<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 27, 2000 there were 21,191,601 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 September 30, 2000 and December 31, 1999... 2
Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2000 and 1999............................................................ 3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 78,809,208 $68,617,336
Accounts receivable - trade, net................................. 20,438,343 16,726,619
Prepaid expenses and other current assets........................ 3,968,332 2,147,771
------------ -----------
Total current assets............................................... 103,215,883 87,491,726
Property and equipment, net...................................... 5,660,790 5,238,580
Long-term receivables - related parties.......................... 803,349 810,000
Deferred taxes and other long-term assets........................ 2,634,188 827,738
------------ -----------
Total assets....................................................... $112,314,210 $94,368,044
============ ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................. $ 2,912,676 $ 2,656,108
Accrued compensation............................................. 7,049,581 4,917,691
Other current liabilities........................................ 2,372,247 1,682,619
------------ -----------
Total current liabilities.......................................... 12,334,504 9,256,418
Other long-term liabilities........................................ 857,385 509,888
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none at September 30, 2000
and December 31, 1999....................................... - -
Common stock, $0.01 par value:
Authorized shares - 70,000,000
Issued and outstanding shares - 21,176,505 at September 30,
2000 and 20,439,546 at December 31, 1999................... 211,765 204,395
Additional paid-in capital....................................... 94,420,699 79,844,186
Retained earnings................................................ 4,825,498 4,608,521
Accumulated comprehensive loss................................... (335,641) (55,364)
------------ -----------
Total stockholders' equity......................................... 99,122,321 84,601,738
------------ -----------
Total liabilities and stockholders' equity......................... $112,314,210 $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 September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues........................................... $24,736,440 $16,005,110 $65,964,365 $40,524,417
Operating expenses:
Project personnel costs......................... 11,344,084 7,745,522 30,241,018 19,615,527
Selling, marketing and administrative expenses.. 11,296,879 7,935,701 31,038,314 19,118,385
Loss on contract and termination costs.......... - - 5,841,888 -
----------- ----------- ----------- -----------
Total operating expenses...................... 22,640,963 15,681,223 67,121,220 38,733,912
----------- ----------- ----------- -----------
Income (loss) from operations...................... 2,095,477 323,887 (1,156,855) 1,790,505
Other income....................................... 1,016,205 488,761 2,930,967 764,255
----------- ----------- ----------- -----------
Income before provision for income taxes........... 3,111,682 812,648 1,774,112 2,554,760
Provision for income taxes......................... 1,241,293 364,115 1,557,135 999,256
----------- ----------- ----------- -----------
Net income......................................... $ 1,870,389 $ 448,533 $ 216,977 $ 1,555,504
=========== =========== =========== ===========
Basic earnings per share........................... $ 0.09 $ 0.02 $ 0.01 $ 0.09
=========== =========== =========== ===========
Basic weighted average shares outstanding.......... 21,080,681 19,003,322 20,811,715 16,657,736
=========== =========== =========== ===========
Diluted earnings per share......................... $ 0.08 $ 0.02 $ 0.01 $ 0.08
=========== =========== =========== ===========
Diluted weighted average shares outstanding........ 23,897,468 22,201,513 24,208,645 18,532,010
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
TANNING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities
Net income............................................ $ 216,977 $ 1,555,504
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 1,643,882 1,060,546
Other operating activities.......................... (2,271,982) 62,784
Changes in operating assets and liabilities:
Accounts receivable - trade...................... (4,250,724) (6,393,581)
Other assets..................................... 1,005,437 (1,270,401)
Accounts payable................................. 400,568 1,859,263
Accrued compensation............................. 2,380,890 970,050
Other liabilities................................ 1,119,492 195,263
----------- -----------
Net cash provided by (used in) operating activities... 244,540 (1,960,572)
Investing activities
Purchase of property and equipment, net............... (2,192,092) (2,520,114)
----------- -----------
Net cash used in investing activities................. (2,192,092) (2,520,114)
Financing activities
Payments on long-term debt............................ - (573,420)
Proceeds from exercise of stock options............... 1,848,320 2,815,086
Net proceeds from issuance of common stock............ 10,188,381 58,159,993
----------- -----------
