<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 0-26161
SALESLOGIX CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0808340
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8800 N. GAINEY CENTER DRIVE, SUITE 200, SCOTTSDALE, ARIZONA 85258
(Address of principal executive offices) (Zip Code)
(480) 368-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of August 10, 1999, there were 18,554,871 outstanding shares of Common Stock,
par value $.001 per share, of SalesLogix Corporation.
Page 1 of 29
<PAGE> 2
SALESLOGIX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
Page 2 of 29
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALESLOGIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,989 $ 11,377
Short-term investments 4,711 --
Accounts receivable, net of allowance for doubtful accounts of $741,973
and $455,396 at June 30, 1999 and at December 31, 1998, respectively 8,421 4,570
Prepaid expenses and other current assets 1,539 922
-------- --------
Total current assets 46,660 16,869
Property and equipment, net 3,297 2,544
Other assets 12,284 4,561
-------- --------
$ 62,241 $ 23,974
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,305 $ 1,245
Accrued expenses 3,333 1,774
Current portion of notes payable to bank 691 691
Current portion of capital lease obligations 488 558
Deferred revenues 3,030 1,759
-------- --------
Total current liabilities 9,847 6,027
Notes payable to bank, less current portion 587 783
Capital lease obligations, less current portion 268 458
Deferred rental obligation 106 106
Stockholders' equity:
Series A Convertible Preferred Stock -- 4,585
Series B Convertible Preferred Stock -- 67
Series C Convertible Preferred Stock -- 6,448
Series D Convertible Preferred Stock -- 3,944
Series E Convertible Preferred Stock -- 18,438
Class A Common Stock, par value $0.001 per share; 50,000,000 shares
authorized, 18,550,426 shares issued and 18,548,759 shares outstanding
at June 30, 1999; 3,228,325 shares issued and 3,226,658 19 3
shares outstanding at December 31, 1998
Class B Common Stock, par value $0.001 per share; 2,280,000 shares
authorized, no shares issued or outstanding at June 30, 1999; 72,827
shares issued and outstanding at December 31, 1998 -- --
Additional paid-in capital 75,692 2,282
Accumulated deficit (21,116) (17,377)
Less unearned compensation (3,161) (1,789)
Less shares of common stock held in treasury; 1,667 shares at cost (1) (1)
-------- --------
Total stockholders' equity 51,433 16,600
-------- --------
Total liabilities and stockholders' equity $ 62,241 $ 23,974
======== ========
</TABLE>
See accompanying notes
Page 3 of 29
<PAGE> 4
k SALESLOGIX CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 5,228 $ 1,810 $ 9,453 $ 3,899
Services 2,968 1,204 5,045 2,277
------------ ------------ ------------ ------------
Total revenues 8,196 3,014 14,498 6,176
------------ ------------ ------------ ------------
Costs of revenues:
Licenses 393 103 725 194
Services 1,884 1,052 3,235 1,938
------------ ------------ ------------ ------------
Total costs of revenues 2,277 1,155 3,960 2,132
------------ ------------ ------------ ------------
Gross profit 5,919 1,859 10,538 4,044
Operating expenses:
Sales and marketing 4,581 2,009 8,176 3,772
Research and development 1,586 959 2,872 1,629
General and administrative 801 715 1,388 1,102
Amortization of acquisition related
intangible assets 867 359 1,146 718
In-process research and development
write-off 900 -- 900 --
------------ ------------ ------------ ------------
Total operating expenses 8,735 4,042 14,482 7,221
------------ ------------ ------------ ------------
Loss from operations (2,816) (2,183) (3,944) (3,177)
Other income (expense):
Interest income 209 66 316 88
Interest expense (52) (66) (111) (132)
Other income, net -- 2 -- 4
------------ ------------ ------------ ------------
Loss before provision for income taxes (2,659) (2,181) (3,739) (3,217)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (2,659) $ (2,181) $ (3,739) $ (3,217)
============ ============ ============ ============
Historic basic and diluted net loss per share $ (0.28) $ (0.48) $ (0.84) $ (0.75)
============ ============ ============ ============
Pro forma basic and diluted net loss per share $ (0.17) $ (0.18) $ (0.26) $ (0.28)
============ ============ ============ ============
Weighted average shares used in calculating
historic basic and diluted net loss per share 9,451,438 4,522,047 4,435,558 4,266,690
============ ============ ============ ============
Weighted average shares used in calculating pro
forma basic and diluted net loss per share 15,633,245 12,244,883 14,567,483 11,688,410
============ ============ ============ ============
</TABLE>
See accompanying notes.
Page 4 of 29
<PAGE> 5
SALESLOGIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,739) $ (3,217)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, including amortization 757 263
of leased assets
Amortization of acquisition related 1,146 718
intangible assets
Provision for losses on accounts 423 --
receivable
Amortization of unearned compensation 226 --
In-process research and development 900 --
write-off
Changes in operating assets and
liabilities, net of effects from
purchase of Enact Incorporated
Accounts receivable (4,034) (420)
Prepaid expenses and other current (564) (453)
assets
Accounts payable 928 545
Accrued expenses 835 (104)
Deferred revenue 959 96
-------- --------
Net cash used in operating activities (2,163) (2,572)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (1,390) (551)
Payment for purchase of Enact Incorporated,
net of cash acquired (4,711) --
Purchases of investments available for sale (4,833) --
Increase in other assets -- (18)
-------- --------
Net cash used in investing activities (10,934) (569)
-------- --------
FINANCING ACTIVITIES
Net proceeds from initial public offering
and concurrent private placement 34,098 --
Repayments under bank term loan (196) (130)
Principal payments under capital lease (289) (207)
obligations
Net proceeds from issuance of preferred -- 15,946
stock
Purchase of treasury stock -- (1)
Proceeds from exercise of common stock
options 96 102
-------- --------
Net cash provided by financing activities 33,709 15,710
-------- --------
Net increase in cash and cash equivalents 20,612 12,569
Cash and cash equivalents, beginning of
period 11,377 3,189
-------- --------
Cash and cash equivalents, end of period $ 31,989 $ 15,758
======== ========
</TABLE>
See accompanying notes.
Page 5 of 29
<PAGE> 6
SALESLOGIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared on substantially the same basis as the audited annual consolidated
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows of
the Company. The results of operations for the three and six months ended June
30, 1999, are not necessarily indicative of the results to be expected for the
year ending December 31, 1999. Certain information and footnote disclosures
normally contained in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the Notes
to Consolidated Financial Statements contained in SalesLogix Corporation's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission.
NOTE 2. ACQUISITION
On April 30, 1999, the Company acquired Enact Incorporated. Enact was a
privately-held provider of sales configuration software for managing product
catalogs and marketing encyclopedias and generating proposals, quotes and
orders. The Company paid $4.1 million in cash and issued 609,424 shares of its
common stock, of which 201,893 shares are subject to three year monthly vesting.
In connection with the acquisition, the Company incurred direct acquisition
related expenses of approximately $1.4 million.
