UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the quarterly period ended March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ______________ to______________.
Commission file number 000-27449
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RESOURCEPHOENIX.COM
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2190830
- -------------------------------- ----------------------------------
State of Jurisdiction I.R.S. Employer Identification No.
2401 Kerner Boulevard, San Rafael, California 94901-5527
- --------------------------------------------------------------------------------
Address of Principal Executive Offices Zip Code
Registrant's telephone number, including area code: (415) 485-4500
--------------
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
preceding requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Registrant's Common Stock as of April
28, 2000 was 11,210,800.
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INDEX
RESOURCEPHOENIX.COM AND SUBSIDIARY
FORM 10-Q - For the Quarterly Period Ended March 31, 2000
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets - March 31, 2000
(unaudited) and December 31, 1999...........................3
b) Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2000 and March 31, 1999
(unaudited).................................................4
d) Condensed Statements of Cash Flows - Three Months
Ended March 31, 2000 and March 31, 1999 (unaudited).........5
e) Notes to Condensed Consolidated Financial Statements -
March 31, 2000 (unaudited)..................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....25
Part II. Other Information
Item 1. Legal Proceedings..............................................25
Item 2. Changes in Securities and Use of Proceeds......................25
Item 3. Defaults Upon Senior Securities................................25
Item 4. Submission of Matters to a Vote of Security Holders............25
Item 5. Other Information..............................................26
Item 6. Exhibits and Reports on Form 8-K...............................26
Signature .......................................................27
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCEPHOENIX.COM AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 9,614 $ 15,78
Accounts receivable, net of allowance of $55 at 1,422 948
March 31, 2000 and $54 at December 31, 1999
Receivable from affiliates 42 33
Prepaid expenses and other current assets 687 729
-------- --------
Total current assets 11,765 17,490
Property and equipment, at cost, net of accumulated
depreciation 7,015 6,287
Other assets 332 276
-------- --------
Total assets $ 19,112 $ 24,053
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,196 $ 1,455
Accrued liabilities 2,008 1,655
Deferred revenue - current 705 306
-------- --------
Total current liabilities 5,909 3,416
Deferred revenue 931 688
-------- --------
Total Liabilities 6,840 4,104
Commitment and Contingencies
Stockholder's Equity:
Class A Common Stock, $.001 par value; 4,028,000
shares issued and outstanding at December 31,
1999 and 4,038,800 shares issued and outstanding
at March 31, 2000 32,892 32,869
Class B Common Stock, $.001 par value; 7,172,000
shares issued and outstanding at December 31,
1999 and March 31, 2000 9,957 9,957
Accumulated deficit (30,577) (22,877)
-------- --------
Total stockholder's equity 12,272 19,949
-------- --------
Total liabilities and stockholder's equity $ 19,112 $ 24,053
======== ========
The accompanying notes are an integral part of these statements.
3
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RESOURCEPHOENIX.COM AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(unaudited)
Three months ended
March 31,
-------------------
2000 1999
-------- --------
Revenue:
Contract service revenue $ 1,403 $ 809
Contract service revenue - affiliate 1,016 478
Software revenue 532 94
-------- --------
Total revenue 2,951 1,381
Operating expenses:
Cost of providing services 3,343 1,028
Cost of providing software revenue 324 177
General and administrative 2,305 511
Research and development 1,002 656
Client acquisition 3,122 476
Stock-related compensation -- 2,358
Depreciation and amortization 601 91
-------- --------
Total operating expenses 10,697 5,297
-------- --------
Loss from operations (7,746) (3,916)
Other income (expense) 175 9
-------- --------
Net loss before effect of accounting change (7,571) (3,907)
Cumulative effect of accounting change (129) --
-------- --------
Net loss $ (7,700) $ (3,907)
======== ========
Basic and diluted net loss per share:
Net loss before effect of accounting change $ (0.68) $ (.54)
Cumulative effect of accounting change (0.01) --
-------- --------
Net loss $ (0.69) $ (0.54)
======== ========
Shares used in computing basic and
diluted net loss per share 11,201 7,200
Proforma amounts assuming accounting change had been
in effect during the three months ended March 31, 1999:
Net Loss $ (7,522) $ (3,992)
Basic and diluted net loss per share $ (0.67) $ (0.55)
The accompanying notes are an integral part of these statements.
4
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RESOURCEPHOENIX.COM AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------
2000 1999
-------- --------
Operating Activities
Net loss $ (7,700) $ (3,907)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 601 91
Stock-related compensation -- 2,358
Change in operating assets and liabilities:
Accounts receivable (474) 666
Receivable from affiliates (9) 84
Prepaid expenses and other assets (14) (75)
Accounts payable and accrued liabilities 2,094 (367)
Deferred revenue 642 186
-------- --------
Net cash used in operating activities (4,860) (964)
Investing activities
Purchase of property and equipment (1,329) (5)
-------- --------
Net cash used in investing activities (1,329) (5)
Financing activities
Proceeds from capital contribution -- 921
Proceeds from exercise of options 23 --
-------- --------
Net cash provided by financing activities 23 921
Net decrease in cash and cash equivalents (6,166) (48)
Cash and cash equivalents, beginning of period 15,780 503
-------- --------
Cash and cash equivalents, end of period $ 9,614 $ 455
======== ========
The accompanying notes are an integral part of these statements.
5
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RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared without audit by ReSourcePhoenix.com (the "Company") in accordance with
generally accepted accounting principles for interim financial statements and
pursuant to the rules of the Securities and Exchange Commission for Form 10-Q.
Certain information and footnotes required by generally accepted accounting
principles for complete financial statements have been omitted. It is the
opinion of management that all adjustments are of a normal and recurring nature.
For further information, refer to the audited financial statements and footnotes
included in the Company's Annual Report on Form 10-K dated December 31, 1999.
Reclassification of certain prior year balances have been made to conform to the
March 31, 2000 presentation.
NOTE 2. CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101A, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000 to the second quarter of their fiscal year. The Company
has elected to implement SAB No. 101 this quarter, the effect of which is
described as follows:
Effective January 1, 2000, the Company deferred recognition of
implementation fees for its Financial Outsourcing, S.T.A.R. and M.A.R.S. hosting
services and will amortize such fees ratably over a three-year period as client
services are performed. Prior to January 1, 2000, implementation fees were
recognized when the work was completed on a percentage of completion basis. The
cumulative effect of the change in the method of recognizing implementation
revenue on prior years' income was a one-time charge of $129,000 or $0.01 per
share. Of this amount, $85,000 is attributable to the first quarter of 1999. The
effect of this change in accounting principle on first quarter 2000's revenue
was to reduce total revenue from $3.7 million to $3.0 million. Costs related to
client implementation activities are expensed as incurred.
Set forth below is a comparison of operating results for the three
months ended March 31, 2000:
Assuming SAB 101 had
not been adopted
March 31, 2000 March 31, 2000
-------------- --------------
Revenue $ 2,951 $ 3,701
Operating Expenses 10,697 10,697
Net Loss from Operations (7,746) (6,996)
NOTE 3. BASIC AND DILUTED NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share are based
on the weighted average shares outstanding in each period. Basic net loss per
share excludes any dilutive effects of stock options. Diluted net loss per share
includes the dilutive effect of the assumed exercise of stock options using the
6
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RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
treasury stock method. However, the effect of outstanding stock options has been
excluded from the calculation of diluted net loss per share as their inclusion
would be antidilutive.
