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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-29793
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Opus360 Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 13-4023714
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
39 West 13th Street, 3rd Floor
New York, NY 10011
(Address of principal executive (Zip Code)
offices)
(212) 687-1086
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock, $0.01 par value
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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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
As of February 28, 2001, there were 50,741,504 shares of the
Registrant's Common Stock outstanding. The aggregate market value of the
Common Stock held by non-affiliates of the Registrant (based on the closing
price for the Common Stock on the NASDAQ National Market on February 28,
2001) was approximately $0.34.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be
issued in conjunction with the Registrant's 2001 Annual Meeting of
Stockholders, which is expected to be filed not later than 120 days after the
Registrant's fiscal year ended December 31, 2000.
OPUS360 CORPORATION
FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
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Part I
Item 1. Business Overview 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
Item 5. Market for Registrant's Common Equity And Related
Stockholders Matter 18
Item 6. Selected Consolidated Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results 22
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 57
Part III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management 57
Item 13. Certain Relationships and Related Transactions 57
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
of Form 8-K 57
Signatures 58
Exhibit Index 60
2
PART 1
ITEM 1. BUSINESS OVERVIEW
Opus360 Corporation (the "Company" or "Opus360") provides eBusiness
software and services that enable companies to manage and acquire skilled
professionals strategically. Opus360 sells its products and services to
leading corporations, professional services and staffing firms. Opus360's
software empowers businesses to get more work done with the people they have
and reduce the cost of acquiring additional professionals.
In today's information economy, skilled talent is both the primary
source of business value and the greatest cost of doing business. Businesses
are working to improve their acquisition and utilization of the people they
already have and find ways to reduce turnover. Companies are hiring more
professionals through outside agencies, but need better information to manage
their vendors and reduce the cost of acquiring talent this way. Businesses
are also turning to independent professionals to win the War for Talent.
Opus360 enables businesses to take a 360-degree approach to getting
work done. It offers solutions for better utilizing a company's workforce and
reducing the cost of acquiring all types of skilled professionals whether
they are full-time employees, contingent workers or independent professionals.
WORKFORCE360-TM- is a family of eBusiness software and services from
Opus360 that helps companies better utilize their workforce of skilled
professionals and reduce the cost of acquiring additional talent. It includes:
- OPUS360 WORKFORCE MANAGEMENT-TM- - resource management software that
helps companies better utilize their workforce and reduce turnover.
- OPUS360 WORKFORCE PROCUREMENT-TM- - vendor management software that
reduces the time, cost, and risk of hiring skilled professionals
through outside agencies.
- FREEAGENT.COM - a web-based talent exchange where businesses can find
independent professionals.
- E.OFFICE - a management service that reduces the cost, complexity and
risk of using independent professionals.
WORKFORCE360 software and services can be used individually or as an
end-to-end integrated solution for managing and acquiring skilled
professionals. This enables businesses to solve their most pressing human
capital management challenges immediately and expand into other solutions
later.
OPUS360 PRODUCTS AND SERVICES
Opus360 Workforce Management-TM- is a resource management software
that helps companies better utilize their workforce and reduce turnover. It
enables businesses to track the work that needs to be done today and in the
future. It also tracks the skills and preferences of people who are available
to do the work. The software makes it easy to assign the right people to the
right work. The ability to consider worker preferences when making
assignments increases job satisfaction and reduces turnover.
The software's workforce planning features enable businesses to make
sure they have the right workforce for future work, or to choose work that
suits the skills available in their workforce. The software offers many
features that help businesses keep their people fully utilized. Where there
are gaps between the work that needs to be done and the people who are
available, the software makes it easy to hire additional help from outside
agencies through seamless integration with Opus360 Workforce Procurement.
Opus360 Workforce Procurement-TM- is vendor management software that
reduces the time, cost, and risk of hiring skilled professionals through
outside agencies. Managed services providers also use the software as a
technology platform for delivering managed services to their customers.
Opus360 Workforce Procurement automates requisition workflows between buyer
and supplier, and captures vendor performance metrics at each step called
TCQ(2) (Time, Cost, Quantity, Quality). Once workers are hired, they can be
managed through Opus360 Workforce Management.
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FreeAgent.com is a web-based talent exchange where businesses can
find independent professionals and independent professionals can find work.
Businesses can post project requirements and get responses from the over
180,000 independent professionals registered on the site. Businesses can also
search directly for independent professionals with specific skills. Free
agents can create personalized electronic resumes called e.portfolios that
describe their skills. They can also search for work from among the many
projects posted on the site.
E.office is a management service that enables companies to expand
their available skilled labor pool by reducing the cost, complexity and risk
of using independent professionals. E.office reduces tax and regulatory risk
to businesses by turning 1099 independents into W-2 employees of e.office.
Replacing contracts and invoices for each independent professional with a
single contract and monthly invoice for all the company's independents
significantly decreases the cost to both the company and their contractors.
E.office offers independent professionals benefits, services, and tax
advantages, which are portable. These benefits include free life, disability
and liability insurance; and optional health insurance plans, dental
insurance and a 401(k) retirement plan. Invoicing, collections, tax payments,
and HR administrative support services make independents more productive.
E.office also enables independent professionals to retain the tax advantages
of being independent by deducting business expenses from gross income.
STRATEGIC RELATIONSHIPS
Opus360 uses Product Alliance Partners, Certified Consulting
Alliance Partners and Channel / Hosting Partners to strengthen its product,
implementation, and channel offerings.
Product Alliance Partners include the premier names in the
technology industry, providing applications and contents that are integrated
with Opus360's solutions to offer unparalleled value and performance.
- Actuate Corporation - Opus360 has integrated the Actuate Report Server
with Workforce360-TM-.
- BEA Systems - Opus360 has built Workforce360 on BEA Systems' WebLogic
Application Server.
- Oracle Corporation - Opus360 has built Workforce360 on Oracle's
Database Server.
- People Sciences, Inc. - Opus360 has integrated People Sciences'
skills models, databases, and associated services into Workforce360.
- webMethods, Inc. - Opus360 uses webMethods to bring new B2B
integrations to market rapidly.
- CollabNet Inc. - Opus360's FreeAgent.com is linked with CollabNet's
sourceXchange, the premier marketplace for financing and managing open
source software development over the Internet.
Certified Consulting Alliance Partners are world-class industry leaders
that apply the necessary engagement resources and industry best practices to
ensure that Opus360's clients successfully implement, integrate, deploy and use
Opus360's solutions.
- CompuCom
- CTG (Computer Task Group)
- PricewaterhouseCoopers
Channel and Hosting Alliance Partners work with Opus360 to help our
clients quickly and efficiently access Opus360's solutions and services. Those
partners that have also been selected as authorized application service
providers (ASPs) will help clients to minimize their up-front IT investment by
deploying, hosting, managing and enhancing Opus360's software applications at a
centrally managed facility, guaranteeing application availability, security, and
performance.
- Great Plains - Opus360 can leverage Great Plains' marketing and
communication programs to sell Opus360 solutions that are integrated
with Great Plains solutions to and through their sales channels.
- Hire.com - Opus360 has entered into a co-marketing alliance with
Hire.Com to make available Hire.com's "e-Recruiter" service to users
of Workforce360.
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Other strategic partners include members of Opus360 Customer Advisory
Board, which was established to allow customers to help steer the strategic
direction of Workforce360, and help market and promote Opus360 products.
Members of the Opus360 Customer Advisory Board include:
- Lucent Corporation
- Sapient Corporation
CLIENTS
Opus360 Workforce Management clients include CompuCom, Computer
Sciences Corporation, CyberSafe, Enherent, Lucent Technologies (Worldwide
Services) and NetVendor.
Clients who have licensed Opus360 Workforce Procurement include CTG,
Global Managed Services and TRS Staffing.
Many corporations, professional services firms, staffing firms and
independent professionals access the over 180,000 independent professionals
registered on FreeAgent.com.
Clients using Opus360's e.office service include Apple Solution
Experts, a division of a Big 5 consulting firm, and many individual
independent professionals.
TECHNOLOGY
Opus360 software has been designed from the ground up to excel in
today's networked economy. Its state-of-the-art 100% pure Internet
architecture, offers superior scalability, reliability and performance in
comparison with other point solution web-enabled client/server or Java
application-based architectures.
Some of the primary highlights and benefits of this advanced architecture
include:
- 100% pure Internet architecture with no applets or plug-ins on the
client or browser
- Standards-Based - Opus360 software is designed using open industry
standards including:
- Enterprise Java Beans (EJB) is the most efficient way to package
enterprise level application functionality and processing. The use
of EJB with our tight compliance to Java 2 Enterprise Edition
(J2EE) standards enables Opus360 to deliver functionality in a
shorter time-span than competing vendors using less advanced
technologies.
- XML is a highly versatile language enabling document information
to be structured according to content.
- Resource Definition Framework (RDF) enables the system to track
and locate XML data for efficient delivery of content to an
Internet browser.
- Scalable Performance - The software features an N-tier architecture
and dynamic load balancing to ensure business-critical reliability to
clients.
- Open Integration Platform - The software easily integrates with
enterprise and Internet applications by transmitting relevant
information to other systems via XML documents.
- Portable Architecture - Opus360 does not use any proprietary features
within the web/application server making it portable to multiple
platforms.
- Ease of Deployment - The platform has been designed to excel in a
networked environment and is ideal for a hosted deployment model.