The acquisition was recorded under the purchase method of accounting and
therefore the results of operations of Enact and the fair values of the acquired
assets and liabilities were included in the Company's financial statements
beginning on the acquisition date. Upon consummation of the transaction, Enact
was merged into a wholly-owned subsidiary of the Company. In connection with the
acquisition, the Company received an independent appraisal of the intangible
assets acquired, which indicated that approximately $900,000 of the acquired
intangible assets was in-process research and development that had not yet
reached technological feasibility. Because there can be no assurance that the
Company will be able to successfully complete the development and integration of
the in-process research and development into its suite of software products or
that the acquired technology has any alternative future use, the acquired
in-process research and development was charged to expense by the Company in its
quarter ended June 30, 1999.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values on the date of the acquisition as follows
(in thousands):
<TABLE>
<S> <C>
Purchased technology $2,800
Write-off of in-process research and development 900
Goodwill 5,969
Net liabilities acquired, including costs of acquisition (1,516)
Less common stock issued (4,053)
------
Cash portion of purchase price $4,100
======
</TABLE>
Approximately $8.8 million of the purchase price, attributed to purchased
technology and goodwill, is being amortized over its useful life of three years.
Page 6 of 29
<PAGE> 7
The pro forma results of operations set forth below have been prepared to
reflect the effects of the Enact acquisition, assuming the acquisition had
occurred on January 1, 1998.
<TABLE>
<CAPTION>
Pro Forma
Six Months Ended
June 30,
---------------------------
(in thousands, except per
share data)
1999 1998
-------- -------
<S> <C> <C>
Total revenues $ 14,670 $ 6,283
======== =======
Net loss (4,235) (3,517)
======== =======
Basic and diluted net loss per share $ (0.95) $ (0.82)
======== =======
</TABLE>
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common share equivalents outstanding during
the period. Dilutive common share equivalents consist of employee stock options
using the treasury method and dilutive convertible securities using the
if-converted method.
Pro forma basic and diluted earnings per share assumes conversion of all
Preferred Stock at the beginning of the period.
NOTE 4. NEW PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Statement 133 establishes
accounting and reporting standards for derivative contracts, and for hedging
activities. The new standard requires that all derivatives be recognized as
either assets or liabilities in the consolidated statements of financial
condition and that those instruments be measured at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedging
instrument. The accounting for changes in the fair market value of a derivative
(that is, unrealized gains and losses) depends on the intended use of the
derivative and the resulting designation. The statement is effective in the
first quarter of year 2001. The Company does not believe the effect of Statement
133 will have a material effect on the Company's financial position, results of
operations or cash flows.
NOTE 5. SEGMENT INFORMATION
The Company operates as a single business segment and licenses and markets its
products through direct and indirect channels in the United States, Canada,
Europe and Asia-Pacific. Information regarding revenues in different geographic
regions is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
United States $ 6,661 $ 2,896 $12,083 $ 5,997
International 1,535 118 2,415 179
------- ------- ------- -------
Total revenues $ 8,196 $ 3,014 $14,498 $ 6,176
======= ======= ======= =======
</TABLE>
Page 7 of 29
<PAGE> 8
NOTE 6. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Purchased technology $ 4,000 $ 1,200
Customer list and other 320 320
Goodwill 10,350 4,381
------- -------
14,670 5,901
Amortization 2,482 1,436
------- -------
Net intangible assets of acquired
businesses 12,188 4,465
Recoverable deposits and other 96 96
------- -------
$12,284 $ 4,561
======= =======
</TABLE>
NOTE 7. INITIAL PUBLIC OFFERING AND CONCURRENT PRIVATE PLACEMENT
The Company's initial public offering was effective in May 1999. The Company
sold 3,823,750 shares of common stock at an offering price of $9.00 per share in
the offering and 402,994 shares of common stock at a purchase price of $8.685 in
a concurrent private placement. Net proceeds to the Company from the offering
and private placement were approximately $34.1 million.
Page 8 of 29
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Form 10-Q contain forward-looking statements
based upon current expectations that involve risks and uncertainties, such as
our plans, objectives, expectations and intentions. Forward-looking statements
can be identified by their use of such verbs as "expects," "anticipates," and
"believes" or similar verbs or conjugations of such verbs. If any of our
assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, our actual results could differ materially
from those anticipated by such forward-looking statements. In addition,
SalesLogix' actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under Factors Affecting Operating Results
below and under "Risk Factors," "Business" and elsewhere in our Securities and
Exchange Commission filings, including our Registration Statement on Form S-1,
which became effective May 27, 1999.
OVERVIEW
SalesLogix is a leading provider of software that enables mid-market
businesses to create interactive selling networks that automate prospect and
customer interactions.
SalesLogix was incorporated in September 1995 and commenced operations in
January 1996. From January 1996 until April 1997, our operating activities
related primarily to research and development and the development of our
independent business partner network. In April 1997, we released the first
commercial version of our sales automation solution, SalesLogix. Throughout the
remainder of 1997, we focused on developing a worldwide business partner
network, to support the sales and marketing of the SalesLogix brand. In December
1997, we acquired Opis Corporation, a developer of customer support automation
software solutions, and subsequently launched our second product line,
SupportLogix. In the beginning of 1998, a link between SalesLogix and
SupportLogix was developed and released so that the solutions could be sold by
our business partners as an integrated front-office automation suite.
During the second half of 1998, we expanded our distribution channel to
include a direct sales force that focused on key strategic accounts and worked
with business partners on larger opportunities. We also hired managers in the
United Kingdom and Australia who commenced recruitment and training of
international business partners. In December 1998, we released the first major
upgrade of SalesLogix 3.0 and a version of the product that can be deployed over
the Internet. In April of 1999, we acquired Enact, a developer of e-commerce and
product configuration technology, and subsequently launched our third product
line, CommerceLogix. In June 1999, a new release of CommerceLogix was launched
that integrated its capabilities with SalesLogix and SupportLogix. This expanded
product suite allows our business partners and direct sales force
representatives to sell an integrated front-office and e-commerce solution that
supports web-based selling, direct selling, call center sales or sales through a
distributor network.
Since inception, we have incurred significant losses and as of June 30,
1999 we had an accumulated deficit of $21.1 million. We derive revenues
principally from the sale of software licenses and fees for maintenance,
technical support, consulting and training services. We market and sell our
products primarily through our business partners and to a lesser extent through
our direct sales force. Sales to or initiated by our business partners accounted
for 86% and 82% of license revenues in 1998 and the six months ended June 30,
1999, respectively, and we expect that a substantial majority of our license
revenues will continue to be generated from sales to our business partners. The
contractual arrangements we enter into with our business partners provide for
license fees payable to us based upon a percentage of our list price.
Page 9 of 29
<PAGE> 10
We recognize revenue in accordance with the provisions of the American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition," which we adopted beginning January 1, 1998. We sell our
products under perpetual licenses and recognize license revenues when all of the
following conditions are met: an executed license agreement, unconditional
purchase order or contract has been received; the product has been delivered to
the customer; collection of the receivable is deemed probable; and the fee is
fixed or determinable based upon vendor specific objective elements of the
arrangements. Maintenance and technical support revenues are recognized ratably
over the contract term, typically one year. Revenues for consulting and training
services are recognized as such services are provided.
In December 1998, we recorded unearned compensation of $1.9 million
representing the difference between the exercise price of options granted to
acquire shares of stock during 1998 and the deemed fair value for financial
reporting purposes of our common stock on the dates of grant. Unearned
compensation is amortized over the vesting periods of the options, generally
four years.
Acquisitions
In connection with the Opis acquisition in December 1997, we paid $801,559
in cash, issued 1,228,654 shares of Series D convertible preferred stock and
granted options to purchase 96,836 shares of Series D convertible preferred
stock. We also entered into employment agreements with certain officers of Opis.
The transaction was recorded under the purchase method of accounting and the
results of operations of Opis and the fair value of the assets acquired and
liabilities assumed were included in our consolidated financial statements
beginning on the acquisition date. In connection with this acquisition, we
recorded $5.9 million in purchased technology and other intangible assets that
are being amortized over periods of up to five years.
