<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 JUNE 30, 2000 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 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)
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 July 25, 2000 there were 21,051,955 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. Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999........... 2
Condensed Consolidated Statements of Income for the Three and Six Months Ended
June 30, 2000 and 1999.................................................................... 3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
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............................................................................. 8
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.......................................................... 15
Signatures.............................................................................................. 16
Exhibit Index to Quarterly Report....................................................................... 17
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................... $ 77,856,153 $ 68,617,336
Accounts receivable - trade, net.................................... 18,456,619 16,726,619
Prepaid expenses and other current assets........................... 3,003,237 2,147,771
------------------ ------------------
Total current assets..................................................... 99,316,009 87,491,726
Property and equipment, net......................................... 5,716,948 5,238,580
Long-term receivables - related parties............................. 1,103,349 810,000
Deposits and other long-term assets................................. 3,252,160 827,738
------------------ ------------------
Total assets............................................................ $ 109,388,466 $ 94,368,044
================== ==================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.................................................... $ 3,045,022 $ 2,656,108
Accrued compensation................................................ 7,061,492 4,917,691
Other current liabilities........................................... 3,233,932 1,682,619
------------------ ------------------
Total current liabilities................................................ 13,340,446 9,256,418
Other long-term liabilities.............................................. 868,125 509,888
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none at June 30, 2000
and December 31, 1999....................................... - -
Common stock, $0.01 par value:
Authorized shares - 70,000,000
Issued and outstanding shares - 20,930,041 at June 30, 2000
and 20,439,546 at December 31, 1999........................ 209,301 204,395
Additional paid-in capital.......................................... 92,114,428 79,844,186
Retained earnings................................................... 2,955,109 4,608,521
Accumulated comprehensive loss...................................... (98,943) (55,364)
------------------ ------------------
Total stockholders' equity............................................... 95,179,895 84,601,738
------------------ ------------------
Total liabilities and stockholders' equity............................... $ 109,388,466 $ 94,368,044
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 21,650,091 $ 13,214,258 $ 41,227,925 $ 24,519,307
Operating expenses:
Project personnel costs......................... 9,179,188 6,377,710 18,896,934 11,870,005
Selling, marketing and administrative expenses.. 10,622,964 6,503,921 19,741,435 11,182,684
Loss on contract and termination costs.......... 5,841,888 - 5,841,888 -
----------------- ---------------- ---------------- ---------------
Total operating expenses.................... 25,644,040 12,881,631 44,480,257 23,052,689
----------------- ---------------- ---------------- ---------------
Income (loss) from operations......................... (3,993,949) 332,627 (3,252,332) 1,466,618
Other income.......................................... 950,310 112,680 1,914,762 275,494
----------------- ---------------- ---------------- ---------------
Income (loss) before provision for income taxes....... (3,043,639) 445,307 (1,337,570) 1,742,112
Provision for (benefit from) income taxes............. (471,172) 157,543 315,842 635,141
----------------- ---------------- ---------------- ---------------
Net income (loss)..................................... $ (2,572,467) $ 287,764 $ (1,653,412) $ 1,106,971
================= ================ ================ ===============
Basic earnings (loss) per share....................... $ (0.12) $ 0.02 $ (0.08) $ 0.07
================= ================ ================ ===============
Basic weighted average shares outstanding............. 20,753,566 15,584,362 20,675,753 15,465,505
================= ================ ================ ===============
Diluted earnings (loss) per share..................... $ (0.12) $ 0.02 $ (0.08) $ 0.07
================= ================ ================ ===============
Diluted weighted average shares outstanding........... 20,753,566 17,422,184 20,675,753 16,677,820
