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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-26925
INTERWORLD CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 13-3818716
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<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
395 Hudson Street, 6th Floor
New York, NY 10014-3669
----------------------------
(Address of principal executive offices) (Zip code)
(212) 301-2500
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(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 September 1, 1999 there were 26,960,724 shares of the Registrant's Common
Stock issued and outstanding.
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INTERWORLD CORPORATION
TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 2
Consolidated Statements of Operations for the three and six months
ended June 30, 1999 (unaudited) and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 (unaudited) and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
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 15
SIGNATURES 15
EXHIBIT INDEX 15
</TABLE>
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PART I
Item 1. FINANCIAL STATEMENTS
INTERWORLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,683 $ 858
Accounts receivable - net 5,611 6,153
Prepayments and other current assets 489 497
Deferred offering costs 143 -
-------- --------
TOTAL CURRENT ASSETS 7,926 7,508
-------- --------
Property and equipment, net 7,084 6,070
Other assets 481 541
-------- --------
TOTAL ASSETS $ 15,491 $ 14,119
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 6,944 $ 5,791
Capital lease obligations to related party - current 1,194 1,328
Deferred revenue and customer deposits 2,503 1,024
-------- --------
TOTAL CURRENT LIABILITIES 10,641 8,143
-------- --------
Notes payable to related Party 719 3,229
Capital lease obligations to related party - long term 84 599
Deferred rent 1,231 1,030
-------- --------
TOTAL LIABILITIES 12,675 13,001
-------- --------
</TABLE>
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INTERWORLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Commitments
Mandatorily redeemable
Series A Convertible Preferred Stock ($0.01 par value; 8,200,000 shares
authorized, 7,539,999 issued and outstanding at June 30, 1999 and 47,424 47,334
December 31,1998, respectively)
Mandatorily redeemable
Series B Convertible Preferred Stock ($0.01 par value; 2,500,000 shares
authorized, 1,650,000 issued and outstanding at June 30, 1999) 15,629 -
Stockholders' deficit:
Common stock ($0.01 par value; 35,000,000 shares authorized, 14,158,483 and
14,011,886 issued and outstanding at June 30, 1999 and December
31, 1998, respectively) 141 139
Additional paid-in capital 9,566 6,840
Accumulated deficit (69,944) (53,195)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (60,237) (46,216)
-------- --------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 15,491 $ 14,119
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues, net:
Product licenses $ 5,652 $ 844 $ 10,037 $ 2,390
Services 2,612 950 5,228 1,816
Other 1 - 1 -
-------- -------- -------- --------
TOTAL REVENUES, NET 8,265 1,794 15,266 4,206
-------- -------- -------- --------
Cost of revenues:
Product licenses 343 117 551 189
Services 5,071 1,318 7,827 2,450
Other - - - -
-------- -------- -------- --------
TOTAL COST OF REVENUES 5,414 1,435 8,378 2,639
-------- -------- -------- --------
GROSS PROFIT 2,851 359 6,888 1,567
Operating expenses:
Research and development 4,277 2,093 7,914 4,057
Sales and marketing 5,427 2,582 10,396 4,646
General and administrative 1,860 2,062 3,073 3,487
Noncash employee compensation 618 488 1,738 865
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 12,182 7,225 23,121 13,055
-------- -------- -------- --------
LOSS FROM OPERATIONS (9,331) (6,866) (16,233) (11,488)
Other income (expense):
Interest income 39 139 130 202
Interest expense (293) (130) (588) (215)
-------- -------- -------- --------
TOTAL OTHER INCOME (EXPENSE) (254) 9 (458) (13)
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (9,585) (6,857) (16,691) (11,501)
Income taxes - - (45) -
-------- -------- -------- --------
NET LOSS $ (9,585) $ (6,857) $(16,736) $(11,501)
======== ======== ======== ========
BASIC LOSS PER SHARE AND DILUTED LOSS
PER SHARE $ (0.68) $ (0.50) $ (1.20) $ (0.84)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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INTERWORLD CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
--------
1999 1998
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Cash flows from operating activities:
Net loss $(16,736) $ (11,501)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,495 1,148