If the Company had reported net income, the calculation of diluted
earnings per share would have included the shares used in the computation of net
loss per share as well as an additional 672,000 common equivalent shares
(determined using the treasury stock method) related to outstanding stock
options not included above for the first quarter of fiscal 2000.
NOTE 4. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. We
are, however, party to various legal proceedings and claims from time to time
arising in the ordinary course of business. We do not expect that the results in
any of these legal proceedings will seriously harm our business or results of
operations.
NOTE 5. GOING CONCERN
The Company will need to raise additional capital during the second
quarter. In late April the Company began to implement a number of steps aimed at
reducing its operating costs, which, prior to that point, had been predicated on
higher anticipated revenue levels. Those steps included, among other things,
staff reductions amounting to approximately 15% of its work force and cessation
of certain development efforts that will reduce expenditures for outside
consulting expertise. We expect to record a charge of approximately $900,000 in
the second quarter of 2000 related to these reductions. Despite these efforts,
the Company will continue to operate at a significant cash negative level.
Absent additional financing, the Company may not have sufficient resources to
continue as a going concern beyond its second quarter. We may sell additional
debt or equity securities or enter into new credit facilities to meet our cash
needs. To that end, the Company has entered into a commitment letter with
Tourneau Fund, Ltd. to provide us with equity financing. (See Note 5 -
Subsequent Events.) Our ability to raise funds through the equity facility with
Tourneau is subject to certain conditions at the time of each sale of our Class
A common stock. We may not be able to negotiate and execute a definitive
agreement with Tourneau or satisfy the conditions for each sale of our Class A
common stock. We cannot assure you that we will be able to complete this or any
other financing, that such financing will be adequate for the Company's needs,
or that a financing will be completed prior to the Company running out of funds.
The factors discussed above create substantial doubt about the
Company's ability to continue as a going concern and an uncertainty as to the
recoverability and classification of recorded asset amounts and the amounts and
classification of liabilities. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern. In
connection with the expected filing of a resale registration statement, as
contemplated in our commitment letter with the Tourneau Fund, Ltd., our
independent auditors, Arthur Andersen LLP, are expected to reissue their
auditors' report on our financial statements for the year ended December 31,
1999. They are expected to modify their report to reflect their view that we
require additional funding to continue our operations and their view that we may
be unable to continue our operations absent receiving additional funding. More
specifically, the modified opinion, among other things, raises substantial doubt
about our ability continue as a going concern.
7
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RESOURCEPHOENIX.COM AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 6. SUBSEQUENT EVENTS
Management Changes
On April 19, 2000, Bryant Tong resigned his positions as President,
Chief Operating Officer and Director of our Company. Gus Constantin, our
Chairman and Chief Executive Officer, will continue in these roles and will
share the office of President with Corey West, our Senior Vice President, Sales
and Marketing.
Financing Arrangement with Tourneau Fund, Ltd.
On May 5, 2000, we signed a commitment letter with Tourneau Fund, Ltd.
to provide us with equity financing. The principal terms of the proposed equity
draw down facility provide for the sale of up to 7,000,000 shares of the
Company's Class A common stock over a 14 month period at a discount of six
percent from the trading price of our stock. That 14 month period would commence
subsequent to the SEC declaring a resale registration statement to be filed by
the Company effective and approval by our shareholders. The 14 months will be
divided into pricing periods, each consisting of 20 trading days on the Nasdaq
National Market. We may make 12 monthly draw downs, by giving notice and
requiring Tourneau Fund, Ltd. to purchase shares of our Class A common stock,
for the draw down amount. If our threshold price is at least $1.00, the draw
down amount is $1,500,000. For every $1.00 increase in our threshold price, the
drawn down amount will increase by $500,000. Prior to each draw down, we will
provide Tourneau Fund, Ltd. with a notice that sets forth the number of shares
of Class A common stock we will sell and the commencement date of the pricing
period.
Under a separate Warrant Agreement, we will issue Tourneau Fund, Ltd.
warrants to purchase up to 1,800,000 shares of our Class A common stock at
exercise prices ranging from $2.50 to $7.00 per share.
Our ability to cause Tourneau to purchase common stock through the
equity facility is subject to certain conditions, including the negotiation and
execution of a definitive agreement that reflect the terms of the commitment
letter, approval of the equity facility by our shareholders and the
effectiveness of a resale registration statement registering the resale by
Tourneau Fund of the shares of common stock it purchases under the equity
facility. Our ability to raise funds through the equity facility also would be
subject to the satisfaction of certain conditions at the time of each sale of
Class A common stock to Tourneau Fund. We may not be able to negotiate and
execute a definitive agreement with Tourneau Fund or satisfy the other
conditions to the initial sale to Tourneau Fund under the equity facility prior
to the end of June 2000. If this occurs, we would likely need to raise money
from other sources in order to continue to fund our operations. Such alternative
funding may not be available. In addition, we may not be able to satisfy the
conditions to the subsequent sales to Tourneau Fund under the equity facility.
If this occurs, we would not be able to sell the full 7,000,000 shares to
Tourneau Fund pursuant to the equity facility, and we may need to raise
additional money from other sources in order to continue to fund our operations.
Such alternative funding may not be available on favorable terms, if at all.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and the notes appearing elsewhere in this report. The
following discussion contains forward-looking statements. Our actual results may
differ materially from those projected in the forward-looking statements.
Factors that might cause future results to differ materially from those
projected in the forward-looking statements include those discussed in "Risk
Factors" and elsewhere in this report.
Overview
ReSourcePhoenix.com provides outsourced financial and management
reporting, accounting management, transaction processing and record keeping
services. We allow our clients to focus on their core businesses by outsourcing
the infrastructure and operations of these critical back-office functions.
Our operating subsidiary, ReSource/Phoenix, Inc., commenced operations
on January 1, 1997. Before this time, we operated as part of Phoenix Leasing
Incorporated, a commercial lender and sponsor and syndicator of publicly-traded
limited partnerships. In August 1999, we reorganized into a holding company
structure. As a result, we currently conduct all of our operations through our
wholly-owned subsidiary ReSource/Phoenix, Inc.
At the time of our formation, we provided information technology,
accounting, finance and transaction processing services to entities affiliated
with Phoenix Leasing which had at that time total combined assets of more than
$200 million. We currently provide services to three clients affiliated with
Phoenix Leasing.
We introduced our S.T.A.R. and our original Financial Outsourcing,
formerly ReFOCOS, services in 1993. Using our S.T.A.R. service, we perform a
variety of investor relations functions for sponsors of limited partnerships and
real estate investment trusts. Using our original Financial Outsourcing service,
we perform a wide variety of accounting, finance, transaction processing and
other related services for our clients. Our original Financial Outsourcing and
S.T.A.R. services are based on point-to-point client-server technology.
