<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, 2000
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
INTERACT COMMERCE 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 July 31, 2000, there were 19,891,966 outstanding shares of Common Stock,
par value $.001 per share, of Interact Commerce Corporation.
<PAGE> 2
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION ........................................... 1
ITEM 1. FINANCIAL STATEMENTS ................................... 1
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS ............ 1
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS ....................................... 2
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS ............................................ 3
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS ....................................... 4
NOTE 1. BASIS OF PRESENTATION ......................... 4
NOTE 2. ACQUISITIONS .................................. 4
NOTE 3. EARNINGS PER SHARE ............................ 4
NOTE 4. NEW PRONOUNCEMENTS ............................ 5
NOTE 5. SEGMENT INFORMATION ........................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................... 7
OVERVIEW 1 ............................................. 7
RESULTS OF OPERATIONS .................................. 9
LIQUIDITY AND CAPITAL RESOURCES ........................ 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ............................................ 14
PART II OTHER INFORMATION ............................................... 15
ITEM 1. LEGAL PROCEEDINGS ...................................... 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .............. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS ................................................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................... 16
SIGNATURES ............................................................... 18
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 34,221 $ 60,795
Short-term investments 7,794
--------- ---------
Accounts receivable, net of allowance for doubtful
accounts of $1,660 and $1,064 at June 30, 2000
and at December 31, 1999, respectively 26,393 12,609
Due from Symantec Corporation 5,580 5,609
Prepaid expenses and other current assets 3,576 2,953
--------- ---------
Total current assets 77,564 81,966
Property and equipment, net 16,194 9,707
Intangible assets 62,295 72,049
Other assets 1,659 1,161
--------- ---------
$ 157,712 $ 164,883
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,381 $ 5,287
Accrued expenses 7,322 3,143
Due to Symantec Corporation 4,096 --
Current portion of capital lease obligations 1,004 1,083
Current portion of long-term debt 13,825 11,775
Deferred revenues 11,704 10,800
--------- ---------
Total current liabilities 48,332 32,088
Capital lease obligations, less current portion 1,768 2,264
Long-term debt, less current portion 55,078 55,107
Deferred rental obligation 126 106
Stockholders' equity:
Preferred Stock, authorized 20,000,000 shares, no
shares issued or outstanding at June 30, 2000 or
December 31, 1999 -- --
Common Stock, par value $0.001 per share; 50,000,000
shares authorized, 19,765,156 and 19,348,791
shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 20 19
Additional paid-in capital 105,270 102,816
Accumulated deficit (50,723) (24,883)
Foreign currency translation adjustment (41) --
Unearned compensation (2,118) (2,634)
--------- ---------
Total stockholders' equity 52,408 75,318
========= =========
Total liabilities and stockholders' equity $ 157,712 $ 164,883
========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 19,549 $ 5,228 $ 36,720 $ 9,453
Services 5,619 2,968 10,216 5,045
-------- -------- -------- --------
Total revenues 25,168 8,196 46,936 14,498
-------- -------- -------- --------
Costs of revenues:
Licenses 2,407 393 4,380 725
Services 4,278 1,884 8,010 3,235
-------- -------- -------- --------
Total costs of revenues 6,685 2,277 12,390 3,960
-------- -------- -------- --------
Gross profit 18,483 5,919 34,546 10,538
Operating expenses:
Sales and marketing 13,327 4,581 25,221 8,176
Research and development 6,581 1,586 11,768 2,872
General and administrative 4,047 801 6,931 1,388
Amortization of acquisition related intangible
assets 5,028 867 10,056 1,146
In-process research and development
write-off -- 900 -- 900
-------- -------- -------- --------
Total operating expenses 28,983 8,735 53,976 14,482
-------- -------- -------- --------
Loss from operations (10,500) (2,816) (19,430) (3,944)
Other income (expense):
Interest income 684 209 1,472 316
Interest expense (3,116) (52) (6,358) (111)
Accretion of discount on long-term debt (785) -- (1,524) --
-------- -------- -------- --------
Loss before provision for income taxes (13,717) (2,659) (25,840) (3,739)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $(13,717) $ (2,659) $(25,840) $ (3,739)
======== ======== ======== ========
Historic basic and diluted net loss per share $ (0.70) $ (0.28) $ (1.32) $ (0.84)
