<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 SEPTEMBER 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 November 9, 1999, there were 18,602,883 outstanding shares of Common
Stock, par value $.001 per share, of SalesLogix Corporation.
<PAGE> 2
SALESLOGIX CORPORATION AND SUBSIDIARIES INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION...............................................1
ITEM 1. FINANCIAL STATEMENTS..........................................1
SALESLOGIX CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS...................................1
SALESLOGIX CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS.........................2
SALESLOGIX CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS.........................3
SALESLOGIX CORPORATION AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.........................................................26
PART II - OTHER INFORMATION.................................................27
ITEM 1. LEGAL PROCEEDINGS............................................27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................27
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALESLOGIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------ ------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,385 $ 11,377
Short-term investments 4,773 --
Accounts receivable, net of allowance for doubtful
accounts of $1,059 and $455 at September 30, 1999
and at December 31, 1998, respectively 9,593 4,570
Prepaid expenses and other current assets 1,251 922
-------- --------
Total current assets 45,002 16,869
Property and equipment, net 4,199 2,544
Other assets 11,284 4,561
-------- --------
$ 60,485 $ 23,974
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,235 $ 1,245
Accrued expenses 3,425 1,774
Current portion of notes payable to bank -- 691
Current portion of capital lease obligations 429 558
Deferred revenues 3,818 1,759
-------- --------
Total current liabilities 9,907 6,027
Notes payable to bank, less current portion -- 783
Capital lease obligations, less current portion 175 458
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, 18,575,313 shares issued and 18,573,646 shares outstanding at
September 30, 1999; 3,228,325 shares issued and
3,226,658 shares outstanding at December 31, 1998 19 3
Class B Common Stock, par value $0.001 per share; 2,280,000 shares -- --
authorized, no shares issued or outstanding at September 30, 1999; 72,827
shares issued and outstanding at December 31, 1998
Additional paid-in capital 75,740 2,282
Accumulated deficit (22,560) (17,377)
Less unearned compensation (2,901) (1,789)
Less shares of common stock held in treasury; 1,667 shares at cost (1) (1)
-------- --------
Total stockholders' equity 50,297 16,600
-------- --------
Total liabilities and stockholders' equity $ 60,485 $ 23,974
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 4
SALESLOGIX CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 6,623 $ 2,583 $ 16,076 $ 6,482
Services 3,500 1,479 8,545 3,756
------------ ------------ ------------ ------------
Total revenues 10,123 4,062 24,621 10,238
------------ ------------ ------------ ------------
Costs of revenues:
Licenses 457 118 1,182 311
Services 2,208 1,120 5,443 3,059
------------ ------------ ------------ ------------
Total costs of revenues 2,665 1,238 6,625 3,370
------------ ------------ ------------ ------------
Gross profit 7,458 2,824 17,996 6,868
Operating expenses:
Sales and marketing 5,477 2,960 13,653 6,733
Research and development 1,700 1,086 4,572 2,715
General and administrative 918 522 2,306 1,624
Amortization of acquisition related intangible
assets 1,161 359 2,307 1,077
In-process research and development write-off -- -- 900 --
------------ ------------ ------------ ------------
Total operating expenses 9,256 4,927 23,738 12,149
------------ ------------ ------------ ------------
Loss from operations (1,798) (2,103) (5,742) (5,281)
Other income (expense):
Interest income 378 166 694 255
Interest expense (24) (65) (135) (198)
Other income, net -- 16 -- 20
------------ ------------ ------------ ------------
Loss before provision for income taxes (1,444) (1,986) (5,183) (5,204)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,444) $ (1,986) $ (5,183) $ (5,204)
============ ============ ============ ============
Historic basic and diluted net loss per share $ (0.08) $ (0.60) $ (0.49) $ (1.32)
============ ============ ============ ============
Pro forma basic and diluted net loss per share $ (0.08) $ (0.15) $ (0.33) $ (0.43)
============ ============ ============ ============