In March 1999, we began licensing our M.A.R.S. software, which is a
customer relationship management application aimed at the mutual fund and
variable annuity industries. All of our software clients have entered into
annual software maintenance and support contracts. The first of these contracts
comes up for renewal in the second quarter of 2000.
We introduced our Web-enabled Financial Outsourcing service and our
hosted M.A.R.S. service in November 1998 and August 1999, respectively. Our
Web-enabled Financial Outsourcing service is similar to our original Financial
Outsourcing service, except that clients can now access the service using the
Internet. We successfully implemented the first hosted M.A.R.S. client during
the fourth quarter of 1999. With the hosted M.A.R.S. service offerings, we
install and maintain the M.A.R.S. software in our data operations center for our
clients.
Contract service revenue. We derive contract service revenue primarily
from fees to provide monthly information technology, accounting, finance and
transaction processing for services related to Financial Outsourcing and
S.T.A.R. We recognize monthly fees as these services are performed. Prior to
January 1, 2000, implementation fees and subsequent consulting fees were
recognized when the work was completed on a percentage of completion basis. As
of January 1, 2000, fees for these services are deferred and amortized over the
estimated contract service period, which is estimated to be three years. The
method of recognizing implementation and consulting fees was changed in response
to the Security and Exchange Commission's Staff Accounting Bulletin (SAB) No.
101 "Revenue Recognition." The effect is reported as a change in accounting
principle in accordance with Accounting Principles Board Opinion ("APB") No. 20,
9
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"Accounting Changes". The cumulative effect of changing to a new method of
accounting effective January 1, 2000 was to increase net loss by $129,000 or
$0.01 basic and fully diluted loss per share for the three months ended March
31, 2000.
Contract service revenue -- affiliate. We derive contract service
revenue from affiliates by providing our S.T.A.R. and Financial Outsourcing
service to certain affiliate companies. Prior to August 1, 1999, we charged our
affiliates the fully allocated cost to provide such services. Effective August
1, 1999, we increased our fees to affiliates to reflect a market rate. We
recognize affiliate revenue in the same manner as our contract service revenue.
Software revenue. We derive software revenue from software license
fees, consulting services, maintenance, hosting and training for our M.A.R.S.
software. Maintenance and hosting fees have been reclassed from contract service
revenue to software revenue. Software license fee revenue consists principally
of up-front license fees earned from the licensing of the M.A.R.S. software and
related implementation and installation. Revenue from up-front software license
agreements is recognized in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2. This revenue is recognized when
delivery has occurred, collection is deemed probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to all delivered and undelivered elements of the arrangement.
Historically, we licensed our M.A.R.S. product primarily on a perpetual basis.
Consulting services and training revenues are recognized as services are
performed and accepted by the customers. Maintenance revenue is recognized
ratably over the term of the agreement. In instances where software license
agreements include a combination of consulting services, training and
maintenance, these separate elements are unbundled from the agreement based on
the element's fair value.
The Company also provides M.A.R.S. services on a hosted basis, whereby
our customers do not take possession of the software, instead, the software
resides on the Company's server. We then provide implementation and maintenance
services as described in the paragraph above. Revenue from our hosting services
(including up front implementation fees) is recognized ratably over the term of
the agreement. This treatment is in accordance with the tentative conclusion
reached by the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) in its January 19-20, 2000 meeting , on Issue No. 00-3
"Application of AICPA Statement of Position 97-2, Software Revenue Recognition
to Arrangements that Include the Right to Use Software Stored on Another
Entity's Hardware". That tentative conclusion was that SOP 97-2 only applies to
hosting arrangements in which the customer has the contractural right to take
possession of the software at anytime during the hosting period without
significant penalty and it is feasible for the customer to either run the
software on its own hardware or contract with an unrelated third party to host
the software. In the case of our hosting arrangements, the software may only be
used through access to our data processing facility under our direct supervision
and control.
We expect that in the future software revenue will decline as a
percentage of total revenue as we devote greater resources to our other
outsourced business services.
Components of costs and expenses. Cost of providing services includes
salaries and benefits for personnel in our Financial Outsourcing and S.T.A.R.
operations groups, fees paid to outside service providers other than
implementation service providers and other miscellaneous operating costs. Cost
of providing software revenue includes salaries and benefits for personnel in
our M.A.R.S. technical support and installation groups and costs related to
consulting, training and updates. Prior to the quarter ended June 30, 1998,
these costs were recorded as research and development. General and
administrative expenses includes salaries and benefits for management personnel,
fees paid to outside service providers for corporate-related services and other
overhead expenses. Research and development expenses include salaries and
benefits for personnel engaged in M.A.R.S. development, consulting fees paid to
outside service providers engaged in M.A.R.S. development, miscellaneous costs
associated with M.A.R.S. development, and similar types of expenses engaged in
application development efforts related to our Financial Outsourcing service.
Client acquisition expense primarily includes salaries, benefits and commissions
paid to our sales and marketing and implementation personnel, travel expenses of
10
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our sales and marketing and implementation personnel, certain advertising
expenses and fees paid to outside implementation consultants.
Stock-related compensation expense. As a result of stock options
granted in 1999, we recognized stock-related compensation expense of $5.0
million in 1999, $3.1 million of which was recognized in the first quarter of
1999.
Revenue and operating expense trends. On April 14, 2000 the Company
announced that its revenue growth would be less than previously anticipated due
to business conditions and the impact of the adoption of SAB 101. Factors acting
to slow future revenue growth from levels previously anticipated include, among
other things, an expected reduction in fees from affiliate companies due to
reduced operations and the closure of one of the affiliates, delays in the
selling cycle, due in part to concerns over the Company's financial viability
going forward, planned strategic reductions in client acquisition expenditures,
and the adoption of SAB 101 which will defer revenue that would otherwise have
been reported during the current year. 1
In response to anticipated slower sales growth the Company initiated
several steps in late April to reduce its operating cost structure. Those steps
include, among other things, staff reductions, primarily in the areas of general
and administrative and client acquisition expenses, and reduced spending in
certain support and product development areas. These steps, together with a
slower pace of staff additions in the client services areas, are expected to
reduce the Company's cash operating requirements beginning in the middle of the
second quarter. Despite these steps the Company will continue to incur losses
and negative cash flow over at least the balance of the fiscal year. 1
- --------------------
1 This paragraph contains forward-looking statements reflecting our current
expectations. In addition, our actual future performance may not meet our
current expectations. You are strongly encouraged to review the section entitled
"Risk Factors" commencing on page 15 and discussions elsewhere in this Quarterly
Report on Form 10-Q of the factors that could affect future performance.
11
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Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain
items reflected in our consolidated statements of operations expressed as a
percentage of revenue and the percentage change in the underlying values from
period to period.
Quarter Ended March 31,
----------------------- Percentage
2000 1999 Change
---------- --------- ----------
Consolidated Statements of Operations Data:
Revenue:
Contract service revenue................... 47.5% 58.6% 74.3%
Contract service revenue-- affiliate....... 34.4 34.6 112.6
Software revenue........................... 18.0 6.8 466.0
---------- --------- ---------
Total Revenue........................ 100.0 100.0 114.0
---------- --------- ---------
Operating expenses:...........................
