<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, 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)
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<CAPTION>
DELAWARE 86-0808340
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
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 3, 2000, there were 20,042,846 outstanding shares of Common
Stock, par value $.001 per share, of Interact Commerce Corporation.
<PAGE> 2
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES INDEX
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Page
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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. ACQUISITION.................................................................. 4
NOTE 3. EARNINGS PER SHARE........................................................... 4
NOTE 4. NEW PRONOUNCEMENTS........................................................... 5
NOTE 5. SEGMENT INFORMATION.......................................................... 5
NOTE 6. SUBSEQUENT EVENT............................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................ 7
OVERVIEW.............................................................................. 7
RESULTS OF OPERATIONS................................................................. 9
LIQUIDITY AND CAPITAL RESOURCES....................................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 13
PART II OTHER INFORMATION .................................................................................. 15
ITEM 1. LEGAL PROCEEDINGS.................................................................. 15
ITEM 2. USE OF PROCEEDS ................................................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 15
SIGNATURES ................................................................................................... 16
</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>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,509 $ 60,795
Short-term investments 16,759 --
Accounts receivable, net of allowance for doubtful accounts 28,348 12,609
Due from Symantec Corporation -- 5,609
Prepaid expenses and other current assets 4,525 2,953
--------- ---------
Total current assets 60,141 81,966
Property and equipment, net 17,478 9,707
Intangible assets 57,417 72,049
Recoverable deposits and other assets 2,086 1,161
--------- ---------
$ 137,122 $ 164,883
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,992 $ 5,287
Accrued expenses 10,096 3,143
Due to Symantec Corporation 85 --
Current portion of capital lease obligations 1,146 1,083
Current portion of long-term debt 13,569 11,775
Deferred revenues 6,815 10,800
--------- ---------
Total current liabilities 41,703 32,088
Capital lease obligations, less current portion 2,256 2,264
Long-term debt, less current portion 55,533 55,107
Deferred rental obligation 154 106
Stockholders' equity:
Preferred Stock, authorized 20,000,000 shares, no shares issued or
outstanding at September 30, 2000 or December
31, 1999 -- --
Common Stock, par value $0.001 per share; 50,000,000 shares
authorized, 20,001,490 and 19,348,791 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively 20 19
Additional paid-in capital 102,906 102,816
Accumulated deficit (63,512) (24,883)
Foreign currency translation adjustment (79) --
Unearned compensation (1,859) (2,634)
--------- ---------
Total stockholders' equity 37,476 75,318
--------- ---------
Total liabilities and stockholders' equity $ 137,122 $ 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 23,486 $ 6,623 $ 60,206 $ 16,076
Services 6,016 3,500 16,232 8,545
-------- -------- -------- --------
Total revenues 29,502 10,123 76,438 24,621
-------- -------- -------- --------
Costs of revenues:
Licenses 2,509 457 6,889 1,182
Services 4,903 2,208 12,913 5,443
-------- -------- -------- --------
Total costs of revenues 7,412 2,665 19,802 6,625
-------- -------- -------- --------
Gross profit 22,090 7,458 56,636 17,996
Operating expenses:
Sales and marketing 15,849 5,477 41,070 13,653
Research and development 7,371 1,700 19,139 4,572
General and administrative 3,460 918 10,391 2,306
Amortization of acquisition related intangible
assets 5,028 1,161 15,084 2,307
Warrant expense 394 -- 394 --
In-process research and development
write-off -- -- -- 900
-------- -------- -------- --------
Total operating expenses 32,102 9,256 86,078 23,738
-------- -------- -------- --------
Loss from operations (10,012) (1,798) (29,442) (5,742)
Other income (expense):
Interest income (expense), net (2,547) 354 (7,433) 559
Accretion of discount on long-term debt (230) -- (1,754) --
-------- -------- -------- --------
Loss before provision for income taxes (12,789) (1,444) (38,629) (5,183)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $(12,789) $ (1,444) $(38,629) $ (5,183)
======== ======== ======== ========
Historic basic and diluted net loss per share $ (0.64) $ (0.08) $ (1.96) $ (0.49)
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.64) $ (0.08) $ (1.96) $ (0.33)
======== ======== ======== ========
Weighted average shares used in calculating historic
basic and diluted net loss per share 19,960 18,559 19,690 10,540
======== ======== ======== ========
Weighted average shares used in calculating pro forma
basic and diluted net loss per share 19,960 18,559 19,690 15,912
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
INTERACT COMMERCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
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NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(38,629) $ (5,183)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, including amortization of leased assets 4,756 1,262
Amortization of acquisition related intangible assets 15,084 2,307
Provision for losses on accounts receivable 2,960 1,496