The native information architecture of Opus360 software is
document-centric meaning that each request made by a user, and each response
returned by the system is in the form of an XML document. XML is a highly
versatile standard that enables information to be structured according to
content. As XML documents are being transmitted throughout the system and
changing dynamically, tracking the location of the data in the system is
critical. This is easily accomplished using Resource Description Framework
(RDF), a data-modeling language that abstracts data from Oracle and describes
it in an XML format. The use of XML and RDF significantly reduces the
complexity of creating intuitive applications that enable users to access
information quickly and easily.
With XML, the structure and content of a document is kept separate
from the presentation. This means that the same XML source document can be
created and displayed in a variety of ways -- on a
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computer monitor or within wireless devices such as a cellular phones and
Personal Digital Assistants (PDA's). Opus360 has created an XML Bus that
includes all the information to be exchanged with other applications enabling
users of the software to access data sources virtually anywhere on the
Internet. This unique system architecture is what enables Opus360
applications to exist anywhere on a network yet still connect to form
seamless, private, semi-private, and public information networks and
exchanges. These capabilities offer Opus360 clients a significant strategic
advantage in deploying and integrating applications within today's network
and exchange-based environments.
Built in four functional tiers (3 logical tiers), Opus360 software
enables mission critical deployment in high volume, hosted environments. For
example, the central tier, the Application Framework, utilizes an information
bank consisting of the relational database (Oracle) as well as object storage
for foreign document formats. Being fully J2EE compliant, the Application
Framework is designed to live in an application server environment, can be
horizontally scaled to N-degrees, and can feed any number of web servers
communicating content to web browsers anywhere on the Internet. The platform
employs Enterprise Java Beans (EJB) to process application business rules and
logic, has been optimized for high volume XML traffic and is fully scalable
within large hosted environments.
Considerable emphasis has been placed on developing an open
integration platform to ensure Opus360 solutions will easily co-exist with
other enterprise applications such as Enterprise Resource Planning (ERP)
systems as well as Internet resources (job boards, exchanges, news sources,
etc.).
SALES AND MARKETING
We sell our Workforce360 software and services primarily through a
direct sales organization. The direct sales force is organized into technical
pre-sales and sales professionals. Many of Opus360's customers are also
channel partners who resell Opus360 solutions to their customers. Opus360 is
expanding its sales operations. As of December 31, 2000, Opus360 had
approximately 33 sales and marketing personnel. Opus360 markets its software
and services using an integrated marketing approach that incorporates online
marketing, advertising, public relations, events, and direct response
efforts. We focus our efforts on educating our target markets and compiling
and analyzing client and industry feedback. We have formalized this with a
Customer Advisory Board, which uses feedback from strategic clients to
design, develop and test enhancements to new versions of our products and
services.
CUSTOMER SERVICE, TRAINING AND SUPPORT
These services enable Opus360 clients to start using Opus360
software quickly and efficiently. Offered services include business process
analysis, configuration, data conversion, customization, integration,
deployment, training and hosting. Business process analysis maps client
business processes to Opus360 software processes. Configuration services
prepare Opus360 software to meet client needs. Data conversion services
transfer legacy data into Opus360 software. Customization services enable
clients to add unique features to Opus360 software. Integration services
enable external software to work with Opus360 software. Deployment services
roll out Opus360 solutions for clients. Training services teach system
administrators and end-users to use Opus360 software. Hosting services enable
clients to use Opus360 software without installing it on their own systems.
As of December 31, 2000, Opus360 had approximately 53 services and customer
support personnel.
RESEARCH & DEVELOPMENT
We have incurred research and development expenses in excess of $38
million since our inception. Our New York and Los Angeles research locations
have coordinated efforts to produce our integrated suite of products and
services. As of December 31, 2000, Opus360 had approximately 54 research and
development personnel.
RECENT ACQUISITIONS
On January 10, 2000, we 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. On January 20, 2000, we acquired Ithority
Corporation an operator of a marketplace for intellectual capital that allows
buyers and sellers to conduct business through a web-based electronic medium.
On February 24, 2000, we acquired PeopleMover, Inc. ("PeopleMover"), a
provider of
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internet-centric software solutions for managing people. PeopleMover's
internet-based solutions, PeopleMover/Staffing ("PSA") and
PeopleMover/Service Automation enables organizations to assign people to jobs
based on skills and enables organizations to complete projects efficiently
and at the lowest possible cost. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and Note 3 of "Notes
to Consolidated Financial Statements" for more detailed information.
EMPLOYEES
As of December 31, 2000, we had a total of 172 corporate employees,
excluding our FreeAgent e.office employees who have purchased our FREEAGENT
and E.OFFICE services. Of the 172 employees, 54 were in research and
development, 33 were in sales, marketing and business development, 53 were in
professional services and customer support, and 32 were in administration and
finance. None of our employees are represented by a labor union or a
collective bargaining agreement. We have not experienced any work stoppages
and consider our relations with our employees to be good.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
THE OCCURRENCE OF ANY OF THE FOLLOWING RISKS COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS. IN THAT CASE,
THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MIGHT LOSE ALL OR
PART OF YOUR INVESTMENT.
OUR BUSINESS IS DIFFICULT TO EVALUATE DUE TO OUR LIMITED OPERATING HISTORY.
We were founded in August 1998. Until May 27, 1999, we focused on
development of our strategy and services and the establishment of
distribution, co-branding and other similar arrangements for our services. On
May 27, 1999, we acquired Churchill and commenced formal operations of our
FreeAgent.com web site. In addition, a significant portion of 2000 was
devoted to development of our enterprise software, the Workforce360 product
line. Given the changing climate in the Internet marketplace, we also took
decisions in 2000 to significantly reduce the advertising commitment to the
FreeAgent.com web site. As a result, it is difficult to anticipate what
revenue may be generated from the FreeAgent.com segment of our business over
the long term.
Our limited operating history will make it difficult to forecast our
future operating results because, among other things, we have only recently
begun sales of the Workforce360 products. You should evaluate our chances of
financial and operational success in light of the risks, uncertainties,
expenses, delays and difficulties associated with operating a new business.
Our principal risks are that:
- we may not be able to increase usage of our services and derive
revenue from these services;
- our marketing and sales efforts may not be successful;
- we may not be able to effectively respond to competitive
developments;
- we may not be able to integrate the business, products, services
and technology of our recent acquisitions and possible future
acquisitions; and
- we may not be able to manage our anticipated growth.
The uncertainty of our future performance and the uncertainties of
our operating in a new and expanding market increase the risk that the value
of your investment in our common stock will decline.
DUE TO THE LOW TRADING PRICE OF OUR COMMON STOCK OVER RECENT PERIODS, OUR
COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET.
On January 5, 2001, we received notice from NASDAQ that our Common
Stock had failed to maintain a minimum bid price of $1.00 over a period of 30
consecutive trading days as required by NASDAQ's Marketplace Rule 4450(a)(5).
As a result, we have 90 calendar days, or until April 4, 2001, to regain
compliance with this requirement. If we are unable to demonstrate compliance
with this
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requirement on or before April 4, 2001, NASDAQ will provide us with notice
that our Common Stock will be delisted. At that time, we may appeal such
notice to a NASDAQ Listing Qualifications Panel.
If a delisting were to occur, our common stock would trade on the
over the counter Bulletin Board, or in the pink sheets maintained by the
National Quotation Bureau, Inc. Such markets are generally considered to be
less efficient markets.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE LOSSES WILL CONTINUE.
As of December 31, 2000, we had an accumulated deficit of $106.4
million. We have not achieved profitability and expect to continue to incur
net losses in 2001. We expect to continue to incur significant operating
expenses and, as a result, will need to generate significant revenues to
achieve profitability, which may not occur. Even if we do achieve
profitability, we may be unable to sustain or increase profitability on a
quarterly or annual basis in the future. Our history of net losses and
negative cash flow from operations as well as projected additional losses
raises substantial doubt about our ability to continue as a going concern.
We recently announced that we expect to become EBITDA-positive
beginning in the fourth quarter of 2001, but we cannot guarantee that this
will happen. EBITDA is a measure of earnings before interest, taxes,
depreciation or amortization are taken into account. If we are unable to
achieve EBITDA-positive results in the fourth quarter of 2001, the price of
our common stock may decrease.
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER IN FUTURE PERIODS,
WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE OR TO DECLINE.
Opus360 quarterly revenues may vary depending on a number of factors
including:
- Demand for our products and services
- Actions taken by our competitors
- Technological changes in the market
- Our ability to develop, introduce and install existing or new and
enhanced products
- Client order deferrals in anticipation of product enhancements or
new products
Our operating results in any quarter will be harmed if our revenues
for that quarter fall below our expectations, and we are not able to quickly
reduce our operating expenses in response. Our operating expenses, which
include sales and marketing, service and product development and general and
administrative expenses, are based on our expectations of future revenues and
are relatively fixed over a 30 to 45 day period. As a result, our ability to
rapidly adjust these expenses is limited, which may increase the fluctuations
in our quarterly operating results. In addition, we do not have a
sufficiently long operating history to be able to determine whether seasonal
factors affect our sales cycle. Therefore, seasonal fluctuations may also
affect our operating results quarter over quarter. Such fluctuations could
have an adverse impact on our stock price.
OUR BUSINESS MODEL IS UNPROVEN, AND WE MAY NOT BECOME PROFITABLE IF WE ARE
UNABLE TO ADAPT IT TO CHANGES IN OUR MARKET.
