UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|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
Commission File number 000-29793
Opus360 Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4023714
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
39 West 13th Street, 3rd Fl. New York, NY 10011
(Address of Principal Executive Offices) (Zip Code)
212-687-6787
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 |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of October 31, 2000.
Common Stock 50,229,927
------------ ------------------
Class Outstanding Shares
<PAGE>
Opus360 Corporation
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30,
2000 and December 31, 1999 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and September 30, 1999 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999 3
Notes to the Consolidated Financial Statements 4-20
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Change in Securities and Use of Proceeds 28
Item 4. Submission of Matters to a Vote of Securities Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
a. Exhibits 28
10.1 Employment Agreement dated May 2, 2000 between the Registrant
and Peter Schwartz
27 Financial Data Schedule
<PAGE>
Opus360 Corporation and Subsidiaries
Consolidated Balance Sheets
(thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 52,812 $ 1,326
Accounts receivable, net of allowances 6,461 2,314
Short-term investments -- 27,137
Prepaid expenses and other current assets 5,156 3,850
--------- --------
Total current assets 64,429 34,627
Property and equipment, net 9,519 2,990
Goodwill, net 30,076 1,702
Officer loans 1,623 --
Due from Peoplemover -- 575
Defered costs and other assets 982 822
--------- --------
Total assets $ 106,629 $ 40,716
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,518 $ 5,489
Accrued expenses 2,656 4,818
Accrued wages 4,374 2,682
Deferred revenues 5,944 --
Line of credit 1,520 --
Deferred costs and other current liabilities 1,275 --
--------- --------
Total current liabilities 23,287 12,989
Capital lease obligation 186 --
--------- --------
Total liabilities 23,473 12,989
Stockholders' equity:
Common stock, $0.001 par value, 150,000 shares authorized,
50,210 and 10,880 issued and outstanding, respectively 50 11
Series A convertible preferred stock, $0.001 par value, 8,400
shares authorized, 0 and 8,284 shares issued and
outstanding, respectively -- 8
Series B convertible preferred stock, $0.001 par value, 8,700
shares authorized, 0 and 8,677 shares issued and
outstanding, respectively -- 9
Paid-in capital 191,878 63,835
Stock subscription receivable (224) (239)
Treasury stock (7) --
Deferred compensation (15,504) (5,469)
Accumulated deficit (93,034) (30,425)
Accumulated other comprehensive loss (3) (3)
--------- --------
Total stockholders' equity 83,156 27,727
--------- --------
Total liabilities and stockholders' equity $ 106,629 $ 40,716
========= ========
</TABLE>
See accompanying notes to consolidated financial statements
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Opus360 Corporation
Consolidated Statements of Operations
(Unaudited)
(thousands except per share amount)
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 3,324 $ 177 $ 6,602 $ 241
Cost of Revenue 582 189 1,866 198
-------- -------- -------- --------
Gross profit (loss) 2,742 (12) 4,736 43
Operating Expenses:
Sales & Marketing, exclusive of $94 and $53 for the three months 6,641 2,241 22,201 3,979
ended and $282 and $53 for the nine months ended, respectively,
reported below as amortization of equity-based compensation
Product Development, exclusive of $146 and $102 for the three months 6,496 2,437 21,741 5,005
ended and $894 and $152 for the nine months ended, respectively,
reported below as amortization of equity-based compensation
General & Administrative, exclusive of $1,294 and $512 for the three 2,600 1,442 8,197 2,806
months ended and $5,556 and $512 for the nine months ended,
respectively reported below as amortization of equity-based
compensation
Depreciation and amortization of goodwill 4,062 171 10,708 309
Amortization of equity-based compensation 1,534 667 6,732 717
-------- -------- -------- --------
Total operating expenses 21,333 6,958 69,579 12,816
-------- -------- -------- --------
Loss from operations (18,591) (6,970) (64,843) (12,773)
Other Income
Net Interest Income 1,015 166 2,234 278
-------- -------- -------- --------
Loss before income taxes (17,576) (6,804) (62,609) (12,495)
Income tax expense -- -- -- --
-------- -------- -------- --------
Net loss $(17,576) $ (6,804) $(62,609) $(12,495)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.35) $ (0.65) $ (1.70) $ (1.26)
======== ======== ======== ========
Shares used in the calculation of basic and diluted net loss
per share 49,793 10,445 36,896 9,939
======== ======== ======== ========
Pro forma basic and diluted net loss per common share excluding
amortization of goodwill and non-cash compensation $ (0.26) $ (0.23) $ (1.03) $ (0.50)
======== ======== ======== ========
Shares used in the calculation of pro forma basic and diluted net
loss per share 49,793 26,832 45,903 23,079
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
2
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Opus360 Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(62,609) $(12,495)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 10,708 309
Other non-cash expenses 8,162 1,517
Loss on disposal of assets 8
Changes in operating assets and liabilities:
Account receivables (3,961) (403)
Prepaid expenses and other current assets (187) (131)
Other assets 421 (14)
Accounts payable and accrued expenses (808) 3,293
Other liabilities (659)
Deferred Revenues 4,257 --
Due to stockholder 747
-------- --------
Total adjustments 17,933 5,326
-------- --------
Net cash used in operating activities $(44,676) $ (7,169)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (7,223) (944)
Decrease (Increase) in short term investments 27,137 (37,174)
Cash provided by (used in) connection with acquistion of subsidiaries (1,651) 129
Cash used in acquisition of other assets (1,000) --
-------- --------
Net cash provided by (used in) investing activities $ 17,263 $(37,989)
-------- --------
Cash flows from financing activities:
Net proceeds from loans 1,750 --
Repayment of loans (214) --
Net proceeds from issuance of Series A convertible preferred stock -- 4,365
Net proceeds from issuance of Series B convertible preferred stock -- 38,491
Net proceeds from issuance of common stock 2,240 33
Net proceeds from offering 75,130 --
Repurchase of treasury stock (7) --
-------- --------
Net cash provided by financing activities $ 78,899 $ 42,889
-------- --------
Net increase (decrease) in cash $ 51,486 $ (2,269)
Cash:
Beginning of period $ 1,326 $ 5,818
-------- --------
End of period $ 52,812 $ 3,549
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Opus360 Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
3
<PAGE>
(Unaudited)
(all tabular amounts in thousands except per share amounts)
Note 1. Organization and Summary of Accounting Policies
(a) Organization and Description of Business
Opus360 Corporation ("Opus360" or the "Company") was incorporated on
August 17, 1998, under the laws of Delaware.
Opus360 provides internet-based enterprise software that enables
businesses to procure and manage professional services, consultants and systems
integration services. Using the Opus360 Workforce Platform - an end-to-end
infrastructure of interoperable software solutions and hosted procurement
services, businesses and service providers can efficiently source and deploy,
increase utilization, and lower the cost of administering their project-based
workforce.
Our services consist of:
o FREEAGENT SERVICES:
FreeAgent Services include the FreeAgent.com website, that offers
independent professionals access to project opportunities and
services; and the FreeAgent E.office service, a commerce service of
Opus360. The FreeAgent E.office service provides independent
contractor management services to corporations and back office
services for independent professionals. Independent contractors who
elect to receive FreeAgent E.office services become the employees of
Opus360's wholly owned subsidiary, The Churchill Benefit Corporation
d/b/a/ FreeAgent.com ("Churchill"). As employees, they receive
payroll, benefits, and IRS W-2 forms from Churchill. Churchill
enters into contracts with organizations for projects to be
performed by FreeAgent E.office members, processes invoices for such
services, and remits the amount due to the FreeAgent E.office member
after deducting payroll taxes, the fees charged by Churchill and
contributions for the member's health insurance and 401(k)
retirement plan, as directed by the member. Individual contractors
pay a set up fee and a monthly services fee. Companies may
alternatively elect to pay a flat percent of each payroll, which
covers fees for services to contractors engaged by them, payroll
taxes and margin.
o APPLICATION AND PROCUREMENT SERVICES:
Opus360 has combined what was formerly referred to as
OpusXchange.com and OpusRM into one platform called the Opus360
Workforce Platform which is an e-commerce platform addressing the
entire spectrum of an organization's requirements for internal and
external workforce management and procurement.