Weighted average shares used in calculating historic
basic and diluted net loss per share 18,559,369 3,302,679 10,540,109 3,941,821
============ ============ ============ ============
Weighted average shares used in calculating pro forma
basic and diluted net loss per share 18,559,369 12,939,994 15,912,393 12,100,565
============ ============ ============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 5
SALESLOGIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,183) $ (5,204)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, including amortization of leased assets 1,262 515
Amortization of acquisition related intangible assets 2,307 1,077
Provision for losses on accounts receivable 1,496 --
Amortization of unearned compensation 335 14
In-process research and development write-off 900 --
Changes in operating assets and liabilities, net of effects from purchase
of Enact Incorporated
Accounts receivable (6,280) (1,570)
Prepaid expenses and other current assets (276) (628)
Accounts payable 858 (69)
Accrued expenses 927 347
Deferred rental obligation -- 43
Deferred revenue 1,747 439
-------- --------
Net cash used in operating activities (1,907) (5,036)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (2,798) (1,100)
Payment for purchase of Enact Incorporated, net of cash acquired (4,833) --
Purchases of investments available for sale (4,773) --
Increase in other assets (9) (87)
-------- --------
Net cash used in investing activities (12,413) (1,187)
-------- --------
FINANCING ACTIVITIES
Net proceeds from initial public offering and concurrent private placement 34,098 --
Repayments under bank term loan (1,474) (228)
Principal payments under capital lease obligations (440) (323)
Net proceeds from issuance of preferred stock -- 15,946
Purchase of stock -- (2,501)
Proceeds from exercise of common stock options 144 139
-------- --------
Net cash provided by financing activities 32,328 13,033
-------- --------
Net increase in cash and cash equivalents 18,008 6,810
Cash and cash equivalents, beginning of period 11,377 3,189
-------- --------
Cash and cash equivalents, end of period $ 29,385 $ 9,999
======== ========
</TABLE>
See accompanying notes.
3
<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 nine months ended
September 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):
4
<PAGE> 7
<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.
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 Nine Months Ended
September 30,
---------------------------
(in thousands, except per
share data)
1999 1998
-------- --------
<S> <C> <C>
Total revenues $24,793 $10,656
======= ========
Net loss (5,679) (6,074)
======= ========
Basic and diluted net loss per share $ (0.54) $ (1.54)
======= ========
</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
5
<PAGE> 8
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 Nine Months Ended
September 30 September 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
United States $ 8,507 $ 3,662 $20,590 $ 9,659
International 1,616 400 4,031 579
------- ------- ------- --------
Total revenues $10,123 $ 4,062 $24,621 $10,238
======= ======= ======= ========
</TABLE>
NOTE 6. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
September 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 3,491 1,436
------- -------
Net intangible assets of acquired businesses 11,179 4,465
Recoverable deposits and other 105 96
------- -------
$11,284 $ 4,561
======= =======
</TABLE>
6
<PAGE> 9
NOTE 7. UNEARNED COMPENSATION
In December 1998, the Company 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 the Company's common stock on the dates of
grant. Unearned compensation is amortized over the vesting periods of the
options, generally four years.
NOTE 8. 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.
7
<PAGE> 10
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 front office and e-commerce
software for mid-market companies. The Company's products create interactive
selling networks that streamline prospect and customer interactions and
dynamically connect mobile sales, internal telesales, third party reseller,
marketing and support organizations.
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 Incorporated, 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.
8
<PAGE> 11
Since inception, we have incurred significant losses and as of
September 30, 1999 we had an accumulated deficit of $22.6 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 77% of license revenues in 1998 and the nine months ended
September 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.
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.