================= ================ ================ ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------------------ --------------
<S> <C> <C>
Operating activities
Net income (loss).................................................................... $ (1,653,412) $ 1,106,971
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization................................................... 1,021,733 619,353
Other operating activities...................................................... (2,336,462) 8,718
Changes in operating assets and liabilities:
Accounts receivable - trade.................................................. (2,002,000) (6,056,005)
Other assets................................................................. (155,690) (1,122,589)
Accounts payable............................................................. 512,914 1,093,784
Accrued compensation......................................................... 2,306,801 307,057
Other liabilities............................................................ 1,965,852 49,935
------------------ --------------
Net cash used in operating activities................................................ (340,264) (3,992,776)
Investing activities
Purchase of property and equipment, net.............................................. (1,588,101) (1,486,656)
------------------ --------------
Net cash used in investing activities................................................ (1,588,101) (1,486,656)
Financing activities
Payments on long-term debt........................................................... - (58,819)
Proceeds from exercise of stock options.............................................. 880,380 1,299,225
Net proceeds from issuance of common stock........................................... 10,188,381 315,875
------------------ --------------
Net cash provided by financing activities............................................ 11,068,761 1,556,281
Effect of exchange rate on cash...................................................... 98,421 41,385
------------------ --------------
Net increase (decrease) in cash and cash equivalents................................. 9,238,817 (3,881,766)
Cash and cash equivalents at beginning of period..................................... 68,617,336 10,446,111
------------------ --------------
Cash and cash equivalents at end of period........................................... $ 77,856,153 $ 6,564,345
================== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
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 and six month periods ended June 30,
2000, or other periods presented, 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 Company has a net loss for
the three and six month periods ended June 30, 2000. Therefore, for these
periods, the effect of common stock equivalents is excluded from the computation
of earnings (loss) per share since their effect is anti-dilutive. The following
table reflects the basic and diluted weighted average shares.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding................ 20,753,566 15,584,362 20,675,753 15,465,505
Dilutive impact of options outstanding............. - 1,837,822 - 1,212,315
---------------- ---------------- --------------- ----------------
Weighted-average shares and potential dilutive
shares outstanding............................. 20,753,566 17,422,184 20,675,753 16,677,820
================ ================ =============== ================
</TABLE>
(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 six months ended June 30, 2000, the Company issued 261,268
shares of common stock in conjunction with purchases under its qualified
employee stock purchase plan, as well as 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
<PAGE>
(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 June 2000, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB No. 133" ("SFAS 137"), which defers for one year the effective date
of SFAS 133.
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 fourth 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.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-8, "Accounting by a Grantee for an Equity Instrument to be Received
in Conjunction with Providing Goods or Services". The EITF concluded that the
provider of the goods or services should measure the fair value of the equity
instruments, for revenue recognition purposes, on the earlier of: (a) the date
the parties come to a mutual understanding of the terms of the equity-based
compensation arrangement and enter into a binding contract that includes a
performance commitment by the provider (as defined in Issue 96-18) or (b) the
date on which the provider's performance necessary to earn the equity
instruments is completed. The approach for determining the amount of revenue,
including when there are performance conditions, generally is symmetrical with
how the issuer would determine the amount of cost to recognize under Issue 96-
18. The consensus, which is to be applied prospectively to new arrangements and
to modifications of existing arrangements that occur after March 16, 2000, is
not expected to be a significant change to the Company's existing practice.