The Opus360 Workforce Platform consists of an enterprise application
offering two distinct but tightly integrated modules for workforce
management and procurement. The Opus360 Workforce Platform also
creates a labor procurement marketplace where buyers and suppliers
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connect. Buyers and suppliers who deploy the procurement module have
an integrated connection to the marketplace that enables them to
work with their customers and suppliers. The Workforce Management
and Workforce Procurement modules can be deployed as a hosted
application or behind an organization's firewall. In a hosted
deployment, buyers and suppliers access the application through the
Opus360.com website. Once logged in, users are provided
functionality appropriate to their role as either a buyer or
supplier.
Opus360 also licenses Private Labeled Sites; a unique combination of
client's service marks with its proprietary FreeAgent.com universal
resource locator for the purpose of bringing together buyers and
sellers of contracted labor resources in a single efficient
marketplace. Not only is the procurement or placement process
facilitated by the `one click through' technology, but traffic
volume is also significantly enhanced by combining these Private
Labeled Sites with Opus360's branding and name recognition. Buyers
include Fortune 500 Corporate IT organizations in vertical markets
with the highest IT spending. Sources of labor supply include
professional services organizations as well as FreeAgent.com.
(b) Basis of Presentation
The unaudited consolidated financial statements have been prepared by the
Company in accordance with generally accepted accounting principles and reflect
all adjustments (all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented.
The Company has reclassified a portion of its general and administrative
expenses to allocate total costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services based on their
headcount. These allocated charges include facility rent for the Company's
offices, communication charges, equipment leases, and depreciation expense for
office furniture and equipment. Certain amounts in the prior year financial
statements have been reclassified to conform to the current year presentation.
Accounts receivable includes the gross billings owed by contracting
businesses using the services of the Company's FreeAgent E.Office employees.
Accrued wages includes the gross billings, that the Company collects for the
services its FreeAgent E.Office employees provide to these contracting
businesses, less the initial sign up fee and the monthly fees owed to the
Company by the E.Office employees.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for any subsequent quarters
or for the entire year ending December 31, 2000. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted under the Securities and Exchange Commission's ("SEC") rules and
regulations. These unaudited consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 1999, included in the Company's S-1 registration statement declared
effective by the SEC on April 6, 2000.
On March 27, 2000 the Board of Directors authorized a three-for-two stock
split of the Company's common stock. The financial information included in the
accompanying financial statements gives effect to the stock split.
5
<PAGE>
On April 12, 2000, the Company completed the sale of 7,000,000 shares of
its common stock, in connection with an initial public offering ("IPO") at a
price of $10 per share. Concurrent with its IPO, the Company sold 1,505,376 of
its common stock to Dell USA L.P. at a price of $9.30 per share (the "Concurrent
Placement").
(c) Principles of Consolidation
The Company's unaudited consolidated financial statements as of and for
the three and nine month periods ending September 30, 2000, include the accounts
of The Churchill Benefit Corporation, INDUSTRYINSITE.COM, Ithority Corporation,
and PeopleMover, Inc. The unaudited consolidated financial statements for the
prior periods only include the accounts of the Company and The Churchill Benefit
Corporation. All significant intercompany balances and transactions have been
eliminated in consolidation.
(d) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(e) Revenue Recognition
OpusRM integration revenues consist of fees paid for integration,
installation and customization of the OpusRM application and are recognized as
revenue only to the extent the Company has incurred third party costs in
connection with the installation of projects, as the services are performed.
The Company recognizes revenue from the sale of licenses for PEOPLEMOVER
STAFFING, the principal application of the Company's PeopleMover subsidiary,
upon receipt of an executed sales agreement and delivery of the software to the
customer provided there are no vendor obligations to be fulfilled and
collectibility is probable. The Company also recognizes revenue from PeopleMover
software contracts that require significant modification or customization of the
software on a percentage of completion basis based on costs incurred. The
Company's PeopleMover subsidiary also provides software support and product
upgrades to its customers through separately priced agreements. These support
revenues are deferred and recognized on a straight line basis over the term of
the contract. Revenue from technical training and consulting services are
recognized as these services are provided to customers.
The Company recognizes revenue from the sale of licenses of its Private
Labeled Site upon delivery and acceptance of the Private Labeled Site.
(f) Cost of Revenue
Cost of revenue includes salaries paid to employees and consultants who
provide implementation, customer support and training to our Opus360 Workforce
Platform customers, as well as costs associated with administering the Company's
FreeAgent.com services including certain technical personnel and
telecommunications charges.
6
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(g) Intangible Assets
Intangible assets consists of goodwill and is amortized on a straight-line
basis over the expected periods to be benefited, generally 3 years. Accumulated
amortization as of September 30, 2000 was $9.2 million.
(h) Equity Based Compensation
The Company accounts for equity-based compensation arrangements in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all equity-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25 and provide pro forma net earnings (loss) disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to apply the provisions of APB
Opinion No. 25 as amended by FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation -- An Interpretation of APB Opinion
No. 25 (FIN 44).
(i) Basic and Diluted Net Loss per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share" and SEC Staff Accounting Bulletin ("SAB")
No. 98. Accordingly, basic net loss per share excludes dilution for potentially
dilutive securities and is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding for the
period.
Pursuant to SAB No. 98, all options, warrants or other potentially
dilutive instruments issued for nominal consideration are required to be
included in the calculation of basic and diluted net loss per share as if they
were outstanding for all periods presented. As of September 30, 2000, the
Company has recorded the fair market value of all equity instruments issued for
all periods presented and, accordingly, does not have any nominal issuances.
Common equivalent shares consist of the incremental common shares issuable upon
the conversion of the Company's preferred stock (using the if-converted method)
and shares issuable upon the exercise of stock options and warrants (using the
treasury stock method); common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
Pro forma basic and diluted net loss per share is computed by assuming the
conversion of all convertible preferred stock into common stock as if such
shares were outstanding from their respective dates of issuance.
(j) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 and believes that it does not have a material effect on the
Company's financial statements.
On March 31, 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 generally applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and
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changes in grantee status that occur on or after July 1, 2000, except for the
provision related to repricings and the definition of an employee which apply to
awards issued after December 15, 1998. To the extent that events covered by FIN
44 occur after the applicable date but prior to July 1, 2000, the effects of
applying FIN 44 shall be recognized on a prospective basis. Accordingly, no
adjustments shall be made upon initial application of FIN 44 to financial
statements for periods prior to July 1, 2000. The Company has determined that
the adoption of FIN 44 does not have a material effect on the Company's
operating results.
Note 2. Acquisitions
1999
On May 27, 1999, the Company acquired 100% of the outstanding common stock
of The Churchill Benefit Corporation ("Churchill") in exchange for 946,474
shares (the "Initial Shares") of the Company's common stock valued at
approximately $1.849 per share, or $1.75 million.
Under the terms of the agreement an additional 405,631 shares of the
Company's common stock were placed in escrow at the time of the closing, and
those shares and up to an additional $0.85 Million of the Company's common stock
would have been issued to the former owners of Churchill 18 months after the
date of closing had certain conditions been met. The milestone stipulated under
the agreement was not achieved as of May 27, 2000 as required, and the former
owner will not receive the escrow shares or the additional shares of the
Company's common stock. The Company will therefore not record any additional
expense relating to these shares.
The acquisition has been accounted for using the purchase method and,
accordingly, the results of operations of Churchill are included in the
Company's consolidated financial statements from the date of acquisition. The
purchase price has been allocated to the Company's historical assets and
liabilities based on the carrying values of the acquired assets and liabilities,
as these carrying values are estimated to approximate fair market value of the
assets acquired and liabilities assumed. Goodwill of $2.1 million was created as
a result of the Churchill transaction and is being amortized over three years.
