<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 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: 0-26795
TANNING TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 84-1381662
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
4600 South Syracuse Street, Suite 1200
Denver, Colorado 80237
(Address of Principal Executive Offices, Including Zip Code)
(303) 220-9944
(Registrant's Telephone Number, Including Area Code)
Former Address:
4600 South Ulster Street, Suite 380
Denver, Colorado 80237
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X ] No []
As of November 12, 1999 there were 20,194,956 shares of Common Stock, $.01
par value, outstanding.
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TANNING TECHNOLOGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998......... 2
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1999 and 1998........................................................ 3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
1999 and 1998...................................................................... 4
Notes to Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... 7
Item 3. Qualitative and Quantitative Disclosures About Market Risk......................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 14
Item 2. Changes in Securities and Use of Proceeds.......................................... 14
Item 3. Defaults Upon Senior Securities.................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................ 14
Item 5. Other Information.................................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................... 14
Signatures.................................................................................... 15
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TANNING TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................. $ 66,365,250 $ 10,446,111
Accounts receivable - trade, net...................................... 15,592,734 9,225,153
Prepaid expenses and other current assets............................. 1,494,275 914,925
----------------- ----------------
Total current assets.................................................... 83,452,259 20,586,189
Property and equipment, net........................................... 4,680,600 3,215,032
Notes receivable, employees........................................... 500,000 -
Deposits and other long-term assets................................... 357,033 121,854
----------------- ----------------
Total assets............................................................ $ 88,989,892 $ 23,923,075
================= ================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable...................................................... $ 3,416,134 $ 1,554,871
Accrued compensation.................................................. 3,412,149 2,280,842
Other current liabilities............................................. 2,656,610 2,745,781
----------------- ---------------
Total current liabilities............................................... 9,484,893 6,581,494
Other long-term liabilities............................................. 219,205 569,536
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none at September 30,1999
and December 31, 1998............................................ - -
Common stock, $0.01 par value:
Authorized shares - 70,000,000
Issued and outstanding shares - 20,180,633 at
September 30, 1999 and 15,217,063 at December 31, 1998.......... 201,806 152,171
Additional paid-in capital............................................ 75,393,647 14,468,203
Retained earnings..................................................... 3,714,932 2,159,428
Accumulated comprehensive income (loss)............................... (24,591) (7,757)
----------------- ---------------
Total stockholders' equity.............................................. 79,285,794 16,772,045
----------------- ---------------
Total liabilities and stockholders' equity.............................. $ 88,989,892 $ 23,923,075
================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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TANNING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Services revenue.................................. $ 16,005,110 $ 9,184,597 $ 40,524,417 $ 19,372,067
Product sales..................................... - 2,308,881 - 2,937,236
------------ ------------ ------------ ------------
Net revenues...................................... 16,005,110 11,493,478 40,524,417 22,309,303
Operating expenses:
Project personnel costs......................... 7,745,522 4,003,722 19,615,527 9,765,051
Selling, marketing and administrative
expenses...................................... 7,935,701 3,211,589 19,118,385 8,181,827
Product development costs....................... - 1,181,296 - 2,704,271
------------ ------------ ------------ ------------
Total operating expenses..................... 15,681,223 8,396,607 38,733,912 20,651,149
------------ ------------ ------------ ------------
Income from operations............................ 323,887 3,096,871 1,790,505 1,658,154
Other income...................................... 488,761 104,531 764,255 231,945
------------ ------------ ------------ ------------
Income before provision for income taxes.......... 812,648 3,201,402 2,554,760 1,890,099
Provision for income taxes........................ 364,115 1,191,855 999,256 704,070
------------ ------------ ------------ ------------
Net income........................................ $ 448,533 $ 2,009,547 $ 1,555,504 $ 1,186,029
============ ============ ============ ============
Basic earnings per share.......................... $ 0.02 $ 0.13 $ 0.09 $ 0.08
============ ============ ============ ============
Basic weighted average shares outstanding......... 19,003,322 15,217,063 16,657,736 14,885,370
============ ============ ============ ============
Diluted earnings per share........................ $ 0.02 $ 0.13 $ 0.08 $ 0.08
============ ============ ============ ============
Diluted weighted average shares outstanding....... 22,201,513 15,465,471 18,532,010 14,993,570
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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TANNING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
----------------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Operating activities
Net income.......................................................................... $ 1,555,504 $ 1,186,029
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization..................................................... 1,060,546 651,747
Other operating activities........................................................ 62,784 66,626
Changes in operating assets and liabilities:
Accounts receivable - trade.................................................... (6,393,581) (4,280,523)
Other assets................................................................... (1,270,401) (214,584)
Accounts payable............................................................... 1,859,263 (12,400)
Accrued compensation........................................................... 970,050 179,250
Other liabilities.............................................................. 195,263 1,221,493
-------------- -------------
Net cash used in operating activities............................................... (1,960,572) (1,202,362)
Investing activities
Purchase of property and equipment, net............................................. (2,520,114) (1,435,056)
-------------- -------------
Net cash used in investing activities............................................... (2,520,114) (1,435,056)
Financing activities
Payments on long-term debt.......................................................... (573,420) (400,916)
Proceeds from exercise of stock options............................................. 2,815,086 -
Net proceeds from issuance of common stock.......................................... 58,159,993 1,900,000
-------------- -------------
Net cash provided by financing activities........................................... 60,401,659 1,499,084
Effect of exchange rate on cash..................................................... (1,834) 30,467
-------------- -------------
Net increase (decrease) in cash and cash equivalents................................ 55,919,139 (1,107,867)
Cash and cash equivalents at beginning of period.................................... 10,446,111 7,768,636
-------------- -------------
Cash and cash equivalents at end of period.......................................... $66,365,250 $ 6,660,769
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TANNING TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Tanning Technology Corporation (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, 1998
included in our Registration Statement on Form S-1. The accompanying
consolidated financial statements reflect all adjustments (consisting solely 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 and nine month periods ended September
30, 1999 are not necessarily indicative of the results to be expected for any
future period or the full fiscal year.