Amortization of unearned compensation 324 335
Warrant expense 394 --
Foreign currency translation adjustment (79)
Accretion of debt discount 5,543
In-process research and development write-off -- 900
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (18,700) (6,280)
Due to/from Symantec Corporation 5,694 --
Inventory 265 --
Prepaid expenses and other current assets (1,836) (276)
Accounts payable 4,704 858
Accrued expenses 6,952 927
Deferred revenue (3,986) 1,747
Deferred rental obligation 48 --
-------- --------
Net cash used in operating activities (16,506) (1,907)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (11,446) (2,798)
Payment for purchase of Enact Incorporated, net of cash acquired -- (4,833)
Purchase of investments available for sale (16,759) (4,773)
Increase in other assets (1,131) (9)
-------- --------
Net cash used in investing activities (29,336) (12,413)
FINANCING ACTIVITIES
Net proceeds from initial public offering and concurrent private
placement -- 34,098
Repayments under loan (5,567) (1,474)
Principal payments under capital lease obligations (819) (440)
Proceeds from employee stock purchase plan 1,162 --
Proceeds from exercise of common stock options 780 144
-------- --------
Net cash provided by (used in) financing activities (4,444) 32,328
-------- --------
Net increase/(decrease) in cash and cash equivalents (50,286) 18,008
Cash and cash equivalents, beginning of period 60,795 11,377
-------- --------
Cash and cash equivalents, end of period $ 10,509 $ 29,385
======== ========
Supplemental Cash Flow Information
Assets acquired under capital lease obligations $ 1,322 $ 28
======== ========
Cash paid for interest $ 4,594 $ 135
======== ========
</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") enables
individuals and organizations worldwide to interact more, sell more and grow
faster, by providing a market-leading contact and relationship management
software solutions. The Company's products integrate all aspects of customer
interaction, from mobile sales professionals to support, marketing, accounting
and eBusiness partners. 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 nine months ended September 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. ACQUISITION
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 maximum payments 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 agreed to reimburse the Company.
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 the Company's 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 through October 21, 2000, the Company
managed its business as two segments, software and Internet. The software
segment included the Company's traditional SalesLogix products for sales,
support, and configuration and the ACT! software products acquired on December
31, 1999. The Internet segment included the Company's Interact.com business
operated by Interact Ventures LLC, a wholly owned subsidiary of the Company.
Beginning October 21, 2000, after the elimination of the Internet segment, the
Company operates as a single business segment. 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 nine months ended September 30, 2000.
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THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER SEPTEMBER
30, 2000 30, 2000
------------ -----------
(in thousands; unaudited)
<S> <C> <C>
Software revenues $ 29,502 $ 76,438
Internet revenues -- --
-------- --------
Total segment revenues 29,502 76,438
======== ========
Software profit 4,108 5,084
Internet loss (8,697) (19,047)
-------- --------
Total segment profit (loss) $ (4,589) $(13,963)
======== ========
</TABLE>
5
<PAGE> 8
Total segment profit (loss) reconciles to consolidated loss before taxes for the
three and nine months ended September 30, 2000 as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
(in thousands; unaudited)
<S> <C> <C>
Total segment profit (loss) $ (4,589) $(13,963)
Amounts not allocated to segments
Amortization of acquisition related
intangible assets (5,028) (15,084)
Warrant expense (394) (394)
Interest income 508 1,980
Interest expense (3,056) (9,414)
Accretion of discount on long-term debt (230) (1,754)
-------- --------
Total consolidated loss before taxes $(12,789) $(38,629)
======== ========
</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, New Zealand, India, Korea and
Japan), Singapore (Singapore and other Asia) and Latin America. Information
regarding revenues in different geographic regions is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands; unaudited)
<S> <C> <C> <C> <C>
North America $24,027 $ 8,507 $62,986 $20,590
International 5,475 1,616 13,452 4,031
----- ----- ------ -----
$29,502 $10,123 $76,438 $24,621
======= ======= ======= =======
</TABLE>
NOTE 6. SUBSEQUENT EVENT
On October 21, 2000, the Company announced the elimination of its
Interact.com business. This restructuring eliminated redundant and unnecessary
positions and resulted in a reduction in the Company's workforce of
approximately 13 percent of the Company's employees. The Company will take an
estimated one-time write-off of up to $10.0 million in its fourth quarter 2000
results as a result of the elimination.
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. The Company's products integrate all aspects of customer
interaction, from mobile sales professionals to support, marketing, accounting
and eBusiness partners. The Company's products include ACT! and SalesLogix.
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 certain 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 certain 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 1,471,306 shares of our common
stock at $11.39 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 were 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%.