The accumulated amortization as of September 30, 2000 was $0.94 million. The
goodwill was calculated as follows:
Value of Initial Shares $1,750
Acquisition costs 297
Negative net assets acquired 66
------
Excess purchase price over net assets acquired $2,113
======
2000
IndustryInsite.com
On January 10, 2000, the Company acquired from Brainstorm Interactive,
Inc. ("Brainstorm") all of the related assets and liabilities of
Industryinsite.com, a website operated by Brainstorm, for an aggregate purchase
price of $1.0 million. The purchase price
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was paid as follows: $0.65 million on closing and $0.35 million on April 12,
2000. The Company allocated the purchase price to intangible assets, which is
being amortized over three years. The accumulated amortization as of September
30, 2000 was $0.24 million.
Ithority Corporation
On January 20, 2000, the Company acquired 100% of the outstanding equity
of Ithority Corporation ("Ithority") in exchange for approximately 243,474
shares of the Company's common stock valued at $2.0 million, or $8.21 per share,
plus $0.25 million paid on closing and $0.25 million paid in the second quarter
of 2000.
The former shareholders of Ithority are also entitled to up to
approximately 182,599 shares, which have been placed in escrow (the "Ithority
Escrow Shares") plus $4.0 million of the Company's common stock payable one year
from the date of closing based upon the then fair market value of the Company's
common stock (the "Ithority Additional Shares"). The Ithority Escrow Shares will
be released one year from the date of closing, subject to satisfaction of
certain conditions to such release, including no breach of certain
representations and warranties provided by the selling shareholders.
Approximately 178,240 of the Ithority Escrow Shares and 97% of Ithority
Additional Shares payable to certain selling shareholders are subject to three
year vesting agreements under which the Company has the right but not the
obligation to repurchase these shares for $0.01 per share in the event the
shareholder is no longer employed by the Company. The Company has recorded
deferred compensation expense of $5.3 million for the fair market value of the
Ithority Escrow shares, which are subject to these continued employment
arrangements, and is amortizing such amount over the vesting period. As of
September 30, 2000 the accumulated amortization was $1.2 million. The Company
will only include the vested portion of the restricted shares for purposes of
calculating basic earnings per share. The Company will also include the unvested
portion of the restricted shares for purposes of calculating diluted earnings
per share, if such amounts are dilutive. During the quarter ended September 30,
2000 one of the selling shareholders terminated his employment with the Company
and the Company intends to repurchase his shares subject to the vesting
agreement.
The Company accounted for the acquisition of Ithority using the purchase
method and, accordingly, the results of operations of Ithority are included in
the Company's consolidated financial statements from the date of acquisition.
The purchase price has been allocated to Ithority's historical assets and
liabilities based on the fair values of the assets acquired and liabilities
assumed.
The following financial information represents the allocation of the
purchase price over historical net book values of the acquired assets and
assumed liabilities of Ithority. The resulting goodwill of $2.9 million created
as a result of the Ithority acquisition is being amortized over three years. The
accumulated amortization as of September 30, 2000 was $0.65 million. Actual fair
values were based on financial information as of the acquisition date. On the
acquisition date the allocated values were as follows:
Value of shares not subject to restricted stock vesting agreement $2,155
Cash payment 500
Acquisition costs 186
Negative net assets acquired 107
------
Excess purchase price over net assets acquired $2,948
======
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PeopleMover, Inc.:
On February 24, 2000, the Company acquired all of the outstanding equity
of PeopleMover, Inc. ("PeopleMover") for approximately 2,634,000 shares of
common stock. Additionally, the Company exchanged options to purchase
approximately 1,189,000 shares of its common stock for outstanding stock options
to purchase PeopleMover common stock.
The purchase price of PeopleMover consisted of the following:
o 2,634,000 shares of Opus360 common shares valued at approximately
$24.0 million, or $9.11 per share;
o the assumption by Opus360 of options to purchase shares of
PeopleMover common stock, exchanged for options to purchase
approximately 1,189,000 shares of Opus360 common stock. The options
have been valued at approximately $7.9 million using the
Black-Scholes pricing model. Such shares have an aggregate exercise
price of approximately $5.2 million; and
o the Company also incurred acquisition costs of approximately $0.66
million related to the merger.
Approximately 342,000 shares issued to certain PeopleMover shareholders
are subject to a three-year restricted stock vesting agreement, whereby the
Company has the right but not the obligation to repurchase these shares for
$0.01 per share in the event the shareholder is terminated for cause by the
Company. The Company will only include the vested portion of the restricted
shares for purposes of calculating basic earnings per share. The Company will
also include the unvested portion of the restricted shares for purposes of
calculating diluted earnings per share, if such amounts are dilutive.
The value of the approximately 342,000 shares, which are subject to the
three-year vesting agreement, is approximately $3.1 million, which was recorded
to deferred compensation expense and is being amortized over the term of the
vesting agreement. As of September 30, 2000 the accumulated amortization was
$0.7 million.
In connection with its negotiations to acquire PeopleMover, the Company
entered into an interim funding agreement with PeopleMover pursuant to which the
Company agreed to provide loans to PeopleMover through the earlier of March 3,
2000 or the date that the acquisition agreement was signed. The $0.8 million
aggregate amount of the loans reduced the purchase price of the acquisition on a
dollar-for-dollar basis.
The Company accounted for the acquisition of PeopleMover using the
purchase method and, accordingly, the results of operations of PeopleMover are
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price was allocated to PeopleMover's historical assets
and liabilities based on the fair values of the assets acquired and liabilities
assumed.
The following financial information represents the allocation of the
purchase price over historical net book values of the acquired assets and
assumed liabilities of PeopleMover. The resulting goodwill is being amortized
over three years. As of September 30, 2000 the accumulated amortization was $7.4
million.
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Value of shares not subject to restricted stock vesting agreement $20,860
Value of stock options issued, measured using Black-Scholes pricing
model 7,875
Costs associated with acquisition 666
Negative net assets acquired 3,829
-------
Excess purchase price over net assets acquired 33,230
=======
Pro Forma Financial Information:
The following table presents the Company's summary pro-forma consolidated
financial information for the nine months ended September 30, 2000 and September
30, 1999 as if the Year 2000 acquisitions had occurred on January 1, 1999.
September 30, 2000
Total revenue $ 6,649
Net Loss (63,171)
Pro-forma basic and diluted net loss per share $ (1.38)
September 30, 1999
Total revenue $ 1,383
Net loss (13,882)
Pro-forma basic and diluted net loss per share $ (0.40)
Note 3. Related Party Transactions
On March 23, 2000 Richard S. Miller, the Company's President and Chief
Operating Officer exercised stock options to purchase 300,000 shares of the
Company's common stock at an exercise price of $2.67 per share. In connection
with Mr. Miller's exercise of the options, the Company provided Mr. Miller with
a full recourse loan of $1.5 million at an annual interest rate of 7% per annum,
compounded annually. The term of the loan is three years subject to acceleration
upon the occurrence of an event of default, including the termination of Mr.
Miller's employment with the Company for any reason whatsoever.
In February 2000, the Company entered into an agreement with Lucent
Technologies Inc. ("Lucent"), a company whose, Executive Vice President is a
member of the Company's board of directors. The agreement provides for Lucent to
use the Company's Workforce Management product and also assist in the
development and marketing of these services by serving as a member of the
Opus360 Workforce Platform Customer Advisory Board.
In September 2000, the Company licensed a Private Labeled Site to
Safeguard Scientifics, Inc., a shareholder of the Company, for $100,000. The
amount was included in accounts receivable for the period ended September 30,
2000.
Note 4. Lines of Credit
In February 2000 and June 2000, the Company borrowed $1.1 million and $0.7
million, respectively, as part of a $1.8 million equipment line of credit (the
"Facility") with a bank. The annual interest rate on the Facility is equal to
the three-year Treasury bill rate as of the date of funding plus 3%. The
Company's current outstanding balance under this line at September 30, 2000 is
$1.5 million with an interest rate of 9.3% per annum.