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. The Enact products are 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
9
<PAGE> 12
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 necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Licenses 65.4% 63.6% 65.3% 63.3%
Services 34.6% 36.4% 34.7% 36.7%
------------ ------------ ------------ ------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues:
Licenses 4.5% 2.9% 4.8% 3.0%
Services 21.8% 27.6% 22.1% 29.9%
------------ ------------ ------------ ------------
Total costs of revenues 26.3% 30.5% 26.9% 32.9%
------------ ------------ ------------ ------------
Gross profit 73.7% 69.5% 73.1% 67.1%
Operating expenses:
Sales and marketing 54.1% 72.9% 55.4% 65.8%
Research and development 16.8% 26.7% 18.6% 26.5%
General and administrative 9.1% 12.9% 9.4% 15.9%
Amortization of acquisition related
intangible assets 11.5% 8.8% 9.4% 10.5%
In-process research and development
write-off 0.0% 0.0% 3.6% 0.0%
------------ ------------ ------------ ------------
Total operating expenses 91.5% 121.3% 96.4% 118.7%
------------ ------------ ------------ ------------
Loss from operations (17.8)% (51.8)% (23.3)% (51.6)%
Interest and other income, net 3.5% 2.9% 2.3% 0.8%
=========== =========== =========== ===========
Net loss (14.3)% (48.9)% (21.0)% (50.8)%
=========== =========== =========== ===========
</TABLE>
Revenues
Total revenues increased from $4.1 million in the three months ended
September 30, 1998 to $10.1 million in the three months ended September 30,
1999, an increase of 149%. Total revenues increased from $10.2 million in the
nine months ended September 30, 1998 to $24.6 million in the nine months ended
September 30, 1999, an increase of 140%. No customer accounted for more than 10%
of revenues in the three or nine month periods ended September 30, 1998 and
1999. Our revenues outside of the United States increased from
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<PAGE> 13
approximately $400,000 in the three months ended September 30, 1998 to
approximately $1.6 million in the three months ended September 30, 1999, and
increased from approximately $579,000 in the nine months ended September 30,
1998 to approximately $4.0 million in the nine months ended September 30, 1999.
License Revenues. Our license revenues increased from $2.6 million in
the three months ended September 30, 1998 to $6.6 million in the three months
ended September 30, 1999, an increase of 156%. Revenues from licenses also
increased from $6.5 million in the nine months ended September 30, 1998 to $16.1
million in the nine months ended September 30, 1999, an increase of 148%. The
increases in license revenues were due primarily to increases in the size and
productivity of our business partner network, increased market 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 63.6% and 65.4% of our total
revenues for the three months ended September 30, 1998 and 1999, respectively,
and 63.3% and 65.3% of our total revenues for the nine months ended September
30, 1998 and 1999, respectively.
Service Revenues. Service revenues include fees for maintenance,
technical support, consulting and training services. Our service revenues
increased from $1.5 million in the three months ended September 30, 1998 to $3.5
million in the three months ended September 30, 1999, an increase of 137%.
Revenues from services also increased from $3.8 million in the nine months ended
September 30, 1998 to $8.5 million in the nine months ended September 30, 1999,
an increase of 128%. 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 36.4% and 34.6% of our total
revenues for the three months ended September 30, 1998 and 1999, respectively,
and 36.7% and 34.7% of our total revenues for the nine months ended September
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 $118,000 in the
three months ended September 30, 1998 to $457,000 in the three months ended
September 30, 1999, representing 4.6% and 6.9% of license revenues in the
respective periods. Cost of license revenues increased from $311,000 in the nine
months ended September 30, 1998 to $1.2 million in the nine months ended
September 30, 1999, representing 4.8% and 7.4% of license revenues in the
respective periods. Cost of license revenues increased due to increases in
overall license sales and, to a lesser extent, as a result of increased product
royalties for third-party technology, primarily report writing software,
embedded in our products.
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 September 30,
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<PAGE> 14
1998 to $2.2 million in the three months ended September 30, 1999, representing
75.7% and 63.1% of service revenues in the respective periods. Cost of service
revenues also increased from $3.1 million in the nine months ended September 30,
1998 to $5.4 million in the nine months ended September 30, 1999, representing
81.4% and 63.7% 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 $3.0 million in the three months ended
September 30, 1998 to $5.5 million in the three months ended September 30, 1999,
an increase of 85%. Sales and marketing expenses increased from $6.7 million in
the nine months ended September 30, 1998 to $13.7 million in the nine months
ended September 30, 1999, an increase of 103%. 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 72.9% and 54.1% of our
total revenues for the three months ended September 30, 1998 and 1999,
respectively, and 65.8% and 55.4% of our total revenues for the nine months
ended September 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 $1.1 million in the three
months ended September 30, 1998 to $1.7 million in the three months ended
September 30, 1999, an increase of 57%. Research and development expenses
increased from $2.7 million in the nine months ended September 30, 1998 to $4.6
million in the nine months ended September 30, 1999, an increase of 68%. 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 26.7% and 16.8% of our total
revenues for the three months ended September 30, 1998 and 1999, respectively,
and 26.5% and 18.6% of our total revenues for the nine months ended September
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.