If we are unable to anticipate changes in the market for labor
procurement and management services, or if our business model is not
successful, we may not be able to expand our business or successfully compete
with other companies. Our current business model depends upon the Internet to
enable us to build and deliver comprehensive labor procurement and management
services. However, the market for these kinds of Internet-based services is
at an early stage of development and we may be unable to implement our
business plan fully or obtain broad acceptance of our products and services
either by organizations or by free agents. Our revenue model and profit
potential are also unproven. We may be required to further adapt our business
model in response to additional changes in the market for these services, or
if our current business model is not successful.
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IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO CONTINUE
OR EXPAND OUR OPERATIONS.
Since our inception, our operating activities have used more cash
than they have generated. Although we expect to become EBITDA-positive in the
fourth quarter of 2001, fluctuations in our revenue and expenses may require
us in the future to raise additional funds. Such funds may be required in
order to fund more aggressive brand promotion or more rapid expansion, to
develop new or enhanced products or services, to respond to competitive
pressures or to acquire complementary businesses, products or technologies.
We cannot be certain that additional financing will be available on terms
favorable to us, if at all. If adequate funds are not available on acceptable
terms or not available at all, we may be unable to successfully promote our
products and services, fund our expansion, develop or enhance our products or
services, respond to competitive pressures or take advantage of acquisition
opportunities.
YOU WILL EXPERIENCE DILUTION IF WE RAISE ADDITIONAL FUNDS THROUGH THE
ISSUANCE OF ADDITIONAL EQUITY OR CONVERTIBLE DEBT SECURITIES.
If we raise additional funds through the issuance of equity
securities or convertible debt securities, you will experience dilution of
your percentage ownership of our company. This dilution may be substantial.
In addition, these securities may have powers, preferences and rights that
are preferential to the holders of our common stock and may limit our ability
to pay dividends on our common stock.
WE HAVE A CONTINGENT LIABILITY OF UP TO $0.1 MILLION, PLUS INTEREST, AS A
RESULT OF OUR ISSUING OPTIONS TO FREEAGENT E.OFFICE EMPLOYEES UNDER
CIRCUMSTANCES THAT MAY HAVE VIOLATED THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, AND WE INTEND TO MAKE A RESCISSION OFFER TO THESE EMPLOYEES
AS A RESULT OF THIS VIOLATION.
Prior to our initial public offering, we granted options to purchase
approximately 178,500 shares of our common stock to our FREEAGENT E.OFFICE
employees. Because of the monthly fees paid by our FREEAGENT E.OFFICE
employees, the grant of these options and the issuance of any shares of our
common stock upon exercise of these options may not qualify as a grant or
issuance under a written compensatory benefit plan. As a result, the grant of
these options and the issuance of shares of our common stock upon exercise of
these options may not comply with the requirements of Rule 701 under the
Securities Act, or any other available exemptions from the registration
requirements of the Securities Act, and may not have qualified for any
exemption from qualification under applicable state securities laws.
OUR REVENUES WILL NOT GROW IF THE INTERNET DOES NOT BECOME A PROVEN
PROCUREMENT AND PROJECT SEARCH MEDIUM.
If we are unable to compete with traditional methods for procuring
free agent talent and searching for and securing project assignments, our
revenues will not increase. The future of our business is dependent on the
acceptance of the Internet by professionals and buyers requiring individuals
with specific professional skills as an effective means to procure labor and
to search for and transact project-based work assignments. Currently, only a
small percentage of U.S. businesses, less than one-half of one percent,
engage in any recruiting activities online. The online recruitment and
project-based work search market is new and is rapidly evolving, and we do
not yet know how effective online recruiting and project searching will be
compared to traditional recruitment and project search methods. The adoption
of online recruiting and project searching, particularly among organizations
and professionals who have historically relied upon traditional recruiting
and project searching methods, requires the acceptance of a new way of
conducting business, exchanging information, advertising and searching for
project-based work. Many potential buyers requiring individuals with specific
professional skills have little or no experience using the Internet for
recruiting, and only a limited number of professionals who are currently
searching for project assignments have experience using the Internet in
connection with their searches. As a result, we may not be able to
effectively compete with traditional recruiting and project-based work search
methods.
WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS IF USE OF THE INTERNET DOES NOT
CONTINUE TO GROW.
If use of the Internet does not continue to grow, we may not be able
to meet our business objectives or expand our operations. Use of the Internet
may be inhibited by any of the following factors:
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- the Internet infrastructure may be unable to support the demands
placed on it, or its performance and reliability may decline as
usage grows;
- websites may be unable to provide adequate security and
authentication of confidential information contained in
transmissions over the Internet; or
- the Internet industry may be unable to adequately respond to
privacy concerns of potential users.
OUR REVENUES WILL NOT INCREASE IF WE DO NOT SUCCESSFULLY DEVELOP AWARENESS OF
OUR BRAND NAMES.
If we fail to successfully promote and maintain our Workforce360 or
FreeAgent.com brand names, fail to generate a corresponding increase in
revenues as a result of our branding efforts, or encounter legal obstacles in
connection with our continued use of our brand names, our revenues will not
increase and our prospects for growth will be diminished. We believe that
continuing to build awareness of each of our brand names is critical to
achieving widespread acceptance of our services. We believe that brand
recognition will become a key differentiating factor among providers of
project-based professional procurement and management services as competition
in the market for these services increases. We will be unable to maintain and
build brand awareness if we do not succeed in our marketing efforts, provide
high quality services and increase the number of professionals and buyers
requiring individuals with specific professional skills to fulfill project
needs.
OUR WORKFORCE360 SOFTWARE AND SERVICES MAY NOT BE ACCEPTED BY CUSTOMERS.
Before making any commitment to use our Workforce360 software and
services, potential users will likely consider a wide range of issues,
including service benefits, integration with legacy systems, potential
capacity, functionality and reliability. Prospective users will generally
need to change established professional management and procurement practices
and operate their businesses in new ways. Because our WORKFORCE360 service
represents a new, Internet-based approach for most organizations to manage
and allocate their professional resources, those persons responsible for the
use or approval of our WORKFORCE360 service within these organizations will
be addressing these issues for the first time. If our WORKFORCE360 service is
not attractive to potential customers, our revenues from this service will
not increase. In addition, if systems integrators fail to adopt and support
WORKFORCE360 as a resource management tool, our ability to reach our target
customers in this market may be diminished.
OUR SALES CYCLES FOR WORKFORCE360 WILL BE LENGTHY, WHICH COULD DELAY THE
GROWTH OF OUR REVENUES AND INCREASE OUR EXPENDITURES.
Our Workforce360 software and services are new and commercially
untried services that have only recently been released commercially. We may
face significant delays in their acceptance. We will not be able to recognize
any revenues during the period in which a potential customer evaluates
whether or not to use them, and we expect that this period will be
substantial, ranging between six and 12 months. The decision of a customer to
use any of our services may be expensive, time consuming and complex and may
require an organization to make a significant commitment of resources. As a
result, we will have to expend valuable time and resources to educate
interested persons at all levels in these organizations on their use and
benefits. Our expenditure of substantial time and resources to persuade
customers to use our services or an unexpectedly long sales and
implementation cycle for them will have a negative impact on the timing of
our revenues. Since we are in the early stages of selling the Workforce360
software and services, we cannot predict how long the average sales and
implementation cycle will be, and we may be unable to adapt our business to
shorten the average sales cycle.
IF WE ARE UNABLE TO HIRE AND RETAIN HIGHLY SKILLED PERSONNEL, WE WILL NOT BE
ABLE TO GROW AND TO COMPETE EFFECTIVELY.
Our future success will depend to a significant extent on our
ability to attract and retain senior management, experienced sales and
marketing personnel, software developers, qualified engineers and other
highly skilled personnel. Competition for these highly skilled employees is
intense, particularly in the Internet industry. We may experience difficulty
from time to time in hiring the personnel necessary to support the growth of
our business.
10
IF WE ARE UNABLE TO SUCCESSFULLY INTRODUCE NEW OR ENHANCED SERVICES, PRODUCTS
OR FEATURES, OUR SALES MAY DECLINE.
We may not be able to increase our sales if we are unable to develop
and introduce new or enhanced services or products, or if these services or
products do not achieve market acceptance. In addition, in order to remain
competitive, we believe that we must continually improve on a timely basis
the responsiveness, functionality and features of our existing services and
products. However, we may not succeed in developing or introducing features,
functions, services or products that buyers requiring individuals with
specific professional skills or free agents find attractive. We expect to
introduce enhanced services, products and features in order to respond to:
- rapidly changing technology in online professional
procurement and management;
- evolving industry standards, including both formal and de
facto standards, relating to online labor procurement and
management;
- developments and changes relating to the Internet;
- competing services and products that offer increased
functionality; and
- changes in the requirements of buyers requiring individuals
with specific professional skills and free agents.
If any new or enhanced service, product or feature that we introduce
is not favorably received, the public's perception and the reputation of our
brands could suffer irreparable damage.
IF WE CANNOT COMPETE SUCCESSFULLY, OUR REVENUES WILL DECREASE, AND WE MAY
NEVER BECOME PROFITABLE.
Due to competition, we may experience reduced use of our services
and lower margins on our services and products.