Net cash provided by financing activities............. 12,036,701 60,401,659
Effect of exchange rate on cash....................... 102,723 (1,834)
----------- -----------
Net increase in cash and cash equivalents............. 10,191,872 55,919,139
Cash and cash equivalents at beginning of period...... 68,617,336 10,446,111
----------- -----------
Cash and cash equivalents at end of period............ $78,809,208 $66,365,250
=========== ===========
</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 nine month periods ended September
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
Basic earnings per share (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.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding...... 21,080,681 19,003,322 20,811,715 16,657,736
Dilutive impact of options outstanding... 2,816,787 3,198,191 3,396,930 1,874,274
-------------- -------------- -------------- --------------
Weighted-average shares and potential
dilutive shares outstanding............ 23,897,468 22,201,513 24,208,645 18,532,010
============== ============== ============== ==============
</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 nine months ended September 30, 2000, the Company issued 507,732
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>
On September 28, 2000, Global Crossing Ltd. announced that it had reached
an agreement with Exodus Communications Inc. ("Exodus") pursuant to which Exodus
would acquire GlobalCenter. The transaction is expected to close during the
first quarter of 2001.
(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 was originally required to be
adopted in years beginning after June 15, 2000. 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. 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 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 Standards 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 was
effective July 1, 2000. The application of FIN 44 has not had 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, has
not caused 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.
6
<PAGE>
Information about the Company's revenues and long-lived assets by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers:
United States...................... $18,602 $11,137 $49,139 $26,310
Denmark............................ 4,532 4,116 12,871 11,440
UK and other Europe................ 1,602 752 3,954 2,774
----------- ----------- ----------- -----------
Total.............................. $24,736 $16,005 $65,964 $40,524
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------- -------------------
<S> <C> <C>
Long-lived assets, net:
United States...................... $ 4,000 $ 3,735
Foreign............................ 1,661 1,503
----------- -----------
Total.............................. $ 5,661 $ 5,238
=========== ===========
</TABLE>
(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 September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income..................... $1,870,389 $448,533 $ 216,977 $1,555,504
Foreign currency translation... (236,698) 104,781 (280,277) (16,834)
-------------- -------------- ------------- --------------
Comprehensive income (loss).. $1,633,691 $553,314 $ (63,300) $1,538,670
============== ============== ============= ==============
</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):
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
The Company did not recognize any revenue associated with this fixed-price
contract after the first 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 nine months ended September 30, 1999, this fixed-price
contract accounted for 5% of total revenues.
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, variations
in demand for information technology services and in economic conditions
generally; our ability to attract business from new clients, and maintain and
expand business from existing clients; 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; potential collection risks arising from clients with
uncertain financial condition; 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 a premier provider of innovative technology integration solutions
for companies who seek to be leaders in the networked economy. We architect,
build and deploy networked enterprise solutions for companies throughout the
world. We specialize in large, complex, integrated solutions that incorporate
online transaction processing and very large databases. Proven Internet and
middleware technologies are central to our e-Business solutions, enabling rich
collaboration among employees, customers, suppliers and partners. We provide
focused solutions in the areas of Service Level Assurance(TM), Channel
Integration, Financial Trading and Asset Management, and Marketplace
Implementation and Integration, and offer our customers project teams composed
of industry leading talent and experience.
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 after the first 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 during the second quarter, and to a lesser extent, during the
third quarter of 2000. Approximately 25 employee project personnel and 15
subcontractors were engaged on this fixed-price contract at the time of its
termination. The subcontractors were released at the beginning of the third
quarter of 2000.
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 nine months of 1999, and 26% of
revenues for the same period in 2000.