Cost of providing services................. 113.3 74.4 (225.2)
Cost of providing software revenue......... 11.0 12.8 (83.1)
General and administrative................. 78.1 37.0 (351.1)
Research and development................... 34.0 47.5 (52.7)
Client acquisition......................... 105.8 34.5 (555.9)
Stock-related compensation................. 0.0 170.8 100.0
Depreciation and amortization.............. 20.4 6.6 (560.4)
---------- --------- ---------
Total operating expenses............. 362.5 383.6 (101.9)
---------- --------- ---------
Loss from operations.......................... (262.5) (283.6) (97.8)
Other income.................................. 5.9 .7 1,844.4
---------- --------- ---------
Net loss before change in accounting
principle................................... (256.6) (282.9) (93.6)
Cumulative effect on prior years of change
in accounting principle..................... (4.4) - (100.0)
---------- --------- ---------
Net loss...................................... (261.0)% (282.9)% (97.1)%
========= ========= =========
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Revenue. Total revenue increased 114.0% or $1.6 million in the first
quarter ending 2000 when compared with the same period in 1999, primarily due to
growth in both our Financial Outsourcing service for affiliate and non-affiliate
clients and sales of our M.A.R.S. product.
Contract service revenue. Contract service revenue increased 74.3% or
$0.6 million in the first quarter of fiscal 2000 when compared with the same
period of fiscal 1999 primarily due to an increase in Financial Outsourcing
revenue of $0.5 million. The higher revenue from Financial Outsourcing was due
to the net addition of 22 new clients between March 31, 1999 and March 31, 2000.
An increase in S.T.A.R. revenue of $0.04 million was due to the addition of two
new clients and increased activity for existing clients.
Contract service revenue -- affiliate. Contract service revenue from
affiliates increased 112.6% or $0.5 million in the first quarter of fiscal 2000
compared with the same period in 1999. The increase in contract service revenue
from affiliates was primarily due to a change in August 1999 from a fee based on
allocated cost to a fee schedule that was reflective of market rates for the
services provided.
Software revenue. Software revenue increased 466.0% or $0.4 million in
the first quarter of fiscal 2000 when compared with the same period in 1999.
This increase was primarily due to the introduction of our current M.A.R.S.
release in March 1999. Revenue in the current quarter was primarily related to
the sale of additional licenses to existing clients, rather than the addition of
new clients, and higher maintenance revenue.
12
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Cost of providing services. Cost of providing services increased 225.2%
or $2.3 million in the first quarter of fiscal 2000 when compared with the same
period in 1999. The increase was primarily due to the increase in the number of
clients serviced, which required us to add full time and contract personnel in
our operations group. Increased labor, labor-related benefit and contract labor
expenses accounted for 71.2% of the increase in our cost of providing services.
The rate of increase in cost of services exceeded the rate of revenue
growth from services for the quarter. In Note 2 to the financial statements,
revenues from implementation services are now deferred and recognized ratably
over three years rather than the actual average implementation phase of one to
three months.
This was due in part to the adoption of SAB 101 which had the effect of
deferring a significant portion of revenue that would otherwise have been
recorded in the period and to the rapid expansion of staff in the client
services area. Such staff were hired in anticipation of a higher number of
client additions than materialized. Staff reduction, together with a slower rate
of staff additions going forward and are expected to return the Company to
positive gross margins later in the fiscal year.
Cost of providing software revenue. Cost of providing software revenue
increased 83% or $0.1 million in the first quarter of fiscal 2000 when compared
with the same period in 1999. The increase was due primarily to the increase in
M.A.R.S. clients from seven as of March 31, 1999 to 10 at the end of the current
quarter.
General and administrative expenses. General and administrative
expenses increased 351.1% or $1.8 million in first quarter 2000 compared with
the same period in. The increase was primarily due to the hiring of additional
management and administrative personnel to support our operations.
Research and development expenses. Research and development expenses
increased 52.7% or $0.3 million in the first quarter 2000 when compared with the
same period of fiscal 1999. The increase was due primarily to hiring additional
full-time and contract personnel to develop enhancements and new features to our
M.A.R.S software product and conduct application development work for our
Financial Outsourcing services.
Client acquisition expenses. Client acquisition expenses increased
555.9% or $2.6 million in first quarter 2000 compared with the same period of
fiscal 1999. The increase was due largely to incremental salary and benefits
expense of $1.2 million associated with hiring additional sales and
implementation personnel for our Financial Outsourcing services and, to a lesser
extent, M.A.R.S. An increase of $0.4 million in consultant expenses incurred
supporting new Financial Outsourcing client implementations. Increased sales
support costs, including the opening of 14 regional sales offices, together with
higher advertising and promotional expenses also contributed to higher costs in
first quarter 2000 compared to the same period in 1999.
Stock-related compensation expense. As a result of stock options
granted in 1999, we recognized stock-related compensation expense of $2.4
million in first quarter 1999. We had no stock-related compensation expense in
the first quarter of 2000.
Cumulative effect on prior years for a change in accounting principle.
As of January 1, 2000, the method of recognizing implementation fees for our
Financial Outsourcing and for M.A.R.S. hosted clients was changed from a
percentage of completion basis to recognition ratably over the estimated
contract life. The Company has adopted a three year period for such
amortization, in response to the Security and Exchange Commission's Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition." In accordance with
Accounting Principles Board Opinion ("APB") No. 20, "Accounting Changes," the
effect of changing to a new method of accounting effective at the beginning of
our fiscal year, January 1, 2000 is to report the cumulative effect on prior
year income as of January 1, 2000 which resulted in an increase in net loss of
$129,000.
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The impact of the change was to reduce Financial Outsourcing revenue by
$415,000 and Software revenue by $335,000 for a total of $750,000 or $0.07 per
share for the quarter ended March 31, 2000.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through
equity contributions and loans from the Gus and Mary Jane Constantin 1978 Living
Trust, our sole stockholder prior to our initial public offering and from the
net proceeds of our initial public offering, which closed in October 1999.
At March 31, 2000, we had approximately $9.6 million of cash and cash
equivalents. Net cash used in operating activities in the first three months of
2000 and 1999 was $4.9 million and $1.0 million, respectively. The cash used in
operating activities in 2000 and 1999 was primarily the result of net losses.
Net cash used in investing activities was $1.3 million in first quarter
2000 and $5,000 in the first quarter of 1999. The net cash used in investing
activities resulted primarily from capital expenditures for data processing
equipment, leasehold improvements and furniture and fixtures. We expect to make
additional capital expenditures for computer hardware and software, furniture,
equipment and fixtures to support the continued growth of our operations.
Net cash provided by financing activities was $23,000 in first quarter
2000 and $0.9 million, in the first three months 1999. Net cash provided by
financing activities in 2000 resulted from the exercise of certain employee
options. Net cash provided by financing activities in the first three months of
1999 was due to capital contributions from our then sole stockholder.
We will need to raise additional capital during the second quarter.
Subsequent to the end of the first quarter, the Company began to implement a
number of steps aimed at reducing its operating costs. Those steps included,
among other things, staff reductions amounting to approximately 15% of its work
force and cessation of certain development efforts that will reduce expenditures
for outside consulting expertise. Despite these efforts, the Company will
continue to operate at a significant cash negative level. Absent additional
financing, the Company may not have sufficient resources to continue as a going
concern beyond its second quarter. To that end, the Company has entered into a
commitment letter with Tourneau Fund, Ltd. to provide us with equity financing.