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.70) $ (0.17) $ (1.32) $ (0.26)
======== ======== ======== ========
Weighted average shares used in calculating historic
basic and diluted net loss per share 19,662 9,451 19,552 4,436
======== ======== ======== ========
Weighted average shares used in calculating pro forma
basic and diluted net loss per share 19,662 15,633 19,552 14,567
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(25,840) $ (3,739)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, including amortization of leased assets 2,546 757
Amortization of acquisition related intangible assets 10,056 1,146
Noncash interest and accretion of debt discount 4,729 --
Provision for losses on accounts receivable 2,189 423
Amortization of unearned compensation 216 226
In-process research and development write-off -- 900
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (15,973) (4,034)
Due to/from Symantec Corporation 4,126 --
Prepaid expenses and other current assets (623) (564)
Accounts payable 5,093 928
Accrued expenses 4,198 835
Deferred revenue 904 959
-------- --------
Net cash used in operating activities (8,379) (2,163)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (9,195) (1,390)
Payment for purchase of Enact Incorporated, net of cash acquired
-- (4,711)
Purchase of investments available for sale (7,794) (4,833)
Increase in other assets 214 --
-------- --------
Net cash used in investing activities (16,775) (10,934)
FINANCING ACTIVITIES
Net proceeds from initial public offering and concurrent private
placement -- 34,098
Repayment of loan (2,708) (196)
Principal payments under capital lease obligations (412) (289)
Proceeds from employee stock purchase plan 1,162 --
Proceeds from exercise of common stock options 579 96
-------- --------
Net cash provided by (used in) financing activities (1,379) 33,709
-------- --------
Net increase/(decrease) in cash and cash equivalents (26,533) 20,612
Effect of exchange rate changes on cash (41) --
Cash and cash equivalents, beginning of period 60,795 11,377
-------- --------
Cash and cash equivalents, end of period $ 34,221 $ 31,989
======== ========
Supplemental Cash Flow Information
Assets acquired under capital lease obligations $ 285 $ --
======== ========
Cash paid for interest $ 2,382 $ 111
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Interact Commerce Corporation (the "Company" or "Interact") is a
leading provider of front office and e-commerce software for individuals, small
businesses and 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. Prior to April 26, 2000, the Company was
known as SalesLogix Corporation.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared on substantially the same basis as the
Company's 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 its financial position,
results of operations and cash flows. The results of operations for the three
and six months ended June 30, 2000, are not necessarily indicative of the
results to be expected for the year ending December 31, 2000. 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 our Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
NOTE 2. ACQUISITIONS
On December 31, 1999, the Company acquired the ACT! product line and
related business from Symantec Corporation pursuant to an agreement dated
December 6, 1999, as amended and closed on December 31, 1999. Under the terms of
the agreement, we acquired an exclusive, worldwide license to ACT! and an option
to purchase the product line at the end of the four year license term for an
aggregate purchase price of $60.0 million in cash, plus 623,247 shares of the
Company's common stock valued at $20.0 million. The Company is accounting for
the transaction using the purchase method of accounting. Amounts due to Symantec
are based on a contractual formula and are subject to maximums of $5.0 million
per quarter in 2000, $4.25 million per quarter in 2001, $2.75 million per
quarter in 2002, and $2.25 million per quarter in 2003. The maximum quarterly
payment amounts total $57.0 million, and the Company believes the limits will be
reached in each quarter during the four year term of the agreement. The final
payment is equal to $60.0 million less amounts previously paid. The cash portion
of the purchase price has been discounted at 22.4% to reflect the Company's
incremental borrowing rate in a simultaneous third party borrowing transaction.
The Company has also assumed certain deferred revenue obligations for which
Symantec will provide reimbursement.
NOTE 3. EARNINGS PER SHARE
Earnings per share is computed in accordance with SFAS No. 128,
"Earnings per Share" as well as Staff Accounting Bulletin No. 98, which covers
the determination of and accounting for "cheap stock" in periods prior to an
initial public offering. Basic earnings per share is computed using the weighted
average number of common shares. 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 stock options and warrants
using the treasury method and dilutive convertible securities using the
if-converted method.
