UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27269
BREAKAWAY SOLUTIONS, INC.
(Exact name of registrant as specified in charter)
Delaware 04-3285165
(State of Incorporation) (I.R.S. Employer Identification No.)
50 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 960-3400
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 |_| No |X|
--------------
17,417,161 shares of the registrant's common stock, par value $0.000125,
were outstanding as of October 31, 1999.
BREAKAWAY SOLUTIONS, INC.
FORM 10-Q/A
TABLE OF CONTENTS
SEPTEMBER 30, 1999
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets .................................... 3
Consolidated Statements of Operations........................... 4
Consolidated Statements of Cash Flows .......................... 5
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk ...... 20
PART II - OTHER INFORMATION
Signature .............................................................. 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1999
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 16,954 $ 7,747,165
Accounts receivable, net of allowance for doubtful accounts of $131,000 and
$225,000 in 1998 and 1999, respectively 1,445,994 4,790,175
Unbilled revenues on contracts 625,609 3,741,704
Prepaid expenses 46,211 1,741,716
Deferred offering costs -- 2,768,717
Advances to employees 13,273 566,759
--------------------------
Total current assets 2,148,041 21,356,236
Property and equipment, net 553,566 4,465,033
Intangible assets -- 13,731,600
Other assets 40,877 274,641
--------------------------
Total assets $ 2,742,484 $39,827,510
==========================
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 425,743 --
Due to stockholders - current portion -- $ 625,000
Notes payable -- 110,885
Capital lease obligation-current portion 148,391 --
Accounts payable 814,074 3,531,310
Accrued compensation and related benefits 178,191 1,581,162
Accrued expenses -- 3,965,977
Deferred revenue on contracts 196,225 117,523
Deferred tax liability-current portion -- 188,750
--------------------------
Total current liabilities 1,762,624 10,120,607
Due to stockholders - long-term portion -- 1,587,527
Capital lease obligation-long-term portion 67,040 45,833
Deferred tax liability -- 566,250
--------------------------
Total long-term liabilities 67,040 2,199,610
--------------------------
Total liabilities 1,829,664 12,320,217
--------------------------
Commitments and contingencies
Stockholders' equity:
Series A preferred stock $.0001 par value, 5,853,000 shares authorized,
none issued and outstanding in 1998 and 5,853,000 shares issued and
outstanding in 1999 (liquidation preference of $8,291,945) -- 585
Series B preferred stock $.0001 par value, 3,078,065 shares authorized,
2,931,849 shares issued and outstanding in 1999 (liquidation
preference of $19,057,018) -- 293
Common stock $.000125 par value, 80,000,000 shares authorized, 7,680,000
shares issued in 1998 and 8,409,198 shares issued in 1999, 6,124,800
and 6,853,998 shares outstanding in 1998 and 1999, respectively 960 1,049
Additional paid-in capital -- 34,759,778
Less: deferred compensation -- (271,042)
Less: Treasury stock, at cost (32) (32)
Retained earnings (deficit) 911,892 (6,983,338)
--------------------------
Total stockholders' equity 912,820 27,507,293
--------------------------
Total liabilities and stockholders' equity $ 2,742,484 $39,827,510
==========================
See accompanying notes to consolidated financial statements
3
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30
------------- ------------
1998 1999 1998 1999
Revenues $2,749,852 $ 7,180,772 $7,478,539 $14,743,582
Operating expenses:
Project personnel costs 1,480,838 3,420,920 4,076,441 7,038,220
Selling, general and administrative expenses 1,561,325 8,260,831 3,338,381 14,722,350
---------- ----------- ---------- -----------
Total operating expenses 3,042,163 11,681,751 7,414,822 21,760,570
---------- ----------- ---------- -----------
Income (loss) from operations (292,311) (4,500,979) 63,717 (7,016,988)
Other income (expense):
Other income 160,000 7,045 160,000 24
Interest income 3,514 128,926 58 188,436
Interest expense (4,777) (100,870) -- (154,810)
Total other income 158,737 35,101 160,058 33,650
Net income (loss) $ (133,574) $(4,465,878) $ 223,775 $(6,983,338)
---------- ----------- --------- -----------
---------- ----------- --------- -----------
Net income (loss) per share -basic and diluted $(0.02) $(0.65) $0.04 $(1.31)
Weighted average common shares outstanding 6,124,800 6,848,956 6,124,800 5,349,475
Pro forma information:
Income (loss) before taxes, as reported (133,574) 223,775
Pro forma income taxes (benefit) (45,415) 89,510
---------- ----------- ---------- -----------
Pro forma net income (loss) (88,159) 134,265
========== =========== ========== ===========
Pro forma net income (loss) per share - basic
and diluted (0.01) 0.02
Pro forma weighted average common shares
outstanding 6,124,800 6,124,800
See accompanying notes to consolidated financial statements
4
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
-------------
1998 1999
---- ----
(Unaudited)
Net income (loss) $223,775 $(6,983,338)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation expense 230,700 675,113
Amortization expense -- 1,205,954
Compensation expense for issuance of common stock options -- 223,050
Changes in operating assets and liabilities, net of
impact of acquisition of businesses:
Accounts receivable (1,133,301) (2,412,228)
Unbilled revenues on contracts (103,446) (3,116,095)
Prepaid and other assets 448 (1,976,766)
Accounts payable 429,553 2,519,413
Accrued compensation and related benefits 89,897 1,287,418
Accrued expenses -- 3,221,666
Deferred revenue on contracts 47,391 (78,702)
--------------------------
Net cash used in operating activities (214,983) (5,434,515)
Cash flows from investing activities:
Cash paid for acquired businesses net of cash acquired -- (2,103,165)
Purchases of property and equipment (316,233) (3,939,268)
--------------------------
Net cash used in investing activities (316,233) (6,042,433)
--------------------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 23,288,514
Proceeds from exercise of stock options -- 507,250
Increase in deferred offering costs -- (2,768,717)
Proceeds from notes payable to stockholder -- 4,000,000
Notes payable to stockholder -- (37,530)
Repurchase and retirement of common stock -- (4,468,980)
Advances to employees (30,092) (553,486)
Payments on current portion of long-term debt (10,417) (141,629)
Distribution to stockholders (434,843) --
Proceeds from (repayments of) credit line 330,000 (425,743)
Increase in other assets (31,279) --
Repurchase of treasury stock (6) --
Payments of capital lease obligations 163,166 (192,520)
-------------------------
Net cash (used in) provided by financing activities (343,471) 19,207,159
-------------------------
Net (decrease) increase in cash and cash equivalents (874,687) 7,730,211
-------------------------
Cash and cash equivalents at beginning of period 879,136 16,954
-------------------------
Cash and cash equivalents at end of period $4,449 $7,747,165
-------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $11,114 $98,927
--------- ----------
--------- ----------
Conversion of notes payable and accrued interest to
stockholder for common stock -- $4,053,425
--------- ----------
--------- ----------
Supplemental disclosures of non-cash investing and financing activities:
Capital lease obligations $(166,834) $99,849
-------------------------
Issuance of common stock in connection with acquisition
of businesses -- $9,192,785
Acquisition of businesses:
Assets acquired 16,358,192
Liabilities assumed and issued (4,298,840)
Common stock and stock options issued (9,956,187)
=========================
Net cash paid for acquisition of businesses $(2,103,165)
See accompanying notes to consolidated financial statements
5
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Breakaway Solutions, Inc. (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's Form S-1 filed with the
Securities and Exchange Commission (Registration No. 333-83343). The
accompanying consolidated financial statements reflect all adjustments
(consisting solely of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for the
interim periods presented. The results of operations for the three and nine
month periods ended September 30, 1998 and 1999 are not necessarily
indicative of the results to be expected for any future period or the full
fiscal year.