(See Note 5 - Subsequent Events.) Our ability to raise funds through the equity
facility with Tourneau is subject to certain conditions at the time of each sale
of our Class A common stock. We may not be able to negotiate and execute a
definitive agreement with Tourneau or satisfy the conditions for each sale of
our Class A common stock. We cannot assure you that we will be able to complete
this or any other financing, that such financing will be adequate for the
Company's needs, or that a financing will be completed prior to the Company
running out of funds.
Forward Looking Statements
This report contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect," "anticipate," "intend" and "plan." Our actual results may differ
materially from those discussed in these statements. Factors that could
contribute to such differences include, but are not limited to, those discussed
below and elsewhere in this report.
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Risk Factors
We may not be able to continue operating our business if we do not complete our
previously announced equity line financing with Tourneau Fund, Ltd. or an
alternative equity or debt financing prior to the end of June 2000.
Our business has not generated sufficient cash flow to fund our
operations without requiring external sources of capital, and we expect to
continue to have significant net cash outflow. As of March 31, 2000, we had
working capital of $5.9 million. If we do not complete an equity or debt
financing prior to the end of June 2000, we may not have sufficient cash to
continue operating our business. In that event, our shareholders could lose
substantially all, if not all, of their investment in our company.
On May 5, 2000, we entered into a commitment letter with Tourneau Fund
Ltd. to provide us with equity financing. The commitment letter provides for the
purchase of up to 7,000,000 shares of Class A common stock at a discount to the
prevailing market price and the issuance of warrants to purchase up to 1,800,000
shares of Class A common stock at exercise prices ranging from $2.50 to $7.00
per share. Our ability to cause Tourneau to purchase common stock through the
equity facility is subject to certain conditions, including the negotiation and
execution of a definitive agreement that reflect the terms of the commitment
letter, approval of the equity facility by our shareholders and the
effectiveness of a resale registration statement registering the resale by
Tourneau of the shares of common stock it purchases under the equity facility.
Our ability to raise funds through the equity facility also would be subject to
the satisfaction of certain conditions at the time of each sale of Class A
common stock to Tourneau. We may not be able to negotiate and execute a
definitive agreement with Tourneau or satisfy the other conditions to the
initial sale to Tourneau under the equity facility prior to the end of June
2000. If this occurs, we would likely need to raise money from other sources in
order to continue to fund our operations. Such alternative funding may not be
available. In addition, we may not be able to satisfy the conditions to the
subsequent sales to Tourneau under the equity facility. If this occurs, we would
not be able to sell the full 7,000,000 shares to Tourneau pursuant to the equity
facility, and we may need to raise additional money from other sources in order
to continue to fund our operations. Such alternative funding may not be
available on favorable terms, if at all.
We may have difficulty raising money we need for our operations in the future.
Even if we execute a definitive agreement with Tourneau and satisfy the
conditions to the initial sale and subsequent sales under the equity facility,
we may have to raise additional money from other sources in the future. Because
the price at which we would sell stock to Tourneau under the equity facility
will depend on the prevailing market price of our Class A common stock over the
14 month term of the equity facility, we cannot predict the amount of proceeds
we would receive under the equity facility. Due to price fluctuations, we may
receive less proceeds than we need to fund our operations until the Company
achieves cash breakeven. If this occurs, we would need to raise additional
funds. Outside sources may not provide us with money when we need it. If we
cannot obtain money when we need it, we may need to further reduce our
operations. In addition, even if we are able to find outside sources that will
provide us with money when we need it, in order to raise this money we may be
required to issue securities with better rights than the rights of our Class A
common stock or we may be required to take other actions which lessen the value
of our current Class A common stock, including borrowing money on terms that are
not favorable to us.
We expect to continue to incur losses and experience negative cash flow.
We expect to have significant operating losses and continue to record
significant net cash outflow on a quarterly and annual basis. We reported net
loss from operations of $30.8 million for the period from January 1, 1997, the
date on which we began operations as a separate company, through March 31, 2000,
and reported net cash used in operating and investing activities of $26.4
million for the same period. Further developing our business and expanding our
network may require significant capital in addition to the amount that may be
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raised under the proposed equity facility with Tourneau. We may not be able to
obtain additional capital on terms favorable to us or at all.
Our ability to achieve and maintain profitability is highly dependent
upon the successful commercialization of our Financial Outsourcing services. We
may not ever be able to successfully commercialize our products or achieve
profitability.
Modifications of the report of our independent public accountants regarding our
ability to continue as a going concern may significantly impair our ability to
sell our products and services.
In connection with the expected filing of a resale registration
statement, as contemplated in our commitment letter with the Tourneau Fund,
Ltd., our independent auditors, Arthur Andersen LLP, are expected to reissue
their auditors' report on our financial statements for the year ended December
31, 1999. They are expected to modify their report to reflect their view that we
require additional funding to continue our operations and their view that we may
be unable to continue our operations absent receiving additional funding. More
specifically, the modified report, among other things, raises substantial doubt
about our ability to continue as a going concern. We believe that growing
concern among our existing and potential customers regarding our continued
financial viability has been a significant factor causing demand for our
products to grow more slowly than we previously anticipated. The modified report
from Arthur Andersen may reinforce our existing and potential customers'
concern.
Even if we close the equity facility with Tourneau, we cannot assure
you that Arthur Andersen's report on our future financial statements will not
include a similar modification. The continued inclusion of a going concern
modification in Arthur Andersen's report could perpetuate concerns about our
ability to fulfill our contractual obligations, as well as adversely affect our
relationships with third parties and impair our ability to complete future
financings. Each of the foregoing could significantly damage our business.
Our Class A common stock may be delisted from the Nasdaq National Market if we
cannot meet the continued listing requirements.
While the Class A common stock has met the current initial listing
requirements for inclusion in the Nasdaq National Market, there can be no
assurance that we will meet the continued listing requirements. To maintain our
listing on the Nasdaq National Market:
o we must have at least 750,000 shares publicly held with a market value
of at least $5 million;
o we will have to maintain at least $4 million in net tangible assets;
o the minimum bid price of our Class A common stock will have to be $1.00
per share;
o our Class A common must be held by at least 400 holders; and
o our Class A common stock must have at least two active market makers.
If we are unable to satisfy the maintenance criteria of the Nasdaq
National Market, our Class A common stock may be delisted. If this occurs, our
Class A common stock would be traded only in the over-the-counter market. As a
result, the liquidity of our Class A common stock would be significantly
impaired and the price of our Class A common stock would be significantly
adversely affected. Among other things, our company could receive less media
coverage and have fewer security analysts.