4
<PAGE> 7
Pro forma net loss per share presented in the consolidated statements
of operations has been computed as described above, but also gives effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock upon the closing of the Company's initial public offering (determined
using the if-converted method).
NOTE 4. NEW PRONOUNCEMENTS
In June 1998, Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
The Company adopted SFAS 133 on January 1, 2000. SFAS 133 requires the Company
to recognize all derivatives on the balance sheet at fair value. The adoption of
SFAS 133 did not have a significant effect on its results of operations or
financial position.
NOTE 5. SEGMENT INFORMATION
Prior to January 1, 2000, the Company operated as a single business
segment. Beginning on January 1, 2000, the Company manages its business as two
segments, software and Internet. The software segment includes the Company's
traditional SalesLogix products for sales, support, and configuration and the
ACT! software products acquired on December 31, 1999. The Internet segment
includes the Company's new Interact.com business operated by Interact Ventures
LLC, a wholly owned subsidiary of the Company. The Company evaluates performance
based on profit or loss before charges for amortization of acquisition related
intangible assets and net interest costs. Segment information is as follows for
the three and six months ended June 30, 2000.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 2000
------------- -------------
(in thousands)
<S> <C> <C>
Software $ 25,168 $ 46,936
Internet -- --
-------- --------
Total segment revenues 25,168 46,936
======== ========
Software 548 976
Internet (6,020) (10,350)
======== ========
Total segment profit (loss) $ (5,472) $ (9,374)
======== ========
</TABLE>
5
<PAGE> 8
Total segment profit (loss) reconciles to consolidated loss before taxes for the
three and six months ended June 30, 2000 as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 2000
------------- -------------
(in thousands)
<S> <C> <C>
Total segment profit (loss) $ (5,472) $ (9,374)
Amounts not allocated to segments
Amortization of acquisition related
intangible assets (5,028) (10,056)
Interest income 684 1,472
Interest expense (3,116) (6,358)
Accretion of discount on long-term debt (785) (1,524)
======== ========
Total consolidated loss before taxes $(13,717) $(25,840)
======== ========
</TABLE>
The Company licenses and markets its products through direct and
indirect channels in North America (United States and Canada), EMEA (Europe,
Middle East, and Africa), Asia-Pacific (Australia and Asia) and Latin America.
Information regarding revenues in different geographic regions is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
--------------------- ---------------------
(in thousands)
<S> <C> <C> <C> <C>
North America $20,670 $ 6,661 $38,959 $12,083
International 4,498 1,535 7,977 2,415
------- ------- ------- -------
$25,168 $ 8,196 $46,936 $14,498
======= ======= ======= =======
</TABLE>
6
<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, our
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 "Risk Factors," "Business" and
elsewhere in our Securities and Exchange Commission filings, including our
Annual Report on Form 10-K for the year ended December 31, 1999.
OVERVIEW
Interact Commerce Corporation (the "Company" or "Interact") enables
individuals and organizations worldwide to interact more, sell more and grow
faster, by providing a market-leading contact and relationship management
software solutions integrated into an interactive selling network. The Company's
products integrate all aspects of the selling process, from mobile sales
professionals to support, marketing, accounting and eBusiness partners. The
Company's products include ACT!, SalesLogix, and the Interact.com business
operated by Interact Ventures LLC, a wholly owned subsidiary of the Company.
Prior to April 26, 2000, the Company was known as SalesLogix
Corporation. The Company 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 initial
development of our independent business partner channel. In April 1997, we
released the first commercial version of SalesLogix, our client-server based
sales automation solution.
In December 1997, we acquired Opis Corporation, a company engaged in
the development, marketing, and selling of customer support software primarily
to mid-sized organizations. 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. 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 capitalized
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. 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 officers of Enact.
We paid $4.2 million in cash for merger consideration, plus transaction expenses
and repayment of Enact's debt. 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
capitalized 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.