The market for labor procurement and management services is
intensely competitive and highly fragmented. Our services compete with a
combination of online and offline companies that provide competing services,
including traditional companies providing benefits and services to
independent professionals, traditional and online recruiting and job-posting
services, and developers of enterprise resource planning services. Some of
our competitors may offer their services at no cost or at prices that are
less than the ones that we currently offer or intend to offer.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources and larger customer bases than we do. In addition, current and
potential competitors may make strategic acquisitions or establish
cooperative relationships to expand their businesses or to offer more
comprehensive services. We believe that the companies in our target market
compete primarily on the basis of the number of features their services
provide to end users, and the extent of their relationships with both
organizations that procure project-based professionals and individuals who
are available for projects. We believe that we compete effectively by
offering services that addresses the procurement and management of
project-based professionals. However, the rapid pace at which the market is
evolving, both in terms of technological innovation, increased functionality
and service offerings, will require us to continually improve our
infrastructure and our services, as well as the range of services we offer.
We may not be able to respond adequately to these competitive challenges.
IF WE FAIL TO MANAGE OUR GROWTH, OUR REVENUES MAY NOT INCREASE, AND WE MAY
INCUR ADDITIONAL LOSSES.
Since we have only been in business a short time, our expansion has
placed, and will continue to place, significant strains on our
infrastructure, management, internal controls and financial systems. Our
personnel, systems, procedures and controls may be inadequate to support our
future operations. In order to accommodate the growth of our business, we
will need to hire, train and retain appropriate personnel to manage our
operations. We will also need to improve our financial and management
controls, reporting systems and operating systems. We may encounter
difficulties in developing and implementing these new systems. Our management
has limited experience managing a business of our size or experience managing
11
a public company. If we are unable to manage our growth effectively and
maintain the quality of our products and services, our business may suffer.
ANY ACQUISITIONS OF TECHNOLOGIES, PRODUCTS OR BUSINESSES THAT WE MAKE MAY NOT
BE SUCCESSFUL, MAY CAUSE US TO INCUR SUBSTANTIAL ADDITIONAL COSTS, AND MAY
REQUIRE US TO INCUR INDEBTEDNESS OR TO ISSUE DEBT OR EQUITY SECURITIES ON
TERMS THAT MAY NOT BE ATTRACTIVE.
As part of our business strategy, we have in the recent past
acquired or invested in technologies, products or businesses that were
expected to be complementary to our business and may do so in the future. The
process of integrating any future acquisitions could involve substantial
risks for us, including:
- unforeseen operating difficulties and expenditures;
- difficulties in assimilation of acquired personnel,
operations, technologies and products;
- the need to manage a significantly larger and more
geographically-dispersed business;
- amortization of large amounts of goodwill and other
intangible assets, such as the approximately $33.2 million
of goodwill and other intangible assets relating to our
acquisition of PeopleMover which will be amortized over the
three year period commencing with such acquisition;
- the diversion of management's attention away from ongoing
development of our business or other business concerns;
- the risks of loss of employees of an acquired business,
including employees who may have been instrumental to the
success or growth of that business; and
- the use of substantial amount of our available cash,
including in the case of any future acquisitions, the
proceeds of this offering, to consummate the acquisition.
We may never achieve the benefits that we expect from the
acquisitions of PeopleMover, Ithority and INDUSTRYINSITE.COM or that we might
anticipate from any future acquisition. If we make future acquisitions, we
may issue shares of our capital stock, that dilute other stockholders, incur
debt, assume significant liabilities or create additional expenses related to
amortizing goodwill and other intangible assets, any of which might reduce
our reported earnings and cause our stock price to decline. Any financing
that we might need for future acquisitions may only be available to us on
terms that materially dilute existing shareholders, restrict our business or
impose on us costs that would reduce our net income or increase our net
losses.
IF WE EXPAND OUR OPERATIONS INTO INTERNATIONAL MARKETS, WE WILL FACE NEW
CHALLENGES THAT WE HAVE NOT PREVIOUSLY FACED.
As part of our expansion, we may begin to conduct a portion of our
operations outside the United States. We currently have minimal experience
operating in foreign markets. If we expand our operations into foreign
markets, we will face new challenges that we have not previously faced while
conducting our operations in the United States. Countries in which we are
currently considering conducting operations include Canada, Japan and the
United Kingdom. These challenges include:
- currency exchange rate fluctuations, particularly if we sell
our products and services in foreign currencies;
- trade barriers including tariffs and export controls;
- difficulties in collecting accounts receivable in foreign
countries;
- the burdens of complying with a wide variety of foreign
laws, particularly complex labor and privacy regulations;
12
- reduced protection for intellectual property rights in some
countries, particularly in Asia; and
- the need to tailor our products and services for foreign
markets.
In addition, if we conduct any of our foreign operations through
joint ventures with third parties, we may have limited ability to control the
operation of these entities.
WE MAY EXPERIENCE REDUCED VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR
REPUTATION IF ANY SYSTEM FAILURES RESULT IN UNEXPECTED NETWORK INTERRUPTIONS.
Any system failure that we may experience, including network,
software or hardware failures, that causes an interruption in the delivery of
our products and services or a decrease in responsiveness of our services
could result in reduced use of our services and damage to our reputation and
brands. Our servers and software must be able to accommodate a high volume of
traffic by organizations and free agents to Opus360 software and services.
There can be no assurance, however, that our systems will be able to
accommodate our growth. We rely on third-party Internet service providers to
provide our clients with access to our services. We have experienced on two
occasions service interruptions as a result of systems failures by these
Internet service providers, which have lasted between four to eight hours. We
believe that these interruptions will occur from time to time in the future.
In addition, from time to time the speed of our system has been reduced as a
result of increased traffic through our Internet service provider. We may not
be able to expand and adapt our network infrastructure at a pace that will be
commensurate with the additional traffic increases that we anticipate will
occur. We do not currently maintain business interruption insurance and our
other insurance may not adequately compensate us for any losses that may
occur due to any failures in our system or interruptions in our service.
OUR SERVICES MAY CONTAIN DEFECTS OR ERRORS THAT COULD DAMAGE OUR REPUTATION.
The services that we have developed and that we currently plan to
introduce are complex and must meet the stringent technical requirements of
our customers. We must develop our services quickly to keep pace with the
rapidly changing industry in which we operate. However, the services we
provide may contain undetected errors or defects, especially when first
introduced or when new versions are released. In addition, our services may
not properly operate when integrated with the systems of our customers.
While we continually test our services for errors and work with
customers through our customer support services to identify and correct bugs,
errors in our services may be found in the future. Testing for errors is
complicated in part because it is difficult to simulate or anticipate the
computing environments in which our customers use our services. Our services
may not be free from errors or defects even after they have been tested,
which could result in the rejection of our services and damage to our
reputation, as well as lost revenue, diverted development resources, and
increased support costs.
BREACHES OF OUR NETWORK SECURITY COULD INCREASE OUR COSTS AND DAMAGE OUR
REPUTATION.
Our FREEAGENT.COM and e.office services, contains data for many of
the free agents in our FREEAGENT.COM community. In addition, our hosted
Opus360 Workforce Management and Procurement Services contain resource and
project information for our clients. As a result, we may become liable to any
of those free agents or organizations that experience losses due to any
security failures in our services. Unauthorized persons that penetrate our
network security could misappropriate proprietary information or cause
interruptions in our services. Misappropriation of proprietary information or
interruptions of our services could result in reduced traffic to our websites
and reduce demand for our services. As a result, we may be required to expend
capital and resources to protect against or to alleviate security breaches,
which could reduce our profitability.
COMPUTER VIRUSES COULD DISRUPT OUR SYSTEMS, WHICH COULD REDUCE DEMAND FOR OUR
SERVICES AND DAMAGE OUR REPUTATION.
Computer viruses may cause disruptions of our services and the loss
of information saved on our servers by free agents and organizations that
seek individuals with specific professional skills to fulfill project needs.
These viruses could reduce demand for our services, and damage our reputation
in the
13
markets in which we compete. In addition, the inadvertent transmission of
computer viruses could expose us to a material risk of loss or litigation and
possible liability for any damages incurred by third parties.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL
UNCERTAINTIES AFFECTING THE INTERNET, WHICH COULD INCREASE OUR EXPENSES OR
LIMIT THE SCOPE OF OUR OPERATIONS.
Legal uncertainties and new regulations relating to the use of the
Internet could increase our costs of doing business, prevent us from
delivering our products and services over the Internet or slow the growth of
our business. To date, governmental regulations have not materially
restricted use of the Internet in our markets. However, the legal and
regulatory environment relating to the Internet is uncertain and may change.
In addition to new laws and regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may cover issues, which
include:
- user privacy;
- civil rights and employment claims;
- consumer protection;
- libel and defamation;
- copyright, trademark and patent infringement;
- pricing controls;
- characteristics and quality of products and services;
- sales and other taxes; and
- other claims based on the nature and content of Internet
materials.
In addition, any imposition of state sales and use taxes imposed on
the products and services sold over the Internet may decrease demand for
products and services that we, or others sell over the Internet. The U.S.
Congress has passed legislation, which limits until October 21, 2001 the
ability of states to impose any new taxes on Internet-based transactions. If
Congress does not renew this legislation, any subsequent imposition of state
taxes on Internet-based transactions could limit the demand for our services
or increase our expenses.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE, AND ANY LIABILITIES IMPOSED ON US FOR INFRINGING ON
THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD REQUIRE US TO PAY
SIGNIFICANT DAMAGES OR DISRUPT OUR BUSINESS.