(2) EARNINGS PER SHARE
We have adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires entities to present both
basic earnings per share ("EPS") and diluted EPS. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if stock options were
exercised, resulting in the issuance of common stock that then shared in the
earnings of our company. Potential dilution of stock options exercisable into
common stock was computed using the treasury stock method based on the average
fair market value of the stock. The following table reflects the basic and
diluted weighted average shares.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding............... 19,003,322 15,217,063 16,657,736 14,885,370
Dilutive impact of options outstanding............ 3,198,191 248,408 1,874,274 108,200
-------------- --------------- --------------- -------------
Weighted-average shares and potential dilutive
shares outstanding.............................. 22,201,513 15,465,471 18,532,010 14,993,570
============== =============== =============== =============
</TABLE>
(3) CAPITAL STOCK
On July 28, 1999, we completed an initial public offering of Common Stock,
par value $.01 per share ("Common Stock"), in which we sold 4,000,000 shares of
Common Stock at $15.00 per share. On August 23, 1999, we issued an additional
310,920 shares of Common Stock in connection with the exercise of the
underwriters' over-allotment option. Proceeds to our company from these
transactions, net of underwriting discounts and costs of the offering, were
approximately $57.8 million.
In connection with the initial public offering, we effected a 1 for 3.05
reverse stock split of our Class A and Class C common shares and a 1 for 2.67
reverse stock split of our Class B common shares, and the Class A, Class B and
Class C common stock was converted into one class of voting common stock. All
references to common shares in the accompanying financial statements reflect our
reverse stock splits, including the conversion to one class of common stock,
retroactively applied to all periods presented.
During the nine months ended September 30, 1999, we issued 652,650 shares
of common stock in conjunction with purchases under our qualified stock purchase
plan, as well as the exercise of vested stock options.
5
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(4) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"), which is required to be adopted in years
beginning after June 15, 2000. We anticipate that the adoption of SFAS No. 133
will not have a significant effect on the financial condition of the Company.
(5) SEGMENT REPORTING
During 1998, we adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires a business enterprise, based upon a management
approach, to disclose financial and descriptive information about its operating
segments. Operating segments are components of an enterprise about which
separate financial information is available and regularly evaluated by the chief
operating decision maker(s) of an enterprise. Under this definition, we operated
as a single business unit for all periods presented.
SFAS 131 also requires the disclosure of certain financial information
pertaining to geographic areas. Long-lived assets located outside the United
States are not material. Information about our revenues by geographic area is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external customers:
United States................................. $11,137 $ 8,363 $26,310 $16,402
Denmark....................................... 4,116 2,868 11,440 5,147
UK and other Europe........................... 752 262 2,774 760
------------- ---------------- ------------- ---------------
Total......................................... $16,005 $11,493 $40,524 $22,309
============= ================ ============= ===============
</TABLE>
(6) COMPREHENSIVE INCOME
During 1998, we adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
in financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. The components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income.................................... $448,533 $2,009,547 $1,555,504 $1,186,029
Foreign currency translation.................. 104,781 30,430 (16,834) 30,467
------------- ---------------- ------------- ---------------
Comprehensive income......................... $553,314 $2,039,977 $1,538,670 $1,216,496
============= ================ ============= ===============
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, including statements relating to our expectations, beliefs, hopes,
intentions, prospects and strategies. Such forward-looking statements are
subject to various risks and uncertainties, many of which are beyond our
control. Actual results could differ materially from the forward-looking
statements and our expectations as a result of, among other things, potential
difficulties in managing growth, controlling costs, and recruiting and retaining
technical and management professionals and key employees; our dependence on our
principal clients; the ability of clients to terminate projects before
completion; difficulties associated with international operations and expansion;
difficulties in estimating the time and resources necessary for project
engagements and in continuing to perform challenging and critical projects in a
manner that satisfies our clients; the intensely competitive nature of the
business areas in which we compete; difficulties in responding to changing
technology, industry standards and client preferences; dependence on continued
growth in use and acceptance of the Internet; difficulties associated with
potential acquisitions and investments; and the other factors set forth in
Exhibit 99.1 to our Securities and Exchange Commission filings as well as
factors discussed elsewhere in this Quarterly Report on Form 10-Q. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
We are an information technology services provider that architects, builds
and deploys enterprise solutions for companies in the United States and
internationally. We specialize in large, complex, integrated solutions that
incorporate online transaction processing and very large databases. Internet
technologies are central to many of our solutions, enabling direct interaction
among customers and business partners on the World Wide Web, and among employees
within the organization on their private intranets.
Our revenue is comprised primarily of fees generated for professional
services. Historically, we have generally provided services to clients on a time
and materials basis, although we sometimes work on a fixed-fee basis. Under time
and materials contracts, we recognize revenue as services are provided. Under
fixed-fee contracts, we recognize revenue on a percentage of completion basis.
In the future, we anticipate that an increasing percentage of our client
engagements will be subject to fixed-fee or other arrangements that are not
solely based on time and materials. We are generally reimbursed for reasonable
expenses under our contracts.
Revenue from foreign operations represents revenue for professional
services performed for clients outside the United States. Revenue from foreign
operations has made an increasing contribution to our total services revenue and
we anticipate continued growth in revenue from foreign operations. Foreign
operations represented 30% of services revenue in the first nine months of 1998,
and 35% of services revenue for the same period in 1999.
Revenue from a limited number of clients has comprised a very substantial
portion of our revenues and is expected to represent a very substantial portion
of our revenues in the forseeable future. Any cancellation, deferral or
significant reduction in work performed for these principal clients could have a
material adverse effect on our business, financial condition and results of
operations.