Net Income (Loss) Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128
requires the presentation of basic and diluted net income (loss) per share
for all periods presented. There are no common stock equivalents outstanding
in 1998. As the Company has been in a net loss position for the three and
nine months ended September 30, 1999 common stock equivalents of 1,395,307
for the three months ended September 30, 1999 and 991,401 for the nine months
ended September 30, 1999 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per
share is the same as basic loss per share, and has not been presented
separately.
Stock Split
In July 1999 the Board of Directors approved an increase in the number
of authorized common shares from 20,000,000 to 80,000,000, and in September
1999 approved a four-for-five stock split which became effective on October
5, 1999. All share data shown in the accompanying consolidated financial
statements have been retroactively restated to reflect this stock split.
2. Acquisitions
Subsequent to December 31, 1998, the Company entered into the following
acquisitions, which are accounted for under the purchase method of accounting:
Applica Corporation
In March, 1999, the Company entered into an agreement to acquire
all the outstanding stock of Applica Corporation, a provider of
application hosting services. The purchase price was comprised of
723,699 shares of common stock.
WPL Laboratories, Inc.
In May, 1999, the Company entered into an agreement to acquire
all the outstanding stock of WPL Laboratories, Inc., a provider of
advanced software development services. The purchase price was
comprised of $5,000,000 in cash, 1,364,140 shares of common stock
and the assumption of all outstanding WPL stock options, which
became exercisable for 314,804 shares of the Company's common stock
at a per share exercise price of $2.36 with a four-year vesting
period. The WPL stockholders received one half of their cash
consideration at closing and will receive the remainder
incrementally over a four-year period so long as the stockholder
does not voluntarily terminate his employment and is not terminated
for cause. Of the shares of common stock issued to the former WPL
stockholders, approximately fifty percent are subject to the
Company's right, which lapses incrementally over a four-year period,
to repurchase the shares of a particular stockholder, at their value
at the time of the acquisition, upon the stockholder's resignation
or the Company's termination of the stockholder for cause. In
connection with the stock issuance, in July 1999 the Company
provided approximately $1,200,000 in loans to stockholders. The
loans which bear interest at prime plus 1% are due at the earlier of
the sale of stock or four years.
Web Yes, Inc.
In June, 1999, the Company entered into an agreement to acquire
all the outstanding stock of Web Yes, Inc., a provider of web
hosting services. The purchase price was comprised of 492,491
6
shares of common stock. Of the shares of common stock issued to the
former Web Yes stockholders, 342,680 are subject to the Company's
right, which lapses incrementally over a four-year period, to
repurchase the shares of the particular stockholder upon the
termination of his employment with the Company. The repurchase price
shall be either at the share value at the time of the acquisition if
the stockholder terminates employment or is terminated for cause, or
at the fair market value if the stockholder's employment is
terminated without cause.
In addition, of the 452,491 shares issued in the acquisition of
Web Yes, Inc., the Company issued 35,583 shares of common stock to
employees of Web Yes, Inc. The common stock is subject to
restrictions relating to employment. As a result, the fair value
of the stock issued has been recorded as deferred compensation and
will be recognized as compensation expense over the restriction
period of four years.
The results of operations of the acquisitions have been included
in the unaudited consolidated financial statements from their
respective dates of acquisition. The excess of the purchase price
and expenses associated with each acquisition over the estimated
fair value of the net assets acquired has been recorded as
intangible assets. Such costs are being amortized on a
straight-line basis over three to five years, the period expected
to be benefited.
The following unaudited pro forma results of operations give
effect to the acquisitions as if the transactions had occurred as
of January 1, 1998. Such pro forma financial information reflects
certain adjustments, including amortization of intangibles,
interest expense, income tax effects and an increase in the
weighted average shares outstanding. This pro forma information
does not necessarily reflect the results of operations that would
have occurred had the acquisitions taken place as of January 1,
1998 and is not necessarily indicative of results that may be
obtained in the future.
Nine Months Ended
September 30,
-------------------------
1998 1999
---- ----
Revenues 9,390,780 16,712,009
Net loss (1,337,264) (5,430,425)
Net loss per share (0.15) (0.84)
Weighted average shares outstanding 8,884,955 6,502,128
3. Related Party Transactions
In January, 1999, Internet Capital Group ("ICG"), holder of the
Company's Series A Preferred Stock, entered into an option agreement with the
Company's Chief Executive Officer. The Option Agreement grants the Chief
Executive Officer the right to purchase all or part of an aggregate of
284,195 shares of the Series A Preferred Stock owned by ICG at an exercise
price of $1.42. The option vested immediately and expires seven years after
the date of grant.