Successful intellectual property infringement claims against us
could result in monetary liability or a material disruption in our
operations. We cannot be certain that our services, products, content,
technology and brand names do not or will not infringe upon valid patents,
copyrights or other intellectual property rights held by others. We expect
that the number of infringement claims will increase as more participants
enter our markets. We may be subject to legal proceedings and claims from
time to time relating to the intellectual property of others in the ordinary
course of our business. We may incur substantial expenses in defending
against these third party infringement claims, regardless of their merit. In
the event of a successful infringement suit against us, we could be liable
for substantial damages and be required to pay substantial royalties for our
use of third party intellectual property or be prohibited from using third
party intellectual property in our products or services. Any of these
outcomes could reduce our revenues and prospects for growth.
WE MAY BE UNABLE TO OBTAIN U.S. TRADEMARK REGISTRATION FOR OUR BRANDS OR TO
PROTECT OUR OTHER PROPRIETARY INTELLECTUAL PROPERTY RIGHTS.
If we fail to obtain federal trademark or service mark registrations
for our marks and any related derivative marks, our promotion of these marks
as our brands could be disrupted. If we are unable to secure the rights to
use these marks and related derivative marks, a key element of our strategy
of promoting these
14
marks as brands in our target markets could be disrupted. To date, we have
filed intent to use applications for several of our service marks, including
OPUS360, WORKFORCE360, OPUS FREEAGENT, FREEAGENT.COM, FREEAGENT, OPUS
XCHANGE, FREEAGENT XCHANGE, OPUSRM, FREEAGENT E.OFFICE and E.PORTFOLIO.
However, in connection with the settlement of the claims raised by the San
Jose Mercury News, we have withdrawn all applications using the FreeAgent
mark. Adverse outcomes to our applications for these or any other marks, any
failure to register our marks, or any related litigation, should it occur,
could result in our being limited or prohibited from using our marks and
related derivative marks in the future.
IF WE FAIL TO PROTECT OUR PATENTS, COPYRIGHTS OR OTHER INTELLECTUAL PROPERTY
RIGHTS, OTHER PARTIES COULD APPROPRIATE OUR PROPRIETARY PROPERTIES, INCLUDING
OUR TECHNOLOGY.
The technology and software we have developed which underlies our
Workforce360 products and services is important to us. We do not have any
patents relating to our technology and software, although we do have a U.S.
patent application pending for the "Opus360 Knowledge Worker Network" which
describes the processes and technology involved in implementing an
Internet-based supply chain solution for matching people and projects. This
patent may not be granted and, if granted, the patent and any other patents
we apply for in the future may be successfully challenged.
In general, to protect our proprietary technology and software, we
rely on a combination of contractual provisions, confidentiality procedures
and trade secrets. The unauthorized reproduction or other misappropriation of
our intellectual property, including the technology on which our Workforce360
products and services are based, could enable third parties to benefit from
our intellectual property without paying us. If this were to occur, our
revenues would be reduced, and our competitors may be able to compete with us
more effectively. The steps we have taken to protect our proprietary rights
in our intellectual property may not be adequate to deter misappropriation of
their use. We may not be able to detect unauthorized use of our intellectual
property or take appropriate steps to enforce our intellectual property
rights. In addition, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries, is uncertain and still
evolving. If we resort to legal proceedings to enforce our intellectual
property rights, the proceedings could be burdensome and expensive.
WE MAY NOT BE ABLE TO ACCESS THIRD PARTY TECHNOLOGY, WHICH WE DEPEND UPON TO
CONDUCT OUR BUSINESS AND AS A RESULT WE COULD EXPERIENCE DELAYS IN THE
DEVELOPMENT AND INTRODUCTION OF NEW SERVICES OR ENHANCEMENTS OF EXISTING
SERVICES.
If we lose the ability to access third party technology which we
use, are unable to gain access to additional products or are unable to
integrate new technology with our existing systems, we could experience
delays in our development and introduction of new services and related
products or enhancements until equivalent or replacement technology can be
accessed, if available, or developed internally, if feasible. If we
experience these delays, our revenues could be substantially reduced. We
license technology that is incorporated into our services and related
products from third parties for database technology. In light of the rapidly
evolving nature of Internet technology, we may increasingly need to rely on
technology licensed to us by other vendors, including providers of
development tools that will enable us to quickly adapt our technology to new
services. Technology from our current or other vendors may not continue to be
available to us on commercially reasonable terms, or at all.
WE MAY BE LIABLE FOR SUBSTANTIAL PAYMENTS AS A RESULT OF INFORMATION
RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET.
We may be sued for defamation, civil rights infringement,
negligence, copyright or trademark infringement, personal injury, product
liability or other legal claims relating to information that is published or
made available on FREEAGENT.COM and the other sites linked to it. These types
of claims have been brought, sometimes successfully, against other online
services in the past. We could also be sued for the content that is
accessible from FREEAGENT.COM and through links to other Internet sites or
through content and materials that may be posted by members in chat rooms or
on bulletin boards. Our acquisition of Ithority, an online marketplace where
people in need of expert advice can be connected with providers of expert
advice on a variety of subjects, creates the possibility that we will be
subject to potential claims that, among others, the professional advice
obtained through the service was inappropriate, incorrect, or negligently or
recklessly provided. We also offer e-mail services, which may subject us to
potential risks, such as liabilities or claims resulting from unsolicited
email or spamming, lost or misdirected messages, security breaches, illegal
or fraudulent use of email or interruptions or delays in email service. Our
15
insurance does not specifically provide for coverage of these types of claims
and therefore may not adequately protect us if we are required to make these
types of payments. In addition, we could incur significant costs in
investigating and defending these types of claims, even if we ultimately are
not liable.
WE MAY BE SUBJECT TO THE UNFAVORABLE INTERPRETATION OF GOVERNMENT REGULATIONS.
As an employer, we are subject to all federal, state and local
statutes and regulations governing our relationships with our employees and
affecting businesses generally. In addition, by entering into employment
agreements with free agents, FREEAGENT.COM and e.office are affected by
specifically applicable licensing and other regulatory requirements as well
as by uncertainty in the application of numerous federal and state laws
relating to labor, tax, employment matters and wage payments. These laws
include the U.S. Family Medical Leave Act, the Fair Labor Standards Act and
the Americans With Disabilities Act, as well as state laws relating to
workers compensation, unemployment benefits, minimum wages and medical and
pregnancy issues. Many of these laws do not specifically address the
obligations and responsibilities of non-traditional employers such as us.
Because we expect to be subject to some or all of these laws in each state in
which we have employees, our expenses to comply with these laws may be
substantial, and we may become liable for the payment of wages to our
FREEAGENT or E.OFFICE employees, whether or not the FREEAGENT or E.OFFICE
employee has obtained an assignment, or we have received payment from the
organizations contracting with us for the services performed by these
employee. Interpretive issues concerning these types of relationships have
arisen and remain unsettled.
WE EXPECT TO INCUR SUBSTANTIAL EXPENSES IN ORDER TO COMPLY WITH STATE
EMPLOYEE LEASING, EMPLOYMENT AGENCY OR TEMPORARY EMPLOYMENT LAWS.
Uncertainties arising under state law include the compliance
requirements to which FREEAGENT.COM and e.office are subject under state
employee leasing, employment agency or temporary employment laws, as well as
under other state laws. We expect to incur substantial expenses in order to
comply with these laws and could be subject to substantial penalties for
failing to comply with these laws. FREEAGENT.COM and e.office have attributes
that could be seen as potentially triggering compliance requirements under
some of these laws. Some states regulate employee leasing companies,
employment agencies and temporary staffing companies, while most states focus
on only one or two of these types of businesses. State statutory and
regulatory definitions and requirements concerning these types of businesses
are occasionally similar, but generally all of them differ in several
important respects. If we are governed by any of these statutes or
regulations, we may be subject to licensing requirements and financial
oversight. The length of time for us to obtain any regulatory approval
required to begin or continue operations could vary from state to state.
There can be no assurance that we will be able to satisfy the licensing
requirements or other applicable regulations of any particular state in which
we have already begun to operate or intend to operate, that we will be able
to provide the full range of FREEAGENT or E.OFFICE services currently offered
or that we will be able to operate profitably within the regulatory
environment of any state in which we do decide to obtain regulatory approval.
THERE ARE CONSIDERABLE UNCERTAINTIES IN THE APPLICATION OF FEDERAL TAX AND
EMPLOYEE BENEFITS LAWS TO OUR BUSINESS THAT COULD LIMIT OUR ABILITY TO
PROVIDE BENEFITS THAT WILL ATTRACT FREE AGENTS.
Uncertainties arising under the Internal Revenue Code of 1986, as
amended, and ERISA include the qualified tax status and favorable tax status
of some of the benefit plans that we provide. For example, the IRS could
determine that free agents who purchase our FREEAGENT or E.OFFICE services
are not our employees under the provisions of the Code and ERISA relating to
employee benefit plans such as the 401(k) plan we offer. If the IRS made such
a determination, neither free agents who pay for our FREEAGENT and E.OFFICE
services nor we would be permitted to make tax deferred contributions to our
401(k) plan. Similarly, the IRS or other taxing authorities could determine
that free agents who purchase our FREEAGENT and E.OFFICE services are not our
employees under federal, state or local laws and regulations providing for
the favorable tax treatment of payments made for group health, disability and
life insurance benefits provided as part of our FREEAGENT E.OFFICE services
or, with respect to the stock options granted to these employees, whether
these options qualify as incentive stock options. If an adverse determination
was made as to the employee status of free agents under one or more of these
federal, state or local laws and regulations, our FREEAGENT and E.OFFICE
services would become less attractive to our registered free agents since we
would no longer be able to provide those valuable corporate-style benefits.