In April 1999, we acquired Enact Incorporated in a merger transaction.
Enact was a privately-held provider of sales configuration software for managing
product catalogs and marketing encyclopedias and generating proposals, quotes
and orders. We anticipate that the Enact products will be sold and serviced by
our direct sales force and consulting services group and business partner
channel. In connection with the Enact acquisition, we issued 609,424 shares of
our common stock, of which 201,893 shares are restricted subject to three year
monthly vesting based upon the continued employment of the officers of Enact. We
paid $4.1 million in cash for merger consideration, plus transaction expenses,
repayment of debt of Enact and out-of-pocket expenses associated with the
integration of Enact's business into ours. We also entered into employment
agreements with officers of Enact in connection with the acquisition. The
transaction was recorded under the purchase method of accounting and the results
of operations of Enact and the fair value of the assets acquired and liabilities
assumed are included in our consolidated financial statements beginning on April
30, 1999. In connection with this acquisition, we recorded approximately $8.8
million in purchased technology and other intangible assets that will be
amortized over three years, and expensed approximately $900,000 of in-process
research and development based upon an independent appraisal.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenue,
statement of operations data for the periods indicated. We believe that
period-to-period comparisons of our operating results are not indicative of
results for any future period.
Page 10 of 29
<PAGE> 11
<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Licenses 63.8% 60.1% 65.2% 63.1%
Services 36.2% 39.9% 34.8% 36.9%
------- ------- ------- -------
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues:
Licenses 4.8% 3.4% 5.0% 3.1%
Services 23.0% 34.9% 22.3% 31.4%
------- ------- ------- -------
Total costs of revenues 27.8% 38.3% 27.3% 34.5%
------- ------- ------- -------
Gross profit 72.2% 61.7% 72.7% 65.5%
Operating expenses:
Sales and marketing 55.8% 66.7% 56.4% 61.2%
Research and development 19.3% 31.8% 19.8% 26.4%
General and administrative 9.8% 23.7% 9.6% 17.8%
Amortization of
acquisition related
intangible assets 10.6% 11.9% 7.9% 11.6%
In-process research and
development write-off 11.0% 0.0% 6.2% 0.0%
------- ------- ------- -------
Total operating expenses 106.5% 134.1% 99.9% 117.0%
------- ------- ------- -------
Loss from operations (34.3)% (72.4)% (27.2)% (51.5)%
Interest and other income, net 1.9% 0.0% 1.4% (0.6)%
======= ======= ======= =======
Net income (32.4)% (72.4)% (25.8)% (52.1)%
======= ======= ======= =======
</TABLE>
Revenues
Total revenues increased from $3.0 million in the three months ended June
30, 1998 to $8.2 million in the three months ended June 30, 1999, an increase of
173%. Total revenues increased from $6.2 million in the six months ended June
30, 1998 to $14.5 million in the six months ended June 30, 1999, an increase of
134%. No customer accounted for more than 10% of revenues in the three or six
month periods ended June 30, 1998 and 1999. Our revenues outside of the United
States increased from approximately $118,000 in the three months ended June 30,
1998 to approximately $1.5 million in the three months ended June 30, 1999, and
increased from approximately $179,000 in the six months ended June 30, 1998 to
approximately $2.4 million in the six months ended June 30, 1999.
License Revenues. Our license revenues increased from $1.8 million in the
three months ended June 30, 1998 to $5.2 million in the three months ended June
30, 1999, an increase of 189%. Revenues from licenses also increased from $3.9
million in the six months ended June 30, 1998 to $9.5 million in the six months
ended June 30, 1999, an increase of 144%. The increases in license revenues were
due primarily to increases in the size and productivity of our business partner
network, increased market
Page 11 of 29
<PAGE> 12
awareness and acceptance of our products and, to a lesser extent, the
establishment of our direct sales force in the second half of 1998 and the
acquisition of Enact in April 1999. Our license revenues represented 60.1% and
63.8% of our total revenues for the three months ended June 30, 1999 and 1999,
respectively, and 63.1% and 65.2% of our total revenues for the six months ended
June 30, 1998 and 1999, respectively.
Service Revenues. Service revenues include fees for maintenance, technical
support, consulting and training services. Our service revenues increased from
$1.2 million in the three months ended June 30, 1998 to $3.0 million in the
three months ended June 30, 1999, an increase of 150%. Revenues from services
also increased from $2.3 million in the six months ended June 30, 1998 to $5.0
million in the six months ended June 30, 1999, an increase of 117%. The
increases resulted primarily from the increase in the number of licenses sold as
well as renewals of existing maintenance and technical support contracts from
our growing installed base of customers and, to a lesser extent, the acquisition
of Enact in April 1999. Customers are required to enter into one-year support
and maintenance contracts at the time of initial license purchase and have the
option to renew for additional one-year periods thereafter. Our service revenues
represented 39.9% and 36.2% of our total revenues for the three months ended
June 30, 1998 and 1999, respectively, and 36.9% and 34.8% of our total revenues
for the six months ended June 30, 1998 and 1999, respectively.
Costs of Revenues
Cost of License Revenues. Cost of license revenues includes the cost of
media, product packaging, documentation and other production costs and
third-party royalties. Cost of license revenues increased from $103,000 in the
three months ended June 30, 1998 to $393,000 in the three months ended June 30,
1999, representing 5.7% and 7.5% of license revenues in the respective periods.
Cost of license revenues increased from $194,000 in the six months ended June
30, 1998 to $725,000 in the six months ended June 30, 1999, representing 5.0%
and 7.7% of license revenues in the respective periods. Cost of license revenues
increased as a result of increased product royalties for third-party technology,
primarily report writing software, embedded in our products and, to a lesser
extent, due to increases in overall license sales.
Cost of Service Revenues. Cost of service revenues consists primarily of
the cost of providing technical support, training and consulting services to
customers and business partners. Cost of service revenues increased from $1.1
million in the three months ended June 30, 1998 to $1.9 million in the three
months ended June 30, 1999, representing 87.4% and 63.5% of service revenues in
the respective periods. Cost of service revenues also increased from $1.9
million in the six months ended June 30, 1998 to $3.2 million in the six months
ended June 30, 1999, representing 85.1% and 64.1% of service revenues in the
respective periods. The absolute dollar increases were primarily attributable to
hiring and training of additional personnel to support our growing customer
base and business partner network, and to a lesser extent, the acquisition of
Enact in April 1999. The decreases as a percentage of service revenues reflected
the growth of service revenues and a reduction in the time and expenses our
consulting organization incurred while providing free or low margin support to
business partners in their early implementations of our products.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel-related expenses, costs related to the recruitment and support of our
business partner channel and marketing and promotional costs to increase brand
awareness in the marketplace and to generate leads for our sales channels. Sales
and marketing expenses increased from $2.0 million in the three months ended
June 30, 1998 to $4.6 million in the three months ended June 30, 1999, an
increase of 130%. Sales and marketing
Page 12 of 29
<PAGE> 13
expenses increased from $3.8 million in the six months ended June 30, 1998 to
$8.2 million in the six months ended June 30, 1999, an increase of 116%. The
increases reflected the hiring of additional sales and marketing personnel,
expanded advertising and other promotional activities and increased sales
commissions and bonuses related to increased license revenues and, to a lesser
extent, the acquisition of Enact in April 1999. Sales and marketing expenses
represented 66.7% and 55.8% of our total revenues for the three months ended
June 30, 1998 and 1999, respectively, and 61.2% and 56.4% of our total revenues
for the six months ended June 30, 1998 and 1999, respectively. We anticipate
that we will continue to invest significantly in sales and marketing and that
these expenses will increase in absolute dollars.
