 2000 increased by $45.8 million,
or 605.1%, to $53.3 million from $7.6 million for the first six months ended
June 30, 1999. The increase was due to our acquisition of Eggrock Partners,
as well as greater market demand for Internet professional services, which
generated $45.4 million, or 85.1%, of our total revenues for the six months
ended June 30, 2000, as compared to $7.5 million, or 98.8%, of total revenues
for the six months ended June 30, 1999. The increase was also due to
increased demand for our application hosting services, which generated $8.0
million, or 14.9%, of our total revenues for the first six months ended June
30, 2000, as compared to $0.1 million, or 1.3%, of total revenues for the six
months ended June 30, 1999.
Additionally, we expanded our market presence geographically through the
acquisition of Eggrock, and the establishment of our first European office in
London, England.
OPERATING EXPENSES
PROJECT PERSONNEL COSTS. Project personnel costs for the three months ended June
30, 2000 increased by $13.8 million, or 669.7%, to $15.9 million from $2.1
million for the three months ended June 30, 1999. Project personnel costs
represented 45.2% of revenues for the three months ended June 30, 2000, as
compared to 46.4% of revenues for the three months ended June 30, 1999. The
increase in absolute dollars during the second quarter of 2000, as compared to
the second quarter of 1999, was due primarily to an increase in the number of
employees hired to deliver client services. Project personnel costs decreased as
a percentage of revenues for the second quarter ended June 30, 2000 due
primarily to an increase in the average hourly billable rate of our
professionals over the comparable period in 1999.
Project personnel costs for the six months ended June 30, 2000 increased by
$20.4 million, or 564.8%, to $24.0 million from $3.6 million for the six months
ended June 30, 1999. Project personnel costs represented 45.1% of revenues for
the six months ended June 30, 2000, as compared to 47.9% of revenues for the six
months ended June 30, 1999. The increase in absolute dollars during the first
six months of 2000, as compared to the first six months of 1999, was due
primarily to an increase in the number of employees hired to deliver client
services. Project personnel costs decreased as a percentage of revenues for the
six months ended June 30, 2000 due primarily to an increase in the average
hourly billable rate of our professionals over the comparable period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended June 30, 2000 increased $16.7 million, or
384.8%, to $21.0 million from $4.3 million for the three months ended June
30, 1999. As a percentage of revenues, selling, general and administrative
expenses decreased from 97.5% for the three months ended June 30, 1999 to
59.8% for the three months ended June 30, 2000. The decrease in 2000 was
primarily due to economies of scale associated with growth in the Company's
operations. Selling, general and
<PAGE>
Form 10Q Page 12 of 24
administrative expenses incurred relating to our application hosting service
line were $3.9 million for the three months ended June 30, 2000 compared to
$0.1 million for the three months ended June 30, 1999. Selling, general and
administrative expenses incurred relating to bad debt expense were $1.3
million for the three months ended June 30, 2000 as compared to $0.2 million
for the three months ended June 30, 1999. This increase was primarily due to
increased revenues.
Selling, general and administrative expenses for the six months ended June
30, 2000 increased $27.5 million, or 445.2%, to $33.6 million from $6.2
million for the six months ended June 30, 1999. As a percentage of revenues,
selling, general and administrative expenses decreased from 81.6% for the six
months ended June 30, 1999 to 63.1% for the six months ended June 30, 2000.
The decrease in 2000 was primarily due to economies of scale associated with
growth in the Company's operations. Selling, general and administrative
expenses incurred relating to our application hosting service line were $6.1
million for the six months ended June 30, 2000 and $0.1 million for the six
months ended June 30, 1999. Selling, general and administrative expenses
incurred relating to bad debt expense were $2.1 million for the six months
ended June 30, 2000 as compared to $0.2 million for the six months ended June
30, 1999. This increase was primarily due to increased revenues.
NON-CASH CHARGES. Amortization of deferred costs, goodwill and intangible
assets for the three months ended June 30, 2000 increased $18.2 million to
$18.5 million from $0.3 million for the three months ended June 30, 1999.
This increase was attributable to amortization related to intangible assets
recorded upon the acquisitions of WPL Laboratories, Inc., Web Yes, Inc.,
DataCyr and Eggrock Partners. We amortize deferred costs and intangible
assets over their estimated useful lives, ranging from three to five years.
The expenses for the three months ended June 30, 2000 consisted of
amortization of goodwill of $10.6 million and amortization of deferred costs
of $7.9 million. When combined, these expenses represented 52.6% of revenues
for the three months ended June 30, 2000.
Amortization of deferred costs, goodwill and intangible assets for the six
months ended June 30, 2000 increased $19.1 million to $19.5 million for the
first six months ended June 30, 2000 from $0.3 million for the six months
ended June 30, 1999. This increase was attributable to amortization related
to intangible assets recorded upon the acquisitions of Applica Corporation,
WPL Laboratories, Inc., Web Yes, Inc., DataCyr and Eggrock Partners. The
expenses for the six months ended June 30, 2000 consisted of amortization of
goodwill of $11.4 million and amortization of deferred costs of $8.0 million.
When combined, these expenses represented 36.5% of revenues for the six
months ended June 30, 2000.