11
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Note 5. Commitments and Contingencies
Registration Rights:
Beginning 180 days after the effective date of the Company's IPO, certain
holders of the Company's common stock and warrants will be entitled to have
their shares registered under the Securities Act of 1933 upon written demand in
certain circumstances. The Company will be responsible for all expenses in
connection with the registration rights.
Employment Agreements:
In connection with the Ithority and PeopleMover transactions, the Company
entered into various three-year employment contracts with certain employees
which obligate the Company to pay annual salaries totaling approximately $0.4
million and to provide these employees the opportunity to participate in the
Company's bonus and benefit plans.
On January 21, 2000, the Company entered into a three-year employment
agreement with Mr. Richard S. Miller, who assumed the role of President and
Chief Operating Officer, which obligates the Company to pay an annual salary of
$0.25 million. The Agreement further provides that Mr. Miller will be eligible
for annual bonuses of not less than $0.1 million per year if certain performance
criteria are met.
In connection with the January 21, 2000 employment agreement, Mr. Miller
was granted incentive stock options to purchase 32,918 shares of the Company's
common stock at a strike price of $9.11 per share and non-qualified stock
options to purchase 1,474,582 shares of common stock of which 300,000 have a
strike price of $2.67 and were immediately vested, 600,000 have a strike price
of $2.67 and vest over 3 years and the remaining 574,582 have a strike price of
$8.00 and vest over 3 years. The Company recorded deferred compensation of $6.4
million in connection with Mr. Miller's option grants of which $1.9 million was
expensed on the date of grant and the remaining $4.5 million will be amortized
over the three-year vesting term of Mr. Miller's options. The non-qualified
options issued to Mr. Miller have been issued outside of the Company's existing
Stock Option Plans.
On March 24, 2000, the Company entered into a three-year agreement with
Dr. Ram Chillarege, who assumed the role of Executive Vice President Software &
Technology. In connection with the March 24, 2000 agreement, Dr. Chillarege was
granted incentive stock options to purchase 30,000 of the Company's common stock
at a strike price of $10.00 and non-qualified stock options to purchase 470,000
shares of common stock of which 100,000 have a strike price of $5.00 and were
immediately vested, 150,000 have a strike price of $5.00 and vest over three
years and 220,000 have a strike price of $10.00 and vest over three years. The
Company recorded deferred compensation of $1.3 million in connection with Dr.
Chillarege's option grants of which $0.5 million was expensed on the date of
grant and the remaining $0.8 million will be amortized over the three-year
vesting term of Dr. Chillarege's options. The non-qualified options issued to
Dr. Chillarege have been issued outside of the Company's existing Stock Option
Plans.
In February 2000, the Company entered into three-year agreements with
several of its employees, who are also stockholders, which obligate the Company
to annual salaries totaling approximately $3.2 million. Pursuant to the terms of
some of these agreements, the Company has the right to purchase 3,787,500 shares
for approximately $0.1 million from these individuals at the employees' original
cost if these employees are either terminated for cause or resign during the
year ended December 31, 2000.
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In May and June 2000, the Company entered into various three-year
employment contracts with certain employees which obligate the Company to annual
salaries totaling approximately $0.7 million plus the opportunity to participate
in the Company's bonus and benefit plans.
In September 2000, the Company entered into a three-year agreement with
Mr. Peter Schwartz, who assumed the role of Executive Vice President and Chief
Financial Officer, which obligates the Company to pay an annual salary of $0.2
million. The agreement further provides that Mr. Schwartz will be eligible for
annual bonuses of not less than $0.1 million per year. In connection with the
employment agreement Mr. Schwartz was granted an incentive stock option to
purchase 700,000 of the Company's common stock at a strike price of $3.69, of
which 140,000 were vested immediately and the balance over three years.
Contingencies:
The Company accounts for its FreeAgent E.office employees as employees for
federal income tax and benefit plan purposes. The Company recognizes that the
Internal Revenue Service ("IRS") definition of an employee is subject to
interpretation. To date, the IRS has not challenged the Company's reporting.
Should the IRS determine that the FreeAgent E.office employees do not
qualify as employees under applicable federal statutes and regulations, the
employees could lose the favorable tax status of certain of the Company's
benefit and 401(k) retirement plans. The Company is unable to predict the
potential impact, which any such determination might have and whether any
resulting liability or benefit will relate to past or future operations.
Accordingly, the Company is unable to make a meaningful estimate of the amount,
if any, of such liability or benefit.
In December 1999 and during the first and second quarter of 2000 the
Company entered into several agreements with various media companies and their
affiliated Internet sites pursuant to which the parties agreed to promote their
respective content products and services and jointly develop various co-branded
websites and feature the Company's services within those co-branded sites. The
Company agreed to spend in the aggregate a minimum of $0.2 million in
development costs, approximately $12.4 million in advertising through March 2005
to market the site, and an additional $2.0 million in integration fees. In
addition the terms of the agreements required the Company to share revenue
generated on some of the co-branded sites.
In October 2000, the Company restructured several of its co-branding and
advertising agreements. Under the revised agreements, the Company has agreed to
purchase an aggregate of $6.3 million in advertising from various media
companies and their affiliated Internet sites through September 2002. Through
the end of September 2000, the Company has purchased and expensed $0.5 million
of advertising as part of the $6.3 million commitment. The Company will expense
the remaining advertising commitment as incurred.
Rescission Offer:
As of September 30, 2000, the Company has granted options to purchase
approximately 112,500 shares of its common stock to its FREEAGENT E.OFFICE
employees, which may not have complied with certain federal and state securities
laws.
As disclosed in the Company's Prospectus dated April 7, 2000, in the
fourth quarter of 2000 the Company intends to make a rescission offer to all the
FreeAgent E.office
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employees. The Company intends to file a registration statement with respect to
the rescission offer under applicable federal and state securities laws. In the
rescission offer, the Company will offer to repurchase from the FreeAgent
E.office employees all of the shares issued upon exercise of options by these
employees before the expiration of the rescission offer registration statement,
at the exercise price paid for these shares, plus interest at the rate of 10%
per year from the date of issuance until the rescission offer expires. The
Company will also offer to repurchase all of the unexercised options issued to
these FreeAgent E.office employees at 20% of the option exercise price
multiplied by the number of shares subject to such options, plus interest at the
rate of 10% per year from the date of issuance until the rescission offer
expires. The rescission offer will expire approximately 30 days after the
effectiveness of the rescission offer registration statement.
Based on the number of options outstanding as of September 30, 2000, the
Company could be required to pay to these FreeAgent E.office employees up to
approximately $0.2 million, including interest, in connection with the
rescission offer. The applicable securities laws do not expressly provide that a
rescission offer will terminate a purchaser's right to rescind a sale of stock,
which was not registered as required. Accordingly, if any FreeAgent E.office
employees reject the rescission offer, the Company may continue to be
contingently liable for the purchase price of these shares and options, which
were not issued in compliance with applicable securities laws.
Amounts related to this contingent liability are not reflected in the
accompanying financial statements.
Legal Proceedings:
On July 6, 2000, Knowledge Transfer International ("KTI") filed a
complaint against the Company in the Supreme Court of the State of New York in
the County of New York. KTI's claims arise generally out of a letter signed by
KTI and by the Company on June 16, 1999. KTI claims that this letter constituted
a joint venture agreement under which KTI was to develop and operate a "free
agent" certification program for use on the Company's FreeAgent.com website and
the parties agreed to share equally all of the revenue to be generated
therefrom. KTI asserts a claim that the Company breached that alleged agreement
and also asserts additional claims for an accounting, breach of fiduciary duty,
quantum mervit and unjust enrichment relating to this alleged joint venture.
KTI seeks damages in an amount to be determined at the time of the trial,
but claims that its damages are believed to be in excess of $20 million. KTI
also seeks the imposition of a constructive trust on KTI's presumed share of the
revenue KTI alleges the Company has derived from certification and training
programs made available on or through its website.
The Company filed an answer to this complaint on August 31, 2000, which,
among other things, denied the existence of the alleged joint venture. While the
outcome of litigation is inherently uncertain, the Company believes that it has
valid defenses to KTI's claims and it intends to defend this lawsuit vigorously.