7
<PAGE> 10
Through December 31, 1999, we derived revenues principally from the
sale of software licenses for our SalesLogix line of products and related 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. 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 sell our SalesLogix line of 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.
On December 31, 1999, we acquired the ACT! product line and related
business from Symantec Corporation pursuant to an agreement dated December 6,
1999, as amended and closed on December 31, 1999. Under the terms of the
agreement, we acquired an exclusive, worldwide license to ACT! and an option to
purchase the product line at the end of the four year license term for an
aggregate purchase price of $60.0 million in cash, plus 623,247 shares of the
Company's common stock valued at $20.0 million. The transaction was recorded
under the purchase method of accounting and the results of operations of ACT!
and the fair value of the assets acquired and liabilities assumed are included
in our consolidated financial statements beginning on December 31, 1999. In
connection with this acquisition, we recorded approximately $61.9 million in
capitalized technology and other intangible assets that will be amortized over
four years. The cash portion of the purchase price has been discounted at 22.4%
to reflect the Company's borrowing rate in a simultaneous third party
transaction.
ACT! is a shrink-wrapped product that is sold through a two-tier retail
distribution channel. We recognize ACT! revenue upon persuasive evidence of an
arrangement, delivery of software to the customer, determination that there are
no significant post-delivery obligations, and a probable collection of a fixed
or determinable fee. Product revenue related to all distribution channel
inventory in excess of defined in inventory levels in such channels will be
deferred. Revenue related to significant post-contract support agreements
(generally product maintenance and upgrade insurance) will be deferred and
recognized over the period of the arrangement.
On December 31, 1999, we received net proceeds of $25.9 million from
the sale of senior subordinated debt. We paid a 1% commitment fee on the
subordinated debt and issued warrants to purchase 841,107 shares of our common
stock at $28.75 per share to the lenders. The fair value of these warrants,
determined using the Black Scholes method, as well as the commitment fee, have
been recorded as a discount to the debt and will be amortized to interest
expense using the interest method over the term of the loan. The first two
interest payments may be made "in kind" by increasing the principal balance by
the amount of interest due. The effective interest rate on the subordinated
debt, including amortization of this discount, is 22.4%.
In December 1999, we announced the development of Interact.com. When
released, Interact.com will provide fully Web-enabled interaction between
Interact and our ACT! and SalesLogix applications. The combination will offer
relevant e-business services in-context of application used for contact,
account, and opportunity management. We believe these combinations enable
interactive selling network solutions for individuals, organizations of any
size, and vertical communities.
8
<PAGE> 11
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.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Licenses 77.7% 63.8% 78.2% 65.2%
Services 22.3% 36.2% 21.8% 34.8%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues:
Licenses 9.6% 4.8% 9.3% 5.0%
Services 17.0% 23.0% 17.1% 22.3%
----- ----- ----- -----
Total costs of revenues 26.6% 27.8% 26.4% 27.3%
----- ----- ----- -----
Gross profit 73.4% 72.2% 73.6% 72.7%
Operating expenses:
Sales and marketing 52.9% 55.8% 53.7% 56.4%
Research and development 26.1% 19.3% 25.1% 19.8%
General and administrative 16.1% 9.8% 14.8% 9.6%
Amortization of acquisition related
intangible assets 20.0% 10.6% 21.4% 7.9%
In-process research and development
write-off 0.0% 11.0% 0.0% 6.2%
----- ----- ----- -----
Total operating expenses 115.1% 106.5% 115.0% 99.9%
----- ----- ----- -----
Loss from operations (41.7)% (34.3)% (41.4)% (27.2)%
Interest and other income (expense), net (12.8)% 1.9% (13.7)% 1.4%
----- ----- ----- -----
Net loss (54.5)% (32.4)% (55.1)% (25.8)%
===== ===== ===== =====
</TABLE>
9
<PAGE> 12
Revenues
Total revenues increased from $8.2 million in the three months ended
June 30, 1999 to $25.2 million in the three months ended June 30, 2000, an
increase of 207%. Total revenues increased from $14.5 million in the six months
ended June 30, 1999 to $46.9 million in the six months ended June 30, 2000, an
increase of 224%. Our revenues outside of North America increased from
approximately $1.5 million in the three months ended June 30, 1999 to
approximately $4.5 million in the three months ended June 30, 2000, and
increased from approximately $2.4 million in the six months ended June 30, 1999
to approximately $8.0 million in the six months ended June 30, 2000. During the
three and six months ended June 30, 2000, the Company had one customer that
accounted for approximately 22% and 12% of revenue. This customer accounted for
approximately 26% of the outstanding receivables at June 30, 2000. No customer
accounted for more than 10% of revenues for the three or six months ended June
30, 1999.