Loss on disposition of Capital Expenditures (2) -
Noncash consulting expense 410 47
Noncash employee compensation 1,738 865
Noncash interest expense 524 69
Changes in discontinued operations - (50)
Changes in assets and liabilities:
Accounts receivable - net 542 1,520
Prepaid expenses and other current assets 32 (528)
Deferred offering costs (143) -
Accounts payable and accrued expenses 163 (132)
Deferred revenue and customer deposits 1,479 (241)
Other assets and liabilities 48 70
Deferred rent 201 303
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NET CASH USED IN OPERATING ACTIVITIES (10,249) (8,430)
-------- --------
Cash flows from investing activities:
Capital expenditures (2,531) (626)
Capital expenditures of UGO Networks, Inc. - (464)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,531) (1,090)
Cash flows from financing activities:
Principal payments on capital lease obligations (684) (736)
Proceeds from issuance of Series A preferred stock - 10,080
Proceeds from issuance of Series B preferred stock 16,500 -
Deposits on preferred stock subscriptions - (225)
Proceeds from exercise of common stock options 789 657
Proceeds from notes payable to related party 1,000 -
Payments of notes payable to related party (4,000) -
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,605 9,776
-------- --------
Net increase (decrease) in cash and cash equivalents 825 256
Cash and cash equivalents, beginning of period 858 6,081
-------- --------
Cash and cash equivalents, end of period $ 1,683 $ 6,337
======== ========
Cash paid for:
Interest $ 65 $ 169
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1. BUSINESS
InterWorld Corporation ("InterWorld") is a provider of Internet commerce
software solutions that enable manufacturers, distributors and retailers to
conduct business over the Internet. InterWorld's products, called "Enterprise
Commerce" software, enable companies to build their online businesses and
integrate them with their existing business practices and enterprise systems.
InterWorld derives its revenues from its family of enterprise commerce software
consisting of its Commerce Exchange platform, applications, tools and business
adapters.
NOTE 2. BASIS OF PRESENTATION
The accompanying Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998, the related Consolidated Statements of Operations for the
three and six months ended June 30, 1999 (unaudited) and 1998 (unaudited), the
Consolidated Statements of Cash Flows for the six months ended June 30, 1999
(unaudited) and 1998 (unaudited), and the related Notes to the consolidated
financial statements, have been prepared in conformity with the guidelines set
forth by the Securities and Exchange Commission for quarterly reporting on Form
10-Q. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of
InterWorld and its wholly owned and majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements and the related notes are unaudited and should be
reviewed in conjunction with InterWorld's consolidated financial statements for
the year ended December 31, 1998, as set forth in InterWorld's Registration
Statement on Form S-1 (No. 333-79879). In the opinion of management, the
Consolidated Financial Statements and the related notes included herein present
fairly, in all material respects, the financial position and results of
operations of InterWorld and its wholly owned subsidiaries as of and for the
three and six months ended June 30, 1999. In addition, the stated financial
position and quarterly results of operations are not necessarily indicative of
expected results for future periods.
Accounting Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. At June 30, 1999, InterWorld did not own any derivative
instruments and had not engaged in any hedging activities during the three
months ended June 30, 1999.
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During the six months ended June 30, 1999 and 1998, approximately 15% and 7%,
respectively, of our revenues were generated by our foreign sales offices. At
June 30, 1999, less than 7% of gross receivables were denominated in foreign
currencies. Currently, we do not expect to purchase derivative instruments or
engage in any hedging activities.
NOTE 3. LOSS PER COMMON SHARE
Effective December 31, 1997, InterWorld adopted SFAS No. 128, "Earnings per
Share" ("SFAS 128") which requires presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities
that have publicly traded common stock or common stock equivalents (options,
warrants, convertible securities or contingent stock arrangements). Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period.
The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of common stock equivalents that would have an antidilutive
effect on earnings.