(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 June 30, Six months ended June 30,
-------------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ----------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Revenues from external customers:
United States........................... $ 16,659 $ 8,097 $ 30,537 $ 15,173
Denmark................................. 4,611 3,849 8,339 7,324
UK and other Europe..................... 380 1,268 2,352 2,022
------------------- ----------------------- ------------------- --------------------
Total................................... $ 21,650 $ 13,214 $ 41,228 $ 24,519
=================== ======================= =================== ====================
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------- -----------------------
<S> <C> <C>
Long-lived assets, net:
United States.......................... $ 3,879 $ 3,735
Foreign................................ 1,838 1,503
------------------- -----------------------
Total.................................. $ 5,717 $ 5,238
=================== =======================
</TABLE>
6
<PAGE>
(6) COMPREHENSIVE INCOME (LOSS)
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 June 30, Six months ended June 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss)....................... $ (2,572,467) $ 287,764 $ (1,653,412) $ 1,106,971
Foreign currency translation............ (36,703) (68,914) (43,579) (121,615)
------------------ ----------------- ----------------- ------------------
Comprehensive income (loss).......... $ (2,609,170) $ 218,850 $ (1,696,991) $ 985,356
================== ================= ================= ==================
</TABLE>
(7) LOSS ON CONTRACT AND TERMINATION COSTS
During the second quarter of 2000, the Company reached an agreement to
terminate a fixed-price contract with British Sky Broadcasting Ltd. The
aggregate financial impact of this contract and its termination costs during the
second quarter of 2000 was a $5.8 million pretax loss, consisting of the
following (in thousands):
<TABLE>
<S> <C>
Write-off of accounts receivable............................... $3,332
Project personnel costs incurred in the second quarter ........ 2,000
Other related costs............................................ 510
---------
Total loss.................................................. $5,842
=========
</TABLE>
The Company did not recognize any revenue associated with this fixed-price
contract during the second quarter of 2000. The Company recognized $1.6 million
in revenue, or 8% of total revenues, and incurred $1.6 million in project
personnel costs associated with this fixed-price contract during the first
quarter of 2000. For the three and six month periods ended June 30, 1999, this
fixed-price contract accounted for 7% and 6% of total revenues, respectively.
7
<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 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 a portion of our client engagements will continue to
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.
During the second quarter of 2000, we reached an agreement to terminate a
fixed-fee contract with British Sky Broadcasting Ltd. ("BSkyB"). The aggregate
financial impact of this contract and its termination costs during the second
quarter of 2000 was a $5.8 million loss. This loss consists of a write off of
accounts receivable of $3.3 million, $2.0 million in project personnel costs,
and $0.5 million in other related costs. We did not recognize any revenue
associated with this fixed-fee contract during the second quarter of 2000. BSkyB
accounted for 6% of total revenues during 1999, and 8% of total revenues for the
first quarter of 2000, making BSkyB one of our five largest customers, in terms
of revenue, for each of these periods. The termination of this contract has
contributed to a decrease in revenue from foreign operations as a percentage of
total revenues in the second quarter of 2000. Approximately 25 employee project
personnel and 15 subcontractors were engaged on this fixed-price contract at the
time of its termination. Our results of operations will be adversely impacted if
we do not effectively re-deploy the employee project personnel that were staffed
on the BSkyB project.
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 38% of revenues in the first six months of 1999, and 26% 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.
8
<PAGE>
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.
Selling, marketing and administrative expenses consist primarily of
salaries, bonuses, commissions 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 and marketing 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.
9
<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 ended Six months
June 30, ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................. 100% 100% 100% 100%
Project personnel costs.................. 42 48 46 48
---------- ---------- ---------- ----------
Gross profit margin................... 58 52 54 52
Selling, marketing and administrative.... 49 49 48 46
Loss on contract and termination costs... 27 0 14 0
---------- ---------- ---------- ----------
Income (loss) from operations......... (18) 3 (8) 6
Interest income and other, net........... 4 0 5 1
---------- ---------- ---------- ----------
Income (loss) before income taxes..... (14) 3 (3) 7
Income tax provision (benefit)........... (2) 1 1 3
---------- ---------- ---------- ----------
Net income (loss)..................... (12)% 2% (4)% 4%
========== ========== ========== ==========
</TABLE>
Comparison of three months ended June 30, 1999 and 2000
Net revenues
Our revenues increased $8.5 million, or 64%, to $21.7 million for the
second quarter of 2000 from $13.2 million for the second quarter of 1999. This
increase in revenues reflects an increase in both the size and number of client
projects, as well as higher average billing rates. This increase in overall
revenues was partially offset by a decrease in revenues from foreign operations.
Revenues from foreign operations decreased $0.1 million, or 2%, to $5.0 million
for the second quarter of 2000 from $5.1 million for the second quarter of 1999.