Amounts related to these contingent liabilities are not reflected in the
accompanying financial statements.
Note 6. Basic and Diluted Net Loss Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
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Three months ended
September 30
2000 1999
-------- --------
Numerator:
Net loss $(17,576) $ (6,804)
-------- --------
Denominator:
Basic and diluted loss per share weighted
average shares 49,793 10,445
-------- --------
Basic and diluted net loss per share $ (0.35) $ (0.65)
-------- --------
Nine months ended
September 30
2000 1999
-------- --------
Numerator:
Net loss $(62,609) $(12,495)
-------- --------
Denominator:
Basic and diluted loss per share weighted
average shares 36,896 9,939
-------- --------
Basic and diluted net loss per share $ (1.70) $ (1.26)
-------- --------
Diluted net loss per share for the three and nine month periods ended
September 30, 2000 and September 30, 1999 does not include the effect of options
and warrants to purchase 12,775,050 and 4,328,575 shares of common stock,
respectively, or 384,713 unvested escrowed shares of common stock issued to
former shareholders of Ithority and PeopleMover. In addition diluted net loss
per share for the three and nine month periods ended September 30, 1999 does not
include 12,426,000 and 25,441,000 shares of common stock issuable upon the
conversion for Series A and B preferred stock on an "as-if converted" basis,
respectively, as the effect of their inclusion is anti-dilutive for each period.
Note 7. Stockholders' Equity
Strategic and Advisory Agreements:
Greenhill & Co.:
On September 3, 1999, the Company entered into an agreement with Greenhill
& Co. ("Greenhill") whereby Greenhill was to act as the Company's mergers and
acquisitions advisor for a period of six months or until the Company has either
acquired two identified targets or completed acquisitions aggregating $30
million (the "Initial Term"). Unless otherwise terminated, the agreement was to
be automatically renewed (a) following the Initial Term and would continue until
the Company had completed either $250 million of cumulative acquisitions or a
total of four previously identified targets that have an aggregate value of at
least $100 million (the "First Renewal Term") and (b) following the First
Renewal Term, until the Company had completed at least $750 million of
cumulative acquisitions or a
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total of ten previously identified targets (the "Second Renewal Term").
As consideration for the above services, Greenhill received 1) warrants to
immediately purchase 450,000 shares of the Company's common stock at an exercise
price of $3.07 per share upon the commencement of the Initial Term, and was
entitled to receive 2) warrants to immediately purchase 450,000 shares of the
Company's common stock at the then fair market value upon the earlier of the
commencement of the First Renewal Term or the pricing of a qualified IPO, and 3)
warrants to immediately purchase 450,000 shares of the Company's common stock at
the then fair market value upon commencement of the Second Renewal Term.
In connection with the issuance of the Greenhill Initial Term warrants,
the Company recorded a pre-paid expense of approximately $0.5 million
representing the fair market value of the warrants calculated using the
Black-Scholes pricing model and was amortizing this amount over the Initial Term
of the agreement.
In May 2000, Greenhill exercised the Initial Term warrants for a
combination of cash and the surrender of a portion of the warrants.
In January 2000, the Company completed the acquisitions of
INDUSTRYINSITE.COM and Ithority Corporation (see Note 2) and, accordingly, the
Company expensed any previously unamortized amounts associated with the Initial
Term warrants. The unamortized amount expensed in the quarter ended March 31,
2000 was $0.2 million. Additionally, the Company issued to Greenhill the First
Renewal Term warrant to purchase 450,000 shares of the Company's common stock at
an exercise price of $8.21 per share. In connection with the First Renewal Term
warrants the Company recorded a pre-paid expense of approximately $0.8 million
calculated using the Black-Scholes pricing model. The Company is amortizing this
amount over one year, which is the Company's best estimate of the length of the
First Renewal Term. As of September 30, 2000 the accumulated amortization for
the First Renewal Term warrant is $0.6 million.
Kirshenbaum Bond & Partners:
In June 1999, the Company entered into an agreement with Kirshenbaum Bond
& Partners ("KBP") whereby KBP was to develop and build an advertising and
branding campaign for the Company in exchange for monthly fees to be paid in
cash and warrants to purchase shares of the Company's common stock. All warrants
issued under this agreement have a strike price of $0.01, became exercisable
upon the Company's IPO and expire five years from the dates of issuance. The
agreement also provides that, after the Company has completed its IPO, all fees
are to be paid only in cash.
In connection with the KBP agreement, the Company issued 9,120 warrants to
KBP during the quarter ended March 31, 2000, and the Company recorded sales and
marketing expenses of approximately $0.1 million, representing the fair market
value of the warrants calculated using the Black-Scholes pricing model. No
further warrants are to be issued under the KBP agreement.
Lucent:
On February 7, 2000, the Company entered into a strategic relationship
with Lucent, whereby Lucent will assist the Company in developing its Workforce
Management product for two years in exchange for two warrants to immediately
purchase shares of the Company's common stock. The first warrant entitles Lucent
to purchase up to 225,000 shares of the
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Company's common stock at the exercise price of $3.33 per share for one year
from the date of grant. In connection with the granting of the first warrant to
Lucent on February 7, 2000, the Company recorded a prepaid expense of
approximately $1.3 million, representing the fair market value of the warrant
calculated using the Black-Scholes pricing model, which will be amortized over
the term of the agreement. The accumulated amortization as of September 30, 2000
was $0.5 million. The second warrant is exercisable for a three-year period
commencing on the 240th day after the effective date of the Company's IPO. The
exercise price of the second warrant will be equal to the average market price
of the Company's common stock during the 10 trading days immediately preceding
the date the warrant first becomes exercisable. The number of shares issuable
upon the exercise of the second warrant is determined by dividing $2.7 million
by the present value of a warrant to purchase one share of the Company's common
stock, as determined by the Black-Scholes option pricing model, with the strike
price assumed to be the actual exercise price and the volatility rate assumed to
be 100%. The Company will record prepaid expense for the second warrant at the
time it becomes exercisable which will represent the then fair market value of
the warrant calculated using the Black-Scholes pricing model and will be
amortized over the remaining life of the original 2-year agreement.
Dell:
On March 1, 2000 the Company entered into a stock purchase agreement with
Dell USA L.P. ("Dell"), an affiliate of Dell Computer Corporation, whereby Dell
agreed to purchase up to $14 million of the Company's common stock at a price
equal to the initial public offering price per share less an amount equal to the
per share underwriting discount and commissions received by the underwriters
(the "Concurrent Placement"). The closing of the Concurrent Placement occurred
on April 7, 2000. The shares sold in the Concurrent Placement were not
registered for immediate sale under the Securities Act.
In connection with Dell's purchase of the Company's common stock, Dell
Marketing LP, the marketing affiliate of Dell Computer Corporation entered into
a marketing agreement pursuant to which Dell Marketing will provide a prominent
link to the Company's web site on its web site. The marketing arrangement became
effective with the closing of the Concurrent Placement and is for a period of
one year.
Stock Options:
In March 2000, the Company adopted the (1) 2000 Stock Option Plan (the
"2000 Plan"), which provides for the granting of non-qualified and incentive
stock options to employees, board members and advisors (2) the 2000 Non-Employee
Directors' Plan (the "Non-Employee Director Plan"), which provides for
automatic, non-discretionary grants, of non-qualified stock options to
non-employee board members, as defined, and (3) the 2000 Employee Stock Purchase
Plan (the "ESPP"), which permits eligible employees to acquire, through payroll
deductions, shares of the Company's common stock. The 2000 Plan and the
Non-Employee Director Plan authorize the granting of 7.5 million and 1.13
million options, respectively, and provide for option terms not to exceed ten
years. The ESPP authorizes the issuance of 2.25 million shares to participating
employees.
During the first quarter of 2000, the Company recorded additional deferred
compensation of $8,293,000, primarily related to options granted to its new
President, Executive Vice President Software & Technology, and in connection
with granting options to employees and board members. During the quarter ended
September 30, 2000 the
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<PAGE>
Company did not record any additional deferred compensation.