In May 1999, ICG provided $4,000,000 in advances which were converted
into equity in July, 1999. In connection with this transaction, the Company
issued ICG a warrant to purchase 73,872 shares of common stock at an exercise
price of $8.13 per share. During 1999 the Company provided information
technology consulting services to companies in which ICG holds equity
interests ("ICG Partner Companies"). For the three months and nine months
ended September 30, 1999, revenues generated for services provided to ICG
Partner Companies amounted to approximately $1,171,000 and $1,296,000,
respectively.
4. Series B Preferred Stock Financing
In July 1999, the Company issued an aggregate of 2,931,849 shares of
Series B Preferred Stock at $6.50 per share. ICG purchased 769,514 shares of
Series B Preferred Stock in the transaction for consideration in the
aggregate of $4,999,994, $4,053,425 of which was paid by conversion of its
convertible promissory note issued by the Company in May 1999.
5. Initial Public Offering
On October 5, 1999 the Company issued 3,450,000 shares of its common
stock (450,000 shares of which represented the underwriters exercise of its
overallotment option), $0.000125 par value per share, for proceeds of
approximately $43,700,000 (net of underwriting discounts, commissions and
expenses). The Company intends to use the proceeds for working capital and
other general corporate purposes.
6. Income Taxes (Unaudited)
Effective January 1, 1999, the Company terminated its S Corporation
election and is subject to corporate-level federal and certain state income
taxes. Upon termination of the S Corporation status, deferred income taxes
are recorded for the tax effect of cumulative temporary differences between
the financial reporting and tax bases of certain assets and liabilities;
primarily deferred revenue that must be recognized currently for tax
purposes, accrued expenses that are not currently deductible, cumulative
differences between tax depreciation and financial reporting allowances, and
the impact of the conversion from the cash method to the accrual method of
reporting for tax purposes.
Pro forma income tax expense (benefit), assuming the Company had been a
C Corporation and applying the tax laws in effect during the periods
presented would have been as follows for the three and nine months ended
September 30, 1998:
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
1998 1999 1998 1999
---- ---- ---- ----
Federal tax (benefit) (45,415) 76,084
State taxes, net of federal -- 13,426
------- ---------- ------ ----------
(45,415) 89,510
======= ========== ====== ==========
As of September 30, 1999, as a result of the acquisitions of Applica
Corporation, WPL Laboratories, Inc., and Web Yes, Inc., the Company has
recorded a net tax liability of $755,000. The net deferred tax liability is
primarily attributable to liabilities arising from cash-to-accrual
conversion and the recording of certain intangible assets offset by assets
relating to net operating losses.
7. Stock Plans
(a) 1999 Stock Incentive Plan
The 1999 Stock Incentive Plan was adopted by the board of directors on
July 15, 1999. The 1999 plan is intended to replace the 1998 plan. Up to
4,800,000 shares of common stock (subject to adjustment in the event of stock
splits and other similar events) may be issued pursuant to awards granted
under the 1999 plan.
The 1999 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards.
(b) 1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the board of
directors on July 15, 1999. The purchase plan authorizes the issuance of up
to a total of 400,000 shares of common stock to participating employees.
The following employees, including directors who are employees and
employees of any participating subsidiaries, are eligible to participate in
the purchase plan
- Employees who are customarily employed for more than 20 hours per
week and for more than five months per year; and
- Employees employed for at least one month prior to enrolling in the
purchase plan.
Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of the Company's stock or any subsidiary
are not eligible to participate.
8. Operating Segments
Historically, the Company has operated in a single segment. With the
acquisitions of Applica Corporation and Web Yes, Inc., the Company expanded
its operations to include a second segment, application and web hosting.
Revenues from application and web hosting services amounted to $700,000 for
the three and nine months ended September 30, 1999. Total assets related to
the application and web hosting business are approximately $6,300,000 as of
September 30, 1999, of which approximately $5,500,000 represents intangible
assets.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Breakaway Solutions is a Delaware corporation. We incorporated in
Massachusetts under the name The Counsell Group, Inc. in 1992, and
reincorporated in Delaware in August 1995. In October 1998, we changed our name
to Breakaway Solutions, Inc.
We are a full service provider of e-business solutions that allow growing
enterprises to capitalize on the power of the Internet to reach and support
customers and markets. Our services consist of Breakaway strategy consulting,
Breakaway Internet solutions, Breakaway eCRM solutions and Breakaway Application
hosting. From our inception in 1992 through 1998, our operating activities
primarily consisted of providing Internet solutions and eCRM solutions services.
Prior to our acquisition of Applica, we derived no revenues from application
hosting. We believe, however, that application hosting will account for a
significantly greater portion of our total revenues in the future.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Revenues for the three months ended September 30, 1999
increased by $4.5 million, or 166.7%, to $7.2 million from $2.7 million for
the three months ended September 30, 1998. The increase was due primarily to
additional service offerings in strategy, eCRM, and Internet, and the new
addition of our hosting line of business which gave us a greater market
presence. Additionally, we expanded geographically which increased our US
market presence. We were in a better position to meet that demand due to
increased hiring for all of our service offerings. Revenues for our hosting
line of business were $0.7 million for the three months ended September 30,
1999 which increased from a negligible amount for the three months ended
September 30, 1998.
Project personnel costs. Project personnel costs for the three months
ended September 30, 1999 increased by $1.9 million, or 126.7%, to $3.4
million from $1.5 million for the three months ended September 30, 1998.
Project personnel costs represented 47.6% of revenues for the three months
ended September 30, 1999, as compared to 53.8% of revenues for the three
months ended September 30, 1998. The increase in absolute dollars was due
primarily to an increase in the number of employees hired to perform the
client services delivered. Project personnel costs decreased as a percentage
of revenues for the three months ended September 30, 1999 due primarily to an
increase in the average hourly billable rate of our professionals over the
comparable period in 1998 and, to a lesser extent, due to an increase in
average employee utilization rate.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 30, 1999 increased
by $6.7 million, or 418.8%, to $8.3 million from $1.6 million for the three
months ended September 30, 1998. As a percentage of revenues, selling, general
and administrative expenses increased from 56.8% in the 1998 period to 115.0% in
the 1999 period. The increase in 1999 was due primarily to increases in
personnel-related expenses to support increased administrative employees,
outside professional fees for recruiting, the recruiting and hiring of a senior
executive management team, the hiring of dedicated sales and marketing
employees, a brand name marketing campaign, the investment in our hosting
service line infrastructure, and the continued development of our regional
offices.