Research and Development. Research and development expenses consist
primarily of personnel-related costs for software developers, quality assurance
and product documentation personnel and payments to outside contractors.
Research and development expenses increased from $1.0 million in the three
months ended June 30, 1998 to $1.6 million in the three months ended June 30,
1999, an increase of 60%. Research and development expenses increased from $1.6
million in the six months ended June 30, 1998 to $2.9 million in the six months
ended June 30, 1999, an increase of 81%. These increases were primarily due to
an increase in the number of software developers, quality assurance personnel
and outside developers to support our product development, testing and
documentation activities related to the development and release of both
client-server and Internet versions of SalesLogix and, to a lesser extent, the
acquisition of Enact in April 1999. Research and development expenses
represented 31.8% and 19.3% of our total revenues for the three months ended
June 30, 1998 and 1999, respectively, and 26.4% and 19.8% of our total revenues
for the six months ended June 30, 1998 and 1999, respectively. We anticipate
that we will continue to invest significantly in research and development and
that these expenses will increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and
administrative personnel, as well as outside professional fees. General and
administrative expenses increased from $715,000 in the three months ended June
30, 1998 to $801,000 in the three months ended June 30, 1999, an increase of
12%. General and administrative expenses increased from $1.1 million in the six
months ended June 30, 1998 to $1.4 million in the six months ended June 30,
1999, an increase of 27%. These increases were primarily due to increased
staffing and related expenses necessary to manage and support the expansion of
our operations and, to a lesser extent, the acquisition of Enact in April 1999.
General and administrative expenses represented 23.7% and 9.8% of our total
revenues for the three months ended June 30, 1998 and 1999, respectively, and
17.8% and 9.6% of our total revenues for the six months ended June 30, 1998 and
1999, respectively. The decreases were primarily attributable to the more rapid
growth of revenues compared to the growth of general and administrative expenses
during these periods. We believe that general and administrative expenses will
continue to increase in absolute dollars as a result of the anticipated
expansion of our administrative staff and the expenses associated with being a
public company, including but not limited to annual and public reporting
costs, directors' and officers' liability insurance, investor relations programs
and professional service fees.
Amortization of Acquisition-Related Intangible Assets. Amortization of
acquisition-related intangible assets consists primarily of the amortization of
specifically identifiable intangible assets and goodwill. Amortization of
acquisition-related intangible assets increased from $359,000 in the three
months ended June 30, 1998 to $867,000 in the three months ended June 30,1999.
Amortization of acquisition-related intangible assets increased from $718,000 in
the six months ended June 30, 1998 to $1.1 million in the six months ended June
30, 1999. The increases were primarily due to the increase in
acquisition-related intangible assets related to the acquisition of Enact in
April 1999.
Page 13 of 29
<PAGE> 14
In-Process Research and Development Write-Off. In-process research and
development write-off related to the acquisition of Enact. The amount of the
write-off was determined through an independent appraisal.
Other Income, Net. Other income, net consists primarily of interest income
earned on our cash and short-term investments balances, offset by interest
expense incurred on our outstanding notes payable to a bank. The increase in our
cash and short-term investment balances is primarily due to the net proceeds of
$34.1 million from our initial public offering and concurrent private placement
in May 1999.
Income Taxes. As of June 30, 1999, we had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $14.5
million. The federal carryforwards expire at various dates beginning in 2011.
The Internal Revenue Code contains provisions that limit the use in any future
period of net operating loss and tax credit carryforwards upon the occurrence of
special events, including a significant change in ownership interest. We had
deferred tax assets, including net operating loss and tax credit carryforwards ,
totaling approximately $7.2 million as of June 30, 1999. A valuation allowance
has been recorded for the entire net deferred tax asset balance as a result of
uncertainties regarding its utilization.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had cash and cash equivalents of $32.0 million, an
increase of $20.6 million from December 31, 1998. Our working capital at June
30, 1999 was $36.8 million, compared to $10.8 million at December 31, 1998. We
have a working capital revolving line of credit with a financial institution
that is secured by our accounts receivable. This facility allows us to borrow up
to the lesser of 75% of our eligible accounts receivable or $2.5 million. As of
June 30, 1999, we had borrowed $300,000 under the facility. The agreement under
which the line of credit was established contains certain covenants, including a
provision requiring us to maintain certain financial ratios. We were in
compliance with these covenants at June 30, 1999.
Our operating activities resulted in net cash outflows of $2.6 million in
the six months ended June 30, 1998 and $2.2 million in the six months ended June
30, 1999. The operating cash outflows resulted primarily from significant
investments in sales, marketing and product development, which led to operating
losses. The cash outflows from operating losses, increases in accounts
receivable, prepaid expenses and other current assets were partially offset by
increases in accounts payable, accrued expenses and deferred revenues.
Cash used in investing activities was $569,000 in the six months ended
June 30, 1998 and $10.9 million in the six months ended June 30, 1999, resulting
primarily from the purchase of capital equipment, investments and the total cash
consideration and related expenses paid in connection with the Enact
acquisition.
Cash provided by financing activities totaled $15.7 million in the six
months ended June 30, 1998 and $33.7 million in the six months ended June 30,
1999, resulting primarily from the issuance of Series E Preferred Stock and
stock option exercises in 1998, and our initial public offering, concurrent
private placement and exercises of stock options in 1999, partially offset by
payments on capital equipment lease obligations and the bank term loan.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we strive to:
Page 14 of 29
<PAGE> 15
- enter new markets and increase penetration of existing markets for
our products and services;
- introduce new products and product enhancements;
- increase our product development, sales, marketing and customer
support activities;
- develop and expand our network of business partners and direct sales
force; and
- expand our international operations.
Such operating expenses will consume a material amount of our cash
resources. We believe that our existing cash and cash equivalents and available
bank borrowings, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
Thereafter, we may require additional funds to support our working capital
requirements or for other purposes.
YEAR 2000 COMPLIANCE
Many existing computer systems and software products do not properly
recognize and process dates after December 31, 1999. This "Year 2000" problem
could result in miscalculations, data corruption, system failures or disruptions
of operations.
We are subject to potential Year 2000 problems affecting our products, our
customers' systems, our internal systems and the systems of our vendors, any of
which could have a material adverse effect on our business, operating results
and financial condition. Significant uncertainty exists in the software industry
and other industries concerning the scope and magnitude of the Year 2000
problem. We recognize the need to take reasonable steps to reduce the risk that
our operations will be adversely affected by Year 2000 software failures.
We have completed our initial assessment of the potential overall impact
of the Year 2000 problem on our products, business, financial condition and
operating results, and are in the final steps of completing our risk assessment
for potential Year 2000 problems. We have conducted a review of the current
versions of our products and have obtained assurances from vendors of the
third-party products embedded into our products and believe that our products
are substantially Year 2000 compliant--that is, they are capable of adequately
distinguishing and interpreting dates falling after December 31, 1999. We have
confirmed that some versions of products previously offered by SalesLogix and
Opis Corporation were not Year 2000 compliant, but in each such case we have
determined that known end users were offered and shipped free upgrades to newer
versions of our relevant product. Nevertheless, a small percentage of our
customers may not have installed the shipped upgrade and may be operating prior
non-Year 2000 compliant versions of our products. We have prepared revised Year
2000 compliance information for posting on our website to advise such customers,
but do not plan to undertake an assessment to determine whether any customers
continue to use prior non-Year 2000 compliant versions of our products. We
continue to test our products and expect that modifications with respect to any
remaining Year 2000 issues will be made by the end of calendar year 1999.