In 1998, we had revenue from both services and, to a lesser extent, product
sales. We completed the sale of the rights to one of our software products in
the third quarter of 1998. We have shifted our business focus to concentrate
solely on generating revenues from services.
Project personnel costs represent our most significant expense and consist
primarily of salaries, bonuses and employee benefits for company personnel
dedicated to client assignments, and fees paid to subcontractors for work
performed on our projects. Subcontractors generally cost us more than our own
project personnel; consequently, we usually generate lower gross profit margins
by using subcontractors. Non-billable time incurred by our project personnel
resulting from start-up time for new hires and training time incurred to upgrade
the skills of existing staff may cause gross profit margins to decrease.
7
<PAGE>
Selling, marketing and administrative expenses consist primarily of
salaries, bonuses and employee benefits for non-project personnel, occupancy
costs, staff recruiting costs, travel expenses, depreciation expenses and
promotional costs. Our sales and marketing costs are expected to increase as a
percentage of revenue in the future as we enhance our selling effort. We also
expect to expand geographically by opening new offices in 1999 and 2000. This
will require us to purchase office equipment and computer networking equipment,
both of which will increase our depreciation expense.
In anticipation of business growth, we expect to incur costs and expend
capital. We can give no assurances that we will continue to grow, or that we
will grow at a pace that will support these costs and expenditures. To the
extent revenues do not increase at a rate commensurate with these additional
costs and expenditures, our results of operations and liquidity could be
materially and adversely affected. In particular, we expect that our plans for
increases in expenses and capital expenditures over the next year to support our
growth will negatively impact profitability.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's consolidated statements of income.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Services revenue.................................. 100% 80% 100% 87%
Product sales..................................... 0 20 0 13
----- ----- ----- -----
Net revenues..................................... 100 100 100 100
Project personnel costs........................... 48 35 48 44
----- ----- ----- -----
Gross profit margin.............................. 52 65 52 56
Selling, marketing and administrative............. 50 28 48 37
Product development costs......................... 0 10 0 12
----- ----- ----- -----
Income from operations............................ 2 27 4 7
Interest income and other, net.................... 3 1 2 1
----- ----- ----- -----
Income before income taxes........................ 5 28 6 8
Income tax provision.............................. 2 10 2 3
----- ----- ----- -----
Net income........................................ 3% 18% 4% 5%
===== ===== ===== =====
</TABLE>
Comparison of three months ended September 30, 1998 and 1999
Net revenues
Our net revenues increased $4.5 million, or 39%, to $16.0 million for the
third quarter of 1999 from $11.5 million for the third quarter of 1998. Included
in net revenues for the third quarter of 1998 are product sales of $2.3 million;
there was no revenue from product sales during the third quarter of 1999. The
increase in services revenue of 74% reflects an increase in both the size and
number of client projects. The increase in services revenue from our foreign
operations also contributed to this increase in overall revenue. Revenues from
foreign operations increased $1.7 million, or 56%, to $4.8 million for the third
quarter of 1999 from $3.1 million for the third quarter of 1998. Revenues from
our five largest clients as a percentage of services revenues were 75% for the
third quarter of 1999, and 81% for the same period in 1998.
Project personnel costs
Our project personnel costs increased $3.7 million, or 93%, to $7.7 million
for the third quarter of 1999 from $4.0 million for the third quarter of 1998.
This increase was primarily due to an increase in project personnel from 97 at
September 30, 1998 to 195 at September 30, 1999, as well as higher salaries.
Among the 195 technical employees at September 30, 1999, 17 were employed by our
majority owned off-shore development center in Hydrabad, India. There were no
Indian employees at September 30, 1998. Our gross profit margin decreased
from 65% for the third quarter of 1998 to 52% for the same period in 1999,
primarily as a result of the significant margin realized from product sales
during the third quarter of 1998. There were no product sales during the third
quarter of 1999. Gross profit margin during the third quarter of 1998, excluding
product sales, was 56%. This decrease in profit margin from services revenue is
attributable to higher employee utilization during the third quarter of 1998,
and the negative impact of a single fixed fee project during the third quarter
of 1999, as well as increased payroll tax expenses associated with expatriate
labor during the third quarter of 1999.
9
<PAGE>
Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $4.7 million,
or 147%, to $7.9 million for the third quarter of 1999 from $3.2 million for the
third quarter of 1998. The increase in selling, marketing and administrative
expenses was primarily due to additional selling and marketing activities
undertaken to drive our revenue growth, and higher administrative expenses
resulting from increases in our employee headcount and related infrastructure
costs. Our selling, marketing and administrative staff grew from 38 employees at
September 30, 1998 to 75 employees at September 30, 1999.
Product development costs
We incurred costs associated with software product sales during the third
quarter of 1998 of $1.2 million. No such costs were incurred in 1999.
Provision for income taxes
Income tax expense represents combined federal, state, and foreign taxes.
Our income tax provision decreased to $0.4 million on pre-tax profits of $0.8
million for the third quarter of 1999, as compared to a quarter provision of
$1.2 million on pre-tax profits of $3.2 million for the third quarter of 1998.
Our effective tax rate increased to 45% for the third quarter of 1999, from 37%
for the same period in 1998, principally as the result of a decrease in European
pre-tax profits during the third quarter of 1999 which are typically taxed at a
lower average tax rate than domestic earnings.
Comparison of nine months ended September 30, 1998 and 1999
Net revenues
Our net revenues increased $18.2 million, or 82% to $40.5 million for the
first nine months of 1999 from $22.3 million for the first nine months of 1998.