8
<PAGE>
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. A limited number of our clients--generally in the range of 15% of
our total revenue--are relatively new businesses, based on innovative business
plans relating to the internet and frequently dependent on external financing
for their growth and success. There has recently been significant volatility in
the prospects of these types of businesses, and in their ability to raise needed
financing. To the extent these clients are unable to grow as anticipated or
secure needed financing, their demand for our services or ability to pay for
services already provided could be adversely affected, which in turn could have
an adverse effect on us.
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 long-term 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 long-term business growth, we expect to incur costs and
expend capital. Our ability to generate revenues fluctuates from quarter to
quarter as a result of a number of factors, and 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 are inadequate to support our
costs and expenditures, our results of operations and liquidity would 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 Nine months ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues................................. 100% 100% 100% 100%
Project personnel costs.................. 46 48 46 48
------ ------ ------ ------
Gross profit margin.................... 54 52 54 52
Selling, marketing and administrative.... 46 50 47 48
Loss on contract and termination costs... 0 0 9 0
------ ------ ------ ------
Income (loss) from operations.......... 8 2 (2) 4
Interest income and other, net........... 4 3 4 2
------ ------ ------ ------
Income before income taxes............. 12 5 2 6
Income tax provision..................... 5 2 2 2
------ ------ ------ ------
Net income............................. 7% 3% 0% 4%
====== ====== ====== ======
</TABLE>
Comparison of three months ended September 30, 1999 and 2000
Revenues
Our revenues increased $8.7 million, or 55%, to $24.7 million for the third
quarter of 2000 from $16.0 million for the third 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. An increase in revenues from our
foreign operations also contributed to this increase in overall revenues.
Revenues from foreign operations increased $1.3 million, or 26%, to $6.1 million
for the third quarter of 2000 from $4.8 million for the third quarter of 1999.
Revenues from our five largest clients as a percentage of total revenues were
64% for the third quarter of 2000, and 75% for the same period in 1999. On
September 28, 2000, GlobalCenter, Inc. announced that it was being acquired by
Exodus Communications, Inc. GlobalCenter, Inc. was one of our five largest
clients during the third quarter of 2000, representing in excess of $4 million
in revenues. The announced acquisition creates significant uncertainty as to the
nature of our ongoing relationship with GlobalCenter, Inc., and as to the level
of revenues, if any, we will generate with this client.
Project personnel costs
Our project personnel costs increased $3.6 million, or 46%, to $11.3
million for the third quarter of 2000 from $7.7 million for the third quarter of
1999. This increase was primarily due to an increase in project personnel,
including subcontractors, from 212 at September 30, 1999 to 345 at September 30,
2000, partially offset by the lower cost of labor associated with our off-shore
Indian development center. Our gross profit margin has increased from 52% for
the third quarter of 1999 to 54% for the same period in 2000. The increase in
gross margin was attributable to higher average bill rates, as well as more
extensive use of off-shore Indian resources, partially offset by a decrease in
utilization during the third quarter of 2000.
Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $3.4 million,
or 42%, to $11.3 million for the third quarter of 2000 from $7.9 million for the
third 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 75 employees at
September 30, 1999 to 107 employees at September 30, 2000.
10
<PAGE>
Other income
Other income increased $0.5 million, to $1.0 million for the third quarter
of 2000 from $0.5 million for the third quarter of 1999. This increase was
attributable to an increase in interest income, as well as foreign currency
translation gains, partially offset by a reserve taken against an equity
investment made during 1998. The increase in interest income during the third
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 income taxes
Income tax expense represents combined federal, state, and foreign taxes.
Our income tax provision was $1.2 million on pre-tax income of $3.1 million for
the third quarter of 2000, as compared to a provision of $0.4 million on pre-tax
income of $0.8 million for the third quarter of 1999. Our effective tax rate
decreased to 40% for the third quarter of 2000, from 45% for the same period in
1999, principally as the result of an increase in European pre-tax profits
during the third quarter of 2000 which are typically taxed at a lower average
tax rate than domestic earnings.