Nevertheless, there can be no assurances that the implementation of
modifications to any embedded products will not be delayed or that we will not
experience unexpected Year 2000 problems.
The pressing need of many customers and potential customers to address
Year 2000 issues is affecting their purchasing patterns as they focus their
existing manpower and reallocate information
Page 15 of 29
<PAGE> 16
technology and other significant resources to confirming the Year 2000
compliance of or replacing existing information technology systems. These
changes in purchasing patterns, which may increase in the last two calendar
quarters of 1999, may result in reduced allocation of funds to purchase software
products such as those we offer. To the extent Year 2000 issues cause a
significant delay in, or cancellation of, decisions to purchase our products or
services, our business, financial condition and operating results would be
materially adversely affected.
We have reviewed and continue to review our internal management
information and other critical business systems to identify any Year 2000
problems relating to those systems. We also have identified those third party
vendors whom we believe provide us with critical products or services, such as
the owner and manager of our headquarters building and external vendors that
supply us with material information systems. We have communicated with each of
these vendors concerning Year 2000 issues and have sought written assurances
from most of these vendors that their provision of products and services will
not be disrupted by Year 2000 problems. We are continuing with this project and
expect to complete it by September 1, 1999. In the course of these
investigations to date, we have not encountered any material Year 2000 problems
concerning the continued provision of third-party products and services.
We license certain technology from third parties, including software that
is integrated with and used in our software product offerings and performs key
functions in our products. We have investigated the Year 2000 disclosures and
readiness statements of the third party vendors of these embedded products and
believe that this project is now substantially completed. We are continuing to
evaluate the integration of additional third party software into our products
and as we do so will continue to investigate whether such integration may raise
potential year 2000 problems. We have also performed independent testing and
analysis of product architectures to confirm that the interaction between the
embedded third party products and our own products will not itself create Year
2000 problems. The third party software embedded in our products is generally
generic in nature and subject to standard software license agreements which, by
their terms, severely limit the scope and period of performance warranties and
also the recoverability of consequential and similar type damages in the event
of product failures. For these reasons, we may not have significant remedies
against third party software vendors if in fact year 2000 problems arise because
of problems in the embedded products. Even if we are able to assert significant
claims against one or more third party vendors of products with Year 2000
problems, the relevant vendors may be thinly capitalized or otherwise
essentially judgment proof because of other Year 2000 claims asserted against
them.
We have not incurred to date and do not anticipate incurring in the
future, any material costs directly associated with our Year 2000 compliance
efforts, except for compensation expenses associated with our salaried employees
who have devoted some of their time to our Year 2000 assessment and remediation
efforts. As discussed above, we do not expect the total cost of Year 2000
problems to be material to our business, financial condition and operating
results. However, we cannot be certain at this time that any later discovered
Year 2000 problems will not require material costs to address.
We continue to believe that our most significant risk with respect to Year
2000 issues relates to the performance and readiness status of third parties. A
reasonable worst case Year 2000 scenario would be the result of failures of
third parties, including without limitation, governmental entities, utilities,
and financial and telecommunications systems, or a general infrastructure
collapse, that negatively impact our ability, or the ability of our distribution
partners, to provide products and services to our customers, or the ability of
our customers to purchase products, or events affecting regional, national or
global economies generally. The impact of these failures cannot be estimated at
this time; however, we are continuing our effort to consider and adopt
contingency plans to limit, to the extent possible, the financial impact of
these failures on our results of operations.
Page 16 of 29
<PAGE> 17
During the months prior to the century change, we will continue to
evaluate new versions of our software products, new software and information
systems provided to us by third parties and any new infrastructure systems that
we acquire to determine whether they are Year 2000 compliant. Despite our
current assessment, we may not identify and correct all significant Year 2000
problems on a timely basis. Year 2000 compliance efforts may involve significant
time and expense and unremediated problems could materially adversely affect our
business, financial condition and operating results.
We have considered and are establishing a set of contingency and disaster
recovery plans to address, where feasible, potential consequences of the Year
2000 issue. These plans include actions to take in the event of any substantial
outages or disruptions in our ability to continue to use our current facilities
or internal information systems, and staffing plans to facilitate quick response
to any Year 2000 issues that do arise. We intend to continue to evaluate both
existing and newly identified Year 2000 risks and to develop and implement such
further responsive measures as may be appropriate and feasible to reduce our
exposure.
The statements in the previous section include "Year 2000 Readiness
Disclosures" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
FACTORS AFFECTING OPERATING RESULTS:
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE OUR
STRATEGY AND FORECAST OPERATING RESULTS
We commenced operations in January 1996 and released our first commercial
version of SalesLogix in April 1997. Accordingly, we have a limited operating
history, which makes it difficult to evaluate our business strategy and forecast
our future operating results. The new, competitive, fragmented and rapidly
changing nature of our market increases these risks and uncertainties. We cannot
assure you that our business strategy will be successful or that we will be able
to accurately forecast our future operating results.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES
We incurred net losses in each quarter from inception through June 30,
1999. As of June 30, 1999, we had an accumulated deficit of approximately $21.1
million. We have not achieved profitability and expect to continue to incur net
losses for the foreseeable future. We expect to continue to devote substantial
resources to our product development, sales, marketing and customer support
activities. As a result, we will need to generate significant quarterly revenues
to achieve and maintain profitability. Although our revenues have increased over
recent quarters, we cannot assure you that we will realize sufficient revenues
to achieve and sustain profitability in any future period.
WE REQUIRE SUBSTANTIAL CAPITAL TO FUND OUR BUSINESS
We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures and
potential acquisitions. Our future capital requirements will depend on many
factors, including the rate of revenue growth, the timing and extent of spending
to support product development efforts and expansion of sales and marketing, the
timing of introductions of new products and enhancements to existing products
and market acceptance of our products. As a result, we could be required to
raise substantial additional capital. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the issuance
of these securities could result in dilution to existing stockholders. If
additional funds are raised through the issuance of debt securities, the debt
would have rights, preferences and privileges senior to holders of
Page 17 of 29
<PAGE> 18
common stock and the terms of the debt could impose restrictions on our
operations. We cannot assure you that such additional capital, if required, will
be available on acceptable terms, or at all. If we are unable to obtain needed
additional capital, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which would materially
adversely affect our business, financial condition and operating results.
OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
CAUSING OUR STOCK PRICE TO DECLINE
Our operating results are difficult to predict and are likely to fluctuate
significantly on a quarterly and an annual basis due to a number of factors,
many of which are outside of our control. It is particularly difficult to
predict the timing or amount of our license revenues because our products are
typically shipped shortly after orders are received and therefore the amount of
unfilled orders for our products is small. Furthermore, because of customer
buying patterns that we do not expect to change, we recognize a substantial
portion of our license revenues in the last month and often in the last weeks or
days of a quarter. Other factors that may contribute to the difficulty of
predicting our operating results include, but are not limited to, the following:
- the lengthiness and unpredictability of sales cycles for our
products;
- the mix of revenues generated by product licenses and customer
service and support;
- the mix of sales channels through which our products are sold;
- new product announcements and introductions by our competitors; and
- our ability to develop, market and manage product transitions and
acquisitions.
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results should not be relied upon as indicative of future
performance.
We plan to increase our operating expenses to expand our product
development, sales, marketing and customer support activities. We base our
decisions regarding our operating expenses on anticipated revenue trends and
many of our expenses are relatively fixed in the short term. We may not be able
to reduce our expenses if our revenues are lower than anticipated, which could
cause our operating results to be below the expectations of public market
analysts or investors, causing the price of our common stock to fall.