Included in the first nine months of 1998 net revenue is $2.9 million of revenue
from product sales; there was no revenue from product sales in the first nine
months of 1999. The increase in services revenue of 109% reflects an increase in
the average size of client projects as well as higher average billing rates. The
increase in services revenue from our foreign operations also contributed to
this increase in overall revenue. The revenue from foreign operations increased
$8.3 million, or 141%, to $14.2 million for the first nine months of 1999 from
$5.9 million for first nine months of 1998. Revenues from our five largest
clients as a percentage of services revenues were 74% for the first nine months
of 1999 and 80% for the same period in 1998.
Project personnel costs
Our project personnel costs increased $9.8 million, or 101%, to $19.6
million for the first nine months of 1999 from $9.8 million for the first nine
months of 1998. This increase was primarily due to an increase in project
personnel from 97 at September 30, 1998 to 195 at September 30, 1999, as well as
higher salaries. Among the 195 technical employees at September 30, 1999, 17
were employed by our majority owned off-shore development center in Hydrabad,
India. There were no Indian employees at September 30, 1998. Our gross profit
margin decreased from 56% for the first nine months of 1998 to 52% for the
same period in 1999, primarily as a result of the significant margin realized
from product sales during the first nine months of 1998. There were no product
sales during the first nine months of 1999. Gross profit margin during the first
nine months of 1998, excluding product sales, was 50%. The increase in profit
margin from services revenue during the first nine months of 1999, as compared
to the first nine months of 1998, is attributable to higher average billing
rates and increased utilization of project personnel.
Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $10.9 million,
or 133%, to $19.1 million for the first nine months of 1999 from $8.2 million
for the first nine months of 1998. The increase in selling, marketing and
administrative expenses was primarily due to additional selling and marketing
activities to drive our revenue growth, and higher administrative expenses
resulting from increases in our employee headcount and related infrastructure
costs. Our sales, marketing and administrative staff grew from 38 employees at
September 30, 1998 to 75 employees at September 30, 1999.
10
<PAGE>
Product development costs
We incurred costs associated with software product sales during the first
nine months of 1998 of $2.7 million. No such costs were incurred in 1999.
Provision for income taxes
Our income tax provision increased to $1.0 million on pre-tax profits of
$2.6 million at the end of the first nine months of 1999 compared to a provision
of $0.7 million on pre-tax profits of $1.9 million for the comparable period of
1998. Our effective tax rate was 39% for the first nine months of 1999 and 37%
for the same period in 1998.
11
<PAGE>
Liquidity and Capital Resources
Historically, we have funded operations and investments in property and
equipment primarily through cash generated from operations, the sale of common
stock and, to a lesser extent, borrowings. Outstanding debt of $1.1 million was
paid off in 1998 with the net proceeds from the sale of common stock of $1.9
million. During the third quarter of 1999, we had a bank note outstanding of
approximately $520,000, the proceeds of which were used to acquire office
furniture and fixtures. We repaid this note during the third quarter and had no
outstanding debt as of September 30, 1999.
On July 28, 1999, we completed a public offering of Common Stock which
resulted in the issuance of 4,000,000 shares of Common Stock. On August 23,
1999, we issued an additional 310,920 shares of Common Stock in connection with
the exercise of the underwriters' over-allotment option. Proceeds to our company
from these transactions, net of underwriting discounts and costs of the
offering, were approximately $57.8 million. The net proceeds of the offering
(including the net proceeds of the underwriters' exercise of the over-allotment
option) have been invested in short-term, interest bearing, investment grade
obligations. Based on our current business plan, we believe that the cash
provided from operations, cash on hand, and the proceeds from this offering will
be sufficient to meet our cash requirements at least through the end of 2000.
Cash and cash equivalents increased to $66.4 million at September 30, 1999
from $10.4 million at December 31, 1998. The increase was primarily due to $61.0
million in net proceeds from the issuance of common stock and the exercise of
stock options, partially offset by investments in property and equipment, and a
$2.0 million net decrease in cash from operating activities. Proceeds from the
issuance of common stock in connection with the exercise of stock options
amounted to $1.02 million during the third quarter of 1999. We currently have no
material commitments for capital expenditures.
Year 2000 Readiness
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
These programs were unable to distinguish properly between the year 1900 and the
year 2000, and as such, risk failure with the changing of the century. This
circumstance is frequently referred to as the "Year 2000 issue."
We rely on information technology systems, applications and devices in
several aspects of our business, including service delivery, time reporting, and
financial accounting. In this regard, we have conducted an assessment of our
information technology systems and believe that significant changes will not be
necessary in order to achieve a Year 2000 date conversion with no effect on
customers or disruption of business operations. We have obtained written and/or
verbal confirmation, either directly or through published materials, from our
major third-party software providers that those applications currently being
used are Year 2000 compliant or that revised versions that are compliant are
available. Our hardware platforms, principally servers and network devices, have
been confirmed as Year 2000 compliant by the manufacturers, or have been
appropriately upgraded in order to achieve compliance. The total expense related
to these efforts has not had a material impact on our results of operations.
In addition to our internal systems, we also rely, directly and indirectly,
on the systems of business enterprises such as clients, suppliers, utilities,
creditors and financial institutions, both domestic and international. We have
obtained, or in some cases plan to obtain, assurances, either directly or
through published materials, from those material third-party vendors with which
we transact business that there will be no interruption of service as a result
of the Year 2000 issue. As a precautionary measure, we have implemented an
electricity redundancy plan, via independent generators, in order to address the
risk associated with potential interruption of electrical power service. We also
intend to implement a redundancy plan for Internet access.
In addition, the failure of the accounting systems of our clients due to
the Year 2000 issue could result in a delay in the payment of invoices we have
issued for services rendered. A delay in payment of invoices could have a
material negative effect on us. During the fourth quarter we intend to inquire
of, and obtain assurances from, our major customers regarding the compliance of
their accounting systems. We also face risks related to the potential failure of
our non-information technology systems, which include, among other things, our
climate control systems and elevators.