The second quarter of 2000 does not reflect any revenue recognized from a fixed-
price contract that was terminated during the quarter. During the second quarter
of 1999, we recognized $0.9 million in revenue from this fixed-price contract.
Revenues from our five largest clients as a percentage of total revenues were
78% for the second quarter of 2000, and 74% for the same period in 1999.
Project personnel costs
Our project personnel costs increased $2.8 million, or 44%, to $9.2 million
for the second quarter of 2000 from $6.4 million for the second quarter of 1999.
This increase was primarily due to an increase in project personnel, including
subcontractors, from 183 at June 30, 1999 to 336 at June 30, 2000, as well as
higher employee salaries. Our gross profit margin has increased from 52% for the
second quarter of 1999 to 58% for the same period in 2000. Not included in
project personnel costs for the second quarter of 2000 is approximately $2
million in labor costs associated with a fixed-price project that was terminated
during the quarter. This $2 million cost is included as part of "Loss on
contract and termination costs" on the statement of income for the three months
ended June 30, 2000.
Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $4.1 million,
or 63%, to $10.6 million for the second quarter of 2000 from $6.5 million for
the second 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
65 employees at June 30, 1999 to 99 employees at June 30, 2000.
10
<PAGE>
Loss on contract and termination costs
During the second quarter of 2000, we reached an agreement to terminate a
fixed-price contract with British Sky Broadcasting Ltd. The aggregate financial
impact of this contract and its termination costs during the second quarter of
2000 was a $5.8 million loss. This loss consists of a write off of accounts
receivable of $3.3 million, $2.0 million in project personnel costs, and $0.5
million in other related costs.
Other income
Due to an increase in interest income, other income increased $0.9 million,
to $1.0 million for the second quarter of 2000 from $0.1 million for the second
quarter of 1999. This increase in interest income during the second quarter of
2000 was a result of the investment of the proceeds from our initial public
offering in July 1999, as well as the proceeds from the sale of common stock to
GlobalCenter Inc. in February 2000. Proceeds from these transactions have been
invested in short-term, interest bearing, investment grade obligations.
Provision for (benefit from) income taxes
Income tax expense represents combined federal, state, and foreign taxes.
Our income tax benefit was $0.5 million on pre-tax losses of $3.0 million for
the second quarter of 2000, as compared to a provision of $0.2 million on pre-
tax income of $0.4 million for the second quarter of 1999. Pre-tax losses during
the second quarter of 2000 were principally related to a fixed-price contract
that was terminated during the quarter. The tax benefit was recorded in the
second quarter of 2000 in anticipation of applying the tax benefit to future tax
provisions as we generate future profits.
Comparison of six months ended June 30, 1999 and 2000
Net revenues
Our revenues increased $16.7 million, or 68%, to $41.2 million for the
first half of 2000 from $24.5 million for the first half of 1999. This increase
in revenues reflects an increase in both the size and number of client projects,
as well as higher average billing rates. The increase in revenues from our
foreign operations also contributed to this increase in overall revenues.
Revenues from foreign operations increased $1.4 million, or 15%, to $10.7
million for the first half of 2000 from $9.3 million for the first half of 1999.
The first half of 2000 reflects $1.6 million in revenue recognized from a fixed-
price contract that was terminated during the second quarter. All of this
revenue was recognized during the first quarter of 2000. During the first half
of 1999, we recognized $1.4 million in revenue from this fixed-price contract.
Revenues from this fixed-price contract, as a percentage of total revenues, were
4% for the first half of 2000, and 6% for the same period in 1999. Revenues from
our five largest clients as a percentage of total revenues were 72% for the
first half of 2000, and 73% for the same period in 1999.