CUSTOMER BUYING PATTERNS AND SALES FORCE COMPENSATION MAY MAKE IT DIFFICULT
TO PREDICT FUTURE OPERATING RESULTS
Our revenues have tended to be stronger in the fourth quarter than in each
of the first three quarters of a year, making it more difficult to predict
future operating results. We believe that these fluctuations are caused
primarily by customer buying patterns, which are often influenced by year-end
budgetary pressures as well as by our sales force compensation policies and
those of our business partners, which tend to reward sales personnel who meet or
exceed year-end sales quotas. We expect this trend to continue for the
foreseeable future.
Page 18 of 29
<PAGE> 19
OUR OPERATING RESULTS PRIMARILY RELY ON MARKET ACCEPTANCE OF OUR SALESLOGIX
PRODUCT
Our future financial performance will depend substantially on our ability
to develop and maintain market acceptance of SalesLogix and new and enhanced
versions of SalesLogix and other new products. During 1998 and the six months
ended June 30, 1999, license revenues from our SalesLogix product accounted for
approximately 94% and 92% of our total license revenues, respectively. We expect
product license revenues from SalesLogix to continue to account for a
substantial majority of our revenues for the foreseeable future. As a result,
factors adversely affecting the pricing or demand for SalesLogix, such as
competition, technological change or evolution in customer preferences, could
materially adversely affect our business, financial condition and operating
results. Many of these factors are beyond our control and difficult to predict.
OUR OPERATING RESULTS PRIMARILY DEPEND UPON THE SALE AND IMPLEMENTATION OF
OUR PRODUCTS BY OUR BUSINESS PARTNERS
Our success will continue to depend significantly on our ability to
develop and cultivate relationships with our resellers, whom we refer to as our
business partners, as well as on the success of their sales efforts. Our sales
and distribution strategy focuses primarily on developing and expanding indirect
distribution channels through our network of business partners and, to a lesser
extent, expanding our direct sales organization. Sales to or initiated by our
business partners accounted for 86% and 82% of license revenues in 1998 and the
six months ended June 30, 1999, respectively. The relatively small size of our
business partners may restrict their ability to timely install and implement our
products during periods when they are especially busy, which may create a
service backlog that adversely affects our revenues during these periods. We are
currently investing, and intend to continue to invest significantly, to support
and expand our indirect distribution channel. We cannot assure you that we will
be able to retain our existing business partners or add new business partners to
market, sell, implement and support our products effectively. Our failure to do
so could materially adversely affect our business.
OUR RELIANCE ON BUSINESS PARTNERS MAKES IT MORE DIFFICULT TO MAINTAIN QUALITY
CONTROL AND FORECAST SALES
Our focus on indirect distribution may adversely affect our business,
financial condition and operating results if we are unable to:
- adequately train and certify a sufficient number of business
partners;
- provide adequate incentives to our business partners;
- provide adequate service and support to our end users through our
business partners;
- retain company and brand loyalty with our business partners and end
user customers;
- manage conflict among our business partners, whose contracts with us
are generally non-exclusive; or
- manage collection of receivables from business partners on a timely
basis.
Page 19 of 29
<PAGE> 20
OUR BUSINESS PARTNERS MAY HANDLE COMPETING PRODUCTS, DIVERTING ATTENTION AWAY
FROM OUR PRODUCTS
Many of our business partners also sell products that compete with our
products and we cannot assure you that our business partners will continue to
devote the resources necessary to provide us with effective sales, marketing and
technical support. If our business partners do not continue to support our
products, our business may be materially adversely affected.
IF WE EXPERIENCE DIFFICULTY EXPANDING OUR DIRECT SALES CAPABILITY, WE MAY NOT
BE ABLE TO EXPAND OUR BUSINESS AS PLANNED
In mid-1998, we established a direct sales organization to focus on key
strategic accounts and larger opportunities and we plan to expand the size of
our direct sales force. We have limited experience in establishing and
maintaining a direct sales force. Accordingly, this internal expansion may not
be successfully completed and the cost of this expansion may exceed the revenues
generated. Our expanded sales organization may not be able to compete
successfully against the significantly more extensive and well-funded sales and
marketing operations of many of our current or potential competitors. In
addition, expansion of our direct sales force may lead to conflict with our
business partners. We have experienced and continue to experience difficulty in
recruiting qualified sales personnel. We cannot assure you that we will be able
to effectively maintain and expand our direct sales force.
WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR BUSINESS
The market for software that automates sales, marketing and customer
support operations, collectively referred to in our industry as front office
software, is intensely competitive, fragmented and rapidly changing. We
primarily compete with a variety of software vendors that provide marketing,
sales and customer support automation products. While numerous solutions can be
cited as potential competitors, direct competitors of SalesLogix can be broadly
categorized into three groups:
- Front Office Software Vendors such as Onyx, Pivotal, Siebel and
Vantive. These companies generally seek to provide front office
software through direct sales forces. They also offer customized
solutions through consulting services. Several of these companies
have announced strategies to target the mid-market opportunities we
are pursuing. Pivotal recently completed an initial public offering
of its common stock.
- Contact Manager Vendors such as Symantec with its ACT! product,
Goldmine, which recently merged with Bendata, Inc., and Microsoft
with its Outlook product. These products support a single user or
small workgroup of users and are sold primarily through a retail
channel. Several of these companies have also announced strategies
to target the mid-market opportunities we are pursuing.
- Internal Development by our customers' or potential customers' own
technology departments. These organizations have invested
significant resources in developing their own proprietary selling
systems.
Many of our competitors have longer operating histories and significantly
greater resources and name recognition. We cannot assure you that we will
compete successfully against these companies. We expect that competition will
increase as other established and emerging companies enter our market and as new
products and technologies are introduced. For example, several companies that
traditionally focused on software for financial, reporting, distribution,
payroll, human resources and manufacturing
Page 20 of 29
<PAGE> 21
operations, collectively referred to in our industry as back office software,
have built or acquired front office products to manage sales, customer service
and electronic commerce functions. Recently, Siebel announced a strategic
relationship with Great Plains Software, Inc. to develop an integrated front and
back office solution to target mid-market companies. Increased competition may
result in price reductions, lower gross margins, loss of our market share and
loss of business partners and personnel, any of which could materially adversely
affect our business, financial condition and operating results.
THE MARKET FOR SALES AUTOMATION SOLUTIONS IS EMERGING AND BROAD MARKET
ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN
The market for sales automation products is still emerging and continued
growth in demand for and acceptance of sales automation products remains
uncertain. The success of our business in the face of intense competition will
depend on growth of the overall market for sales automation products. We have
spent, and will continue to spend, considerable resources targeting the
mid-market segment of the sales automation market, educating potential customers
about our products and sales automation software solutions in general and
developing products that are compatible with Microsoft's browser technology and
the Internet. However, even with these efforts, sales of our products may not
increase unless the market for our products continues to grow. If the market for
our products does not grow or grows more slowly than we anticipate, the demand
for Internet-related front office products and services does not continue to
grow, or the mid-market segment turns out to have significantly less potential
than we estimate, our business, financial condition and operating results would
be materially adversely affected.