If our Class A common stock is delisted, then trading in our Class A
common stock would be subject to rules under the Securities Exchange Act of 1934
that require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as "penny stock." In general, a penny stock is
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an equity security that is not listed on a national exchange and has a market
price of less than $5.00 per share, subject to some exceptions. Prior to any
transaction in a penny stock, the rules require the delivery of a disclosure
schedule explaining the penny stock market and associated risks and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. For these
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The broker-dealer also must disclose the commissions
payable to the broker-dealer, current bid and offer quotations for the penny
stock. In addition, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. This information must be provided to the customer orally or in
writing prior to the transaction and in writing before or with the customer's
confirmation. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed on broker-dealers
by these requirements may discourage them from effecting transactions in our
Class A common stock, which could severely limit the liquidity of our Class A
common stock and the ability of purchasers in this offering to sell our Class A
common stock in the secondary market.
Our success depends on the acceptance and increased use of Internet-based
software applications and business process outsourcing solutions. We cannot be
sure that these solutions will gain market acceptance.
Our business model depends on the adoption of Internet-based software
applications and business process outsourcing solutions by commercial users. Our
business would suffer dramatically if these solutions are not accepted or not
perceived to be effective. The market for Internet services, virtual private
networks and widely distributed Internet-enabled packaged application software
has only recently begun to develop. The growth of Internet-based business
process outsourcing solutions could also be limited by:
o concerns over transaction security and user privacy;
o inadequate network infrastructure for the entire Internet; and
o inconsistent performance of the Internet.
In addition, growth in, demand for and acceptance of Internet-based
software applications and business process outsourcing solutions, including our
Financial Outsourcing service, by early stage and middle market companies is
highly uncertain. It is possible that our outsourced business information
solutions may never achieve broad market acceptance. If the market for our
services does not grow significantly or continues to grow less rapidly than we
currently anticipate, our business, financial condition and operating results
would be seriously harmed.
Our Financial Outsourcing service is targeted at early stage and middle market
companies, which may be more likely to be acquired or to cease operations than
other companies. As a result, our client base may be more volatile than the
client bases of companies whose client bases consist of more established
companies.
Our Financial Outsourcing service is targeted at early stage and middle
market companies, which may be more likely to be acquired or to cease operations
than other companies. As a result, our client base may be more volatile than the
client bases of companies whose client bases consist of more established
companies. From our inception through the end of 1999, we lost five unaffiliated
clients, including one because the client was acquired and three because the
clients ceased operations or no longer had financial means to continue our
services. In the quarter ended March 31, 2000, we lost two clients because they
were purchased and one client because it no longer had financial means to
continue our services. If we experience greater than expected client turnover,
either because our clients are acquired, cease operations or for any other
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reason, our business, financial condition and operating results could be
seriously harmed.
Our growth will be limited if we are unable to attract and retain qualified
personnel.
We must continue to attract and retain qualified information
technology, accounting, finance and transaction processing professionals in
order to perform services for our existing and future clients. The personnel
capable of filling these positions are in great demand and recruiting and
training them requires substantial resources. We may not be able to hire the
necessary personnel to implement our business strategy, or we may need to pay
higher compensation for employees than we currently expect. We cannot assure you
that we will succeed in attracting and retaining the personnel we need to grow.
Our current and historical financial information may not be comparable to our
future financial results.
Our historical revenues were derived primarily from services that we do
not expect to be the focus of our business in the future. We introduced our
S.T.A.R. services and our original Financial Outsourcing service in 1993. Our
Web-enabled Financial Outsourcing service and our hosted M.A.R.S. service were
introduced in November 1998 and August 1999, respectively. For the years 1998,
1999 and the first quarter of 2000, we derived approximately 67%, 50% and 40%,
respectively, of total revenue from our S.T.A.R. services. For the years 1998,
1999 and the first quarter of 2000, we derived approximately 1%, 25% and 18%,
respectively, of total revenue from the sale of software, including license fees
and related services. Because our historical revenues were derived from a
different type of service than the services that we plan to emphasize in the
future, our historical financial results may not be comparable to our future
financial results. In addition, our M.A.R.S. and S.T.A.R. services are marketed
to specialized financial services clients. Our Financial Outsourcing services
are marketed to a broader, less specialized market than either of our M.A.R.S.
or S.T.A.R. services. We may be unsuccessful in our efforts to market to this
target market.
Our strategy does not contemplate M.A.R.S. as one of our core
offerings. As a result, we expect that software license fees will decline as a
percentage of revenues as we devote greater resources to our other outsourced
financial and management reporting services.
Our stock price could fluctuate dramatically because of fluctuations in our
quarterly operating results. This could result in substantial losses to
investors.
Period-to-period comparisons of our operating results may not be a good
indication of our future performance. Moreover, our operating results in some
quarters may not meet the expectations of stock market analysts or investors. In
that event, our stock price would likely fall significantly. For example, on
April 14, 2000, we announced that we expected our revenue to grow more slowly
than previously expected. We also announced on that date that we would adopt a
recently introduced accounting policy, the effect of which would be, among other
things, to reduce our reported revenue for 2000. Following these announcements,
the trading price of our Class A common stock immediately fell dramatically.
As a result of the evolving nature of the markets in which we compete,
we may have difficulty accurately forecasting our revenue in any given period.
In addition to the factors discussed elsewhere in this section, a number of
factors may cause our revenue to fall short of our expectations or cause our
operating results to fluctuate, including:
o the announcement or introduction of new or enhanced products or
services by our competitors;
o pricing changes by us or our competitors;
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o the timing and frequency of new client engagements or cancellations;
and
o sales cycle fluctuations.
We must implement our services for new clients in a timely and
cost-effective manner. To the extent that we are unable to staff client
implementations using internal staff, we will need to delay our client
implementations or hire outside software and systems integration consultants,
whose services generally are much more costly. If we delay implementation for
any client, we may not meet the expectations of that client, which could damage
our relationship with that client. A delay in implementation would also postpone
our recognition of revenues from that client, perhaps into a subsequent
financial reporting period, which could cause us not to meet analyst or investor
expectations for that period. If we hire outside software and systems
integration consultants, our operating expenses will increase and our operating
results will be harmed.
Stock markets often experience significant price and volume
fluctuations. These fluctuations, as well as general economic and political
conditions unrelated to our performance, may adversely affect the price of our
Class A common stock. The market prices of the securities of Internet-related
and technology-related companies have been especially volatile. The closing
price of our Class A common stock, for example, has fluctuated between $1.66 and
$25.37 since our initial public offering in October 1999 through April 28, 2000.
In addition, if our performance in a given quarter or our expected future
performance falls below the expectations of securities analysts or investors,
the price of our Class A common stock will likely fall significantly, as it did
in April 2000.
Our operating results depend on our relationships with a limited number of
clients. As a result, the loss of a single client may seriously harm our
operating results.
Our results of operations and our business depend on our relationships
with a limited number of large clients. As a result, the loss of a single client
may seriously harm our operating results. Set forth below is the percentage of
revenues during the three months ended March 31, 2000 and the years ended
December 31, 1999 and 1998 for each of our clients that accounted for more than
10% of our revenues and for our ten largest clients combined:
Quarter Ended
March 31, Year Ended December 31,
--------- -----------------------
2000 1999 1998
---- ---- ----
Phoenix Leasing (an affiliate) 26% 24% 41%
GE Capital Aviation Services/PIMC 8% 9% 20%
John Hancock Advisors -- 16% --
Total of ten largest clients combined: 72% 77% 86%
We cannot assure you that we will be able to maintain our current level
of revenues derived from any of our clients or markets in the future. The
termination of our business relationships with any of our significant clients or
a material reduction in the use of our services by any of our significant
clients, could seriously harm our business and operating results.