Project personnel costs
Our project personnel costs increased $7.0 million, or 59%, to $18.9
million for the first half of 2000 from $11.9 million for the first half of
1999. This increase was primarily due to an increase in project personnel,
including subcontractors, from 183 at June 30, 1999 to 336 at June 30, 2000, as
well as higher employee salaries. Our gross profit margin has increased from 52%
for the first half of 1999 to 54% for the same period in 2000. Not included in
project personnel costs for the first half of 2000 is approximately $2 million
in labor costs associated with a fixed-price project that was terminated during
the period. This $2 million cost is included as part of "Loss on contract and
termination costs" on the statement of income for the six months ended June 30,
2000.
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Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $8.5 million,
or 76%, to $19.7 million for the first half of 2000 from $11.2 million for the
first half 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 65 employees at
June 30, 1999 to 99 employees at June 30, 2000.
Loss on contract and termination costs
During the fist half of 2000, we reached an agreement to terminate a
fixed-price contract with British Sky Broadcasting Ltd. The aggregate financial
impact of this contract and its termination costs during the first half of 2000
was a $5.8 million loss. This loss consists of a write off of accounts
receivable of $3.3 million, $2.0 million in project personnel costs, and $0.5
million in other related costs.
Other income
Due to an increase in interest income, other income increased $1.6 million,
to $1.9 million for the first half of 2000 from $0.3 million for the first half
of 1999. This increase in interest income during the first half of 2000 was a
result of the investment of the proceeds from our initial public offering in
July 1999, as well as the proceeds from the sale of common stock to GlobalCenter
Inc. in February 2000. Proceeds from these transactions have been invested in
short-term, interest bearing, investment grade obligations.
Provision for income taxes
Income tax expense represents combined federal, state, and foreign taxes.
Our income tax provision was $0.3 million on pre-tax losses of $1.3 million for
the first half of 2000, as compared to a provision of $0.6 million on pre-tax
income of $1.7 million for the first half of 1999. Pre-tax losses during the
first half of 2000 were principally related to a fixed-price contract that was
terminated during the second quarter. The tax benefit was recorded in the first
half of 2000 in anticipation of applying the tax benefit to future tax
provisions as we generate future profits.
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 June 30, 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 $77.9 million at June 30, 2000 from
$68.6 million at December 31, 1999. The increase was primarily due to $10.9
million in net proceeds from the sale of common stock to GlobalCenter Inc. and
the exercise of stock options, partially offset by investments in property and
equipment, and a $0.3 million net decrease in cash from operating activities. We
currently have no material commitments for capital expenditures.
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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.
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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
On May 22, 2000, at an annual meeting of the Company's stockholders, the
following director nominees were elected:
Nominee Votes For Withheld
------- --------- --------
Dan J. Hesser 19,214,378 12,548
Toni S. Hippeli 19,189,976 36,950
Michael E. Shanahan 18,565,524 661,402
At the meeting the stockholders also approved the selection of Ernst &
Young LLP as the independent public accountant for the Company for the year 2000
(with 19,219,513 shares voting for, 6,985 against, 428 abstaining and 1,457,356
non-voting).
Item 5. Other Information
Not applicable
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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 *
10.1 June 30, 2000 Agreement between Tanning Technology Europe Limited and
British Sky Broadcasting Ltd.
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 June 30,
2000.
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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: July 27, 2000 By: /s/ Larry G. Tanning
Name: Larry G. Tanning
Title: President, Chief Executive
Officer and Director
Date: July 27, 2000 By: /s/ Henry F. Skelsey
Name: Henry F. Skelsey
Title: Executive Vice President,
Chief Financial Officer and
Director (Principal Financial
and Accounting Officer)
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TANNING TECHNOLOGY CORPORATION
Exhibit Index to Quarterly Report
On Form 10-Q for the Quarterly Period
Ended June 30, 2000
Exhibit Description
------- -----------
3.1 Certificate of Incorporation of Tanning, as amended and restated *
3.2 Bylaws of Tanning, as amended and restated *
10.1 June 30, 2000 Agreement between Tanning Technology Europe Limited
and British Sky Broadcasting Ltd.
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.
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