OTHER INCOME (EXPENSE). Other income (expense) for the three months ended
June 30, 2000 increased to $0.3 million from $(13,000) for the three months
ended June 30, 1999. Other income (expense) for the six months ended June 30,
2000 increased to $0.7 million from $25,000 for the six months ended June 30,
1999. These increases were mainly attributable to interest income earned on
the proceeds from the Company's initial public offering of Breakaway common
stock in October 1999, and interest income earned on the proceeds from the
Company's private placement of 1,500,000 shares of common stock in May 1999.
DEFERRED TAX BENEFIT. During the three months ended June 30, 2000, the
Company recognized a deferred tax benefit of $3.0 million. This represented
the tax benefit associated with the amortization of deferred costs related to
the acquisition of Eggrock Partners.
<PAGE>
Form 10Q Page 13 of 24
BREAKAWAY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Since 1999, we have funded our operations through the issuance of preferred
and common stock, and to a lesser extent, through a line of credit and
equipment leases with a bank. In May 2000, the Company issued and sold
1,500,000 shares of its common stock through a private placement to five
mutual funds managed by either Putnam Investment Management, Inc. or The
Putnam Advisory Company, Inc. The gross proceeds of the offering were $39.0
million. These proceeds will be used for general corporate purposes.
Our cash and cash equivalents, short-term investments and restricted cash
balance was $55.2 million as of June 30, 2000 and $32.2 million at December 31,
1999. Our working capital balance was $65.2 million as of June 30, 2000 and
$39.9 million at December 31, 1999.
Cash used in operating activities was $7.8 million for the six months ending
June 30, 2000 as compared to $2.6 million for the six months ending June 30,
1999. The increase in cash used in operating activities for the six months
ending June 30, 2000 was primarily attributable to an increase in operating
expenses associated with the Company's growth in personnel and facilities.
Cash used in investing activities was $24.8 million for the six months ended
June 30, 2000 as compared to $3.5 million for the six months ended June 30,
1999. The increase in cash used in investing activities for the six months
ending June 30, 2000 was primarily attributable to purchases of property and
equipment to support our growing application hosting service line and our
growing employee base, and purchases of investments made using the proceeds from
our private placement of common stock with Putnam Investments.
Cash provided by financing activities was $41.2 million for the six months
ending June 30, 2000 as compared to $7.9 million for the six months ending
June 30, 1999. This increase in cash provided by financing activities for the
six months ending June 30, 2000 was primarily attributable to proceeds
received from the private placement of the Company's common stock and
increased proceeds from the exercise of stock options.
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 69.6% for the second quarter of 2000. This
decrease was due primarily to improvements in our billing and collection
process.
We believe that the proceeds from our initial public offering and recent
private placement, funds that are available under our line of credit, and
cash flow from operations will be sufficient to finance our funding
requirements for the foreseeable future. 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>
Form 10Q Page 14 of 24
BREAKAWAY SOLUTIONS, INC.
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 important 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.
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.
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 $20.1 million for the six
months ended June 30, 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 15 of 24
BREAKAWAY SOLUTIONS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS -- CONTINUED
o goodwill amortization charges attributable to the acquisition of
Eggrock Partners;
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 16 of 24
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 Partners. 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 17 of 24
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 seven 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, acquired Zartis.com Limited, a
company based in Dublin, Ireland, 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 18 of 24
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 19 of 24
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 20 of 24
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 21 of 24
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>
Form 10Q Page 22 of 24
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 May 30, 2000, Breakaway issued and sold 1,500,000 million shares of its
common stock through a private placement to various mutual funds managed by
Putnam Investment Management, Inc. or The Putnam Advisory Company, Inc.,
including the Putnam OTC and Emerging Growth Fund, the Putnam New Century
Growth Fund, and the Putnam Voyager Fund II. The proceeds of the sale will be
used for general corporate purposes.
On April 1, 2000, Breakaway issued and sold 7,272,000 shares of its common stock
to former stockholders of Eggrock Partners, Inc. as consideration for the
purchase of all of the outstanding capital stock of Eggrock Partners.
<PAGE>
Form 10Q Page 23 of 24
BREAKAWAY SOLUTIONS, INC.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At its Annual Meeting on May 11, 2000, the stockholders of Breakaway Solutions
took the following actions:
1. Elected the following two directors for terms to expire at the 2003 Annual
Meeting of Stockholders, with votes as indicated opposite each director's name:
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
Gordon Brooks 13,706,530 116,465
Christopher H. Greendale 13,433,702 389,293
</TABLE>
2. Approved the appointment by the Board of Directors of KPMG as auditors for
the year 2000. The vote was 13,546,629 for and 3,218 against the proposal, with
273,148 abstentions.
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:
During the three months ended June 30, 2000, the Company filed two reports on
Form 8-K. The first report, filed on April 14, 2000, described our
acquisition of Eggrock Partners, Inc. and did not contain financial
statements, but incorporated by reference to a Form S-4 that did contain
financial statements. The second report, filed on June 1, 2000, contained a
copy of our press release announcing the sale of 1,500,000 shares of our
common stock to various mutual funds managed by Putnam Investments.
<PAGE>
Form 10Q Page 24 of 24
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: August 14, 2000 /s/ Kevin Comerford
--------------------------------
KEVIN COMERFORD
Vice President, Administration,
Chief Financial Officer,
Treasurer and Secretary
(Principal financial officer and
Chief accounting officer)