License Revenues. Our license revenues increased from $5.2 million in
the three months ended June 30, 1999 to $19.5 million in the three months ended
June 30, 2000, an increase of 274%. Revenues from licenses also increased from
$9.5 million in the six months ended June 30, 1999 to $36.7 million in the six
months ended June 30, 2000, an increase of 288%. License revenues for the three
and six months ended June 30, 2000 include ACT! revenues since December 31,
1999, the date of closing. The increase in license revenues was due primarily to
the acquisition of ACT! Excluding ACT!, the increase was due primarily to
increases in the size and productivity of our business partner network,
increased market awareness and acceptance of our products and the growth of our
direct sales force. License revenues represented 63.8% and 77.7% of our total
revenues for the three months ended June 30, 1999 and 2000, respectively and
65.2% and 78.2% for the six months ended June 30, 1999 and 2000, respectively.
Service Revenues. Service revenues include fees for maintenance,
technical support, consulting and training services. Our service revenues
increased from $3.0 million in the three months ended June 30, 1999 to $5.6
million in the three months ended June 30, 2000, an increase of 89%. Revenues
from services also increased from $5.0 million for the six months ended June 30,
1999 to $10.2 million in the six months ended June 30, 2000, an increase of
103%. Service revenues for the three and six months ended June 30, 2000 include
ACT! revenues since December 31, 1999, the date of closing. The increase in
service revenues 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. 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. The increase in service revenues was also due to the acquisition of
ACT! Our service revenues represented 36.2% and 22.3% of our total revenues for
the three months ended June 30, 1999 and 2000, respectively and represented
34.8% and 21.8% of our total revenues for the six months ended June 30, 1999 and
2000, 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. Total cost of license revenues increased from $393,000 in
the three months ended June 30, 1999 to $2.4 million in the three months ended
June 30, 2000, representing 7.5% and 12.3% of license revenues in the respective
periods. Cost of license revenues also increased from $725,000 in the six months
ended June 30, 1999 to $4.4 million in the six months ended June 30, 2000,
representing 7.7% and 11.9% of license revenues in the respective periods.
Cost of license revenues increased primarily as a result of the
acquisition of ACT! Excluding ACT!, cost of license revenues increased due to
product royalties for third-party technology, primarily
10
<PAGE> 13
report writing software, embedded in our products and, to a lesser extent, due
to increases in overall license sales. ACT! cost of license revenue is higher as
a percentage of license revenue than costs of license for the SalesLogix product
line for the three and six months ended June 30, 2000 due to higher
manufacturing and packaging costs of ACT!, and we expect this trend to continue.
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. Total cost of service revenues increased from
$1.9 million in the three months ended June 30, 1999 to $4.3 million in the
three months ended June 30, 2000, representing 63.5% and 76.1% of service
revenues in the respective periods. Total cost of services also increased from
$3.2 million in the six months ended June 30, 1999 to $8.0 million in the six
months ended June 30, 2000, representing 64.1% and 78.4% of services revenue in
the respective periods. The absolute dollar increases in cost of service revenue
were primarily attributable to hiring and training of additional personnel to
support our growing customer base and business partner network and the cost of
establishing and maintaining a new telephone support center for the ACT! product
line. The increase as a percentage of service revenues primarily reflects the
high fixed costs of the ACT! telephone support center.