Although our principal service offerings generally do not include Year 2000
remediation services, in some cases we have warranted that our work is Year 2000
compliant, and former, present and future clients could assert claims against us
related to the Year 2000 issue. There can be no assurance that all information
technology systems we have designed, developed, recommended or deployed will be
Year 2000 compliant. Any Year 2000-related failure of critical client systems in
which we were involved could result in claims being asserted against us,
regardless of whether the failure is related to the services provided by us. If
asserted, any liability that may result, and the time and resources used in
resolving these claims, could have a material adverse effect on us.
12
<PAGE>
There can be no assurance that the steps we have taken in connection with
the Year 2000 issue are adequate, or that factors beyond our control will not
cause a material adverse effect on our business, reputation, financial
condition, or results of operations.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
We provide our services to customers primarily in the United States, the
United Kingdom and Denmark. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in those foreign markets. Historically we have not experienced
material fluctuations in our results of operations due to foreign currency
exchange rate changes.
The net proceeds from our public offering have been invested in short-term,
interest bearing, investment grade obligations. As such, our interest income
could be affected by fluctuations in prevailing interest rates.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
On July 22, 1999, the Securities and Exchange Commission declared our
Registration Statement on Form S-1 (File No. 333-78657) effective. On July 28,
1999, we completed a public offering of Common Stock which resulted in the
issuance of 4,000,000 shares of Common Stock at an offering price of $15.00 per
share. On August 23, 1999, we issued an additional 310,920 shares of Common
Stock in connection with the exercise of the underwriters' over-allotment
option. The managing underwriters for the offering were Credit Suisse First
Boston, Salomon Smith Barney, CIBC World Markets, ING Barings and Adams,
Harkness & Hill, Inc.. Net proceeds, after deducting underwriting discounts and
commissions of $4.5 million and offering expenses of $2.3 million were $57.8
million. Included in the expenses incurred in the offering was a fee of $250,000
we paid to AEA Investors Inc., the parent of AEA Tanning Investors Inc., which
is a beneficial owner of our common stock, for strategic advisory services in
connection with the offering. The net proceeds of the offering have been
invested in short-term, interest bearing, investment grade obligations, pending
their use for other purposes. None of the net proceeds of the offering were paid
directly or indirectly to any of our directors, officers, general partners or
their associates, persons owning 10% or more of any class of our equity
securities or our affiliates.
During the period from July 1, 1999 through July 22, 1999, we issued an
aggregate of 257,164 shares of our common stock (on a post-reverse split basis)
to employees, officers and directors for an aggregate consideration of $1.0
million pursuant to the exercise of stock options under our stock option plans.
All issuances were made in reliance upon Section 4(2) of the Securities Act
and/or Rule 701 promulgated under the Securities Act, and were made without
general solicitation or advertising.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Cautionary Statement for the Purpose of the "Safe Harbor" Provisions of
The Private Securities Litigation Reform Act of 1995
(b) Reports on Form 8-K.
We did not file any Reports on Form 8-K during the quarter ended September
30, 1999.
14
<PAGE>
SIGNATURES
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.
TANNING TECHNOLOGY CORPORATION
Date: November 12, 1999 By: /s/ Larry G. Tanning
Name: Larry G. Tanning
Title: President, Chief Executive Officer and
Director
Date: November 12, 1999 By: /s/ Henry F. Skelsey
Name: Henry F. Skelsey
Title: Executive Vice President, Chief Financial
Officer and Director (Principal Financial
and Accounting Officer)
15
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
(9-30-99) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 66,365,250
<SECURITIES> 0
<RECEIVABLES> 16,167,527
<ALLOWANCES> 574,793
<INVENTORY> 0
<CURRENT-ASSETS> 83,452,259
<PP&E> 7,128,005
<DEPRECIATION> 2,447,405
<TOTAL-ASSETS> 88,989,892
<CURRENT-LIABILITIES> 9,484,893
<BONDS> 0
0
0
<COMMON> 201,806
<OTHER-SE> 79,083,988
<TOTAL-LIABILITY-AND-EQUITY> 88,989,892
<SALES> 40,524,417
<TOTAL-REVENUES> 40,524,417
<CGS> 0
<TOTAL-COSTS> 19,615,527
<OTHER-EXPENSES> 19,118,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,272
<INCOME-PRETAX> 2,554,760
<INCOME-TAX> 999,256
<INCOME-CONTINUING> 1,790,505
<DISCONTINUED> 0
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<EPS-BASIC> .09
<EPS-DILUTED> .08
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<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995
Tanning Technology Corporation (the "Company") cautions readers that the
important factors set forth below, as well as factors discussed in other
documents filed by the Company with the Securities and Exchange Commission (the
"SEC"), among others, could cause the Company's actual results to differ
materially from forward looking statements contained in this report, future
filings by the Company with the SEC, the Company's press releases and oral
statements made by or on behalf of the Company. The words "estimate," "project,"
"anticipate," "expect," "intend," "believe," "target" and similar expressions
are intended to identify forward looking statements.
Inability to manage our growth could have a material adverse effect on the
quality of our services, our ability to retain key personnel, and our business
Our growth has placed significant demands on our management and other
resources. Our service revenues for the first nine months of 1999 increased
approximately 74% over revenues in the same period in 1998. Our staff increased
from 120 full-time employees at December 31, 1997 to 148 at December 31, 1998,
and to 270 at September 30, 1999. Our future success will depend on our ability
to manage our growth effectively, including:
. continuing to train, motivate, manage and retain our existing employees and
attract and integrate new employees;
. improving our business development capabilities;
. maintaining high rates of employee utilization;
. accurately estimating time and resources for engagements;
. developing and improving our operational, financial, accounting and other
internal systems and controls; and
. maintaining project quality.