The Company expects to amortize unamortized deferred compensation expense
of $8,914,000, at September 30, 2000, as follows:
For the three months ending December 31, 2000 $ 905,000
For the year ending December 31, 2001 $3,557,000
For the year ending December 31, 2002 $3,462,000
For the year ending December 31, 2003 $ 990,000
In connection with the granting of approximately 32,250 stock options in
the first quarter of 2000 to non-employees, the Company recorded deferred
compensation expense of approximately $29,000 for the quarter ended March 31,
2000. These options have been issued under the 1998 Stock Option Plan and
generally vest over three to four years. The Company will amortize deferred
compensation for those options issued to non-employees in accordance with EITF
96-18 and will record expense for the fair market value of the options at each
interim reporting date over which the options vest. Fair market value at each
date of grant and interim reporting period is calculated using the Black-Scholes
pricing model.
Note 8. Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company's reportable segments are
business units that offer different products and services throughout the United
States.
The Company's reportable segments are as follows:
o FREEAGENT SERVICES:
FreeAgent Services include the FreeAgent.com website, that offers
independent professionals access to project opportunities and
services; and the FreeAgent E.office service, a commerce service of
Opus360. The FreeAgent E.office service provides independent
contractor management services to corporations and back office
services for independent professionals. Independent contractors who
elect to receive FreeAgent E.office services become the employees of
Opus360's wholly owned subsidiary, The Churchill Benefit Corporation
d/b/a/ FreeAgent.com ("Churchill"). As employees, they receive
payroll, benefits, and IRS W-2 forms from Churchill. Churchill
enters into contracts with organizations for projects to be
performed by FreeAgent E.office members, processes invoices for such
services, and remits the amount due to the FreeAgent E.office member
after deducting payroll taxes, the fees charged by Churchill and
contributions for the member's health insurance and 401(k)
retirement plan, as directed by the member. Individual contractors
pay a set up fee and a monthly services fee. Companies may
alternatively elect to pay a flat percent of each payroll, which
covers fees for services to contractors engaged by them, payroll
taxes and margin.
o APPLICATION AND PROCUREMENT SERVICES:
Opus360 has combined what was formerly referred to as
OpusXchange.com and OpusRM into one platform called the Opus360
Workforce Platform which
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is an e-commerce platform addressing the entire spectrum of an
organization's requirements for internal and external workforce
management and procurement.
The Opus360 Workforce Platform consists of an enterprise application
offering two distinct but tightly integrated modules for workforce
management and procurement. The Opus360 Workforce Platform also
creates a labor procurement marketplace where buyers and suppliers
connect. Buyers and suppliers who deploy the procurement module have
an integrated connection to the marketplace that enables them to
work with their customers and suppliers. The Workforce Management
and Workforce Procurement modules can be deployed as a hosted
application or behind an organization's firewall. In a hosted
deployment, buyers and suppliers access the application through the
Opus360.com website. Once logged in, users are provided
functionality appropriate to their role as either a buyer or
supplier.
The Company's accounting policies for these segments are the same as those
described in Note 1 - Organization and Summary of Accounting Policies, above.
The table below presents information about segments used by the chief
operating decision-maker of Opus360 for the periods ending September 30, 2000
and September 30, 1999.
<TABLE>
<CAPTION>
Application and
Procurement FreeAgent
Services Services Total
--------------- --------- ---------
<S> <C> <C> <C>
Three Months Ended:
September 30, 2000:
Revenue $ 2,837 $ 487 $ 3,324
Gross profit $ 2,451 $ 291 $ 2,742
Net loss before equity-based compensation charges $ (8,943) $ (7,099) $ (16,042)
Total assets $ 101,615 $ 5,014 $ 106,629
September 30, 1999:
Revenue $ -- $ 177 $ 177
Gross profit $ -- $ (12) $ (12)
Net loss before equity-based compensation charges $ (5,971) $ (166) $ (6,137)
Total assets $ 42,943 $ 2,014 $ 44,957
Nine Months Ended:
September 30, 2000:
Revenue $ 5,265 $ 1,337 $ 6,602
Gross profit $ 3,753 $ 983 $ 4,736
Net loss before equity-based compensation charges $ (25,861) $(30,016) $ (55,877)
Total assets $ 101,615 $ 5,014 $ 106,629
September 30, 1999:
Revenue $ -- $ 241 $ 241
Gross profit $ -- $ 43 $ 43
Net loss before equity-based compensation charges $ (11,401) $ (377) $ (11,778)
Total assets $ 42,943 $ 2,014 $ 44,957
</TABLE>
For the periods September 30, 2000 and September 30, 1999, the
reconciliation between segment net loss and net loss from operations is as
follows:
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Three Months Ended:
September 30, 2000
Segment net operating loss $(16,042)
Equity-based compensation $ (1,534)
Enterprise net operating loss $(17,576)
September 30, 1999
Segment net operating loss $ (6,137)
Equity-based compensation $ (667)
Enterprise net operating loss $ (6,804)
Nine Months Ended:
September 30, 2000
Segment net operating loss $(55,877)
Equity-based compensation $ (6,732)
Enterprise net operating loss $(62,609)
September 30, 1999
Segment net operating loss $(11,778)
Equity-based compensation $ (717)
Enterprise net operating loss $(12,495)
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ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. For example, words such as "may", "will", "should",
"estimates", "predicts", "potential", "continue", "strategy", "believes",
"expects", "anticipates", "plans", "intends", and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Among the important factors that could cause
actual results to differ significantly from those expressed or implied by such
forward-looking statements are our limited operating history and expectation of
future losses; the failure of the Internet to become a proven recruitment and
project search medium; our need to successfully develop awareness of our brand
names; the failure of our products and services to be accepted in the
marketplace; the intense competition in our industry; technological change;
damage to our reputation which could result from unexpected network
interruption; undetected errors or defects in our services; breaches of our
network security or computer viruses; the imposition of new burdensome
government regulations and legal uncertainties regarding the Internet which
could increase our costs or limit our operations; the potential need for
additional financing; the risk that our proprietary rights may not be fully
protected; uncertainties regarding the application of federal tax and employee
benefit laws to our business which could limit our ability to provide benefits
that will attract free agents or serve our clients; the risk that we may be
subject to employment-related claims relating to free agents, or the
organizations that use their services; legal uncertainties regarding the
application of various federal and state laws into our business; as well as the
other risk factors affecting the Company detailed from time to time in documents
filed by the Company with the Securities Exchange Commission ("SEC"), including
but not limited to those discussed under the caption "Risk Factors" in our Form
S-1 registration statement declared effective by the SEC on April 6, 2000.
Overview
We launched our FreeAgent.com website in July 1999. The general release of
our Workforce Management product occurred in the second quarter of 2000. We
launched the Workforce Procurement product in September 1999. In October 2000 we
launched our second-generation version of the integrated Opus360 Workforce
Platform. This version of our human capital management software will enable
large and mid-size organizations to manage their project-based workforce,
procure contingent workers from preferred vendors and manage independent
contractors through our FreeAgent.com services. This release of our Opus360
Workforce Platform consists of two distinct but tightly integrated modules for
Workforce Management and Workforce Procurement. The Workforce Management module
enables professional services organizations to build and optimize project teams,
increase overall workforce utilization and improve employee retention rates. The
Workforce Procurement Module enables buyers and suppliers of contract labor to
automate and streamline hiring processes, reduce procurement costs, and track
the performance of contract labor suppliers. The Workforce Platform is an
Internet-based software application that can be deployed by our customers or
delivered as a hosted solution, which reduces the cost of hardware, maintenance
and updates for our customers. By using our Opus360 Workforce Platform
businesses and service providers can efficiently source and deploy,
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<PAGE>
increase utilization, and lower the cost of administering their project-based
labor. We intend to deploy the Opus360 Workforce Platform at the services
division of Lucent Technologies and BEA Systems, professional services firms
Sapient Corporation and Cambridge Technology Partners, and managed service
providers Computer Task Group (CTG), TRS Staffing and Net-Strike Worldwide.