Interest income, net. Interest income, net, for the three months ended
September 30, 1999 increased to $28,000 from a negligible amount for the
three months ended September 30, 1998. The increase in 1999 was due primarily
to interest income earned on the invested portion of proceeds from our
preferred stock financing in January 1999 and July 1999.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Revenues for the nine months ended September 30, 1999 increased
by $7.2 million, or 96.0%, to $14.7 million from $7.5 million for the nine
months ended September 30, 1998. The increase was due primarily
8
to increased market demand for Internet professional services and the new
addition of our hosting line of business, which was 5% of our total revenues for
the nine months ended September 30, 1999. Additionally, we expanded
geographically, which increased our US market presence.
Project personnel costs. Project personnel costs for the nine months ended
September 30, 1999 increased by $2.9 million, or 70.7%, to $7.0 million from
$4.1 million for the nine months ended September 30, 1998. Project personnel
costs represented 47.7% of revenues for the nine months ended September 30,
1999, as compared to 54.5% of revenues for the nine months ended September 30,
1998. The increase in absolute dollars was due primarily to an increase in the
number of employees hired to perform the client services delivered. Project
personnel costs decreased as a percentage of revenues for the nine months ended
September 30, 1999 due primarily to an increase in the average hourly billable
rate of our professionals over the comparable period in 1998 and, to a lesser
extent, due to an increase in average employee utilization rate.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1999 increased
by $11.4 million, or 345.5%, to $14.7 million from $3.3 million for the nine
months ended September 30, 1998. As a percentage of revenues, selling, general
and administrative expenses increased from 44.6% in the 1998 period to 99.9% in
the 1999 period. The increase in 1999 was due primarily to increases in
personnel-related expenses to support increased administrative employees,
outside professional fees for recruiting, the recruiting and hiring of a senior
executive management team, the hiring of dedicated sales and marketing
employees, a brand name marketing campaign, the investment in our hosting
service line infrastructure, and the opening of a new regional office in Dallas.
Interest income, net. Interest income, net, for the nine months ended
September 30, 1999 increased to $33,600 from a negligible amount for the nine
months ended September 30, 1998. The increase in 1999 was due primarily to
interest income earned on the invested portion of proceeds from our preferred
stock financings in January 1999 and July 1999.
Liquidity and Capital Resources
From inception through December 31, 1998, we funded our operations
primarily through cash provided by operations and a line of credit. In 1999 we
have funded our operations through the issuance of preferred stock and, to a
lesser extent, through a line of credit and equipment leases.
At December 31, 1998, our cash balance was $17,000. Our cash balance
was $7.7 million at September 30, 1999. Our working capital was $385,000 at
December 31, 1998 and $11.2 million at September 30, 1999.
Our operating activities used cash of $215,000 and $5.5 million in the
nine months ended September 30, 1998 and 1999, respectively. The increase in
cash used in 1999 primarily resulted from costs we incurred in connection
with hiring a new management team and implementing a new business model. In
addition, we experienced an increase in our receivables resulting from both
increased days outstanding and the extended payment terms of fixed-fee
contracts which we entered into accounted for approximately 40% of our
revenue for the period. The continued increase in cash used in operating
activities for the nine months ended September 30, 1999 resulted from
continued recruiting and hiring costs, and building our sales and marketing
capabilities.
We used cash for capital expenditures of $316,000 and $3.9 million in
the nine months ended September 30, 1998 and 1999, respectively. These
expenditures were primarily for computer equipment, telecommunications
equipment and furniture and fixtures to support our growth, and to build our
application hosting capabilities. In addition, in the first nine months of
1999, we used $2.1 million in cash for acquired businesses.
We have various equipment lease financing facilities. The terms of these
equipment lease financings average two years. The annual interest rates on
borrowings ranged from 5.4% or 15.7%.
9
In January 1999, we issued 5,853,000 shares of Series A Preferred Stock
for $8.3 million. We used the proceeds to purchase common stock from an
existing stockholder and to fund operations.
In May 1999, we borrowed $4,000,000 from Internet Capital Group and issued
Internet Capital Group a promissory note for $4,000,000 bearing interest at the
prime interest rate plus one percent. This promissory note converted into shares
of the Company's Series B Preferred Stock in the Company's July 1999 Series B
Preferred Stock Financing. We used the proceeds to help finance our acquisition
of WPL and to fund operations.
In July 1999, we issued 2,931,849 shares of Series B Preferred Stock for
approximately $19.0 million. We intend to use the proceeds for working capital
and other general corporate purposes.
In September 1999, we entered into a Master Lease Agreement with Silicon
Valley Bank to finance up to $4 million of equipment and software. Leases under
the Master Lease Agreement will have terms of 36 months. Payments under the
leases will be determined based on an annual interest rate equal to the annual
rate on U.S. Treasury securities of a comparable term plus 2.5%. In
connection with the Master Lease Agreement we issued Silicon Valley Bank
warrants to purchase 10,909 shares of our common stock for $11.00 per share.
The warrants are exercisable until September 21, 2002.
In October 1999, we consummated an initial public offering and issued
3,450,000 shares of common stock for approximately $43.7 million, net of
underwriter's discounts, commissions and expenses. We intend to use the
proceeds for working capital and other general corporate purposes.
We believe that the proceeds of our initial public offering and funds
that are available under our line of credit will be sufficient to finance our
capital requirements for at least the next 12 months. There can be no
assurance, however, that our actual needs will not exceed expectations or
that we will be able to fund our operations in the absence of other sources.
There also can be no assurance that any additional required financing will be
available through additional bank borrowings, debt or equity offerings or
otherwise, or that if such financing is available, that it will be available
on terms acceptable to us.
Market Risk
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. We invest our cash in
money market funds, which are subject to minimal credit and market risk. We
believe the market risks associated with these financial instruments are
immaterial.
Year 2000 Readiness Disclosure
Year 2000 Issue. The year 2000 issue is a result of computer programs or
systems which store or process date-related information using only the last two
digits to refer to a year. These programs or systems may not be able to
distinguish properly between a year in the 1900's and a year in the 2000's.
Failure of these programs or systems to distinguish between the two centuries
could cause the programs or systems to create erroneous results or even to fail.
Our State of Readiness. We have established a year 2000 readiness team to
carry out a program for the assessment of our vulnerability to the year 2000
issue and remediation of identified problems. The team consists of senior
information technology and business professionals and meets on a regular basis.