Our management has limited experience managing a business of Tanning's size.
If we are unable to manage our growth and projects effectively, it could have a
material adverse effect on the quality of our services, our ability to retain
key personnel, and our business and results of operations.
If our revenues do not increase proportionately with our planned increases in
costs and capital expenditures, then our results of operations and liquidity
will suffer
In anticipation of business growth, we expect to incur costs and expend
capital. We can give no assurances that we will continue to grow, or that we
will grow at a pace that will support these costs and expenditures. To the
extent revenues do not increase at a rate commensurate with these additional
costs and expenditures, our results of operations and liquidity could be
materially and adversely affected. In particular, we expect that our plans for
increases in expenses and capital expenditures over the next year to support our
growth will negatively impact profitability.
The loss of our professionals, or the inability to recruit additional
professionals, would make it difficult to complete existing projects and bid for
new projects, which could cause our business to suffer
Our business is labor intensive, and our success depends on identifying,
hiring, training and retaining experienced, knowledgeable professionals. If a
significant number of our current employees or any of our project managers or
senior technical personnel leave, we may be unable to complete or retain
existing projects or bid for new projects of similar scope and revenue. In
addition, former employees may compete with us in the future.
<PAGE>
Even if we retain our current employees, our management must continually
recruit talented professionals in order for our business to grow. There is
currently a shortage of qualified project managers and senior technical
personnel in the information technology services field, and this shortage is
likely to continue. Furthermore, there is significant competition for employees
with the skills required to perform the services we offer. We cannot give any
assurances that we will be able to attract a sufficient number of qualified
employees in the future, or that we will be successful in motivating and
retaining the employees we are able to attract. If we cannot attract, motivate
and retain qualified professionals, our business, financial condition and
results of operations will suffer.
We depend on our key personnel, and the loss of any key personnel may harm our
ability to obtain and retain client engagements, maintain a cohesive culture and
compete effectively
We believe that our success will depend on the continued employment of our key
management personnel. This dependence is particularly important to our business
because personal relationships are critical to obtaining and maintaining client
engagements and maintaining a cohesive culture. If one or more members of our
key management personnel were unable or unwilling to continue in their present
positions, such persons would be very difficult to replace and our business
could be seriously harmed. In addition, if any of these key employees joins a
competitor or forms a competing company, some of our clients might choose to use
the services of that competitor or new company instead of our own. Furthermore,
clients or other companies seeking to develop in-house information technology
services capabilities may hire away some of our key employees. This would not
only result in the loss of key employees but could also result in the loss of a
client relationship or a new business opportunity. Any of the foregoing could
seriously harm our business.
We depend heavily on our principal clients; a significant reduction in the work
we perform for any of them could harm our revenues and earnings
We derive a large portion of our services revenue from a limited number of
clients. Services revenue constitutes substantially all of our revenues. In
1997, our five largest clients accounted for approximately 81% of our services
revenue. In 1998, our five largest clients accounted for approximately 70% of
our services revenue. In the first nine months of 1999, our five largest clients
accounted for approximately 74% of our services revenue. The volume of work
performed for our principal clients may not be sustained from year to year, and
there is a risk that these principal clients may not retain us in the future.
Any cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our financial condition and results of operations.
Our clients may terminate projects before completion; this could adversely
affect our revenues and earnings
In general, our clients may terminate project engagements upon limited notice
and without significant penalty. This makes our results of operations difficult
to predict. Our clients' termination of our project engagements would result in
lower revenues and underutilized employees and, as a result, would negatively
affect our earnings. For example, a client's termination of a significant
project in the fourth quarter of 1997 adversely affected revenues, employee
utilization and earnings in the first half of 1998.
Our international operations and expansion involve risks relating to
difficulties in complying with foreign laws and regulations, staffing
difficulties, currency related risks, difficulties in collecting accounts
receivable, and seasonal reductions in business activity; these risks could
result in increased costs, unanticipated liabilities, operational difficulties
and decreases in revenues and earnings
We currently have significant operations in Europe and intend to expand our
business to other regions, as attractive opportunities arise. Revenues from our
existing international operations represented 35% of services revenue in 1998
and 35% in the first nine months of 1999. We may incur significant costs in
connection with our international expansion.
We also encounter risks in doing business in foreign countries, including:
. increased costs due to the need to comply with visa or other work permit
requirements, which may impair our ability to move personnel between
countries and properly staff our projects;
-2-
<PAGE>
. to the extent we bill for our services in the functional currency of our
foreign subsidiaries, any depreciation of such currencies against the
dollar would negatively impact our results of operations;
. expenses incurred to modify our accounting systems as we do more
business in the countries that are converting their currencies to the
euro;
. difficulties in staffing and managing foreign offices, such as our
office in Chertsey, England, as a result of, among other things,
distance and time zone differences;
. seasonal reductions in business activity, such as the August slowdown in
Europe, which may adversely impact our business and results of
operations;
. longer payment cycles and problems in collecting accounts receivable,
which may adversely impact our results of operations due to required
allowances for doubtful accounts and increased cost of collection
efforts; and
. lack of ability to determine the taxation to which we or our employees may
be subject in foreign countries, including the failure to evaluate complex
payroll tax regulations of foreign countries, which could cause us to
underestimate our tax liabilities.
Any of these factors could result in increased costs, unanticipated liabilities,
operational difficulties and decreases in revenues and earnings.
We may fail to accurately estimate the time and resources necessary for the
performance of our services, which could reduce the profitability of, or result
in a loss on, our projects and damage our customer relationships
To date, we have generally provided services to our clients on a time and
materials basis, although we sometimes work on a fixed-fee or capped fee basis.