As a result, it is likely that our revenues would be adversely affected and
our ability to attract free agents would be reduced.
16
OUR METHOD OF REPORTING NET FEES RECEIVED FROM OUR FREEAGENT AND E.OFFICE
SERVICES FOR ACCOUNTING PURPOSES AND GROSS FOR TAX PURPOSES MAY BE CHALLENGED.
In contrast to our method of reporting under generally accepted
accounting principles as revenues, the fees received from free agents who
purchase our FREEAGENT and E.OFFICE services, for tax purposes we will report
as revenues the gross billings we receive from organizations for the services
rendered by these free agents. Following the receipt of the gross billings
from these organizations, we pay or reimburse the free agents'
project-related expenses, pay the premiums for the free agents' health,
disability and life insurance, make the free agents' desired 401(k)
contributions and withhold any required federal, state and local taxes.
Thereafter, we remit the remaining funds to the free agent as wages and
salaries, treating the free agents' project-related expenses, the premiums
for health, disability and life insurance and 401(k) contributions as
deductible expenses for tax purposes.
In the event free agents who purchase our FREEAGENT and E.OFFICE
services are held not to be our employees under applicable laws and
regulations as described above, we could be liable to the IRS or other taxing
authorities for improper reporting of their wages and salaries. In addition,
whether or not the free agent is treated as our employee, we could also be
liable to the IRS or other taxing authorities if amounts treated as
deductible project-related reimbursable expenses are not properly deductible
for tax purposes. Furthermore, in the event the free agents who purchase our
FREEAGENT E.OFFICE services are held to be employees of an organization using
their services, the qualified plans of these organizations may be adversely
affected. While we believe that we have a reasonable basis for concluding
that free agents who purchase our FREEAGENT E.OFFICE services are our
employees under applicable laws and regulations, the application of these
laws and regulations to our business is uncertain and there can be no
assurance as to the ultimate resolution of these issues.
WE MAY BE SUBJECT TO CLAIMS RELATING TO OUR FREEAGENT AND E.OFFICE EMPLOYEES
OR THE ORGANIZATIONS THAT USE THEIR SERVICES.
We may be subject to claims relating to the actions of free agents
who purchase our FREEAGENT and E.OFFICE services, including possible claims
of discrimination and harassment, violations of non-competition agreements,
theft of property from organizations for whom projects are performed, misuse
of proprietary information from organizations and other criminal actions or
torts and other claims. These claims may allege that we do not adequately
supervise these free agents in a manner sufficient to ensure that these types
of events do not occur. In addition, we may be subject to claims from
organizations for whom FREEAGENT and E.OFFICE employees perform work based
upon the negligence or gross negligence in their performance of projects and
the failure of the work produced by these employees to conform to required
specifications. Although these employees typically indemnify us with respect
to these liabilities, we may not recover from them sufficient amounts to
satisfy these claims. The conduct and performance of our FREEAGENT and
E.OFFICE employees may result in negative publicity, injunctive relief and
the payment by us of money damages or fines.
As the employer of the free agents who purchase our FREEAGENT and
E.OFFICE services, we may be subject to a wide variety of employment-related
claims, such as claims for injuries, wrongful death, harassment,
discrimination, wage and hour violations and other matters. In addition, a
number of legal issues remain unresolved with respect to arrangements among
businesses of the type such as ours that provide services to free agents and
the buyers of professional talent, including questions concerning ultimate
liability for violations of employment and discrimination laws. As a result
of our status as an employer, we may be subject to liability under various
governmental regulations for violations of these regulations even if we do
not participate in the violations. We carry liability insurance, but there
can be no assurance that any of our insurance policies will be sufficient to
cover any judgments, settlements or costs relating to any claims, suits or
complaints or that sufficient insurance will be available to us in the future
on satisfactory terms, if at all. If insurance is not sufficient to cover any
judgments, settlements or costs relating to any present or future claims,
suits or complaints, we may incur substantial losses.
17
ITEM 2. PROPERTIES
Our principal sales, marketing, research, development, and
administrative offices occupy leased space at 39 West 13th Street, New York,
NY 10011 with a lease term expiring in 2009. We also lease space in Manhattan
Beach, California under a lease that expires in 2002 and in Delray Beach,
Florida under a lease expiring in 2001. We believe that these properties and
some sales suites are sufficient to meet our present needs and we do not
anticipate any difficulty in securing additional space, as needed, on
acceptable terms.
ITEM 3. 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.
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 arose out of a letter signed by KTI
and by the Company on June 16, 1999. KTI asserted a claim that the Company
breached that alleged agreement and also asserted additional claims for an
accounting, breach of fiduciary duty, quantum merit and unjust enrichment
relating to this alleged joint venture. KTI sought damages in an amount to be
determined at the time of the trial, but claimed that its damages were
believed to be in excess of $20 million. On January 18, 2001, the Company and
KTI settled the above-described action. Without admitting any liability, the
Company agreed to pay KTI $0.09 million, $0.08 million of which was paid on
January 18, 2001 and the balance of which is to be paid within six months,
and the parties exchanged mutual releases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock was listed on the NASDAQ National Market ("NASDAQ")
under the symbol "OPUS" commencing with our April 4, 2000 initial public
offering. At February 28, 2001 the number of stockholders of record was
approximately 764. The following table sets forth the quarterly high and low
sales prices per share as reported by the NASDAQ for the year ended December
31, 2000.
HIGH LOW
------ ------
First Quarter n/a n/a
Second Quarter $15.7812 $ 2.8750
Third Quarter $ 5.2500 $ 2.2500
Fourth Quarter $ 2.4375 $ 0.2188
On February 28, 2001, the last sale price of our Common Stock on the
NASDAQ was $0.34 per share.
On January 5, 2001, we received notice from the NASDAQ that our
Common Stock had failed to maintain a minimum bid price of $1.00 over a
period of 30 consecutive trading days as required by NASDAQ's Marketplace
Rule 4450(a)(5). As a result, we have 90 calendar days, or until April 4,
2001, to regain compliance with this requirement. If we are unable to
demonstrate compliance with this requirement on or before April 4, 2001,
NASDAQ will provide us with notice that our Common Stock will be delisted. At
that time, we may appeal such notice to a NASDAQ Listing Qualifications Panel.
If a delisting were to occur, our common stock would trade on the
over the counter Bulletin Board, or in the pink sheets maintained by the
National Quotation Bureau, Inc. Such markets are generally considered to be
less efficient markets.
18
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock.
We do not anticipate paying any cash dividend in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. Any future determination to pay cash dividends
will be at the discretion of our board of directors and will be dependent
upon our financial condition, operating results, capital requirements,
general business conditions, restrictions imposed by financing arrangements,
if any, legal and regulatory restrictions on the payment of dividends and
other factors that our board of directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
The former shareholders of Ithority were 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"). On January 10,
2001 as part of the $4 million issuance the Company issued 196,865 shares of
common stock valued at $0.1 million, or $0.55 per share, to certain of the
former stockholders of Ithority Corporation and paid $0.07 million, or $0.1
per share, for the combined shares of approximately 7,254,240 representing
the Ithority escrow shares of 178,240 and shares of approximately 7,076,000
valued at $3.9 million, or $0.55 per share, that would have been issued to
the former shareholders.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which are included
elsewhere in this report. The consolidated statement of operations data for
each of the years ended December 31, 2000 and 1999 and the period from August
17, 1998 (inception) to December 31, 1998, and the consolidated balance sheet
data as of the years and period then ended are derived from our audited
consolidated financial statements which have been prepared assuming that the
Company will continue as a going concern. As disclosed in Note 1 to the
financial statements, the Company has incurred substantial recurring losses
from operations and expects to incur substantial losses in the near future.
These and other factors as described in Note 1 raise substantial doubts about
its ability to continue as a going concern. Managements' plans in regards to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty. .
Period from
Year ended Year ended August 17, 1998
December 31, December 31, (inception) to
2000 1999 December 31, 1999
------------ ------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Licenses $ 6,565 $ - $ -
Services, FreeAgent & Other 4,717 419 -
----------- ------------ -----------------
Total Revenue 11,282 419 -
----------- ------------ -----------------
Cost of Revenue 2,105 261
----------- ------------ -----------------
Gross profit (loss) 9,177 158 -
----------- ------------ -----------------
Sales & Marketing, exclusive of $376, $187, and $0 for the 28,160 11,841 80
years and period ended, respectively, reported below as
amortization of equity-based compensation
Product Development, exclusive of $970, $844, and $0 for the 26,817 10,492 552
years and period ended, respectively, reported below as
amortization of equity-based compensation
General & Administrative, exclusive of $6,632, $1,417, and $0 10,189 4,883 407
for the years and period ended, respectively, reported
below as amortization of equity-based compensation
Depreciation and amortization of goodwill 14,867 629 2
Amortization of equity-based compensation 7,978 2,448 -
----------- ------------ -----------------
Total operating expenses 88,011 30,293 1,041
----------- ------------ -----------------
Loss from operations (78,834) (30,135) (1,041)
Net interest income 2,917 745 6
----------- ------------ -----------------
Loss before income taxes (75,917) (29,390) (1,035)
Income tax expense - - -
----------- ------------ -----------------
Net loss $(75,917) $(29,390) $ (1,035)
=========== ============ =================
Net loss per share - basic and diluted $ (1.89) $ (2.91) $ (0.11)
=========== ============ =================
Weighted average shares used in computing basic and
diluted net loss per share 40,084 10,083 9,120
=========== ============ =================
20
Period from
August 17,
1998
Year ended Year ended (inception) to
December 31, December 31, December 31,
2000 1999 1998
------------- ------------- --------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments $35,835 $28,463 $5,818
Working Capital 34,876 21,638 5,199
Total assets 87,632 40,716 5,886
Line of credit 1,163 - -
Accumulated deficit (106,386) (30,425) (1,035)
Total stockholders' equity 71,775 27,727 5,253
See Note 1 of Notes to Consolidated Financial Statements for an explanation of
the determination of the number of shares used to compute basic and diluted net
loss per share.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF OPUS360 CORPORATION, ("OPUS360") SHOULD BE READ IN
CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA" AND OPUS360'S
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS REPORT. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. THE ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING BUT NOT LIMITED TO, THOSE SET FORTH
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT.