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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 $522,000 in the three months ended
September 30, 1998 to $918,000 in the three months ended September 30, 1999, an
increase of 76%. General and administrative expenses increased from $1.6 million
in the nine months ended September 30, 1998 to $2.3 million in the nine months
ended September 30, 1999, an increase of 42%. 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 12.9% and 9.1% of
our total revenues for the three months ended September 30, 1998 and 1999,
respectively, and 15.9% and 9.4% of our total revenues for the nine months ended
September 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 September 30, 1998 to $1.2 million in the three months ended
September 30, 1999. Amortization of acquisition-related intangible assets
increased from $1.1 million in the nine months ended September 30, 1998 to $2.3
million in the nine months ended September 30, 1999. The increases were
primarily due to the increase in acquisition-related intangible assets related
to the acquisition of Enact in April 1999.
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 capital lease obligations and outstanding notes
payable to a bank. The outstanding notes payable to a bank were paid in full in
July 1999. 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 September 30, 1999, we had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $15.5 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 $8.2 million as of September 30,
1999. A valuation allowance has been
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recorded for the entire net deferred tax asset balance as a result of
uncertainties regarding its utilization.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and cash equivalents of $29.4
million, an increase of $18.0 million from December 31, 1998. Our working
capital at September 30, 1999 was $35.1 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 September 30, 1999, we had no outstanding borrowings
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
September 30, 1999.
Our operating activities resulted in net cash outflows of $5.0 million
in the nine months ended September 30, 1998 and $1.9 million in the nine months
ended September 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 $1.2 million in the nine months
ended September 30, 1998 and $12.4 million in the nine months ended September
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 $13.0 million in the nine
months ended September 30, 1998 and $32.3 million in the nine months ended
September 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, as well as the purchase of stock from a former employee.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we strive to:
- 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.
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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 now completed our assessment of the potential overall impact of
the Year 2000 problem on our products, business, financial condition and
operating results. 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
readiness disclosures, have posted them on our website to advise our customers
and Business Partners, and are completing a new mailing of these disclosures to
our supported customer base and Business Partners, 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 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 calendar quarter 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.
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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. This project is now substantially
complete. 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.
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During the last few weeks 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 have arrived at informal 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 September
30, 1999. As of September 30, 1999, we had an accumulated deficit of
approximately $22.6 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 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 and acquisition efforts and expansion of sales
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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 securities,
the securities could have rights, preferences and privileges senior to holders
of common stock and the terms of the securities 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 acquisition and 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
acquisition and development, and 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.
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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.
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 nine
months ended September 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 77% of license revenues in 1998 and the
nine months ended September 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;
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- 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.
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 would 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
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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 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
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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.
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.
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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.
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.
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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, 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
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<PAGE> 27
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.
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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.
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 September 30, 1999.
26
<PAGE> 29
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 September 30, 1999, SalesLogix issued and sold
(i) 20,231 shares of its common stock registered on Form S-8 to employees
pursuant to the exercise of stock options under its 1996 Equity Incentive Plan
in exchange for an aggregate purchase price of $43,060, (ii) 1,000 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 $1,275, and (iii) 5,167
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 $3,100. 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 the foregoing unregistered securities, SalesLogix relied on an exemption
from registration pursuant to Rule 701 under Section 3(b) of the Securities Act.
(d) Use of Proceeds
On May 27, 1999, SalesLogix's initial public offering registered on
Form S-1, file number 333-75353, became effective. In July 1999, we used $1.3
million of the net proceeds from the offering to retire a bank term loan and
revolving line of credit. During the three month period ending September 30,
1999, we used approximately $1.0 million of the net proceeds from the offering
to purchase office and computer equipment.
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.
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<PAGE> 30
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.
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: November 12, 1999 By: /s/ Gary R. Acord
-------------------------------------
Gary R. Acord
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and Chief
Accounting Officer)
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<PAGE> 31
EXHIBIT INDEX
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
-----------------------------------------------------
29
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