Comparison of nine months ended September 30, 1999 and 2000
Revenues
Our revenues increased $25.5 million, or 63%, to $66.0 million for the
first nine months of 2000 from $40.5 million for the first nine months 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 $2.6 million, or
18%, to $16.8 million for the first nine months of 2000 from $14.2 million for
the first nine months of 1999. The first nine months 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 nine months of 1999, we recognized $2.1
million in revenue from this fixed-price contract. Revenues from this fixed-
price contract, as a percentage of total revenues, were 2% for the first nine
months of 2000, and 5% for the same period in 1999. Revenues from our five
largest clients as a percentage of total revenues were 69% for the first nine
months of 2000, and 74% for the same period in 1999. On September 28, 2000,
GlobalCenter, Inc. announced that it was being acquired by Exodus
Communications, Inc. GlobalCenter, Inc. was one of our five largest clients
during the first nine months of 2000. The announced acquisition creates
significant uncertainty as to the nature of our ongoing relationship with
GlobalCenter, Inc., and as to the level of revenues, if any, we will generate
with this client.
Project personnel costs
Our project personnel costs increased $10.6 million, or 54%, to $30.2
million for the first nine months of 2000 from $19.6 million for the first nine
months of 1999. This increase was primarily due to an increase in project
personnel, including subcontractors, from 212 at September 30, 1999 to 345 at
September 30, 2000, partially offset by the lower cost of labor associated with
our off-shore Indian development center. Our gross profit margin has increased
from 52% for the first nine months of 1999 to 54% for the same period in 2000.
The increase in gross margin was attributable to higher average bill rates, as
well as more extensive use of off-shore Indian resources. Not included in
project personnel costs for the first nine months of 2000 is approximately $2
million in labor costs associated with a fixed-price project that was terminated
during the second quarter. This $2 million cost is included as part of "Loss on
contract and termination costs" on the statement of income for the nine months
ended September 30, 2000.
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Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $11.9 million,
or 62%, to $31.0 million for the first nine months of 2000 from $19.1 million
for the first nine months 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
75 employees at September 30, 1999 to 107 employees at September 30, 2000.
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 first nine months
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
Other income increased $2.1 million, to $2.9 million for the first nine
months of 2000 from $0.8 million for the first nine months of 1999. This
increase was attributable to an increase in interest income, as well as foreign
currency translation gains, partially offset by a reserve taken against an
equity investment made during 1998. The increase in interest income during the
first nine months 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 $1.6 million on pre-tax income of $1.8 million for
the first nine months of 2000, as compared to a provision of $1.0 million on
pre-tax income of $2.6 million for the first nine months of 1999. Our effective
tax rate increased to 88% for the first nine months of 2000, from 39% for the
same period in 1999, principally as the result of pre-tax losses incurred in
Europe during the first nine months of 2000. Because income tax rates, on
average, are lower in Europe than they are domestically, a pre-tax European loss
has the effect of increasing our consolidated effective tax rate. Pre-tax losses
incurred in Europe during the first nine months of 2000 were primarily
attributable to a $5.8 million contract termination charge recorded during the
second quarter of 2000.
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 September 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. On February 1, 2000, GlobalCenter
Inc. purchased 229,227 shares of our common stock in a private offering.
Proceeds to our company from this transaction were $10.0 million. The net
proceeds from each of these offerings (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 and private offerings will be sufficient to
meet our cash requirements at least through the end of 2001.
Cash and cash equivalents increased to $78.8 million at September 30, 2000
from $68.6 million at December 31, 1999. The increase was primarily due to $12.0
million in net proceeds from the sale of common stock to GlobalCenter Inc.,
purchases under our qualified employee stock purchase plan, and the exercise of
stock options, as well as a $0.2 million net increase in cash from operating
activities, partially offset by a $2.2 million investment in property and
equipment. 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
Not applicable
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.
** Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q filed with the Commission on July 27, 2000.
(b) Reports on Form 8-K.
We did not file any Reports on Form 8-K during the quarter ended September
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: October 31, 2000 By: /s/ Larry G. Tanning
Name: Larry G. Tanning
Title: President, Chief Executive Officer
and Director
Date: October 31, 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 September 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.
** Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q filed with the Commission on July 27, 2000.
17