OVERVIEW
Opus360 provides eBusiness software and services that enable
companies to manage and acquire skilled professionals strategically. Opus360
sells its products and services to leading corporations, professional
services and staffing firms. Opus360's software enables businesses to get
more work done with the people they have and reduce the cost of acquiring
additional skilled professionals.
Opus360 enables businesses to take a 360-degree approach to getting
work done. It offers solutions for better utilizing a company's workforce and
reducing the cost of acquiring all types of skilled professionals whether
they are full-time employees, contingent workers or independent professionals.
WORKFORCE360-TM- is the family of eBusiness software and services from
Opus360 that helps companies better utilize their workforce of skilled
professionals and reduce the cost of acquiring additional talent. It includes:
- OPUS360 WORKFORCE MANAGEMENT-TM- - Opus360 Workforce Management-TM- is
a resource management software that helps companies better utilize
their workforce and reduce turnover. It enables businesses to track the
work that needs to be done today and in the future. It also tracks
skills and preferences of people who are available to do work. The
software makes it easy to assign the right people to the right work.
The ability to consider worker preferences when making assignments
increases job satisfaction and reduces turnover. The software's
workforce planning features enable businesses to make sure they have
the right workforce for future work, or to choose work that suits the
skills available in their workforce. The software offers many features
that help businesses keep their people fully utilized. Where there are
gaps between the work that needs to be done and the people who are
available, the software makes it easy to hire additional help from
outside agencies through seamless integration with Opus360 Workforce
Procurement resource management software that helps companies better
utilize their workforce and reduce turnover.
- OPUS360 WORKFORCE PROCUREMENT-TM- - Opus360 Workforce Procurement-TM-
is a vendor management software that reduces the time, cost, and risk
of hiring skilled professionals through outside agencies. Managed
services providers also use the software as a technology platform for
delivering managed services to their customers. Opus360 Workforce
Procurement automates requisition workflows between buyer and supplier,
and captures vendor performance metrics at each step called TCQ2 (Time,
Cost, Quantity, Quality).
- FREEAGENT.COM - FreeAgent.com is a web-based talent exchange where
businesses can find independent professionals and independent
professionals can find work. Businesses can post project requirements
and get responses from the over 180,000 independent professionals
registered on the site. Businesses can also search directly for
independent professionals with specific skills. Free agents can create
personalized electronic resumes called e.portfolios that describe their
skills. They can also search for work from among the many projects
posted on the site.
- E.OFFICE - a management service that enables companies to expand their
available skilled labor pool by reducing the cost, complexity and risk
of using independent professionals. E.office
22
reduces tax and regulatory risk by turning 1099 independents into
W-2 employees of e.office. E.office reduces administrative
complexity by replacing contracts and invoices for each independent
professional with a single contract and monthly invoice for all the
company's independents. E.office also costs less than many other
management services.
E.office increases retention of independent professionals by offering
them benefits, services, and tax advantages. The corporate-style
benefits offered by e.office are portable between jobs. These include
free life, disability and liability insurance; and optional health
insurance plans, dental insurance and a 401(k) retirement plan.
Invoicing, collections, tax payments, and HR administrative support
services make independents more productive. E.office also enables
independent professionals to retain the tax advantages of being
independent by deducting business expenses from gross income.
WORKFORCE360 software and services can be used individually or as an
end-to-end integrated solution for managing and acquiring skilled
professionals. This enables businesses to solve their most pressing human
capital management challenges immediately and expand into other solutions
later.
In May 1999 we acquired Churchill and launched our FreeAgent
e.office services with the launch of the FreeAgent.com website in July 1999.
In January 2000, we acquired all of the related assets and liabilities of
Industryinsite.com and Ithority Corporation ("Ithority"), and in February
2000, we acquired PeopleMover, Inc. ("PeopleMover"). We accounted for these
acquisitions as purchase business combinations. Accordingly, the results of
operations of Churchill, IndustryInsite.com, Ithority and PeopleMover are
included in our combined results from the date of the acquisitions. Please
see Note 3 of Notes to Consolidated Financial Statements for more detailed
information.
Through December 31, 2000, our revenues have been principally
derived from licenses of our software solutions, from the delivery of
implementation and training services, and from maintenance and support
contracts. Customers who license our Workforce360 Platform modules, Opus360
Workforce Management and Opus360 Workforce Procurement, also generally
purchase maintenance and support contracts which provide software upgrades
and technical support over a stated term, which is usually a twelve-month
period. Our customers may also purchase implementation services from us,
which may be provided by us directly or by third-party consulting
organizations. We have also recognized revenue from the sale of licenses for
our PeopleMover subsidiary's products, and from software contracts that
require significant modification or customization of the software, on a
percentage of completion basis based on costs incurred.
We have adopted Statement of Position, or SOP, 97-2, SOFTWARE
REVENUE RECOGNITION, which supersedes SOP 91-1, SOFTWARE REVENUE RECOGNITION
and Statement of Position, or SOP, 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS, which amends SOP
97-2 and supercedes SOP 98-4. SOP 97-2 SOFTWARE REVENUE RECOGNITION, as
amended, generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
market values of each of the elements. The fair value of an element must be
based on vendor-specific objective evidence ("VSOE") of fair value. Software
license revenue allocated to a software product generally is recognized upon
delivery of the product or deferred and recognized in future periods to the
extent that an arrangement includes one or more elements that are to be
delivered at a future date and for which VSOE has not been established.
Services revenue is recognized as the service is performed assuming that
sufficient evidence exist to determine the fair value of the services.
Maintenance and support revenue is recognized ratably over the maintenance
term. If evidence of fair value does not exist for all elements of a license
agreement and future maintenance and support or Postcontract Customer Support
("PCS") is the only undelivered element, then all revenue for the license
arrangement is recognized ratably over the term of the agreement as license
revenue. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair
value of the undelivered elements is deferred and the remaining portion of
the arrangement fee is recognized as revenue.
We allocate the 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 overhead and facilities charges include
facility rent for our corporate offices, communication and web hosting
charges, offices expenses
23
including postage, freight and leases for office equipment and computers, and
depreciation expense for office furniture and equipment.
Included in our operating expenses are various non-cash expenses for
equity issued to various strategic business partners. Also included in our
operating expenses is the non-cash amortization of goodwill. These expenses
are for the amortization of goodwill resulting from our acquisitions of
Churchill, IndustryInsite.com, Ithority and PeopleMover. See Note 3 of Notes
to Consolidated Financial Statements for more detailed information.
Although revenues have consistently increased from quarter to
quarter, we have incurred significant costs to develop our technology and
products, to recruit and train personnel for our sales, marketing,
professional services and administration departments, and for the
amortization of our goodwill and other intangible assets. As a result, we
have incurred significant losses since inception, and as of December 31,
2000, had an accumulated deficit of $106.4 million. We believe our success is
contingent on increasing our customer base while continuing to develop our
products and services.
Our limited operating history makes the prediction of future
operating results very difficult. We believe that period-to-period
comparisons of operating results should not be relied upon as predictive of
future performance. Our operating results are expected to vary significantly
from quarter to quarter and are difficult or impossible to predict. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies at an early stage of development, particularly
companies in new and rapidly evolving markets, including risks associated
with our recent acquisitions. We may not be successful in addressing such
risks and difficulties. Although we have experienced significant percentage
growth in revenues in recent periods, we do not believe that prior growth
rates are sustainable or indicative of future operating results. Please refer
to the "Risk Factors" section for additional information.
Recent Acquisitions
PeopleMover, Inc.
On February 24, 2000, we acquired PeopleMover, Inc. ("PeopleMover"),
a provider of internet-centric software solutions for managing people.
PeopleMover's internet-based solutions, PeopleMover/Staffing ("PSA") and
PeopleMover/Service Automation enables organizations to assign people to jobs
based on skills and enables organizations to complete projects efficiently
and at the lowest possible cost. The acquisition was accounted for using the
purchase method of accounting and accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values on the acquisition dates.
The total purchase price of approximately $33.2 million consisted of
an exchange of 2,292,000 shares of our common stock with a fair value of
$20.9 million, assumed stock options with a fair value of approximately $7.9
million, negative net assets assumed of approximately $3.8 million and other
acquisition related expenses of approximately $0.6 million consisting
primarily of payments for professional fees. The entire purchase price was
allocated to goodwill. We also recorded a deferred compensation expense,
which is being amortized over three years, of $3.1 million for approximately
342,000 shares subject to a three-year restricted stock vesting agreement.
PeopleMover's products and employees have been integrated with the Company's
Workforce360 software and operations, and PeopleMover is no longer a separate
operating entity.
