<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 MARCH 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 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 April 18, 2000 there were 20,684,282 shares of Common Stock, $.01 par
value, outstanding.
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TANNING TECHNOLOGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
----------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999............. 2
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999...................................................................... 3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2000 and 1999................................................................................ 4
Notes to Condensed 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................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 12
Item 2. Changes in Securities and Use of Proceeds.................................................... 12
Item 3. Defaults Upon Senior Securities.............................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 12
Item 5. Other Information............................................................................ 12
Item 6. Exhibits and Reports on Form 8-K............................................................. 12
Signatures.............................................................................................. 13
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 74,939,911 $ 68,617,336
Accounts receivable - trade, net ................................ 21,765,029 16,726,619
Prepaid expenses and other current assets ....................... 2,203,295 2,147,771
------------- -------------
Total current assets ................................................. 98,908,235 87,491,726
Property and equipment, net ..................................... 5,325,053 5,238,580
Long-term receivables - related parties ......................... 810,000 810,000
Deposits and other long-term assets ............................. 969,800 827,738
------------- -------------
Total assets ......................................................... $ 106,013,088 $ 94,368,044
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 2,969,346 $ 2,656,108
Accrued compensation ............................................ 4,380,802 4,917,691
Other current liabilities ....................................... 2,094,605 1,682,619
------------- -------------
Total current liabilities ............................................ 9,444,753 9,256,418
Other long-term liabilities .......................................... 824,198 509,888
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none at March 31, 2000
and December 31, 1999 ................................... -- --
Common stock, $0.01 par value:
Authorized shares - 70,000,000
Issued and outstanding shares - 20,679,370 at March 31, 2000
and 20,439,546 at December 31, 1999 .................... 206,794 204,395
Additional paid-in capital ...................................... 90,072,007 79,844,186
Retained earnings ............................................... 5,527,576 4,608,521
Accumulated comprehensive income (loss) ......................... (62,240) (55,364)
------------- -------------
Total stockholders' equity ........................................... 95,744,137 84,601,738
------------- -------------
Total liabilities and stockholders' equity ........................... $ 106,013,088 $ 94,368,044
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Revenues ........................................... $19,577,834 $11,305,049
Operating expenses:
Project personnel costs ...................... 9,717,746 5,492,295
Selling, marketing and administrative expenses 9,118,471 4,678,763
----------- -----------
Total operating expenses ................. 18,836,217 10,171,058
----------- -----------
Income from operations ............................. 741,617 1,133,991
Other income ....................................... 964,452 162,814
----------- -----------
Income before provision for income taxes ........... 1,706,069 1,296,805
Provision for income taxes ......................... 787,014 477,598
----------- -----------
Net income ......................................... $ 919,055 $ 819,207
=========== ===========
Basic earnings per share ........................... $ 0.04 $ 0.05
=========== ===========
Basic weighted average shares outstanding .......... 20,597,941 15,345,327
=========== ===========
Diluted earnings per share ......................... $ 0.04 $ 0.05
=========== ===========
Diluted weighted average shares outstanding ........ 24,876,523 16,323,342
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $ 919,055 $ 819,207
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization .................................. 432,032 283,948
Other operating activities ..................................... 1,498 21,173
Changes in operating assets and liabilities:
Accounts receivable - trade ................................. (5,131,410) (3,956,415)
Other assets ................................................ (18,664) (90,157)
Accounts payable ............................................ 334,238 306,828
Accrued compensation ........................................ (510,889) (681,191)
Other liabilities ........................................... 735,798 (387,773)
------------ ------------
Net cash used in operating activities ............................... (3,238,342) (3,684,380)
INVESTING ACTIVITIES
Purchase of property and equipment, net ............................. (524,505) (553,739)
------------ ------------
Net cash used in investing activities ............................... (524,505) (553,739)
FINANCING ACTIVITIES
Payments on long-term debt .......................................... -- (29,073)
Proceeds from exercise of stock options ............................. 40,270 1,057,000
Net proceeds from issuance of common stock .......................... 10,000,028 --
------------ ------------
Net cash provided by financing activities ........................... 10,040,298 1,027,927
Effect of exchange rate on cash ..................................... 45,124 (52,701)
------------ ------------
Net increase (decrease) in cash and cash equivalents ................ 6,322,575 (3,262,893)
Cash and cash equivalents at beginning of period .................... 68,617,336 10,446,111
------------ ------------
Cash and cash equivalents at end of period .......................... $ 74,939,911 $ 7,183,218
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TANNING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed 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, 1999 included in our Annual Report on Form 10-K. The accompanying condensed
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 month period ended March 31, 2000 are
not necessarily indicative of the results to be expected for any future period
or the full fiscal year.