All prior periods presented have been restated for the adoption of SFAS 128. The
computations of basic loss per share and diluted loss per share for the three
and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net loss $ (9,585) $ (6,857) $ (16,736) $ (11,501)
----------- ----------- ----------- -----------
Weighted average shares
outstanding used for basic
loss and diluted loss per share* 14,060,751 13,837,346 13,990,702 13,682,032
Basic loss and diluted loss
per share* $ (0.68) $ (0.50) $ (1.20) $ (0.84)
=========== =========== =========== ===========
</TABLE>
* Common stock equivalents are not included since they would be antidilutive.
At June 30, 1999, outstanding options to purchase 4,555,563 shares of common
stock, with exercise prices ranging from $1.25 to $10.00 per share, and at June
30, 1998 options to purchase 3,488,089 shares of common stock, with exercise
prices ranging from $1.25 to $8.50, have been excluded from the computation of
diluted loss per share as they are antidilutive. At June 30, 1999, outstanding
warrants to purchase 534,070 shares of Series A Convertible Preferred Stock
("Series A Preferred"), with exercise prices ranging from $2.00 to $9.775 per
share and at June 30, 1998 warrants to purchase 430,538 shares of Series A
Preferred with exercise prices ranging from $2.00 to $9.775, are also
antidilutive and have been excluded from the computation of diluted loss per
share at both June 30, 1999 and 1998. Common shares issuable upon conversion of
Series A Preferred and Series B Convertible Preferred Stock ("Series B
Preferred") have also been excluded from the computation of diluted loss per
share at June 30, 1999 and 1998, as they are antidilutive.
NOTE 4. SUBSEQUENT EVENTS
On August 16, 1999, InterWorld completed an initial public offering ("IPO") in
which InterWorld sold 3,000,000 shares of common stock at a price of $15 per
share. The net proceeds from the sale of shares in this offering were
approximately $40.9 million, after deducting underwriting discounts and
commissions and estimated expenses of $1.0 million payable by InterWorld. On
September 1, 1999, InterWorld
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received additional net proceeds of approximately $6.3 million when the
underwriter exercised an option granted to it in connection with this offering
to purchase 450,000 additional shares from InterWorld to cover over-allotments.
Upon the closing of the IPO, all outstanding shares of Series A Preferred and
Series B Preferred automatically converted into an aggregate of 9,189,999 shares
of common stock. The pro forma effects of this conversion and the sale of
3,450,000 shares have been reflected below in the unaudited pro forma Balance
Sheet data at June 30, 1999 and the unaudited pro forma weighted average
earnings per share calculations at the three and six months ended June 30, 1999
and 1998.
Also upon completion of the IPO, previously unvested options to purchase 178,570
shares of common stock have automatically vested. InterWorld recognized
approximately $229 of noncash compensation expense upon the vesting of such
options for the three months ended September 30, 1999.