An outside consultant is also working with the readiness team on a temporary
basis to assist them in carrying out their tasks.
The readiness team has developed a program with the following key phases
to assess our state of year 2000 readiness:
o Develop a complete inventory of our hardware and software, and
assess whether that hardware and software is year 2000 ready;
o Test our internal hardware and software which we believe have a
significant impact on our daily operations to assess whether it is
year 2000 ready;
10
o Upgrade, remediate or replace any of our hardware or software that
is not year 2000 ready; and
o Develop a business continuity plan to address possible year 2000
consequences which we cannot control directly or which we have not
been able to test or remediate; and
We have completed a number of the tasks which our program requires, as
follows:
o We have completed the inventory of hardware and software at all of
our locations and have determined that all of the inventoried
hardware and software which we believe have a significant impact on
our daily operations are year 2000 ready or can be made ready with
minimal changes or replacements, based on our vendors' web site
certification statements and commercially available year 2000
testing products; and have determined that such operations are Year
2000 ready.
o We have implemented internal policies to require that a senior
information technology professional approves as year 2000 ready any
hardware or software that we plan to purchase;
o We have developed a list of all vendors which we deem to have a
significant business relationship with us. Of the approximately 20
vendors we have identified, we have obtained web site certifications
or made written inquiries for information or assurances with respect
to the year 2000 readiness of products or services that we purchase
from those vendors;
o We have completed test plans for date sensitive applications which
we have determined to be Year 2000 ready and which we believe will
have a significant impact on our daily operations.
o We have completed an internal review to determine the commitments we
have made to our customers with respect to the year 2000 readiness
of solutions which we have provided to those customers; and
o We have reviewed evaluations of questionnaires regarding year 2000
readiness to our critical vendors.
o We have formulated a business continuity plan that encompasses
Breakaway's strategy for preparation, notification and recovery in
the event of a failure due to the year 2000 issue. The plan includes
procedures to minimize downtime and expedite resumption of business
operations and other solutions for responding to internal failures
in our internal information technology department as well as
widespread external failures related to the year 2000 issue.
We have specific tasks to complete with respect to our year 2000 program,
including;
o Testing of our internal hardware and software which we believe have
a significant impact on our daily operations to confirm its year
2000 readiness; and
o Implementation of any necessary changes, identified as a result of
testing, to our internal software and hardware.
Costs. To date, we have not incurred material expenses in connection
with our year 2000 readiness program. We may need to purchase replacement
products, hire additional consultants or other third parties to assist us,
although we do not currently expect that we will need to take such steps. We
currently estimate that the cost of our year 2000-readiness program will be
approximately $100,000. This amount includes internal labor costs, legal and
outside consulting costs and additional hardware and software purchases. We
expect that we will refine this estimate as we complete the final phase of
our year 2000 readiness program.
Risks. If we fail to solve a year 2000 problem with respect to any of our
systems, we could experience a significant interruption of our normal business
operations. We believe that the most reasonably likely worst case scenarios
related to the year 2000 issue for our business are as follows:
11
o If a solution which we provided to a client causes damage or injury
to that client because the solution was not year 2000 compliant, we
could be liable to the client for breach of warranty. In a number of
cases, our contracts with clients do not limit our liability for
this type of breach;
o If there is a significant and protracted interruption of
telecommunication services to our main office, we would be unable to
conduct business because of our reliance on telecommunication
systems to support daily operations, such as internal communications
through e-mail; and
o If there is a significant and protracted interruption of electrical
power or telecommunications services to our application hosting
facilities, we would be unable to provide our application hosting
services. This failure could significantly slow the growth of our
application hosting business which is an important part of our
strategic plan. We have sought to locate our application hosting
facilities in leased space in co-location facilities which have
back-up power systems and redundant telecommunications services.
Factors That May Affect Future Results
This Quarterly Report on Form 10Q includes or incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. Forward-looking statements give our
current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. Words such as "expects," "may," "anticipates," "intends," "would,"
"will," "plans," "believes," "estimates," "should," and similar words and
expressions are intended to identify forward-looking statements. These
statements are based on estimates, projections, beliefs, and assumptions of the
Company and its management, and are not guarantees of future performance. From
time to time, we also may provide oral or written forward-looking statements in
other materials we release to the public.
Any or all of our forward-looking statements in this report, and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in the discussion below will be important
in determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially. We undertake no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however,
to consult any further disclosures we make in our reports filed with the
Securities and Exchange Commission.
The Company cautions that the following important factors, among others,
in the future could cause the Company's actual results to differ materially from
those expressed in forward-looking statements made by or on behalf of the
Company in filings with the Securities and Exchange Commission, press releases,
communications with investors, and oral statements.
Our Future Success is Uncertain Because We Have Significantly Changed Our
Business
Prior to 1999, we primarily provided traditional systems integration
services along with limited strategic planning and Internet systems integration
services. In 1999, we added application hosting to our service offerings and
substantially increased our capacity to provide strategic planning and Internet
systems integration services through three acquisitions and significant hiring
of professionals. Due to these recent significant changes, we are subject to the
risk that we will fail to implement our business model and strategy. This risk
is heightened because we are operating in the new and rapidly evolving
e-business solutions market. Our historical results of operations do not reflect
our new service offerings.
12
Our Business Will Suffer if Growing Enterprises Do Not Adopt and Accept
Application Hosting Services
Our ability to increase revenues and achieve profitability depends on the
adoption and acceptance of third-party application hosting services by our
target market of growing enterprises. Information technology service providers,
including Breakaway Solutions, only recently have begun to offer third-party
application hosting services. The market for these services has only recently
begun to develop and is evolving rapidly.
Our Business Will Suffer if Growing Enterprises Do Not Accept E-Business
Solutions
Our ability to increase revenues and achieve profitability depends on the
widespread acceptance of e-business solutions by commercial users, particularly
growing enterprises. The market for e-business solutions is relatively new and
is undergoing significant change. The acceptance and growth of e-business
solutions will be limited if the Internet does not prove to be a viable
commercial market.
We Have a History of Operating Losses, Expect to Incur Losses in the Future and
Will Not be Successful Unless We Can Reverse This Trend
We expect to continue to incur increasing and substantial sales and
marketing, infrastructure development and general and administrative expenses.