(2) EARNINGS PER SHARE
The Company has 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 (loss) 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 the 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.
THREE MONTHS ENDED MARCH 31,
--------------------------------
2000 1999
----------- -----------
Weighted-average shares outstanding .......... 20,597,941 15,345,327
Dilutive impact of options outstanding ....... 4,278,582 978,015
---------- ----------
Weighted-average shares and potential dilutive
shares outstanding ...................... 24,876,523 16,323,342
========== ==========
(3) CAPITAL STOCK
On July 28, 1999, the Company completed an initial public offering of
common stock, par value $.01 per share, in which it sold 4,000,000 shares of
common stock at $15.00 per share. On August 23, 1999, the Company issued an
additional 310,920 shares of common stock in connection with the exercise of the
underwriters' over-allotment option. Proceeds to the 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, the Company effected a 1
for 3.05 reverse stock split of its Class A and Class C common shares and a 1
for 2.67 reverse stock split of its 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 these reverse stock splits, including the conversion to one class of
common stock, retroactively applied to all periods presented.
During the three months ended March 31, 2000, the Company issued 10,597
shares of common stock in conjunction with the exercise of vested stock options.
On February 1, 2000, the Company announced the formation of a strategic
relationship with GlobalCenter Inc. ("GlobalCenter"). GlobalCenter, a subsidiary
of Global Crossing Ltd., is a commerce service and Internet network solutions
provider. The terms of the relationship involve three components: an equity
investment by GlobalCenter in the Company, a preferred marketing arrangement
between the two companies, and a direct engagement by GlobalCenter of the
Company's services. GlobalCenter purchased, on February 1, 2000, 229,227 shares
of the Company's common stock for an aggregate price of $10,000,028, or $43.625
per share.
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 133 will not have a significant effect on the financial condition or
results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which is required to be adopted in the second calendar quarter of
2000. SAB 101 sets forth certain criteria, including the existence of persuasive
evidence of an arrangement, which must be met in order that revenue be
recognized. We anticipate that the adoption of SAB 101 will not have a
significant effect on the financial condition or results of operations of the
Company.
(5) SEGMENT REPORTING
Operating segments are components of an enterprise about which separate
financial information is available and regularly evaluated by the chief
operating decision maker(s) of an enterprise. Under this definition, the Company
operated as a single business unit for all periods presented.
Information about the Company's revenues and long-lived assets by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues from external customers:
United States ...................................................... $13,877 $ 7,319
Denmark ............................................................ 3,729 3,476
UK and other Europe ................................................ 1,972 510
------- -------
Total .............................................................. $19,578 $11,305
======= =======
MARCH 31, 2000 DECEMBER 31, 1999
-------------- ------------------
Long-lived assets, net:
United States ...................................................... $ 3,682 $ 3,735
Foreign ............................................................ 1,643 1,503
------- -------
Total .............................................................. $ 5,325 $ 5,238
======= =======
</TABLE>
(6) COMPREHENSIVE INCOME
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 MARCH 31,
-------------------------------
2000 1999
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<S> <C> <C>
Net income ......................................................... $ 919,055 $ 819,207
Foreign currency translation........................................ (6,876) (52,701)
--------- ---------
Comprehensive income ............................................... $ 912,179 $ 766,506
========= =========
</TABLE>
6
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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 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 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 a significant contribution to our total revenue and we
anticipate growth in revenue from foreign operations. Foreign operations
represented 35% of revenues in the first three months of 1999, and 29% of
revenues for the same period in 2000.
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 foreseeable 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.
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. We plan
to increase the number of our project personnel in order to support our planned
revenue growth.