The following table is a summary of our balance sheet at June 30, 1999:
- on an actual basis; and
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily
redeemable preferred stock into an aggregate of 9,189,999 shares
of common stock and the sale by us of 3,450,000 shares of common
stock in the Company's initial public offering, at a price of
$15.00 per share and after deducting underwriting discounts and
commissions and estimated expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
ACTUAL PRO FORMA
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BALANCE SHEET DATA (In Thousands):
Cash and cash equivalents $ 1,683 $ 48,811
Working capital (2,858) 44,270
Total assets 15,491 62,476
Mandatorily redeemable preferred stock 63,053 -
Total stockholders' equity (deficit) (60,237) 49,944
</TABLE>
The following table summarizes the computations of pro forma basic and diluted
loss per share for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (9,585) $ (6,857) $ (16,736) $ (11,501)
---------- ---------- ---------- ----------
Weighted average shares
outstanding used for basic
loss and diluted loss per
share, pro forma 26,700,750 24,827,345 26,476,005 24,107,457
Basic loss and diluted loss
per share $ (0.36) $ (0.28) $ (0.63) $ (0.48)
========== ========== ========= =========
</TABLE>
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report, on Form 10-Q, contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained herein that are not statements of historical fact maybe
deemed to be forward-looking statements. Forward-looking statements are subject
to a number of risks, uncertainties and assumptions. Among the factors that
could cause actual results to differ significantly from those expressed or
implied by such forward-looking statements are: uncertainties relative to global
economic conditions; the adequacy of our internal administrative systems to
efficiently process transactions, store and retrieve data subsequent to the
year 2000; our reliance on a single family of products for substantially all of
our sales; our need to attract significant new clients on an ongoing basis;
market acceptance of our products; the introduction by our competitors of new or
competing technologies; delays in delivery of new products or features; our
ability to continue to update business application products with international
requirements; our ability to successfully maintain or increase market share in
our core business while expanding our product base into other markets; the
strength of our distribution channels; the ability either internally or through
third-party service providers to support client implementation of our products;
as well as the other factors discussed in this Form 10-Q and in other documents
filed by InterWorld with the SEC, including under the caption "Risk Factors" in
InterWorld's Registration Statement on Form S-1 (no. 333-79879).
INTRODUCTION
The following discussion and analysis should be read in conjunction with
InterWorld's unaudited consolidated financial statements and related notes,
included herein, as well as InterWorld's consolidated financial statements and
related notes for the fiscal year ended December 31, 1998, included in
InterWorld's Registration Statement on Form S-1.
RESULTS OF OPERATIONS
Our operating results will generally depend on the volume and timing of our
product license sales, which are difficult to predict. We plan to increase our
operating expenses to achieve revenue growth. If our revenues do not increase as
anticipated and our spending levels are not reduced accordingly, a significant
decline in quarterly operating results could occur. We expect to experience
fluctuations in quarterly operating results due to many factors, including:
- the size and timing of significant client agreements, which typically
occur near the end of our fiscal quarter, but, if delayed, may not occur
until the next quarter;
- the length of the sales cycle for our products;
- fluctuations in demand for our products;
- the introduction of new products by us or our competitors;
- changes in prices by us or our competition; and
- the timing and amount of expenditures by us.
In addition, we believe, based on general software industry trends, that sales
of our products will typically be highest in the fourth quarter of the year and
lowest in the first quarter. As a result, period-to-period comparisons of our
results of
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operations may not be meaningful, and should not be relied on as an indication
of future performance.
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Total Revenues, Net.
Total revenues, net, include fees from product licenses and services. Total
revenues, net for the quarter ended June 30, 1999 were $8.3 million, an increase
of $6.5 million over total revenues, net for the quarter ended June 30, 1998 of
$1.8 million. This increase is attributable to new licenses for our software
products at higher average fees, as well as providing services to a larger
client base.
Cost of Revenues.
Total cost of revenues increased from $1.4 million for the quarter ended June
30, 1998 to $5.4 million for the quarter ended June 30, 1999, an increase of
$4.0 million. Total cost of revenue as a percent of total revenues decreased
from 80.0% for the quarter ended June 30, 1998 to 65.5% for the same period in
1999, largely as a result of the seven-fold increase in product revenue. Cost of
services revenues increased from $1.3 million in the second quarter of 1998 to
$5.1 million in the second quarter of 1999. Cost of service revenues increased
more rapidly than services revenues because of increased use and training of
systems integration company personnel and, to a lesser extent, the training of
clients and partners.
Research and Development.
Research and development expenses increased $2.2 million, or 104%, from $2.1
million in the second quarter of 1998 to $4.3 million in the second quarter of
1999. This increase was due principally to the addition of personnel to support
the design and development of our products.
Sales and Marketing.
Sales and marketing expenses increased from $2.6 million in the second quarter
of 1998 to $5.4 million in the second quarter of 1999, an increase of $2.8
million. This increase was due primarily to the expansion of our sales and
marketing organizations, higher commissions generally reflecting increased
revenues and expanded marketing activities.