As a result, we will need to generate significant revenues to achieve
profitability. We cannot be certain whether or when this will occur because of
the significant uncertainties with respect to our business model. We experienced
a net loss of $575,175 for the fiscal year ended December 31, 1998 and of
$6,983,338 for the nine months ended September 30, 1999. We expect to continue
to incur significant operating losses in the near term. If we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future.
We Plan to Expand Rapidly; if We Cannot Manage Our Growth Successfully, Our
Growth May Slow or Stop
Since November 1998, we have rapidly expanded our operations. Our growth
has placed, and will continue to place, a significant strain on our management,
operating and financial systems, and sales, marketing and administrative
resources. If we cannot manage our expanding operations, we may not be able to
continue to grow or we may grow at a slower pace. Furthermore, our operating
costs may escalate faster than planned. In order to manage our growth
successfully we must:
o Improve our management, financial and information systems and
controls;
o Expand, train and manage our employee base effectively; and
o Enlarge our infrastructure for application hosting services.
We Rely on a Small Number of Clients for Most of Our Revenues; Our Revenues Will
Decline Significantly if We Cannot Keep or Replace These Clients
In 1998, revenues from a single client accounted for approximately
27.0% of our total revenues, and revenues from our five largest clients
accounted for 54.0% of total revenues. During the nine months ended September
30, 1999, revenues from a single client accounted for approximately 9.2% of
our total revenues and revenues from our five largest clients accounted for
approximately 43.7% of our total revenues. If these clients do not need or
want to engage us to perform additional services for them and we are not able
to sell our services to new clients at comparable or greater levels, our
revenues will decline.
13
Our Quarterly Revenues and Operating Results Are Likely to Vary Which May Cause
the Market Price of Our Common Stock to Decline
Our quarterly revenues and operating results are volatile and difficult to
predict. Our quarterly operating results have varied in the past and are likely
to vary significantly from quarter to quarter in the future. It is likely that
in some future quarter or quarters our operating results will be below the
expectations of public market analysts or investors. If so, the market price of
our common stock may decline significantly.
Factors that may cause our results to fluctuate include:
o The amount and timing of demand by our clients for e-business
solution services;
o Our ability to obtain new and follow-on client engagements;
o The number, size and scope of our projects;
o Cancellations or reductions in the scope of major consulting and
systems integration projects;
o Our ability to enter into multiyear contracts with application
hosting clients;
o Cancellations of month-to-month application hosting contracts;
o The length of the sales cycle associated with our service offerings;
o The introduction of new services by us or our competitors;
o Changes in our pricing policies or those of our competitors;
o Our ability to attract, train and retain skilled personnel in all
areas of our business;
o Our ability to manage costs, including personnel costs and support
services costs; and
o The timing and cost of anticipated openings or expansions of new
regional offices and new Solution Centers.
We derive a substantial portion of our revenues from providing
professional services. We generally recognize revenues as we provide services.
Personnel and related costs constitute the substantial majority of our operating
expenses. Because we establish the levels of these expenses in advance of any
particular quarter, underutilization of our professional services employees may
cause significant reductions in our operating results for a particular quarter.
Our Growth Could be Limited if We Are Unable to Attract and Retain Qualified
Personnel
We believe that our success depends largely on our ability to attract
and retain highly skilled technical, consulting, managerial, sales and
marketing personnel. We may not be able to hire or retain the necessary
personnel to implement our business strategy. In addition, we may need to pay
higher compensation for employees than we currently expect due to intense
competition for qualified employees. Individuals with e-business solutions
skills, particularly those with the significant experience which we generally
require, are in very short supply. Competition to hire from this limited pool
is intense.
We May Lose Money on Fixed-Fee Contracts and Performance-Based Contracts
We derive a portion of our revenues from fixed-fee contracts. We also have
begun a program in some client engagements to make a portion of our fees
contingent on meeting performance objectives. If we misjudge the time and
resources necessary to complete a project, or if a client does not achieve the
agreed upon performance
14
objectives, we may incur a loss in connection with the project. This risk is
heightened because we work with complex technologies in compressed time frames.
Our Growth Strategy Will Fail if We Are Unable to Open Successfully New Regional
Offices
A key component of our growth strategy is to open regional offices in new
geographic locations. If we do not implement this strategy successfully we will
not grow. We devote substantial financial and management resources to launch
these offices. We may not select appropriate locations for these regional
offices. We also may not be able to open these offices efficiently or manage
them profitably.
If Our Efforts to Develop Brand Awareness Are Not Successful We Will Not
Increase Revenues As Planned
An important element of our business strategy is to develop and maintain
widespread awareness of the Breakaway Solutions name in our target market. To
promote our name and brand image, we incur substantial marketing expenses. These
expenditures may cause our operating margins to decline. If our efforts are not
successful, we will not experience any increase in revenues to offset the
increase in marketing expenses. We may nonetheless continue to incur these
expenses, possibly at higher levels. Moreover, our name may be closely
associated with the business difficulties of some of our clients, many of whom
are pursuing unproven business models in competitive markets. As a result, the
difficulties or failure of one of our clients could damage our name and brand
image.
Our Failure to Meet Client Expectations or Deliver Error-Free Services Could
Result in Losses and Negative Publicity
Many of our engagements involve information technology solutions that are
critical to our clients' businesses. Any defects or errors in these solutions or
failure to meet clients' specifications or expectations could result in:
o Delayed or lost revenues due to adverse client reaction;
o Requirements to provide additional services to a client at no
charge;
o Refunds of monthly application hosting fees for failure to meet
service level obligations;
o Negative publicity about us and our services, which could adversely
affect our ability to attract or retain clients; and
o Claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our
insurance policies and which may not be limited by the contractual
terms of our engagement.
We Generate a Significant Portion of Our Revenues From Services Related to
Packaged Software Applications of a Limited Number of Vendors; We Would
Experience A Reduction in Revenues if Any of Those Vendors Ceased Doing Business
with Us
We derive a significant portion of our revenues from projects in which we
customize, implement or host packaged software applications developed by third
parties. We do not have contractual arrangements with some of these software
vendors. As a result, those software vendors with whom we do not have
contractual arrangements can cease making their products available to us at
their discretion. Even in the case of software vendors with whom we do have
contractual arrangements, those arrangements are either terminable at will by
either party or are for terms of one year or less. In addition, these software
vendors may choose to compete against us in providing strategic consulting,
systems integration or application hosting services. In addition, the terms of
various agreements with third party software vendors may require cash outlays
prior to our deriving revenue from transactions with out customers. Moreover,
our success is dependent upon the continued popularity of the product offerings
of these vendors and on our ability to establish relationships with new vendors
in the future. If we are unable to obtain
15
packaged applications from these or comparable vendors or, if our vendors choose
to compete with us or the popularity of their products declines, our business
may be adversely affected.