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 $4.6 million in the three months ended
June 30, 1999 to $13.3 million in the three months ended June 30, 2000, an
increase of 191%. Sales and marketing expenses also increased from $8.2 million
in the six months ended June 30, 1999 to $25.2 million in the six months ended
June 30, 2000, an increase of 208%. 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 the incremental advertising, promotions, and
headcount costs associated with the acquisition of the ACT! product line. Sales
and marketing expenses represented 55.8% and 52.9% of our total revenues for the
three months ended June 30, 1999 and 2000, respectively and 56.4% and 53.7% of
our total revenues for the six months ended June 30, 1999 and 2000,
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 $1.6 million in the three
months ended June 30, 1999 to $6.6 million in the three months ended June 30,
2000, an increase of 315%. Research and development expense increased from $2.9
million in the six months ended June 30, 1999 to $11.8 million in the six months
ended June 30, 2000, an increase of 310%. The increases were primarily due to
additional research and development personnel hired in connection with the ACT!
product line acquisition, research and development efforts for the new
Interact.com business that is currently under development, and 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 upgrades to our SalesLogix and
ACT! lines of software products. Research and development expenses represented
19.3% and 26.1% of our total revenues for the three months ended June 30, 1999
and 2000, respectively, and 19.8% and 25.1% of our total revenues for the six
months ended June 30, 1999 and 2000, respectively . We anticipate that we will
continue to invest significantly in research and development and that these
expenses will increase in absolute dollars.
11
<PAGE> 14
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 $801,000 in the three months ended June
30, 1999 to $4.0 million in the three months ended June 30, 2000, an increase of
405%. General and administrative expenses increased from $1.4 million in the six
months ended June 30, 1999 to $6.9 million in the six months ended June 30,
2000, an increase of 399%. This increase was primarily due to increased staffing
and related expenses necessary to manage and support the expansion of our
operations, additional headcount added to support the ACT! products and
Interact.com business, and the additional costs associated with being a
publicly-held company. General and administrative expenses represented 9.8% and
16.1% of our total revenues for the three months ended June 30, 1999 and 2000,
respectively, and 9.6% and 14.8% of our total revenues for the six months ended
June 30, 1999 and 2000, respectively. 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 to support our new lines of
business and our rapid international expansion.
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 $867,000 in the three
months ended June 30, 1999 to $5.0 million in the three months ended June 30,
2000. Amortization of acquisition related intangible assets increased from $1.1
million in the six months ended June 30, 1999 to $10.1 million in the six months
ended June 30, 2000. The increase was primarily due to the increase in
acquisition-related intangible assets related to the acquisitions of ACT! in
December 1999 and Enact in April 1999.
In-Process Research and Development Write-Off. The in-process research
and development write-off related to the acquisition of Enact in April 1999. The
amount of the write-off was determined through an independent appraisal.
Interest Income. Interest income consists primarily of amounts earned
on our cash and short-term investments balances. Interest income increased from
$209,000 for the three months ended June 30, 1999 to $684,000 for the three
months ended June 30, 2000. Interest income increased from $316,000 in the six
months ended June 30,1 1999 to $1.5 million in the six months ended June 30,
2000. The increases were primarily due to earnings on the net proceeds of our
initial public offering and concurrent private placement in May 1999 and the
senior subordinated debt in December 1999.
Interest Expense. Interest expense increased from $52,000 in the three
months ended June 30, 1999 to $3.1 million in the three months ended June 30,
2000. Interest expense increased from $111,000 in the six months ended June 30,
1999 to $6.4 million in the six months ended June 30, 2000. The increases were
primarily due to interest expense on the debt incurred in the conjunction with
the acquisition of ACT! in December 1999.
Accretion of Discount on Long-Term Debt. Accretion of discount on
long-term debt represents the accretion of the discount on the senior
subordinated debt incurred in conjunction with the acquisition of ACT! in
December 1999.
Income Taxes. As of December 31, 1999, we had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $15.0 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 $7.5 million as of December 31,
1999.
12
<PAGE> 15
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, 2000, we had cash, cash equivalents and short-term
investments of $42.0 million, a decrease of $18.8 million from December 31,
1999. Our working capital at June 30, 2000 was $29.2 million, compared to $49.9
million at December 31, 1999.
Our operating activities resulted in net cash outflows of $2.2 million
in the six months ended June 30, 1999, compared to $8.4 million in the six
months ended June 30, 2000. The operating cash outflows resulted primarily from
significant investments in sales, marketing and product development, which led
to operating losses.