General and Administrative.
General and administrative expenses decreased from $2.1 million to $1.9 million
for the three months ended June 30, 1998 and 1999, respectively. This decrease
was due principally to the costs incurred in 1998 associated with a withdrawn
initial public offering and lower provisions for bad debt in 1999.
Noncash Compensation.
Noncash employee compensation increased from $0.5 million for the quarter ended
June 30, 1998 to $0.6 million for the quarter ended June 30, 1999. This was due
primarily to a below market option grant in February 1999. We estimate that we
will recognize approximately $10.3 million of noncash employee compensation
expense in future periods through January 2004, including approximately $1.5
million during the remainder of 1999.
Total Other Income (Expense).
Other expense for the second quarter of 1999 increased by approximately $0.2
million from the June 1998 quarter. This increase was largely attributable to
interest expense associated with warrants issued in conjunction with our secured
loan agreement.
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SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Total Revenues, Net.
Our total revenues, net increased from $4.2 million for the six months ended
June 30, 1998 to $15.3 million for the six months ended June 30, 1999. This
increase was due to an increased number of new software product licenses at a
higher average fee per client, and to a lesser extent, from the provision of
services to a larger client base. Our prospective clients' Year 2000 projects
may adversely affect demand for our products in the remainder of 1999 and 2000.
Cost of Revenues.
Total cost of revenues increased from $2.6 million for the six months ended June
30, 1998 to $8.4 million for the six months ended June 30, 1999. During the
first six months of 1999, we hired additional professional services personnel
and external consultants. Although cost of revenues as a percentage of total
revenues decreased from 62.7% in 1998 to 54.9% for 1999, our increased use and
training of systems integration companies, which began in the fourth quarter of
1998, has more than tripled our cost of services revenues. We expect that our
use of systems integration companies will continue and that these expenses will
also increase significantly in future periods.
Research and Development.
Research and development expenses increased from $4.1 million for the six months
ended June 30, 1998 to $7.9 million for the six months ended June 30, 1999. This
increase was principally due to the addition of personnel to support the design
and development of our products. We expect to continue to incur significant
research and development expenses in future periods.
Sales and Marketing.
Sales and marketing expenses increased from $4.6 million for the six months
ended June 30, 1998 to $10.4 million for the six months ended June 30, 1999.
This increase was due primarily to the expansion of our sales and marketing
organization and expanded marketing activities, including advertising designed
to increase awareness of our brand. In addition, we had an increase in sales
commissions and other incentive compensation due to our expanding client base.
We expect to continue to incur significant sales and marketing expenses in
future periods.
General and Administrative.
General and administrative expenses decreased from $3.5 million for the six
months ended June 30, 1998 to $3.1 million for the six months ended June 30,
1999. This decrease was largely attributable to $0.5 million of costs in the
first six months of 1998 for a withdrawn initial public offering. We intend to
increase our staffing in all areas to accommodate revenue growth.
Noncash Employee Compensation.
Noncash employee compensation is equal to the difference between the exercise
price of the stock option and the deemed fair market value of our common stock
at the date of grant multiplied by the number of options granted. The charge is
amortized over the vesting period of the options (typically, five years). We
recorded noncash employee compensation of $0.9 million for the six months ended
June 30, 1998 and $1.7 million for the six months ended June 30, 1999.
During the first quarter of 1999, we recognized $0.4 million of noncash
compensation expense related to stock options granted to two consultants at a
discount to deemed fair market value. Of this amount, approximately $0.2 million
was reflected in cost of sales and approximately $0.2 million was reflected in
general
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and administrative expense. Based on the performance of one of these consultants
as determined by our chief executive officer, we could recognize up to
approximately $0.5 million of additional noncash compensation expense in future
periods related to options granted to the consultant.
Total Other Income (Expense).
Other income (expense) consists primarily of interest income earned on cash and
cash equivalents, net of cash and noncash interest expense for leased equipment.