We rely on third parties to supply us with the software, hardware and services
necessary to provide our services. The loss of any of this third party software,
hardware or services may be difficult to replace and may harm our operating
results.
A substantial portion of the software that is integrated into our
services is licensed from third parties, including Oracle Corporation,
BroadVision, Inc. and Vitria Technology, Inc. If we were to lose the right to
use the software that we have licensed from Oracle, BroadVision, Vitria or other
third parties, our operations would be seriously harmed. Our agreements with our
software vendors are non-exclusive. Our vendors may choose to compete with us
directly. Oracle, for example, is now offering a Web-enabled version of its
enterprise resource planning software that it markets directly to middle market
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businesses. Our vendors may also enter into strategic relationships with our
competitors. These relationships may take the form of strategic investments, or
marketing or other contractual arrangements. Our competitors may also license
and utilize the same technology in competition with us. We cannot assure you
that the vendors of technology used in our products will continue to support
this technology in its current form. We also cannot assure you that we will be
able to adapt our own offerings to changes in this technology. In addition, we
cannot assure you that the financial or other difficulties of our vendors will
not adversely affect the technologies incorporated into our services, or that if
these technologies become unavailable we will be able to find suitable
alternatives.
In addition, we depend on third parties, such as Cisco Systems, Inc.
and Sun Microsystems, Inc., to supply servers, routers, firewalls, encryption
technology and other key components of our telecommunications and network
infrastructure. If any of our vendors fail to provide needed products or
services in a timely fashion or at an acceptable cost, our business, financial
condition and operating results could be seriously harmed. A disruption in
telecommunications capacity could prevent us from maintaining our standard of
service. Some of the key components of our system and network are available only
from sole or limited sources in the quantities and quality we demand.
We also depend on the services of software and systems integration
firms to help us establish service with new clients. If the services of these
firms became unavailable for any reason, our services to new clients could be
delayed. In addition, we could be forced to pay higher rates for the services of
these or substitute firms. If either of these events were to occur, our
business, financial condition and operating results could be seriously harmed.
Our business and reputation may be harmed if we make mistakes in performing our
services.
Our business is subject to various risks resulting from errors and
omissions in performing services for our clients. We perform accounting,
finance, transaction processing, tax reporting, transfer agency and other
services for our clients. We process data received from our clients that is
critical to our clients' businesses and operations. We may make mistakes in
performing our services, which may result in claims being made against us. If we
do make mistakes, we cannot assure you that our financial reserves or insurance
will be adequate to cover any claims made against us. In addition, our business
reputation will be seriously harmed if we make any mistakes, which could
adversely affect our relationships with our existing clients and our ability to
attract new clients.
Our software products and the software that we have integrated into our services
may have unknown defects that could harm our reputation or decrease market
acceptance of our services.
We derived approximately 18% of our revenues from licensing our
M.A.R.S. software product during the quarter ended March 31, 2000. Our clients
rely on this software to perform critical business functions such as sales and
expense tracking and fulfillment/inventory tracking. Because our clients depend
on our M.A.R.S. software for their critical systems and business functions, any
interruptions caused by unknown defects in our software could damage our
reputation, cause our clients to initiate product liability suits against us,
divert our research and development resources, cause us to lose revenue or delay
market acceptance of any outsourced business service that is based on this
software. Any of these things could harm our business. Our software may contain
errors or defects, particularly when new versions or enhancements are released.
We may not discover software defects that affect our current software or
enhancements until after they are sold. Although we have not experienced any
material software defects to date, any defects could cause our clients to
experience severe system failures.
The software applications that we license from Oracle, BroadVision,
Vitria and other third parties and integrate into our service offerings may
contain defects when introduced or when new versions or enhancements are
released. We cannot assure you that software defects will not be discovered in
the future. If our services incorporate software that has defects and these
defects adversely affect our service offerings, our business, reputation and
operating results may be harmed.
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The markets we serve are highly competitive and many of our competitors have
much greater resources.
Our current and potential competitors include applications service
providers, systems integrators, and software and hardware vendors. Our
competitors, who may operate in one or more of these areas, include companies
such as Andersen Consulting, Corio, Inc., DIGEX, Inc., Exodus Communications,
Inc., International Business Machines Corporation, Navisite, Inc.,
PricewaterhouseCoopers LLP, and USInternetworking, Inc. Some of our competitors
may make strategic acquisitions or establish cooperative relationships among
themselves or with third parties to increase their ability to rapidly gain
market share by addressing the needs of our prospective clients. These
relationships may take the form of strategic investments or marketing or other
contractual arrangements.
Many of our competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry than
we do. We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:
o more quickly develop and expand their network infrastructures and
service offerings;
o better adapt to new or emerging technologies and changing customer
needs;
o negotiate more favorable licensing agreements with software application
vendors;
o more successfully recruit qualified information technology, accounting,
finance and transaction processing professionals;
o negotiate more favorable services agreements with software and systems
integrators;
o devote greater resources to the marketing and sale of their services;
and
o adopt more aggressive pricing policies.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions by our competitors. In addition, we believe that
there is likely to be consolidation in our markets, which could increase price
and other competition in ways that could seriously harm our business, financial
condition and operating results. Finally, there are few substantial barriers to
entry, and we have no patented technology that would bar competitors from our
market.
We rely on rapidly changing technology and must anticipate new technologies.
The technologies in which we have invested are rapidly evolving. As a
result, we must anticipate and rapidly adapt to changes in technology to keep
pace with the latest technological advances that are likely to affect our
business and competitive position. For example, we recently adapted our
Financial Outsourcing service, which formerly used a client-server
communications architecture, to use an Internet communications architecture. Our
future success will depend on our ability to deploy advanced technologies and
respond to technological advances in a timely and cost effective manner. Even if
we are able to deploy new technologies in a timely manner, we are likely to
incur substantial cost in doing so. If we are unable to develop or successfully
introduce new technology on an as needed basis or if we are unable to do so in a
cost effective manner, our business, financial condition and operating results
would be seriously harmed.
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We recently began to expand very rapidly and managing our growth may be
difficult.
In mid-1999, we began to aggressively expand our operations. To the
extent that our business continues to grow both geographically and in terms of
the number of products and services we offer, we must:
o expand, train and manage our employee base effectively;
o enlarge our network and infrastructure to accommodate new clients;
o expand our infrastructure and systems to accommodate the growth of our
existing clients; and
o improve our management, financial and information systems and controls.
We must recruit qualified information technology personnel, for which
there is high demand and short supply. In addition, we must recruit qualified
accounting, finance and transaction processing personnel, which are also in high
demand. During the second half of 1999, we opened eight new offices outside
northern California. In April 2000, we closed five offices, including one office
in California. We have little experience operating a multi-office business.
There will be additional demands on our operations group and sales,
marketing and administrative resources as we increase our service offerings and
expand our target markets. The strains imposed by these demands are magnified by
the early stage nature of our operations. If we cannot manage our growth
effectively, our business, financial condition or operating results could be
seriously harmed.