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. We expect selling, marketing and administrative expenses to
increase as we expand our sales force, open new offices, increase our recruiting
efforts and incur additional costs related to the growth of our business and
operation as a public company.
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
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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
ENDED MARCH 31,
---------------------------
2000 1999
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<S> <C> <C>
Revenues.......................................... 100% 100%
Project personnel costs........................... 50 49
----------- ------------
Gross profit margin............................ 50 51
Selling, marketing and administrative............. 46 41
----------- ------------
Income from operations.......................... 4 10
Interest income and other, net.................... 5 1
----------- ------------
Income before income taxes...................... 9 11
Income tax provision.............................. 4 4
----------- ------------
Net income...................................... 5% 7%
=========== ============
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 2000
NET REVENUES
Our revenues increased $8.3 million, or 73%, to $19.6 million for the first
quarter of 2000 from $11.3 million for the first quarter of 1999. This increase
in revenues reflects an increase in both the size and number of client projects.
The increase in revenues from our foreign operations also contributed to this
increase in overall revenues. Revenues from foreign operations increased $1.7
million, or 43%, to $5.7 million for the first quarter of 2000 from $4.0 million
for the first quarter of 1999. Revenues from our five largest clients as a
percentage of total revenues were 70% for the first quarter of 2000, and 74% for
the same period in 1999.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $4.2 million, or 76%, to $9.7 million
for the first quarter of 2000 from $5.5 million for the first quarter of 1999.
This increase was primarily due to an increase in project personnel from 127 at
March 31, 1999 to 237 at March 31, 2000, as well as higher salaries. Among the
233 technical employees at March 31, 2000, 20 were employed by our majority
owned off-shore development center in Hyderabad, India, compared to 2 employees
at March 31, 1999. Our gross profit margin has decreased from 51% for the first
quarter of 1999 to 50% for the same period in 2000. The gross profit margin
during the first quarter of 2000 was adversely affected by difficulties
encountered in performing a project engagement entered into in 1999 on a fixed
fee basis, because we were required to devote more resources to perform the work
than we had originally anticipated. Approximately 8% of total revenues were
attributable to this project during the first quarter of 2000. We expect that
this project will continue to have an adverse effect on our results as we work
to improve the efficiency of our delivery on this project, and seek to make
appropriate modifications in the terms of the engagement.
SELLING, MARKETING AND ADMINISTRATIVE
Our selling, marketing and administrative expenses increased $4.4 million,
or 94%, to $9.1 million for the first quarter of 2000 from $4.7 million for the
first quarter of 1999. 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 50 employees at
March 31, 1999 to 83 employees at March 31, 2000.
9
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PROVISION FOR INCOME TAXES
Income tax expense represents combined federal, state, and foreign taxes.
Our income tax provision increased to $0.8 million on pre-tax profits of $1.7
million for the first quarter of 2000, as compared to a provision of $0.5
million on pre-tax income of $1.3 million for the first quarter of 1999. Our
effective tax rate increased to 46% for the first quarter of 2000, from 37% for
the same period in 1999, principally as the result of a decrease in European
pre-tax profits during the first quarter of 2000 which are typically taxed at a
lower average tax rate than domestic earnings.
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. All outstanding debt was paid off
during 1999. We had no outstanding debt as of March 31, 2000.
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 our public
offering will be sufficient to meet our cash requirements at least through the
end of 2000.
Cash and cash equivalents increased to $74.9 million at March 31, 2000 from
$68.6 million at December 31, 1999. The increase was primarily due to $10.0
million in net proceeds from the sale of common stock to GlobalCenter, Inc.,
partially offset by investments in property and equipment, and a $3.2 million
net decrease in cash from operating activities. 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, risked 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. To date, we have neither been advised of nor have
experienced problems related to the Year 2000 issue in connection with our
internal hardware and software systems, but we will continue to monitor our
systems for such problems. Based on currently available information, we believe
that any further expenses related to Year 2000 issues will not have 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. To date,
we have neither been advised of nor have experienced any interruptions in
service from those material third party vendors with which we transact business
as a result of the Year 2000 issue. In addition, we have not been advised by any
of our clients that there will be a delay in the payment of invoices we have
issued for services rendered as a result of the failure of such client's
accounting systems due to the Year 2000 issue. A delay in payment of invoices
could have a material negative effect on us.