On October 21, 2000, we discontinued our Interact.com venture. See Note
6 to the Condensed Consolidated Financial Statements.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Licenses 79.6 % 65.4 % 78.8 % 65.3 %
Services 20.4 % 34.6 % 21.2 % 34.7 %
----- ----- ----- -----
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Costs of revenues:
Licenses 8.5 % 4.5 % 9.0 % 4.8 %
Services 16.6 % 21.8 % 16.9 % 22.1 %
----- ----- ----- -----
Total costs of revenues 25.1 % 26.3 % 25.9 % 26.9 %
----- ----- ----- -----
Gross profit 74.9 % 73.7 % 74.1 % 73.1 %
Operating expenses:
Sales and marketing 53.8 % 54.1 % 53.8 % 55.4 %
Research and development 25.0 % 16.8 % 25.0 % 18.6 %
General and administrative 11.7 % 9.1 % 13.6 % 9.4 %
Amortization of acquisition related
intangible assets 17.0 % 11.5 % 19.7 % 9.4 %
Warrant expense 1.3 % 0.0 % 0.5 % 0.0 %
In-process research and development
write-off 0.0 % 0.0 % 0.0 % 3.6 %
----- ----- ----- -----
Total operating expenses 108.8 % 91.5 % 112.6 % 96.4 %
----- ----- ----- -----
Loss from operations (33.9)% (17.8)% (38.5)% (23.3)%
Interest and other income (expense), net (9.4)% 3.5 % (12.0)% 2.3 %
----- ----- ----- -----
Net loss (43.3)% (14.3)% (50.5)% (21.0)%
===== ===== ===== =====
</TABLE>
9
<PAGE> 12
Revenues
Total revenues increased from $10.1 million in the three months ended
September 30, 1999 to $29.5 million in the three months ended September 30,
2000, an increase of 191%. Total revenues increased from $24.6 million in the
nine months ended September 30, 1999 to $76.4 million in the nine months ended
September 30, 2000, an increase of 210%. Our revenues outside of North America
increased from approximately $1.6 million in the three months ended September
30, 1999 to approximately $5.5 million in the three months ended September 30,
2000, and increased from approximately $4.0 million in the nine months ended
September 30, 1999 to approximately $13.5 million in the nine months ended
September 30, 2000. During the three and nine months ended September 30, 2000,
the Company had one customer that accounted for approximately 24% and 16% of
revenue. This customer accounted for approximately 22% of the outstanding
receivables at September 30, 2000. No customer accounted for more than 10% of
revenues for the three or nine months ended September 30, 1999.
License Revenues. Our license revenues increased from $6.6 million in
the three months ended September 30, 1999 to $23.5 million in the three months
ended September 30, 2000, an increase of 255%. Revenues from licenses also
increased from $16.1 million in the nine months ended September 30, 1999 to
$60.2 million in the nine months ended September 30, 2000, an increase of 275%.
License revenues for the three and nine months ended September 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
65.4% and 79.6% of our total revenues for the three months ended September 30,
1999 and 2000, respectively and 65.3% and 78.8% for the nine months ended
September 30, 1999 and 2000, respectively.
Service Revenues. Service revenues include fees for maintenance,
technical support, consulting and training services. Our service revenues
increased from $3.5 million in the three months ended September 30, 1999 to $6.0
million in the three months ended September 30, 2000, an increase of 72%.
Revenues from services also increased from $8.5 million for the nine months
ended September 30, 1999 to $16.2 million in the nine months ended September 30,
2000, an increase of 90%. Service revenues for the three and nine months ended
September 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 34.6% and
20.4% of our total revenues for the three months ended September 30, 1999 and
2000, respectively and represented 34.7% and 21.2% of our total revenues for the
nine months ended September 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 $457,000 in
the three months ended September 30, 1999 to $2.5 million in the three months
ended September 30, 2000, representing 6.9% and 10.7% of license revenues in the
respective periods. Cost of license revenues also increased from $1.2 million in
the nine months ended September 30, 1999 to $6.9 million in the nine months
ended September 30, 2000, representing 7.4% and 11.4% of license revenues in the
respective periods.