Cash used in investing activities was $10.9 million in the six months
ended June 30, 1999, resulting primarily from the Enact acquisition, and
purchases of investments and capital equipment. Cash used in investing
activities was $16.8 million for the six months ended June 30, 2000, resulting
primarily from purchases of investments and capital equipment.
Cash provided by financing activities totaled $33.7 million in the six
months ended June 30, 1999, resulting primarily from net proceeds form the
initial public offering and concurrent private placement. Cash used in financing
activities totaled $1.4 million in the six months ended June 30, 2000, resulting
primarily from payments on capital equipment leases and a loan offset by
proceeds from the exercise of stock options and the employee stock purchase
plan.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we strive to:
- implement our new e-business strategy;
- integrate and expand the ACT! products;
- 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 will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures through December 31, 2000.
We require substantial capital to fund our business, particularly to
finance international expansion 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
13
<PAGE> 16
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 our 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 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 the necessary 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 e-business strategy depends in part upon maintaining the demand for
the existing ACT! products and capturing a significant percentage of the ACT!
user base as subscribers to our new Interact.com subscription products. If we
are not successful in maintaining revenues from the ACT! products and customer
base, or in transitioning the ACT! user base to our Web-based services, our
financing needs may accelerate. Accordingly, we may seek additional financing
through a private placement of debt and/or equity securities, and/or a secondary
public offering of our common stock as early as in the third quarter of 2000,
market and other conditions permitting. Although we believe that such financing
alternatives will be available, there is no assurance that financing will be
available on reasonable business terms or terms acceptable to us, or that market
conditions will permit any secondary public offering on terms acceptable to us.
In addition, issuing additional equity securities will dilute current
stockholders' percentage ownership, and incurring substantial debt may impose
restrictions that could disrupt our ongoing business and increase our expenses.
If we are unable to obtain sufficient financing on terms acceptable to us or at
all, our business, financial condition and operating results would be materially
adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to market risk arises from foreign currency
exchange risk associated with our international operations and foreign currency
exchange risk associated with our U.S. sales made in foreign currency. We do not
currently use, nor have we historically used, derivative financial instruments
to manage or reduce market risk.
Beginning January 1, 2000 the functional currencies for our European,
German, and Australian operations are Pounds Sterling, Euro, and Australian
dollars, respectively. As such, there is potential market risk exposure for our
future earnings due to changes in exchange rates. Given the relatively short
duration of our international monetary assets and liabilities, the relative
stability of these currencies compared to the U.S. dollar, and the relative size
of our international operations, we consider this exposure to be minimal. We
believe that a 10% change in exchange rates would not have a significant impact
on our future earnings.
Our cash equivalents are exposed to financial market risk, including
changes in interest rates. We typically do not attempt to reduce or eliminate
our market exposures on these investment securities because of their short-term
duration. We believe that 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.
14
<PAGE> 17
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, 2000, Interact issued and sold (i)
6,286 unregistered shares of its common stock to former employees of Opis
Corporation pursuant to the exercise of options assumed by Interact in
connection with its acquisition of Opis in exchange for an aggregate purchase
price of $8,046, and (ii) 333 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 $2,997. The options were granted in consideration of these individuals'
services to Interact or, in the case of former employees of Opis, in
consideration of services rendered to Opis. In issuing these securities.
Interact 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, the Company's initial public offering registered on
Form S-1, file number 333-75353, became effective. During the six month period
ending June 30, 2000, the Company used approximately $8.4 million of the net
proceeds from the offering to fund working capital needs, approximately $9.2
million of the net proceeds from the offering to purchase office and computer
equipment, approximately $2.7 million of the net proceeds for principal payments
on a loan, and approximately $400,000 of the net proceeds for payments on
capital lease obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on April 3, 2000 to act on
the following matters:
1. To approve an amendment to the Company's Fifth Restated Certificate
of Incorporation to change the Company's name from SalesLogix Corporation to
Interact Commerce Corporation. The votes cast for and against this amendment
were 16,529,594 and 9,967 respectively, with 3,552 abstaining, which was
sufficient to approve the amendment.