Our Markets Are Highly Competitive and Our Failure to Compete Successfully Will
Limit Our Ability to Retain and Increase Our Market Share
Our markets are new, rapidly evolving and highly competitive. We expect
this competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position will limit our ability to maintain and
increase our market share, which would result in serious harm to our business.
Many of our competitors are substantially larger than we are and have
substantially greater financial, infrastructure and personnel resources than we
have. Furthermore, many of our competitors have well established, large and
experienced marketing and sales capabilities and greater name recognition than
we have. As a result, our competitors may be in a stronger position to respond
quickly to new or emerging technologies and changes in client requirements. They
may also develop and promote their services more effectively than we do.
Moreover, barriers to entry, particularly in the strategic consulting and
systems integration markets, are low. We therefore expect additional competitors
to enter these markets.
If We Are Unable to Reuse Software Code and Methodologies, We May Not be Able to
Deliver Our Services Rapidly and Cost-Effectively
Our business model depends to a significant extent on our ability to reuse
software code and methodologies that we develop in the course of client
engagements. If we are unable to negotiate contracts to permit us to reuse code
and methodologies, we may be unable to provide services to our growing
enterprise clients at a cost and within time frames that these clients find
acceptable. Our clients may prohibit us from such reuse or may severely limit
reuse.
We Depend on a Limited Number of Key Personnel Who Have Recently Joined Us and
Who We May Not be Able to Retain
All of our senior management joined Breakaway Solutions in 1998 and 1999.
Many of these individuals have not previously worked together, and are becoming
integrated as a management team. As a result, our senior managers may not work
together effectively as a team. In addition, due to the competitive nature of
our industry, we may not be able to retain all of our senior managers.
We May Need Additional Capital, Which May Not be Available to Us, and Which, if
Raised, May Dilute Your Ownership Interest in Us
We may need to raise additional funds through public or private equity or
debt financings in order to:
o Support additional capital expenditures;
o Take advantage of acquisition or expansion opportunities;
o Develop new services; or
o Address additional working capital needs.
If we cannot obtain financing on terms acceptable to us or at all, we may be
forced to curtail some or all of these activities. As a result, we could grow
more slowly or stop growing. Any additional capital raised through the sale of
equity will dilute your ownership interest in us and may be on terms that are
unfavorable to holders of our common stock.
We May Undertake Additional Acquisitions Which May Limit Our Ability to Manage
and Maintain Our Business, May Result in Adverse Accounting Treatment and May Be
Difficult to Integrate Into Our Business
16
Since March 1999, we have acquired three companies. We may undertake
additional acquisitions in the future. Acquisitions involve a number of risks,
including:
o Diversion of management attention;
o Amortization of substantial goodwill, adversely affecting our
reported results of operations;
o Inability to retain the management, key personnel and other
employees of the acquired business;
o Inability to establish uniform standards, controls, procedures and
policies;
o Inability to retain the acquired company's customers; and
o Exposure to legal claims for activities of the acquired business
prior to acquisition.
Client satisfaction or performance problems with an acquired business also could
affect our reputation as a whole. In addition, any acquired business could
significantly underperform relative to our expectations.
We May Not be Able to Deliver Our Application Hosting Services if Third Parties
Do Not Provide Us With Key Components of Our Hosting Infrastructure
We depend on other companies to supply key components of the computer and
telecommunications equipment and the telecommunications services which we use to
provide our application hosting services. Some of these components are available
only from sole or limited sources in the quantities and quality we demand.
Although we lease redundant capacity from multiple suppliers, a disruption in
our ability to provide hosting services could prevent us from maintaining the
required standards of service, which would cause us to incur contractual
penalties.
Intellectual Property Infringement Claims Against Us, Even Without Merit, Could
Cost a Significant Amount of Money to Defend and May Divert Management's
Attention
As the number of e-business applications in our target market increases
and the functionality of these applications overlaps, we may become subject to
infringement claims. We cannot be certain that our services, the solutions that
we deliver or the software used in our solutions do not or will not infringe
valid patents, copyrights or other intellectual property rights held by third
parties. If there is infringement, we could be liable for substantial damages.
Any infringement claims, even if without merit, can be time consuming and
expensive to defend. They 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.
We May Not be Able to Protect Our Intellectual Property and Proprietary Rights
If third parties infringe or misappropriate our trade secrets, copyrights,
trademarks or other proprietary information, our business could be seriously
harmed. The steps that we have taken to protect our proprietary rights may not
be adequate to deter misappropriation of our intellectual property. In addition,
we may not be able to detect unauthorized use of our intellectual property and
take appropriate steps to enforce our rights. Also, protection of intellectual
property in many foreign countries is weaker and less reliable than in the
United States. Accordingly, if our business expands into foreign countries,
risks associated with protecting our intellectual property will increase.
Failure of Computer Systems and Software to be Year 2000 Compliant Could
Increase Our Costs, Disrupt Our Service and Reduce Demand from Our Clients
We confront the year 2000 problem in three contexts.
Our clients. The failure of our clients to ensure that their operations
are year 2000 compliant could have an adverse effect on them, which in turn
could limit their ability to retain third party service providers such as
17
Breakaway. In addition, clients or potential clients may delay purchasing
software and related products and services including those of Breakaway, due to
concerns related to the Year 2000 problem.
Our suppliers. Our business could be adversely affected if we cannot
obtain products, services or systems that are year 2000 compliant when we need
them.
Our services. The solutions which we provide to our clients integrate
software and other technology from different providers. If there is a year 2000
problem with respect to a solution provided by us, it may be difficult to
determine whether the problem relates to services which we have performed or is
due to the software, technology or services of other providers. Furthermore, in
the past, the Company entered into a number of our contracts, including
contracts with some of our largest clients, which have express or implied
warranties with respect to year 2000 readiness without limitation as to our
liability. As a result, we may be subjected to year 2000-related lawsuits,
whether or not the services that we have performed are year 2000 compliant. We
cannot be certain what the outcomes of these types of lawsuits may be.