In the future, we anticipate that an increasing percentage of our client
engagements will be subject to fixed-fee or other arrangements that are not
solely based on time and materials. Because we work with complex technologies in
compressed timeframes and because we have limited experience in pricing
engagements on these terms, it can be difficult to judge the time and resources
necessary to complete a project. Our failure to accurately estimate the time and
resources required for a project, or our failure to complete our obligations in
a manner consistent with the project plan upon which our fixed-fee or other
arrangements are based, could reduce the profitability of, or result in a loss
on, our projects if we are required to devote additional resources to project
engagements for which we will not receive additional compensation, and could
damage our customer relationships and our reputation.
Quarter to quarter fluctuations in our revenues and earnings could affect the
market price of our common stock
Our revenues and earnings may vary from quarter to quarter as a result of a
number of factors, including:
. number, size and scope of client engagements commenced or completed
during a quarter;
. employee utilization rates;
. unanticipated project terminations, delays or deferrals;
. the accuracy of estimates of resources required to complete ongoing
projects; and
-3-
<PAGE>
. the contractual terms and degree of completion of projects in which we
are engaged.
Because a high percentage of our expenses, particularly compensation and rent,
are fixed in advance of any particular quarter, any of the factors listed above
could cause significant variations in our earnings in any given quarter. Any
decline in revenues or earnings or a greater than expected loss for any quarter
could materially adversely affect the market price of our common stock, even if
not reflective of any long-term problems with our business.
Competition from bigger, more established competitors who have greater financial
and technical resources, and from new entrants, could cause us to lose current
or future business opportunities and harm our business, results of operations
and ability to grow
The business areas in which we compete are intensely competitive and subject
to rapid technological change. We expect competition to continue and intensify.
Our competitors fall into four major categories:
. large information technology consulting services providers, such as
Andersen Consulting, KPMG, PricewaterhouseCoopers, IBM, EDS and CSC;
. mid-tier information technology services providers, such as Cambridge
Technology Partners and Sapient;
. Internet professional service providers, such as Modem Media. Poppe
Tyson, US Interactive, Proxicom, Viant and Scient; and
. internal information technology departments of current and potential
clients.
Many of our competitors have longer operating histories and client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in clients' needs.
Further, there are low barriers to entry into our business. We do not own any
technologies that preclude or inhibit competitors from entering our industry.
Existing or future competitors may independently develop and patent or copyright
technologies that are superior or substantially similar to our technologies. The
costs to develop and provide information technology consulting services are
relatively low. Therefore, we expect to continue to face additional competition
from new entrants into our industry.
Year 2000 Issues could seriously harm our business as a result of reduced demand
for our services, internal and external operations difficulties, and potential
disputes with, or liabilities to, clients
The Year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year. Clients' and
potential clients' purchasing patterns may be affected by Year 2000 issues as
companies expend significant resources to correct or replace their current
systems for Year 2000 compliance. These clients and potential clients may have
fewer funds available to purchase our services, which could adversely affect our
business, financial condition and results of operations. We may experience
operations difficulties because of undetected errors or defects in the
technology we use in our internal systems. We also rely, directly and
indirectly, on the systems of business enterprises such as clients, suppliers,
utilities, creditors and financial institutions, both domestic and
international, which could be subject to operational difficulties arising out of
Year 2000 issues. In addition, we have made representations to clients regarding
Year 2000 compliance and may become involved in disputes regarding Year 2000
problems involving solutions that we have developed or implemented. Any failure
on the part of our principal internal systems, other business' systems or the
systems that we create for our clients as a result of the Year 2000 problem
could seriously harm our business, reputation, financial condition and results
of operations.
-4-
<PAGE>
Expansion of our solutions and service offerings may not be successful and we
may lose opportunities to expand our business
In addition to growing our business within the disciplines on which we
currently focus, an element of our strategy is to expand our solutions in the
area of supply chain management and our service offerings in areas such as
business consulting, process innovation and creative design. Successful
expansion in these areas will require:
. attracting, integrating and retaining talented personnel;
. successfully marketing and delivering these services; and
. successfully establishing relationships with vendors and technology
providers.
Failure to develop additional solutions and service offerings on a timely
basis could cause us to lose opportunities for business with both existing and
potential clients. We cannot assure you that this expansion will be successful.
We may have difficulty responding to changing technology, industry standards and
client preferences, which could cause us to lose business
Our success will depend in part on our ability to develop information
technology solutions that keep pace with continuing changes in technology,
involving industry standards and changing client preferences. We cannot give
any assurances that we will be successful in addressing these developments on a
timely basis or at all. Our failure to respond quickly and cost-effectively to
new developments could cause us to lose current and potential business
opportunities and have a material adverse effect on our business and results of
operations.
In particular, we have derived a significant portion of our revenues from
projects based primarily on:
. open system technologies, which are standards-based, non-proprietary
technologies;
. multi-tier software architecture, in which the key layers of an
application system are separated and optimized independently to
improve performance, scalability and reliability;
. web-based architectures; and
. electronic commerce, generally.
These areas are continuing to develop and are subject to rapid change. Any
factors negatively affecting the acceptance of information processing systems
using client/server and web-based architectures could have a material adverse
effect on our business, especially if we are unable to develop skills and
replacement technologies for these types of information processing systems.
Our business may suffer if growth in the use of the Internet declines
Because Internet technologies are central to many of our solutions, our
business depends upon continued growth in the use of the Internet by our
clients, prospective clients and their customers and suppliers. Capacity
constraints caused by growth in Internet usage may, unless resolved, impede
further growth in Internet use. 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 our business and results of
operations could suffer. Factors which may affect Internet usage or electronic
commerce adoption include:
. actual or perceived lack of security of information;
. lack of access and ease of use;
. congestion of Internet traffic or other usage delays;
-5-
<PAGE>
. inconsistent quality of service;
. increases in access costs to the Internet;
. excessive government regulation;
. uncertainty regarding intellectual property ownership;
. reluctance to adopt new business methods;
. costs associated with the obsolescence of existing infrastructure; and
. economic viability of the Internet commerce model.