2. To approve an amendment to the Company's Amended and Restated 1996
Equity Incentive Plan to (a) increase the aggregate number of shares of Common
Stock authorized for issuance under the plan by 1,800,000 shares, from 4,500,000
shares to 6,300,000 shares, and (b) to qualify equity-based compensation under
the plan for the performance-based compensation exception under Internal Revenue
Code Section 162(m). The votes cast for and against this amendment were
10,878,682 and 4,016,583 respectively, with 4,693 abstaining, which was
sufficient to approve the amendment.
The Annual Meeting of Stock holders was held on June 20, 2000 to act on
the following matters:
15
<PAGE> 18
1. To elect the six members of the board of directors of the Company.
The votes cast for and against the election of directors was:
<TABLE>
<CAPTION>
FOR ABSTAIN
--- -------
<S> <C> <C>
Stephen L. Hanson 14,211,352 6,400
John B. Carrington 14,211,352 6,400
Anthony P. Morris 13,992,352 225,400
David Schwab 14,216,352 1,400
Deepak Kamra 14,216,352 1,400
Patrick M. Sullivan 14,216,352 1,400
</TABLE>
2. To ratify the selection of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31, 2000. The votes
cast for and against this proposal were 14,207,215 and 6,522 respectively, with
4,015 abstaining, which was sufficient to ratify the selection.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<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 Amendment No. 1 to Fifth Restated Certificate of Incorporation,
effective April 24, 2000, incorporated by reference to Exhibit
3.2 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
3.3 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.
10.1 Commercial Lease Agreement dated January 19, 2000 between the
registrant and Nova CCOP, Inc., incorporated by reference to
Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
10.2 Office Lease dated February 3, 2000 between the registrant and
Century San Jose, LLC, incorporated by reference to Exhibit
10.2 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
10.3 Credit Agreement dated April 27, 2000 between the registrant
and Imperial Bank, incorporated by reference to Exhibit 10.3 to
the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000.
10.4 Security Agreement dated April 27, 2000 between the registrant
and Imperial Bank, incorporated by reference to Exhibit 10.4 to
the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000.
10.5 Revolving Promissory Note dated April 27, 2000 between the
registrant and Imperial Bank, incorporated by reference to
Exhibit 10.5 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
10.6 Master Lease Agreement dated February 28, 2000, as amended and
modified, between the registrant and Imperial Bank,
incorporated by reference to Exhibit 10.6 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
27.1 Financial Data Schedule
</TABLE>
16
<PAGE> 19
(b) REPORTS ON FORM 8-K
On May 9, 2000, the registrant filed a report on Form 8-K to announce
the appointment of John Harbottle as the registrant's new Chief Financial
Officer.
17
<PAGE> 20
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.
INTERACT COMMERCE CORPORATION
Date: August 11, 2000 By: /s/ John Harbottle
----------------------------------------
John Harbottle
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer (Principal
Financial and Chief Accounting Officer)
18
<PAGE> 21
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 Amendment No. 1 to Fifth Restated Certificate of Incorporation,
effective April 24, 2000, incorporated by reference to Exhibit
3.2 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
3.3 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.
10.1 Commercial Lease Agreement dated January 19, 2000 between the
registrant and Nova CCOP, Inc., incorporated by reference to
Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
10.2 Office Lease dated February 3, 2000 between the registrant and
Century San Jose, LLC, incorporated by reference to Exhibit
10.2 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
10.3 Credit Agreement dated April 27, 2000 between the registrant
and Imperial Bank, incorporated by reference to Exhibit 10.3 to
the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000.
10.4 Security Agreement dated April 27, 2000 between the registrant
and Imperial Bank, incorporated by reference to Exhibit 10.4 to
the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000.
10.5 Revolving Promissory Note dated April 27, 2000 between the
registrant and Imperial Bank, incorporated by reference to
Exhibit 10.5 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
10.6 Master Lease Agreement dated February 28, 2000, as amended and
modified, between the registrant and Imperial Bank,
incorporated by reference to Exhibit 10.6 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
27.1 Financial Data Schedule
</TABLE>
19