OUR OPERATING RESULTS DEPEND ON CONTINUED MARKET ACCEPTANCE OF MICROSOFT
TECHNOLOGY
We have designed our products to operate using Microsoft technologies,
including Windows NT, Windows 98 and SQL Server. If the market acceptance of
Microsoft technology declines or we are unable to timely enhance our products
and technology to be compatible with new developments in Microsoft's technology,
our business, financial condition and operating results could be materially
adversely affected. Although we believe that Microsoft technologies are and will
continue to be widely utilized by mid-market businesses, no assurance can be
given that these businesses will actually adopt such technologies as anticipated
or will not in the future migrate to other computing technologies that we do not
support.
WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS AND WE MAY NOT BE ABLE TO
RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED
Our future performance will largely depend on the continued efforts and
abilities of our key technical, customer support, sales and management
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on Patrick Sullivan, our Chief
Executive Officer and President. Except for Mr. Sullivan, Doug Nicholas, Vice
President Business Development and Bruce Chase and Matt Chase, former officers
of Enact, none of our key personnel are subject to non-compete covenants. We
experienced significant management changes at the executive officer level during
the fourth quarter of 1998 when we hired a Vice President of Worldwide Sales and
a Vice President of Marketing. Accordingly, our executive management's ability
to function effectively as a team is unproven. Competition for highly skilled
employees with technical, management, marketing, sales, product development and
other specialized training is intense and there can be no assurance that we will
be successful in attracting and retaining such personnel. In addition, we may
experience increased costs in order to attract and retain skilled employees. The
loss of any of our senior management or other key technical, customer support,
sales and marketing personnel, particularly if lost to competitors, could
materially and adversely affect our business, financial condition and operating
results.
Page 21 of 29
<PAGE> 22
OUR OPERATING RESULTS WILL DEPEND IN PART ON THE SUCCESSFUL INTEGRATION OF ENACT
AND FUTURE ACQUISITIONS
In April 1999, we acquired Enact Incorporated, a privately-held provider
of sales configuration technology for managing product catalogs and marketing
encyclopedias and generating proposals, quotes and orders. The process of
integrating the Enact business with our business is subject to risks commonly
encountered in integrating acquisitions, including, among others, risk of loss
of key personnel; difficulties associated with assimilating technologies,
products, personnel and operations; potential disruption of our ongoing
business; the ability of our sales force, business partners, consultants and
development staff to adapt to the new product line and unanticipated costs
associated with the acquisition. We may not successfully overcome these risks or
any other problems encountered in connection with the acquisition of Enact. As
part of our business strategy, we expect to consider acquiring other companies.
In the event of such acquisitions, we could issue equity securities which would
dilute current stockholders' percentage ownership, incur substantial debt or
assume contingent liabilities. Additionally, we may not be able to successfully
integrate any technologies, products, personnel or operations of companies that
we may acquire in the future. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses. If we
are unable to successfully address any of these risks, our business, financial
condition and operating results could be materially adversely affected.
OUR ABILITY TO INCREASE REVENUES WILL DEPEND IN PART ON SUCCESSFUL EXPANSION
OF OUR INTERNATIONAL OPERATIONS
To date, we have sold our products internationally primarily through our
business partners located in other countries and have supported our
international customers with our domestic customer support staff. Recently we
opened a sales office in the United Kingdom and we intend to continue to expand
our international operations and enter new international markets, primarily
through existing and new business partners and, to a lesser extent, through
direct sales. This expansion will require significant management attention and
financial resources and may not produce desired levels of revenue. We currently
have limited experience in marketing and distributing our products
internationally and have not yet developed non-U.S. versions of our products. In
addition, our international business is subject to inherent risks which could
materially and adversely affect our business, financial condition and operating
results, including:
- longer accounts receivable collection cycles;
- difficulties in managing operations across disparate geographic
areas;
- difficulties in enforcing agreements and intellectual property
rights;
- fluctuations in local economic, market and political conditions;
- need for compliance with a wide variety of U.S. and foreign export
regulations;
- potential adverse tax consequences; and
- currency exchange rate fluctuations.
We are still assessing the impact and cost that conversion to the Euro
will have on both our internal systems and the products we sell. We will attempt
appropriate corrective actions based on the results of our assessment. This
issue and its related costs could materially adversely affect our business,
financial condition and operating results.
Page 22 of 29
<PAGE> 23
WE MAY NOT RECOGNIZE REVENUE WHEN ANTICIPATED, WHICH MAY CAUSE OUR OPERATING
RESULTS TO VARY WIDELY
The sales cycles for our products are variable, typically ranging between
a few weeks to six months from initial contact with the customer to the signing
of a license agreement, although occasionally sales require substantially more
time. Delays in executing customer contracts may affect revenue recognition and
may cause our operating results to vary widely. We believe that an enterprise's
decision to purchase sales automation software is discretionary, involves a
significant commitment of its resources and is influenced by its budget cycles.
To successfully sell our products, we and our business partners generally must
educate our potential customers regarding the use and benefit of our products,
which can require significant time and resources. Consequently, the period
between initial contact and the purchase of our products is often long and
subject to delays associated with the lengthy budgeting, approval and
competitive evaluation processes that typically accompany significant capital
expenditures.
OUR ABILITY TO COMPETE EFFECTIVELY DEPENDS UPON THIRD PARTIES CONTINUING TO
DELIVER, SUPPORT AND ENHANCE CURRENT AND NEW VERSIONS OF SOFTWARE INCORPORATED
INTO OUR PRODUCTS
We incorporate into our products software that is licensed to us by third
parties, including Inprise Corporation, Verity, Inc. and IQ Software
Corporation, and we intend to expand this practice in the future. Because our
products incorporate, or are created using, software developed and maintained by
third parties, we depend on such parties' abilities to deliver, support and
enhance reliable products, develop new products and respond to emerging industry
standards and other technological changes. We also rely heavily on Inprise
Corporation's Delphi Rapid Application Development (RAD) tool to build many key
components of our application programs. The RAD tools market is constantly
evolving and highly competitive as Microsoft and other well-financed competitors
develop and market competing tools. If Delphi becomes unavailable, we may be
required to adopt a replacement RAD tool and substantially modify our
application programs, requiring a substantial amount of time to rewrite our
products in a new language, which could have a material adverse effect on our
business, financial condition and operating results. The third-party software
currently incorporated into or used in our products may become obsolete or
incompatible with future versions of our products. Our sales could be materially
adversely affected if we are unable to replace that software with comparable or
better software.
OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS, RESULTING IN ADDITIONAL EXPENSES
OR LOST SALES
Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. In some
cases, we have had to delay commercial release of versions of our products until
software problems were corrected and in some cases have provided product
enhancements to correct errors in released products. Our current and future
products or releases may not be free from errors after commercial shipments have
begun. Any errors that are discovered after commercial release could result in
loss of revenues or delay in market acceptance, diversion of development
resources, damage to our reputation or increased service and warranty costs, all
of which could materially adversely affect our business, financial condition and
operating results.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR AVOID
INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS, WHICH COULD RESULT IN COSTLY
LITIGATION
Our success depends in part on our ability to protect our proprietary
rights. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and obtain and use information that we
regard as proprietary. Other parties may breach confidentiality agreements and
other protective contracts with us and we may not become aware of, or have
adequate remedies in the event of, such breach. To protect our proprietary
rights, we rely primarily on a combination of copyright, patent,
Page 23 of 29
<PAGE> 24
trade secret and trademark laws, confidentiality agreements with employees and
third parties and protective contractual provisions such as those contained in
license agreements with consultants, business partners and customers, although
we have not signed such agreements in every case. We employ shrink-wrap licenses
designed to restrict the unauthorized use of our products but such licenses may
be difficult to enforce. It may be more difficult to protect our proprietary
rights outside the United States. We also cannot assure you that a third party
will not assert a claim that our technology violates its intellectual property
rights. As the number of software products in our markets increases and product
functionalities increasingly overlap, companies such as ours may become
increasingly subject to infringement claims. Any claims relating to the
infringement of proprietary rights of third parties, regardless of their merit,
could result in costly litigation, divert our management's attention and our
company's resources, cause us to delay product shipments or require us to pay
damages or enter into royalty or license agreements on terms that are not
advantageous to us. Any of these results could materially adversely affect our
business, financial condition and operating results.