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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 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 revenues for the SalesLogix product line for the
three and nine months ended September 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
$2.2 million in the three months ended September 30, 1999 to $4.9 million in the
three months ended September 30, 2000, representing 63.1% and 81.5% of service
revenues in the respective periods. Total cost of services also increased from
$5.4 million in the nine months ended September 30, 1999 to $12.9 million in the
nine months ended September 30, 2000, representing 63.7% and 79.6% 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 maintaining a 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 $5.5 million in the three months ended
September 30, 1999 to $15.8 million in the three months ended September 30,
2000, an increase of 189%. Sales and marketing expenses also increased from
$13.7 million in the nine months ended September 30, 1999 to $41.1 million in
the nine months ended September 30, 2000, an increase of 201%. 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. The increases also reflect the increased promotional activity
related to the Interact.com venture that was discontinued during the fourth
quarter 2000 (see Note 6 to Condensed Consolidated Financial Statements). Sales
and marketing expenses represented 54.1% and 53.8% of our total revenues for the
three months ended September 30, 1999 and 2000, respectively and 55.4% and 53.8%
of our total revenues for the nine months ended September 30, 1999 and 2000,
respectively.
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 $1.7 million in the three
months ended September 30, 1999 to $7.4 million in the three months ended
September 30, 2000, an increase of 334%. Research and development expense
increased from $4.6 million in the nine months ended September 30, 1999 to $19.1
million in the nine months ended September 30, 2000, an increase of 319%. The
increases were primarily due to additional research and development personnel
hired in connection with the ACT! product line acquisition, research and
development for the Interact.com venture that was discontinued during the fourth
quarter 2000 (see Note 6 to Condensed Consolidated Financial Statements), 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
16.8% and 25.0% of our total revenues for the three months ended
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September 30, 1999 and 2000, respectively, and 18.6% and 25.0% of our total
revenues for the nine months ended September 30, 1999 and 2000, respectively .
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 $918,000 in the three months ended
September 30, 1999 to $3.5 million in the three months ended September 30, 2000,
an increase of 277%. General and administrative expenses increased from $2.3
million in the nine months ended September 30, 1999 to $10.4 million in the nine
months ended September 30, 2000, an increase of 351%. 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 the additional costs associated with being a
publicly-held company. General and administrative expenses represented 9.1% and
11.7% of our total revenues for the three months ended September 30, 1999 and
2000, respectively, and 9.4% and 13.6% of our total revenues for the nine months
ended September 30, 1999 and 2000, respectively.
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 $1.2 million in the three
months ended September 30, 1999 to $5.0 million in the three months ended
September 30, 2000. Amortization of acquisition related intangible assets
increased from $2.3 million in the nine months ended September 30, 1999 to $15.1
million in the nine months ended September 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 (Expense), Net. Interest income (expense), net consists
primarily of amounts earned on our cash and short-term investments balances,
offset by interest expense on the debt incurred in conjunction with the
acquisition of the ACT! product line in December 1999. Net interest income of
$354,000 for the three months ended September 30, 1999 decreased to net interest
expense of $2.5 million for the three months ended September 30, 2000. Net
interest income of $559,000 for the nine months ended September 30, 1999
decreased to net interest expense of $7.4 million for the nine months ended
September 30, 2000.
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. A valuation allowance has been recorded for the entire net deferred tax
asset balance as a result of uncertainties regarding its utilization.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash, cash equivalents and short-term
investments of $27.3 million, a decrease of $33.5 million from December 31,
1999. Our working capital at September 30, 2000 was $18.4 million, compared to
$49.9 million at December 31, 1999.
Our operating activities resulted in net cash outflows of $1.9 million
in the nine months ended September 30, 1999, compared to $16.5 million in the
nine months ended September 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 $12.4 million in the nine months
ended September 30, 1999, resulting primarily from the Enact acquisition, and
purchases of investments and capital equipment. Cash used in investing
activities was $29.3 million for the nine months ended September 30, 2000,
resulting primarily from purchases of investments and capital equipment.
Cash provided by financing activities totaled $32.3 million in the nine
months ended September 30, 1999, resulting primarily from net proceeds from the
initial public offering and concurrent private placement. Cash used in financing
activities totaled $4.4 million in the nine months ended September 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 believe that our existing cash and cash equivalents will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures through September 30, 2001.
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 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.
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. Operations in Singapore were added during the third
quarter, with a functional currency of the Singapore Dollar. As such, there is
potential market risk exposure for our future earnings due to changes in
exchange rates. Given the
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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.
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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. USE OF PROCEEDS
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 nine month period
ending September 30, 2000, the Company used approximately $16.5 million of the
net proceeds from the offering to fund working capital needs, approximately
$11.4 million of the net proceeds from the offering to purchase office and
computer equipment, approximately $5.6 million of the net proceeds for principal
payments on a loan, and approximately $800,000 of the net proceeds for payments
on capital lease obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
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.
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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: November 14, 2000 By: /s/ John Harbottle
-------------------------------------------
John Harbottle
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer (Principal
Financial and Chief Accounting Officer)
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EXHIBIT INDEX
NUMBER DESCRIPTION
27.1 Financial Data Schedule
17