If we are unable to maintain our reputation and expand our name recognition, we
may have difficulty attracting new business and retaining current clients, and
our business may suffer
We believe that establishing and maintaining a good reputation and name
recognition are critical for attracting and expanding our client base. We also
believe that the importance of reputation and name recognition will increase due
to the growing number of information technology services providers. If our
reputation is damaged or if potential clients are not familiar with us or the
services we provide, we may become less competitive or lose our market position.
Promotion and enhancement of our name will depend largely on our success in
continuing to provide large, complex, integrated information technology
solutions. If clients do not perceive our solutions to be effective or of high
quality, our brand name and reputation will suffer. In addition, if solutions we
provide have defects, critical business functions of our clients may fail, and
we would likely suffer adverse publicity and could suffer economic liability.
Misappropriation of our intellectual property could harm our reputation, affect
our competitive position and cost us money
We believe our intellectual property, including our proprietary methodologies,
is important to our success and competitive position. If we are unable to
protect our intellectual property against unauthorized use by others, our
reputation among existing and potential clients could be damaged and our
competitive position adversely affected.
Our strategies to deter misappropriation could be inadequate in light of the
following risks:
. non-recognition of the proprietary nature of or inadequate protection
of our methodologies in the United States or foreign countries;
. undetected misappropriation of our proprietary methodologies;
. development of similar software or applications by our competitors;
and
. unenforceability of the non-competition and confidentiality agreements
entered into by our key employees.
If any of these risks materialize, we could be required to spend significant
amounts to defend our rights and our managerial resources could be diverted. In
addition, our proprietary methodologies may decline in value or our rights to
them may not be enforceable.
Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management attention
and harm to our reputation
Although we believe that our services do not infringe on the intellectual
property rights of others, we cannot give any assurances that an infringement
claim will be successfully defended. A successful infringement claim against us
could materially and adversely affect us in the following ways:
-6-
<PAGE>
. we may be liable for damages and litigation costs, including
attorneys' fees;
. we may be enjoined from further use of the intellectual property;
. we may have to license the intellectual property, incurring licensing
fees;
. we may have to develop a non-infringing alternative, which could be
costly and delay projects; and
. we may have to indemnify clients with respect to losses incurred as a
result of our infringement of the intellectual property.
Regardless of the outcome, an infringement claim could result in substantial
costs, diversion of resources and management attention, clients' termination of
project engagements and harm to our reputation.
Our business and our client relationships may suffer if we have disputes over
our right to resell or reuse intellectual property developed for specific
clients
A portion of our business involves the development of software applications
for specific client engagements. Ownership of client-specific software is
generally retained by the client, although we retain rights to some of the
applications, processes and other intellectual property developed in connection
with client engagements. Issues relating to the rights to intellectual property
can be complicated. We cannot give any assurances that disputes will not arise
that affect our ability to resell or reuse such applications, processes and
other intellectual property, damage our relationships with our clients, divert
our management's attention or have a material adverse effect on our business,
financial condition and results of operations.
Potential acquisitions may result in, among other things, increased expenses,
difficulties in integrating target companies and diversion of management's
attention
An element of our strategy includes expanding our solutions and service
offerings and gaining access to new technologies through strategic acquisitions
and investments when attractive opportunities arise. Some of the risks that we
may encounter in implementing this element of our strategy include:
. expenses and difficulties in identifying potential targets and the
costs associated with acquisitions that are abandoned before
completion;
. expenses, delays and difficulties of integrating the acquired company
into our existing organization and our company's culture;
. diversion of management's attention during the acquisition process;
. diversion of management's attention following the acquisition process
where management has options or other equity incentive rights in the
acquired company;
. expenses of amortizing the acquired company's intangible assets, which
could be significant in light of the high valuations of many companies
in the information technology industry;
. impact on our financial condition due to the timing of the
acquisition; and
. expenses of any undisclosed or potential legal liabilities of the
acquired company, including intellectual property, employment, and
warranty and product liability-related problems.
-7-
<PAGE>
If realized, any of these risks could have a material adverse effect on our
business, financial condition and results of operations.
Lack of detailed written contracts could impair our ability to collect fees,
protect our intellectual property and protect ourselves from liability to others
We try to protect ourselves by entering into detailed written contracts with
our clients covering the terms and contingencies of the project engagement. In
some cases, however, consistent with what we believe to be industry practice,
work is performed for clients on the basis of a limited statement of work or
verbal agreements before a detailed written contract can be finalized. To the
extent that we fail to have detailed written contracts in place, our ability to
collect fees, protect our intellectual property and protect ourselves from
liability to others may be impaired.
Government regulation and legal uncertainties relating to the Internet could
result in decreased demand for our services, increased costs, or otherwise harm
our business
Increased regulation of the Internet might slow the growth in use of the
Internet, which could decrease demand for our services, increase our cost of
doing business or otherwise harm our business. Congress, federal regulatory
agencies and the states have recently passed legislation or taken other actions
regulating certain aspects of the Internet, including:
. on-line content;
. interaction with children;
. copyright infringement;
. user privacy;
. taxation;
. access charges;
. liability for third-party activities;
. transmission of sexually explicit material;
. defamation;
. consumer protection; and
. jurisdiction.
Foreign governments have also taken actions to regulate aspects of the
Internet, including user privacy and on-line content. In addition, federal,
state and local governmental organizations as well as foreign governments are
considering other legislative and regulatory proposals that would regulate these
and other aspects of the Internet. We do not know how courts will interpret laws
governing the Internet or the extent to which they will apply existing laws to
the Internet. Therefore, we are not certain how existing or future laws
governing the Internet or applied to the Internet will affect our business.
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q (9-
30-1999) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
-8-