Although our principal service offerings generally do not include Year 2000
remediation services, 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 are 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 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.
10
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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 the sale of common stock 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.
11
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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 January 1, 1999 through July 22, 1999, we issued an
aggregate of 587,008 shares of our common stock to employees, officers and
directors for an aggregate consideration of $2.3 million pursuant to the
exercise of stock options under our stock option plans. During the period from
January 1, 1999 to July 22, 1999 we issued and sold 59,094 shares of common
stock to our employees pursuant to our 1999 stock purchase plan for an aggregate
consideration of $316,000. On February 1, 2000 we issued and sold 229,227 shares
of common stock to GlobalCenter Inc. for an aggregate consideration of $10.0
million. 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
3.1 Certificate of Incorporation of Tanning, as amended and restated *
3.2 Bylaws of Tanning, as amended and restated *
27.1 Financial data schedule
99.1 Cautionary Statement for the Purpose of the "Safe Harbor" Provisions
of The Private Securities Litigation Reform Act of 1995
* Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (SEC File No. 333-78657) filed with the Commission
on July 22, 1999.
(b) Reports on Form 8-K.
We did not file any Reports on Form 8-K during the quarter ended
March 31, 2000.
12
<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: May 1, 2000 By: /s/ Larry G. Tanning
Name: Larry G. Tanning
Title: President, Chief Executive Officer
and Director
Date: May 1, 2000 By: /s/ Henry F. Skelsey
Name: Henry F. Skelsey
Title: Executive Vice President, Chief Financial
Officer and Director (Principal Financial
and Accounting Officer)
13
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
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STATEMENTS.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<RECEIVABLES> 22,562,455
<ALLOWANCES> 797,426
<INVENTORY> 0
<CURRENT-ASSETS> 98,908,235
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<SALES> 19,577,834
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<OTHER-EXPENSES> 9,118,471
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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 ("Tanning" or 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 revenues for the first quarter of 2000 increased approximately
73% over revenues in the same period in 1999. Our staff increased from 148
full-time employees at December 31, 1998 to 281 at December 31, 1999, and to 320
at March 31, 2000. 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.
1
<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
1998, our five largest clients accounted for approximately 70% of our services
revenue. In 1999, our five largest clients accounted for approximately 71% of
our services revenue. In the first quarter of 2000, our five largest clients
accounted for approximately 70% 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.
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 arrangements that are not solely based on time
and materials, including fixed-fee, value-based or other arrangements. Some of
our fixed-fee, fixed-time arrangements provide for significant penalties for
late delivery. 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 or are
assessed penalties, and could damage our customer relationships and our
reputation. For example, difficulties encountered in performing a project
engagement entered into in 1999 on a fixed fee basis has resulted in an adverse
effect on our gross profits, because we were required to devote more resources
to perform the work than we had originally anticipated. We expect that this
project will continue to have an adverse effect on our results.
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.
2
<PAGE>
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,
34% of services revenue in 1999, and 29% of services revenue in the first
quarter of 2000. 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;
. 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 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.
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;
3
<PAGE>
. the accuracy of estimates of resources required to complete ongoing
projects; and
. 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.
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.
4
<PAGE>
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;
. 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.
5
<PAGE>
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:
. 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.
6
<PAGE>
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.
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.
7
<PAGE>
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, although we believe that our clients
are legally obligated to pay for our services even in the absence of detailed
written contracts.
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.
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 refers to 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. To the extent
clients' and potential clients' have experienced problems relating to the Year
2000 issue and/or continue to expend significant resources to make their current
systems Year 2000 compliant, they may have less funds available to purchase our
services, which could adversely affect our business, financial condition and
results of operations. 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. Although to date we
have not experienced, nor have we been advised by any clients, suppliers,
utilities, creditors and financial institutions that they have experienced
problems relating to Year 2000 issues, we can not provide any assurance that
such problems may not arise or be reported to us in the future. 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.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
(3-31-2000) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
8