Our Business May Suffer if Growth in the Use of the Internet Declines
Our business is dependent upon continued growth in the use of the Internet
by our clients, prospective clients and their customers and suppliers. If the
number of users on the Internet does not increase and commerce over the Internet
does not become more accepted and widespread, demand for our services may
decrease and, as a result, our revenues would decline. Factors that may affect
Internet usage or electronic commerce adoption include:
o Actual or perceived lack of security of information;
o Lack of access and ease of use;
o Congestion of Internet traffic;
o Inconsistent quality of service;
o Increases in access costs to the Internet;
o Excessive governmental regulation or the imposition of taxes on
e-commerce transactions;
o Uncertainty regarding intellectual property ownership;
o Reluctance to adopt new business methods; and
o Costs associated with the obsolescence of existing infrastructure.
Our Stock Price Is and Will Likely Remain Volatile. This Volatility Could Result
in Substantial Losses for Investors
The trading price of our common stock has been and is likely to continue
to be volatile. The stock market in general, and the market for technology and
Internet-related companies in particular, has experienced extreme volatility.
This volatility has often been unrelated to the operating performance of
particular companies. Prices for the common stock will be determined in the
marketplace and may be influenced by many factors, including variations in our
financial results, changes in earnings estimates by industry research analysts,
investors' perceptions of us and general economic, industry and market
conditions.
Our Existing Principal Stockholders, Executive Officers and Directors Hold
Equity Allowing them Control Breakaway Solutions. This Control Could Delay or
Prevent a Change in Corporate Control That Stockholders May Believe Will Improve
Management and Could Depress Our Stock Price Because Purchasers Cannot Acquire a
Controlling Interest
18
Our executive officers, directors and stockholders who beneficially own
more than 5.0% of our stock, in the aggregate beneficially own shares
representing approximately 75.2% of our capital stock. As a result, these
persons, acting together, will be able to control all matters submitted to our
stockholders for approval and to control our management and affairs. For
example, these persons, acting together, will control the election and removal
of directors and any merger, consolidation or sale of all or substantially all
of our assets. This control could have the effect of delaying or preventing a
change of control of Breakaway that stockholders may believe would result in
better management. In addition, this control could depress our stock price
because purchasers will not be able to acquire a controlling interest in
Breakaway.
Our Stock Price Could be Adversely Affected by Shares Becoming Available for
Sale
Upon the expiration of lock-up agreements with many of our stockholders
in April 2000, and as the availability of exemptions from registration
afforded by Rules 144 of the Securities Act of 1933 become available sales
of a substantial number of shares of our common stock in the public market
after this offering could depress the market price of our common stock and
could impair our ability to raise capital through the sale of additional
equity securities.
We Are at Risk of Securities Class Action Litigation Which Could Result in
Substantial Costs and Divert Management's Attention and Resources
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the potential volatility of our stock price, we may be the
target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources.
We Have Antitakeover Defenses That Could Delay or Prevent an Acquisition and
Could Adversely Affect the Price of Our Common Stock
Provisions of our certificate of incorporation and bylaws and provisions
of Delaware law could delay, defer or prevent an acquisition or change of
control of Breakaway Solutions or otherwise adversely affect the price of our
common stock. For example, our board of directors is staggered in three classes,
so that only one-third of the directors can be replaced at any annual meeting.
Additionally, our bylaws limit the ability of stockholders to call a special
meeting. Our certificate of incorporation also permits our board to issue shares
of preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could adversely affect the price of the common stock.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
PART II. OTHER INFORMATION
ITEMS 1, 3 AND 5 - Not Applicable
ITEM 2. See notes 1, 4 and 5 to the Notes to the Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 8, 1999, the holders of the Company's capital stock approved an
amendment to the Company's Amended and Restated Certificate of Incorporation to
provide for:
o an increase in the number of authorized shares of Common Stock to
100,000,000 shares;
o an increase in the number of authorized shares of Preferred Stock to
5,000,000 shares;
o the indemnification of, and limitation of liability of, officers and
directors of the Company under certain circumstances;
o the elimination of all references to the terms of the Series A
Preferred Stock and the Series B Preferred Stock,
o the designation by the board of directors of the Company, without
further stockholder action, of one or more series of the Company's
Preferred Stock having the powers, preferences, rights,
qualifications, limitations and restrictions determined by the board
of directors;
o the classification of the board of directors into three classes;
o a provision that the stockholders may not take action by written
consent and may not call special meetings of stockholders;
o certain procedures for the introduction of business at stockholders'
meetings;
o a vote of at least two-thirds of the outstanding stock is necessary
to remove directors for cause;
o a vote of at least seventy-five percent of the outstanding stock of
the Company is necessary to change the foregoing provisions;
o approval of the Amended and Restated By-Laws of the Company;
o the election of the following individuals to the board of directors:
Christopher H. Greendale
Gordon Brooks
Walter W. Buckley, III; and
Frank Selldorff.
In addition, the Stockholders approved the 1999 Stock Incentive Plan and the
1999 Employee Stock Purchase Plan.
20
ITEM 5. OTHER INFORMATION
On October 5, 1999 the Securities and Exchange Commission declared effective the
Company's Registration Statement on Form S-1 (File number 333-83343), relating
to the initial public offering of the Company's Common Stock, $0.000125 par
value. The proceeds to the Company, net of underwriting discounts and costs, was
approximately $39.6 million.
On October 6, 1999, the Company's Common Stock began trading on the Nasdaq
National Market under the ticker symbol "BWAY."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Lease Agreement dated as of October 7, 1999, by and between
the Company and East Office Operating Limited Partnership, relating
to the premises located at World Trade Center East, Boston,
Massachusetts.
27.1 Financial Data Schedule (nine months ended September 30, 1999).
B. Reports on Form 8-K
Not Applicable
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BREAKAWAY SOLUTIONS, INC.
Date: December 1, 1999 By: /s/ Kevin Comerford
--------------------------------------
Name: Kevin Comerford
Title: Vice President, Administration,
Chief Financial Officer, Treasurer,
(Principal Financial Officer and
Principal Accounting Officer), and
Secretary
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