Interest income approximately equaled interest expense for the six months ended
June 30, 1998, while higher borrowings and warrant interest expense associated
with these borrowings for the six months ended June 30, 1999 produced a net
expense of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through approximately
$64.6 million in private sales of mandatorily redeemable preferred stock, all of
which automatically converted to common stock upon consummation of our initial
public offering on August 16, 1999. At June 30, 1999, we had cash and cash
equivalents of $1.7 million and working capital of $(2.9)million.
We have had significant negative cash flows from operating activities to date.
Net cash used in operating activities for six months ended 1999 and 1998 was
$10.2 and $8.4 million, respectively. Net cash used in operating activities in
each of these periods were primarily the result of expenditures for product
development, sales and marketing and infrastructure. For the six months ended
June 30, 1999, our net accounts receivable decreased $0.6 million, from $6.2
million to $5.6 million. This decrease was primarily attributable to an increase
in customer collections, partially offset by increased sales. The increase in
cash and cash equivalents and working capital at June 30, 1999 was largely the
result of the January 1999 issuance of 1,650,000 shares of Series B mandatorily
redeemable preferred stock for an aggregate of $16.5 million in cash.
Net cash used in investing activities consists primarily of capital expenditures
for computer equipment, purchased software, office equipment, furniture,
fixtures and leasehold improvements. Capital expenditures for property and
equipment for the six months ended June 30, 1999 aggregated $2.5 million,
primarily for computer equipment and leasehold improvements. As of June 30,
1999, we also had commitments under noncancelable operating leases of $8.3
million and under noncancelable capital leases of $1.3 million.
Effective May 1998, we amended our secured loan agreement with Comdisco, Inc.,
one of our stockholders that holds warrants to purchase our common stock, under
which our maximum borrowings were increased to $11.0 million. Outstanding
amounts under the loan agreement accrue interest, which is payable monthly, at
a rate of 10% per annum and is secured by our accounts receivable. We may
borrow amounts under the loan agreement for a period of twelve months
subsequent to our initial borrowing under the loan agreement (which occurred in
October 1998) or until completion of our initial public offering, which was
completed on August 16, 1999. Accordingly, no further amounts may be borrowed
under this loan agreement. Subsequent to the initial public offering all
borrowings were repaid.
We believe that our available cash resources, including the net proceeds from
the Company's initial public offering, will be sufficient to meet our working
capital requirements for at least the next twelve months. However, we may need
additional financing to support more rapid growth or to respond to competitive
pressures or unanticipated requirements. Additional financing, if needed, may
not be available on satisfactory terms or at all.
YEAR 2000 COMPLIANCE
12
<PAGE> 14
We assembled an internal task force in June 1998 to evaluate the impact, if any,
of year 2000 issues and implement appropriate steps to ensure year 2000
compliance. The task force commenced a review of our information technology, or
IT, systems and our non-IT systems to identify those systems that could be
materially affected by year 2000 issues. The review focused on the following
categories:
(1) our products,
(2) critical business applications that have been developed internally or
are provided by suppliers and used in our internal business systems,
and
(3) our non-critical business applications that have been developed
internally or are provided by suppliers and used in our internal
business systems.
The review of the first two categories has been completed. Based on this review,
we do not believe that we have material exposure to the year 2000 issue with
respect to our products since our products correctly define the year 2000. We
have also contacted all of our suppliers to assess their year 2000 readiness.
Based on the responses to our questionnaire received from suppliers of critical
externally provided business applications, we do not believe that we have any
material year 2000 exposure. We believe that our critical internal business
systems are either year 2000 compliant, or that the operations performed by
these systems could be performed manually or mechanically if they fail
electronically. We intend to complete our assessment and the replacement or
remediation of the third category, any non-critical business applications, by
September 30, 1999.
Based on the current status of our year 2000 program, the total cost of
effecting year 2000 compliance is not expected to exceed $350,000, of which
$269,000 had been incurred through June 30, 1999. These costs were expensed in
the period incurred and were paid out of working capital. However, we may incur
significant costs if unanticipated year 2000 compliance problems arise. These
unanticipated costs, or our failure to correct any unanticipated year 2000
problems in a timely manner, could have a material adverse effect on our
business, financial condition, results of operations and prospects for growth.