Ithority Corporation
On January 20, 2000, we acquired Ithority Corporation ("Ithority"),
an operator of an online knowledge marketplace, which links buyers and
sellers of knowledge products. Ithority's marketplace is backed by a
reputation system, which enables buyers and sellers to qualify each other, a
virtual escrow system, which reduces the risks of buyers and sellers doing
business together, and a payment processing system. The acquisition was
accounted for using the purchase method of accounting and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values on the acquisition dates.
The total purchase price of approximately $2.9 million consisted of
an exchange of 243,500 shares of our common stock with a fair value of $2.2
million, cash payments aggregating $0.5 million, negative
24
net assets assumed of approximately $0.1 million and other acquisition
related expenses of approximately $0.1 million consisting primarily of
payments for professional fees. The entire purchase price was allocated to
goodwill. We also recorded a deferred compensation expense, which is being
amortized over three years, of $5.3 million for approximately 178,000 shares
subject to a three-year restricted stock vesting agreement. Ithority's
products have been integrated with the Company's FreeAgent.com website and
operations, and Ithority is no longer a separate operating entity.
IndustryInsite.com
In January 2000, we acquired from Brainstorm Interactive, Inc.
("Brainstorm") all of the related assets and liabilities of
Industryinsite.com, a website operated by Brainstorm, for an aggregate cash
purchase price of $1.0 million. The acquisition was accounted for using the
purchase method of accounting and accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values on the acquisition dates.
The purchase price of $1.0 million consisted of cash of $0.65
million paid on closing and cash of $0.35 million paid in April 2000. The
entire purchase price was allocated to goodwill.
The Churchill Benefit Corporation
On May 27, 1999, we acquired The Churchill Benefit Corporation
("Churchill"), a provider of back office services to independent
professionals. Churchill's contracts, invoices and collects from the
customers of its information technology professionals, who sign up for its
services. Churchill provides these services in exchange for a monthly fee.
The total purchase price of approximately $2.1 million consisted of
an exchange of 946,000 shares of our common stock with a fair value of $1.7
million, negative net assets assumed of approximately $0.1 million and other
acquisition related expenses of approximately $0.3 million consisting
primarily of payments for professional fees. The entire purchase price was
allocated to goodwill.
Results of Operations
We intend to continue to devote resources to advertising and
brand-marketing programs designed to promote our Workforce360 enterprise
software. 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 focus on increasing our operating
efficiencies while cutting costs. 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.
Years Ended December 31, 2000 and 1999
Revenue
For the year ended December 31, 2000 our revenue was $11.3 million
of which $9.2 million was derived from Application and Procurement Services
("APS") which consisted of integration services revenue of $2.6 million and
$6.6 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 and license fees of $0.7 million for our
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. $2.1 million was derived from 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 year ended December 31, 1999 we had
revenue of $0.4 million, which was primarily derived from our FreeAgent
e.office services.
25
Cost of Revenue
Cost of revenue for the year ended December 31, 2000, was $2.1
million, an increase of 707% over cost of revenue for the year ended December
31, 1999. This increase resulted from additional salaries and wages paid to
employees that provide implementation and integration services to customers
who were deploying our Workforce360 enterprise software during the year,
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 year
ended December 31, 1999, was $0.3 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 year ended
December 31, 2000 were $28.2 million, excluding $0.4 million reflected as
equity based compensation, an increase of 138% over sales and marketing
expenses of $11.8 million for the year ended December 31, 1999, excluding
$0.2 million reflected as equity based compensation. This increase was
primarily attributable to incremental marketing and advertising expenses for
our Workforce360 enterprise software, FreeAgent.com website, as well as
salaries and benefits paid to an expanded sales and marketing staff. As we
build a brand awareness for our enterprise software solutions, and we
continue to reallocate our resources internally in an attempt to capture
market share and create new marketing opportunities, we expect that sales and
marketing expenses will increase in absolute dollars in future periods.
Product Development. Product development expenses for the year ended
December 31, 2000 were $26.8 million, excluding $1.7 million of software
development cost capitalized and $1.0 million reflected as equity based
compensation, an increase of 156% over product development expenses of $10.5
million for the year ended December 31, 1999, excluding $0.8 million
reflected as equity based compensation. The increase was primarily
attributable to additional personnel developing our Workforce360 enterprise
software and enhancements to our FreeAgent.com services, including salaries
and benefits and fees paid to our third party consultants. During the year
ended December 31, 2000, we capitalized approximately $1.7 million of
software development costs and are amortizing the cost over a three-year
period. With the second-generation release of our Workforce360 enterprise
software, we will focus our development efforts on increasing features and
functionality for our software solutions.
General and Administrative. General and administrative expenses for
the year ended December 31, 2000 were $10.2 million, excluding $6.6 million
reflected as equity based compensation, an increase of 108% over general and
administrative expenses of $4.9 million for the year ended December 31, 1999,
excluding $1.4 million reflected as equity based compensation. 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. We expect that general and
administrative cost will decrease in absolute dollars in future periods as we
implement cost cutting measures.
Depreciation and Amortization. Depreciation and amortization expense
for the year ended December 31, 2000 was $14.9 million, consisting primarily
of amortization of goodwill of $12.1 million associated with our
acquisitions. Depreciation and amortization expense was $0.6 million for the
year ended December 31, 1999.
Amortization of Equity-based Compensation. The amortization of
equity-based compensation for the year ended December 31, 2000 was $8.0
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 amortization of deferred compensation expense for
the Ithority and PeopleMover Escrow shares. Amortization of equity-based
compensation was $2.4 million for the year ended December 31, 1999. We will
continue to amortize our equity-based compensation over the vesting period,
which is generally three to four years.
26
Other Income. Net interest income for the year ended December 31,
2000 was $2.9 million due to higher average cash balances. Interest income
was $0.7 million for the year ended December 31, 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, with net proceeds of approximately $132.6 million
through December 31, 2000. In April 2000, we completed our initial public
offering and a concurrent private placement to Dell USA L.P., raising
approximately $75.1 million net of offering costs.
Cash used in operating activities for the year ended December 31,
2000 was $58.9 million, primarily due to our net loss of $75.9 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 year ended
December 31, 1999 totaled $20.8 million. We expect to significantly 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 year ended December
31, 2000 totaled $14.6 million. We used $9.8 million during the year ended
December 31, 2000 to acquire property and equipment and fund software
development. 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 year
ended December 31, 1999 was $30.7 million. We used $27.1 million to acquire
short-term investments, $3.2 million to acquire property and equipment, and
$0.4 million for various acquisitions.
Net cash provided by financing activities for the year ended
December 31, 2000 was $78.8 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 $3.7 million was realized
from exercises of issued and outstanding options, and warrants and a loan.
Cash flow provided by financing activities for the year ended December 31,
1999 was $47.0 million of which $39.8 million resulted from the issuance of
Series B Convertible Preferred Stock, $4.6 million resulted from the issuance
of Series A Convertible Preferred Stock, and $2.7 million from the issuance
of common stock upon warrant and stock option exercises.
At December 31, 2000, the Company had cash balances of $35.8 million
and unused credit lines of $0.8 million. Since inception the Company has
incurred cumulative negative operating cash from operations flows of $80
million and an accumulative deficit at December 31, 2000 of $106.4 million.
The accompanying financial statements have been prepared assuming
that Opus360 will continue as a going concern. Our history of net losses and
negative cash flows from operations as well as projected additional losses
raises substantial doubt about our ability to continue as a going concern. 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 affect 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 and e.office
employees under circumstances that may have violated the registration
requirements of the Securities Act, we intend to make a rescission offer to
these employees, and we may have a contingent liability of up to $0.1 million.
27
Recent Accounting Pronouncements
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 did not have a material effect on the Company's
operating results.
Qualitative and Quantitive Disclosure About Market Risk
At December 31, 2000, the majority of our cash balances were held
primarily in the form of short- term highly liquid 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.
The Company utilizes lines of credit to purchase equipment and to
back certain financial obligations. The Company's outstanding balance under
its lines of credit at December 31, 2000 was $1.2 million. The weighted
average interest rate for the Company's lines of credit during 2000 was
10.19%. The Company will pay an aggregate amount of $1.3 million, including
interest, for its two lines of credit, which matures on February 2003 and
June 2003, respectively.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, and the related notes
thereto, of Opus360 and the Report of Independent Auditors are filed as a
part of this Form 10-K.
PAGE
NUMBER
Independent Auditors' Report 30
Consolidated Balance Sheets as of December 31, 2000 and
1999 31
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2000 and 1999 and the period
from August 17, 1998 (inception) to December 31, 1998. 32
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2000 and 1999 and the period from
August 17, 1998 (inception) to December 31, 1998. 33
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and
1999 and the period from August 17,
1998 (inception) to December 31, 1998. 35
Notes to Consolidated Financial Statements 36
29
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of Opus360 Corporation:
We have audited the accompanying consolidated balance sheets of
Opus360 Corporation as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years ended December 31, 2000 and 1999 and the period from August 17,
1998 (inception) to December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Opus360
Corporation as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the years ended December 31, 2000 and 1999,
and the period from August 17, 1998 (inception) to December 31, 1998 in
conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
disclosed in Note 1 to the financial statements, the Company has incurred
substantial recurring losses from operations and expects to incur substantial
losses in the near future. These and other factors as described in Note 1
raise substantial doubts about its ability to continue as a going concern.
Managements' plans in regards to these matters