Results of Operations
We have a short operating history and have incurred substantial losses
since our inception. From the date of our inception in August 1998 through
December 31, 1998, we incurred net losses of $1.0 million. For the year ended
December 31, 1999, we incurred net losses of $29.4 million. For the nine months
ending September 30, 2000 we incurred net losses of $62.6 million and as of
September 30, 2000, we had an accumulated deficit of $93.0 million. Our net
losses and resulting accumulated deficit are primarily due to the costs we
incurred to develop our products and services and to expand our sales and
marketing programs.
We intend to continue to devote resources to advertising and
brand-marketing programs designed to promote our Workforce Platform enterprise
software and our FreeAgent E.office service. We anticipate that we will incur
additional salaries and sales commissions as a result of increased sales
personnel and increased sales. Our marketing and branding programs for our
enterprise software will result in an expanded marketing program for trade shows
and customer advisory board meetings. We believe that these expenses will
continue to increase in absolute dollars in future periods. The increase in
sales and marketing costs is expected to be offset by a decrease in our product
development and general and administrative expenses as we continue to focus on
increasing our operating efficiencies while cutting costs. With the release of
the second-generation version of our Opus360 Workforce Platform, we anticipate
that our product development costs will decrease in future periods. We expect to
incur losses from operations for the foreseeable future but these losses are
expected to decrease significantly as a percentage of revenue. To the extent
these decreases in our operating expenses are not followed by commensurate
increases in our revenue, or if we are unable to adjust operating expense levels
as anticipated, our operating losses may exceed our expectations for those
periods. We cannot be certain that we will ever achieve or sustain
profitability.
Three Months Ended September 30, 2000 and 1999
Revenue
For the quarter ended September 30, 2000 our revenue was $3.3 million of
which $2.8 million was derived from Application and Procurement Services ("APS")
which consisted of $1.5 million from the sale of software licenses, including an
accelerated license fee of $0.5 million in mitigation of a licensee's decision
to cease implementation of our product, license fees of $0.7 million for our
Private Labeled Sites, and integration services revenue of $0.6 million; and
$0.5 million related to our FreeAgent Services consisting of initial sign-up
fees and monthly fees paid by our FreeAgent E.office employees as well as sales
of advertising sponsorships on the FreeAgent.com website. For the quarter ended
September 30, 1999 we had revenue of $0.2 million; all of which related to the
FreeAgent.com services.
Cost of Revenue
Cost of revenue for the quarter ended September 30, 2000, was $0.6
million, an
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increase of 300% over cost of revenue for the quarter ended September 30, 1999.
This increase was as a result of additional salaries and wages paid to employees
that provide implementation and integration services to customers who were
deploying our enterprise software during the quarter, salaries paid to staff who
administer our FreeAgent E.office services, and costs associated with operating
the FreeAgent.com website including certain technical personnel and
telecommunications charges. As we continue to increase the sale and
implementation of our enterprise software solution, we expect that cost of
revenue will continue to increase both in absolute dollars and percentage terms
in future periods. Cost of revenue for the quarter ended September 30, 1999, was
$0.2 million and consisted primarily of salaries paid to staff who administered
our FreeAgent E.Office services, costs associated with operating the
FreeAgent.com website including certain technical personnel and
telecommunications charges.
Operating Expenses
Sales and Marketing. Sales and marketing expenses for the quarter ended
September 30, 2000 were $6.7 million, excluding $0.1 million reflected as equity
based compensation below, an increase of 305% over sales and marketing expenses
of $2.2 million for the quarter ended September 30, 1999. This increase was
primarily attributable to incremental marketing and advertising expenses for our
Opus Workforce Platform enterprise software and the FreeAgent.com website, as
well as salaries and benefits paid to an expanded sales and marketing staff. As
we focus our resources on advertising and building brand-awareness for our
Opus360 Workforce Platform enterprise software and increase our sales efforts to
coincide with the launch of our second-generation enterprise platform, our sales
and marketing costs will increase, primarily due to salaries and commissions
paid to our sales and marketing associates.
Product Development. Product development expenses for the quarter ended
September 30, 2000 was $6.5 million, excluding $0.1 million reflected as equity
based compensation below, an increase of 271% over product development expenses
of $2.4 million for the quarter ended September 30, 1999. The increase was
primarily attributable to intensified development, immediately preceding the
release of our flagship product Opus360 Workforce Platform enterprise software.
This effort necessitated adding employees, and increasing the fees paid to our
third party consultants. To date, all product development expenses relating to
the development of our Workforce Platform enterprise software have been expensed
in the period incurred. While we believe that continued investment in product
development is critical to attaining our strategic objective, we expect our
product development expenses will decrease in future periods as our products
achieve stability and our processes are refined.
General and Administrative. General and administrative expenses for the
quarter ended September 30, 2000 were $2.6 million, excluding $1.3 reflected as
equity based compensation below, an increase of 186% over general and
administrative expenses of $1.4 million for the quarter ended September 30,
1999. The increase was primarily attributable to increases in the number of
employees and associated general office expenses, rent and utilities, recruiting
fees and professional fees. Salaries and benefits increased significantly as we
added staff to our executive management team. Our rent and utilities also
increased as a result of new leasehold facilities and the addition of additional
office locations as a result of our acquisitions. We expect that our general and
administrative expenses will decrease in future periods as we consolidate our
office facilities and become more efficient in managing these expenditures.
Depreciation and Amortization. Depreciation and amortization expenses for
the quarter ended September 30, 2000 were $4.0 million, consisting primarily of
amortization of goodwill
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of $3.3 million associated with our acquisitions. Depreciation and amortization
expense was $0.2 million in the quarter ended September 30, 1999.
Amortization of Equity-based Compensation. The amortization of
equity-based compensation for the quarter ended September 30, 2000 was $1.5
million and consisted of deferred compensation expense for options to purchase
common stock granted to employees having exercise prices below the fair market
value of our common stock at the date of grant as well as deferred compensation
expense for the Ithority and PeopleMover Escrow shares. Amortization of
equity-based compensation was $0.7 million in the quarter ended September 30,
1999. We will continue to amortize our equity-based compensation over the
vesting period, which is generally three to four years.
Other Income. Interest income for the quarter ended September 30, 2000 was
$1.0 million and consisted primarily of interest income from the higher level of
cash balances. Interest income was $0.2 million in the quarter ended September
30, 1999.
Income Tax Expense. We have not recorded a provision for income tax
expense as we have incurred substantial losses in every fiscal period since our
inception.
Nine Months Ended September 30, 2000 and 1999
Revenue
For the nine months ended September 30, 2000 our revenue was $6.6 million
of which $5.3 million was derived from APS which consisted of $2.8 million from
the sale of software licenses, including an accelerated license fee of $0.5
million in mitigation of a licensee's decision to cease implementation of our
product, license fees of $0.7 million for our Private Labeled sites,
and integration services revenue of $1.8 million; and $1.3 million related to
our FreeAgent Services consisting of initial sign-up fees and monthly fees
paid by our FreeAgent E.office employees as well as sales of advertising
sponsorships on our FreeAgent.com website. For the nine months ended September
30, 1999 we had revenue of $0.2 million all of which related to FreeAgent.com
services.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2000, was $1.9
million, an increase of 950% over cost of revenue for the nine months September
30, 1999. This increase was as a result of additional salaries and wages paid to
employees that provide implementation and integration services to customers who
were deploying our enterprise software, salaries paid to staff who administer
our FreeAgent E.Office services, costs associated with operating the
FreeAgent.com website, including certain technical personnel and
telecommunications charges. Cost of revenue for the nine months ended September
30, 1999, was $0.2 million and consisted primarily of salaries paid to staff and
costs of operating the FreeAgent.com website including certain technical
personnel and telecommunications charges.