CHANGES IN ACCOUNTING STANDARDS COULD AFFECT OUR FUTURE OPERATING RESULTS
We recognize revenues from software license agreements based upon the
following criteria:
- persuasive evidence of an arrangement exists, such as an executed
license agreement, unconditional purchase order or contract;
- delivery of the product has occurred;
- collection of the resulting receivable is probable; and
- the fee is fixed or determinable based upon vendor-specific
objective evidence of the elements of the arrangement.
- We recognize customer support or maintenance revenues ratably over
the contract term, typically one year, and recognize revenues for
consulting and training services as such services are performed.
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition,"
was issued in October 1997 by the American Institute of Certified Public
Accountants and amended by Statement of Position 98-4 ("SOP 98-4"). We adopted
SOP 97-2 effective January 1, 1998. Based on our interpretation of SOP 97-2 and
SOP 98-4, we believe our current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4. However, full implementation guidelines
for this standard have not yet been issued. Once available, such implementation
guidance could lead to unanticipated changes in our current revenues accounting
practices, which changes could materially adversely affect our business,
financial condition and operating results.
Additionally, the accounting standard setters, including the Securities
and Exchange Commission and the Financial Accounting Standards Board, are
reviewing the accounting standards related to business combinations and
stock-based compensation. Any changes to either of these standards or any other
accounting standards could materially adversely affect our operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are
short-term. We do not have any derivative instruments.
Page 24 of 29
<PAGE> 25
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. All of the potential changes noted above are based on
sensitivity analysis performed on our balances as of June 30, 1999.
Page 25 of 29
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims that arise
in the conduct of its business. In the opinion of management, the amount of
liability, if any, as a result of these claims and proceedings is not likely to
have a material effect on the financial condition or results of operations of
the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities During the Quarter
During the quarter ended June 30, 1999, SalesLogix issued and sold (i)
83,494 unregistered shares of its common stock to employees pursuant to the
exercise of stock options under its 1996 Equity Incentive Plan in exchange for
an aggregate purchase price of $26,785, (ii) 4,534 unregistered shares of its
common stock to former employees of Opis Corporation pursuant to the exercise of
options assumed by SalesLogix in connection with its acquisition of Opis in
exchange for an aggregate purchase price of $3,854, and (iii) 29,999
unregistered shares of its common stock to its business partners pursuant to the
exercise of stock options under its 1998 Business Partner Stock Option Plan in
exchange for an aggregate purchase price of $23,594. The options were granted in
consideration of these individuals' services to SalesLogix or, in the case of
former employees of Opis, in consideration of services rendered to Opis. In
issuing these securities SalesLogix relied on an exemption from registration
pursuant to Rule 701 under Section 3(b) of the Securities Act.
In connection with its acquisition of Enact Incorporated on April 30,
1999, SalesLogix issued 609,424 shares of its common stock, of which 201,893
shares are restricted subject to three year monthly vesting based upon the
continued employment of former Enact officers. This purchase and sale was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transaction did not involve a public offering.
Concurrent with its initial public offering, SalesLogix issued 402,994
shares of its common stock to The Goldman Sachs Group, L.P. and two affiliates,
all of whom were existing stockholders, in exchange for an aggregate purchase
price of $3.5 million. In connection with this transaction, we paid $126,943 to
Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc. and U.S. Bancorp Piper
Jaffray Inc. as a placement fee. This purchase and sale was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on the
basis that the transaction did not involve a public offering.
(d) Use of Proceeds
On May 28, 1999, SalesLogix's registration statement on Form S-1, file
number 333-75353, became effective and the offering commenced. The offering has
terminated as a result of all of the shares offered being sold. The managing
underwriters were Hambrecht & Quist. LLC, BancBoston Robertson Stephens Inc.,
U.S. Bancorp Piper Jaffray Inc. and Charles Schwab & Co., Inc. The offering
consisted of 3,823,750 shares of SalesLogix common stock, including 498,750
shares of common stock pursuant to the exercise of the underwriters'
over-allotment option. The aggregate price of the shares offered and sold was
approximately $34.4 million. Proceeds to SalesLogix, after accounting for $2.1
million in underwriting discounts and commissions and $1.8 million in other
expenses (including expenses incurred in connection with the concurrent private
placement), were $30.6 million. SalesLogix generated interest income of
approximately $209,000 for the three months ended June 30, 1999.
Page 26 of 29
<PAGE> 27
In July 1999, we used $1.3 million of the net proceeds to retire a bank
term loan and a revolving line of credit. We are using the balance of net
proceeds raised in the initial public offering for general corporate purposes,
including working capital and capital expenditures. We also intend to use these
proceeds for possible acquisitions of businesses, products and technologies or
to establish joint ventures that we believe will complement our current or
future business. Although we engage in discussions and evaluations of potential
opportunities from time to time, there are no current agreements, commitments or
understandings with respect to any such transactions. Pending such uses, the net
proceeds have been and will be invested in investment-grade, interest-bearing
instruments, the majority of which are short term.
None of the net offering proceeds were paid, and none of the initial
public offering expenses related to payments, directly or indirectly, to
officers, directors, or general partners of SalesLogix or their associates,
persons owning 10% or more of any class of our securities, or affiliates of
SalesLogix.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
3.1 Fifth Restated Certificate of Incorporation of the
registrant, incorporated by reference to Exhibit 3.4 to
the registrant's Registration Statement on Form S-1 (No.
333-75353), as amended.
3.2 Second Restated Bylaws of the registrant, incorporated
by reference to Exhibit 3.5 to the registrant's
Registration Statement on Form S-1 (No.
333-75353), as amended.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter covered by this
Form 10-Q.
Page 27 of 29
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SALESLOGIX CORPORATION
Date: August 13, 1999 By: /s/ Gary R. Acord
------------------------------------
Gary R. Acord
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and Chief
Accounting Officer)
Page 28 of 29
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Fifth Restated Certificate of Incorporation of the registrant,
incorporated by reference to Exhibit 3.4 to the registrant's
Registration Statement on Form S-1 (No. 333-75353), as amended.
3.2 Second Restated Bylaws of the registrant, incorporated by reference
to Exhibit 3.5 to the registrant's Registration Statement on Form
S-1 (No. 333-75353), as amended.
27.1 Financial Data Schedule
</TABLE>
Page 29 of 29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 31,989
<SECURITIES> 4,711
<RECEIVABLES> 9,163
<ALLOWANCES> 742
<INVENTORY> 74
<CURRENT-ASSETS> 1,465
<PP&E> 5,123
<DEPRECIATION> 1,826
<TOTAL-ASSETS> 62,241
<CURRENT-LIABILITIES> 9,847
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 51,414
<TOTAL-LIABILITY-AND-EQUITY> 62,241
<SALES> 9,453
<TOTAL-REVENUES> 14,498
<CGS> 725
<TOTAL-COSTS> 3,960
<OTHER-EXPENSES> 14,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (205)
<INCOME-PRETAX> (3,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,739)
<EPS-BASIC> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