While our products are year 2000 compliant, we have not undertaken, and do not
intend to undertake, any investigation regarding the year 2000 readiness of any
of our clients. Accordingly, we do not know whether our clients' business
systems which they may attempt to integrate with our products are year 2000
compliant. If a client is not able to operate its systems with our products as a
result of year 2000 problems with its systems, we would be adversely affected.
If a major supplier or client fails to convert its systems on a timely basis or
converts in a manner that is incompatible with our systems, our business,
financial condition, results of operations and prospects for growth could be
materially adversely affected.
We believe that year 2000 issues may affect purchasing patterns of our clients
and prospective clients. Many companies are expending significant resources to
upgrade their current software systems to year 2000 functionality. These
expenditures may reduce funds available to purchase software products and
related services such as those offered by us. In addition, year 2000 issues
could cause a significant number of companies, including our clients; to
reevaluate their current software application solutions needs, and in connection
with the reevaluation, select other solutions. Any of the foregoing could have a
material adverse effect on our business, results of operations, financial
condition and prospects for growth.
In addition, there can be no assurance that governmental agencies, utility
companies, banks, Internet access companies, third-party service providers and
others outside our control will be year 2000 compliant. The failure by those
entities to be year 2000 compliant could result in a systemic failure beyond our
control, such as prolonged Internet, telecommunications or electrical failure,
which could decrease the use of the Internet. Furthermore, retailers and other
business-to-consumer users of our products may be unwilling to continue to
license our products if their customers are unable to use their credit cards to
make electronic purchases because of year 2000 problems affecting banks or other
credit card
13
<PAGE> 15
vendors. Any of the foregoing could have a material adverse effect on our
business, results of operations, financial condition and prospects for growth.
Although we are engaged in an ongoing year 2000 assessment, we have not
developed a contingency plan to address the worst-case scenario that might occur
if technologies we are dependent upon are not year 2000 compliant. The
completion of our assessment and the remaining responses to be received from all
suppliers will be taken into account in determining the need for and nature and
extent of any contingency plan. We intend to develop any required contingency
plan by September 30, 1999.
14
<PAGE> 16
PART II
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 4 of the Notes to the Consolidated Financial Statements
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In June 1999, the stockholders gave their written consent to certain
matters in connection with InterWorld's initial public offering,
including but not limited to, (i) the reelection of all of the current
Directors; (ii) the restatement of InterWorld's certificate of
incorporation to, among other things, increase the number of authorized
common stock to 100,000,000 shares and the authorized preferred stock
to 15,000,000 shares; and (iii) the ratification of InterWorld's Stock
Option and Employee Stock Purchase plans.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). The exhibits listed on the Exhibit Index are filed herewith.
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.
INTERWORLD CORPORATION
DATE: September 13, 1999 BY: /s/ Alan Andreini
--------------------- ----------------------------------
Alan Andreini
President, Chief Executive Officer
DATE: September 13, 1999 BY: /s/ Peter Schwartz
--------------------- ----------------------------------
Peter Schwartz
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule for the six-month period ended
June 30, 1999
15
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,683
<SECURITIES> 0
<RECEIVABLES> 6,869
<ALLOWANCES> (1,258)
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<CURRENT-ASSETS> 7,926
<PP&E> 12,675
<DEPRECIATION> (5,591)
<TOTAL-ASSETS> 15,491
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63,053
0
<COMMON> 141
<OTHER-SE> (60,378)
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<TOTAL-REVENUES> 15,266
<CGS> 8,378
<TOTAL-COSTS> 31,499
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<INTEREST-EXPENSE> 458
<INCOME-PRETAX> (16,691)
<INCOME-TAX> 45
<INCOME-CONTINUING> (16,736)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,736)
<EPS-BASIC> (1.20)
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