We depend on a limited number of key executives who would be difficult to
replace.
Our success depends in significant part on the continued services of
our senior management personnel. Losing one or more of our key executives could
seriously harm our business, financial condition and operating results. We
cannot assure you that we will be able to retain our key executives or that we
would be able to replace any of our key executives if we were to lose their
services for any reason. If we had to replace any of our key executives, we
would not be able to replace the significant amount of knowledge that many of
our key executives have about us.
If we do not effectively address our market, we may never realize a return on
the investments we have made to execute our strategy.
We have made substantial investments to pursue our strategy. These
investments include:
o developing relationships with particular software providers, including
Oracle, BroadVision and Vitria;
o investing to develop unique product features, including invoice
reporting and imaging functions; and
o developing implementation resources around specific applications.
These investments may not be successful. More cost-effective strategies
may be available to compete in this market. We may have chosen to focus on the
wrong application areas or to work with the wrong partners. Potential customers
may not value the specific product features in which we have invested. We cannot
assure you that our strategy will prove successful.
22
<PAGE>
Intellectual property infringement claims against us, even without merit, could
cost a significant amount of money to defend and divert management's attention
away from our business.
As the number of software products in our target market increases and
the functionality of these products further overlaps, software industry
participants may become increasingly subject to infringement claims. Someone may
even claim that our technology infringes their proprietary rights. Any
infringement claims, even if without merit, can be time consuming and expensive
to defend. These suits may divert management's attention and resources and could
cause service implementation delays. They also could require us to enter into
costly royalty or licensing agreements. If successful, a claim of product
infringement against us and our inability to license the infringed or similar
technology could adversely affect our business.
We may be liable if we lose client data from natural disasters, security
breaches or for any other reason.
We currently conduct all of our data processing and network operations
at our facility in San Rafael, California. In the event of a catastrophic
disaster at our San Rafael data operations center, SunGard Recovery Services
Inc. will provide business resumption of our critical systems at its data center
in Philadelphia.
We have comprehensive disaster recovery procedures in place, including
uninterruptible power supply systems with seven day capacity, back-up power
generators, nightly backup of our critical data, systems with off-site data
vaults, and 24 and 72 hour service level agreements for recovering systems and
data from the last available backup. However, we cannot assure you that our
disaster recovery procedures are sufficient, or that our client's data would be
recoverable in the event of a disaster.
Our operations are dependent on SunGard being able to successfully
provide back-up processing capability if we are unable to protect our computer
and network systems against damage from a major catastrophe such as an
earthquake or other natural disaster, fire, power loss, security breach,
telecommunications failure or similar event. We cannot assure you that the
precautions that we have taken to protect ourselves against these types of
events will prove to be adequate. If we suffer damage to our data or operations
center, experience a telecommunications failure or experience a security breach,
our operations could be seriously interrupted. We cannot assure you that any
such interruption or other loss will be covered by our insurance. Any such
interruption or loss could seriously harm our business and operating results.
Gus Constantin can exert substantial control over our company.
Gus Constantin, our founder, chairman and chief executive officer, owns
all of the shares of our Class B common stock, each share of which entitles him
to five votes on most stockholder actions. As a result, Mr. Constantin controls
89.9% of the combined voting power of both classes of our common stock. Holders
of Class A common stock are entitled to one vote per share and in the aggregate
have 10.1% of the combined voting power of both classes of our common stock. As
a result of his stock ownership, Mr. Constantin can, without the approval of our
public stockholders, take corporate actions that could conflict with the
interests of our public stockholders, such as:
o amending our charter documents;
o approving or defeating mergers or takeover attempts;
o determining the amount and timing of dividends paid to himself and to
holders of Class A common stock;
23
<PAGE>
o changing the size and composition of our board of directors and
committees of our board of directors; and
o otherwise controlling management and operations and the outcome of most
matters submitted for a stockholder vote.
Our charter documents could deter a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares.
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. In addition, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. This statute
could prohibit or delay the accomplishment of mergers or other takeover or
change in control in attempts with respect to us and, accordingly, may
discourage attempts to acquire us.
We could be harmed if our products, services or technologies are not compatible
with other products, services or technologies.
We believe that our ability to compete successfully also depends on the
continued compatibility of our services with products, services and network
architectures offered by various vendors. If we fail to conform to a prevailing
or emerging standard, our business, financial condition and operating results
could be seriously harmed. We cannot be sure that their products will be
compatible with ours or that they will adequately address changing customer
needs. We also cannot be sure what new industry standards will develop. We
cannot assure you that we will be able to conform to these new standards quickly
enough to stay competitive. In addition, we cannot assure you that products,
services or technologies developed by others will not make our products,
services or technologies noncompetitive or obsolete.
24
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not hold derivative financial instruments, derivative commodity
investments or other financial investments or engage in foreign currency hedging
or other transactions that expose us to material market risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently involved in any material legal proceedings. We
are, however, party to various legal proceedings and claims from time to time
arising in the ordinary course of business. We do not expect that the results in
any of these legal proceedings will seriously harm our business or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
On October 14, 1999 we commenced our initial public offering (the
"Offering"), which consisted of 4,000,000 shares of our Class A common stock at
$8.00 per share pursuant to a registration statement (No. 333-84589) declared
effective by the Securities and Exchange Commission on October 14, 1999. The
Offering has been terminated and all shares have been sold. The managing
underwriters for the Offering were BancBoston Robertson Stephens, Inc. and
Thomas Weisel Partners LLC. Aggregate proceeds from the Offering were $32
million.
We incurred approximately $3.2 million in total expenses in connection
with the Offering, comprised of approximately $2.2 million in underwriters'
commissions and $1.0 million in other expenses.
After deducting expenses of the Offering, the net offering proceeds to
us were $28.8 million. As of March 31, 2000, we used the net offering proceeds
to repay approximately $6.6 million outstanding promissory notes to our majority
stockholder, to make capital additions of approximately $5.5 million and
approximately $7.1 million for general corporate purposes, including working
capital. The remaining net proceeds have been invested in short-term cash
instruments pending final deployment. We currently estimate that the remaining
net proceeds of the Offering will be used as follows:
o 15% to 25% for capital expenditures; and
o 75% to 85% for general corporate purposes, including working capital.
As of the date of this Form 10-Q, we can only estimate the particular
uses for the net proceeds received from the Offering. As a result, the foregoing
estimates and our use of proceeds are subject to change at our management's
discretion. The amounts actually expended for each of the purposes listed above
may vary significantly depending upon a number of factors, including the
progress of our marketing programs and capital spending requirements.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's stockholders,
through the solicitation of proxies or otherwise, during the first quarter of
fiscal year 2000.
25
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RESOURCEPHOENIX.COM
-------------------
(Registrant)
Date Title Signature
---- ----- ---------
May 12, 2000 President /S/ W. COREY WEST
- ------------ (Principal Executive Officer) -----------------
(W. Corey West)
May 12, 2000 Chief Financial Officer /S/ GREG THORNTON
- ------------ (Principal Accounting Officer) -----------------
(Greg Thornton)
27
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