Operating Expenses
Sales and Marketing. Sales and marketing expenses for the nine months
ended September 30, 2000 were $22.2 million, excluding $0.3 million reflected as
equity based compensation below, an increase of 555% over sales and marketing
expenses of $4.0 million for the nine months ended September 30, 1999. This
increase was primarily attributable to incremental marketing and advertising
expenses for our Opus360 Workforce Platform
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enterprise software, FreeAgent.com website, as well as salaries and benefits
paid to an expanded sales and marketing staff.
Product Development. Product development expenses for the nine months
ended September 30, 2000 were $21.7 million, excluding $0.9 million reflected as
equity based compensation below, an increase of 434% over product development
expenses of $5.0 million for the nine months ended September 30, 1999. The
increase was primarily attributable to additional personnel developing our
Opus360 Workforce Platform enterprise software and enhancements to our
FreeAgent.com services, including salaries and benefits and fees paid to our
third party consultants. To date, all product development expenses relating to
the development of our Workforce Platform enterprise software have been expensed
in the period incurred.
General and Administrative. General and administrative expenses for the
nine months ended September 30, 2000 were $8.2 million, excluding $5.6 reflected
as equity based compensation below, an increase of 293% over general and
administrative expenses of $2.8 million for the nine months ended September 30,
1999. The increase was primarily attributable to an increased number of
employees and associated salaries and benefits, general office expenses, rent
and utilities, recruiting fees and professional fees. Salaries and benefits
increased as we added to our executive management team. Our rent and utilities
also increased as a result of new leasehold facilities and the addition of
additional office locations as a result of our acquisitions.
Depreciation and Amortization. Depreciation and amortization expenses for
the nine months ended September 30, 2000 was $10.7, million consisting primarily
of amortization of goodwill of $8.8 million associated with our acquisitions.
Depreciation and amortization expense was $0.3 million in the nine months ended
September 30, 1999.
Amortization of Equity-based Compensation. The amortization of
equity-based compensation for the nine months ended September 30, 2000 was $6.7
million and consisted of deferred compensation expense for options to purchase
common stock granted to employees, directors, and non-employees having exercise
prices below the fair market value of our common stock at the date of grant as
well as deferred compensation expense for the Ithority and PeopleMover Escrow
shares. Amortization of equity-based compensation was $0.7 million in the nine
months ended September 30, 1999. We will continue to amortize our equity-based
compensation over the vesting period which is generally three to four years.
Other Income. Interest income for the nine months ended September 30, 2000
was $2.2 million due to higher average cash balances. Interest income was $0.3
million in the nine months ended September 30, 1999.
Income Tax Expense. We have not recorded a provision for income tax
expense as we have incurred substantial losses in every fiscal period since our
inception.
Liquidity and Capital Resources
We have funded our operations from inception primarily by the sale of our
equity securities, including net proceeds of approximately $128.5 million
through September 30, 2000. In April 2000, we completed our initial public
offering and concurrent private placement to Dell USA L.P., raising
approximately $75.1 million net of offering costs.
Cash used in operating activities for the nine months ended September 30,
2000 was
25
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$44.7 million, primarily due to our net loss of $62.6 million, adjusted for
various non-cash charges including non-cash compensation and depreciation and
amortization, and changes in operating assets and liabilities, including changes
in our accounts receivable, accounts payable and accrued expenses. Cash used in
operating activities for the nine months ended September 30, 1999 totaled $7.2
million. We expect to decrease our working capital needs quarter to quarter
through more targeted marketing and advertising, better workforce management and
a reduction in general and administrative expenses.
Cash provided by investment activities for the nine months ended September
30, 2000 totaled $17.3 million. We used $7.2 million during the nine months
ended September 30, 2000 to acquire property and equipment. Cash used in
connection with acquisition of subsidiaries' assets and other assets were $2.6
million. Cash from the liquidation of short-term investments was $27.1 million.
Cash used in investing activities for the nine months ended September 30, 1999
was $38.0 million. We used $37.2 to acquire short-term investments, $0.9 million
to acquire property and equipment, and our acquisition of a subsidiary provided
cash of $0.1 million.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $78.9 million. The majority of this amount was from the
net proceeds of $75.1 million from our April 7, 2000 initial public offering and
concurrent private placement. The remaining $3.8 million was realized from
exercises of issued and outstanding options, warrants and loan repayments. Cash
flow provided by financing activities for the nine months ended September 30,
1999 was $42.9 million of which $38.5 resulted from the issuance of Series B
Convertible Preferred Stock and $4.4 million resulted from the issuance of
Series A Convertible Preferred Stock.
We anticipate that our current cash and marketable securities and
available borrowings under our bank facilities, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. In the future, we may need to raise additional funds
through public or private financings, or other arrangements to fund our
operations and potential acquisitions, if any. We currently have no plans to
effect any other offerings. We cannot assure you that any financings or other
arrangements will be available in amounts or on terms acceptable to us or at all
and any new financings or other arrangements could place operating or other
restrictions on us. Our inability to raise capital when needed could seriously
harm the growth of our business and results of operations. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of our stockholders would be reduced. Furthermore, these equity securities could
have rights, preferences or privileges senior to our common stock.
As a result of our issuing options to FREEAGENT E.OFFICE employees under
circumstances that may have violated the registration requirements of the
Securites Act, we intend to make a rescission offer to these employees, and we
may have a contingent liability of up to $0.2 million.
Year 2000 Compliance
To date, we have not experienced any material Year 2000 problems and we
have not incurred any costs to evaluate, test and remediate, if necessary, our
internal computer software and operating systems(collectively, our "Internal
Programs and Systems") for Year 2000 compliance problems. These costs if
incurred in the future will be funded with cash from our financing activities
and operations and will be expensed or capitalized, depending on the nature of
the expenditure. We are not aware of any Year 2000 related problems associated
with our Internal Programs and Systems or software services provided to
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customers, and are not aware of any Year 2000 related problems associated with
the system or software of our business partners. Although the Company has not
experienced any material Year 2000 compliance problems, there can be no
assurance, that the Year 2000 problem will not adversely affect the Company's
business, financial condition, results of operation or cash flow.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning June 15, 2000. We
did not engage in any derivative instruments or hedging activities during the
quarter and the statement did not affect us.
On March 31, 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
generally applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after July 1, 2000, except for the provision related to
repricings and the definition of an employee which apply to awards issued after
December 15, 1998. To the extent that events covered by FIN 44 occur after the
applicable date but prior to July 1, 2000, the effects of applying FIN 44 shall
be recognized on a prospective basis. Accordingly, no adjustments shall be made
upon initial application of FIN 44 to financial statements for periods prior to
July 1, 2000. The Company has determined that the adoption of FIN 44 does not
have a material effect on the Company's operating results.
Qualitative and Quantitive Disclosure About Market Risk
At September 30, 2000, the majority of our cash balances were held
primarily in the form of short term, investment grade corporate and government
securities. As a result, our interest income may be sensitive to changes in the
general level of U.S. interest rates. However, due to the short-term nature of
our investments and the fact that we generally hold these investments until
their maturity dates, we believe that we are not subject to any material
interest or market rate risks.
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ADDITIONAL INFORMATION
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company is at times subject to
pending and threatened legal actions and proceedings. After reviewing pending
and threatened actions and proceedings with counsel, except as provided below,
management believes that the outcome of such actions or proceedings is not
expected to have a material adverse effect on the financial position or results
of operations of the Company.
The discussion contained under the headings - Commitments and
Contingencies - Contingencies - Legal Proceedings in Note 5 contained in Part I
- FINANCIAL INFORMATION, Item 1, Financial Statements is incorporated here by
reference.
Item 2. Change in Securities and Use of Proceeds.
None.
Item 3 Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5 Other Information.
None.
Item 6 Exhibits and Reports on Form 8-K.
a. Exhibits
10.1 Employment Agreement dated September 7, 2000 between the Registrant
and Peter Schwartz
27 Financial Data Schedule
b. Reports on Form 8-K
None.
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
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authorized.
Date November __, 2000 Opus 360 Corporation
--------------------
(Registrant)
/s/ Peter Schwartz
------------------
Executive Vice President and
Chief Financial Officer
(Signature)
