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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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-26925
INTERWORLD CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3818716
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
395 Hudson Street, 6th Floor
New York, NY 10014-3669
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(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 July 31, 2000, there were 29,181,112 shares of the registrant's Common
Stock issued and outstanding.
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<PAGE>
INTERWORLD CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 2
Consolidated Statements of Operations for the three and six months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 (unaudited) and 1999 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 14
1
<PAGE>
PART I
Item 1. FINANCIAL STATEMENTS
INTERWORLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,925 $ 21,583
Short-term investments 14,434 17,986
Accounts receivable (net of allowance for
doubtful accounts of $1,537 and $1,256
at June 30, 2000 and December 31, 1999,
respectively) 11,386 6,505
Prepayments and other current assets 2,236 1,580
----------- -------------
Total current assets 41,981 47,654
----------- -----------
Property and equipment, net 7,674 7,161
Other assets 463 486
----------- -----------
Total assets $ 50,118 $ 55,301
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,531 $ 8,637
Capital lease obligations to related
party - current 37 599
Deferred revenue and customer deposits 6,100 5,201
----------- -----------
Total current liabilities 18,668 14,437
----------- -----------
Deferred rent 2,239 1,586
----------- -----------
Total liabilities 20,907 16,023
----------- -----------
Stockholders' equity:
Preferred stock
($0.01 par value; 15,000,000 shares
authorized, -0- issued and outstanding
at June 30, 2000 and December 31, 1999) - -
Common stock
($0.01 par value; 100,000,000 shares
authorized, 28,477,155 and 27,234,238
issued and outstanding at June 30, 2000
and December 31, 1999, respectively) 285 272
Additional paid-in capital 131,188 122,612
Accumulated deficit (102,191) (83,554)
Equity adjustments (71) (52)
----------- -----------
Total stockholders' equity 29,211 39,278
----------- -----------
Total liabilities and stockholders'
equity $ 50,118 $ 55,301
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues, net:
Product licenses $ 12,409 $ 5,652 $ 21,387 $ 10,038
Services 7,466 2,614 13,710 5,229
----------- ----------- ----------- -----------
Total revenues, net 19,875 8,266 35,097 15,267
----------- ----------- ----------- -----------
Cost of revenues:
Product licenses 1,245 343 2,221 551
Services
(exclusive of stock-based compensation of $61
and $79 for the three months ended June 30, 2000
and 1999 and $152 and $400 for the six months
ended June 30, 2000 and 1999, respectively) 6,074 5,071 10,424 7,669
----------- ----------- ----------- -----------
Total cost of revenues 7,319 5,414 12,645 8,220
----------- ----------- ----------- -----------
Gross profit 12,556 2,852 22,452 7,047
----------- ----------- ----------- -----------
Operating expenses:
Research and development
(exclusive of stock-based compensation of $1,447
and $214 for the three months ended June 30, 2000
and 1999 and $1,660 and $577 for the six months
ended June 30, 2000 and 1999, respectively) 6,190 4,277 11,518 7,914
Sales and marketing
(exclusive of stock-based compensation of $404 and
$237 for the three months ended June 30, 2000 and
1999 and $913 and $657 for the six months ended
June 30, 2000 and 1999, respectively) 9,962 5,428 17,049 10,396
General and administrative
(exclusive of stock-based compensation of $2,786
and $88 for the three months ended June 30, 2000
and 1999 and $4,281 and $515 for the six months
ended June 30, 2000 and 1999, respectively) 2,758 1,860 5,738 2,821
Charge for follow-on offering costs (Note 9) 733 - 733 -
Amortization of stock-based compensation 4,698 618 7,006 2,149
----------- ----------- ----------- -----------
Total operating expenses 24,341 12,183 42,044 23,280
----------- ----------- ----------- -----------
Loss from operations (11,785) (9,331) (19,592) (16,233)
Other income (expense):
Interest income 462 38 983 130
Interest expense (2) (293) (28) (589)
----------- ------------ ------------ ------------
Total other income (expense) 460 (255) 955 (459)
----------- ----------- ----------- -----------
Loss before income taxes (11,325) (9,586) (18,637) (16,692)
Income taxes - - - (44)
----------- ----------- ----------- -----------
Net loss $ (11,325) $ (9,586) $ (18,637) $ (16,736)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.40) $ (0.68) $ (0.67) $ (1.20)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (18,637) $ (16,736)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,511 1,495
Loss on disposition of property and equipment 6 (2)
Amortization of stock-based compensation 7,006 2,149
Tax payments on stock-based compensation (2,287) -
Non-cash interest expense 17 524
Bad debt expense 1,476 574
Changes in assets and liabilities:
Accounts receivable, net (6,357) (32)
Prepayments and other current assets (655) 32
Deferred offering costs - (143)
Other assets 23 48
Accounts payable and accrued expenses 3,855 162
Deferred revenue and customer deposits 899 1,479
Deferred rent 653 201
----------- -----------
Net cash used in operating activities (12,490) (10,249)
----------- -----------
Cash flows from investing activities:
Short-term investments 3,552 -
Capital expenditures (2,031) (2,531)
----------- -----------
Net cash provided by (used in) investing
activities 1,521 (2,531)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (579) (684)
Net proceeds from issuance of Series B
preferred stock - 16,500
Proceeds from exercise of common stock options 3,521 789
Proceeds from employee stock purchase plan 388 -
Proceeds from notes payable to related party - 1,000
Payments of notes payable to related party - (4,000)
----------- -----------
Net cash provided by financing activities 3,330 13,605
----------- -----------
Effect of exchange rate changes in cash and cash
equivalents (19) -
----------- -----------
Net (decrease) increase in cash and cash
equivalents (7,658) 825
Cash and cash equivalents, beginning of period 21,583 858
----------- -----------
Cash and cash equivalents, end of period $ 13,925 $ 1,683
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with the
guidelines set forth by the Securities and Exchange Commission ("SEC") 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, 1999, as set forth in InterWorld's Annual Report on
Form 10-K. 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, 2000.
In addition, the stated financial position and quarterly results of operations
are not necessarily indicative of expected results for future periods.
NOTE 2. 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.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC issued SAB
101A, an amendment to SAB 101, which delays the implementation of SAB 101 to no
later than June 30, 2000 for companies with fiscal years that begin between
December 16, 1999 and March 15, 2000. In June 2000 the SEC issued SAB 101B, an
amendment to SAB 101 and SAB 101A, which delays the implementation date of SAB
101until no later than the fourth quarter of fiscal years beginning after
December 15, 1999. InterWorld does not believe that SAB 101 will have a material
impact on its financial statements.
In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation no. 44, ("FIN 44") Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25 ("APB 25"). This
interpretation, which is effective from July 1, 2000, is intended to clarify
certain problems that have arisen in practice since the issuance of APB 25
including the definition of employee for the purpose of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option award and the accounting for an exchange of stock
compensation awards in a business combination. InterWorld does not believe that
FIN 44 will have a material impact on its financial statements.
5
<PAGE>
NOTE 4. LOSS PER COMMON SHARE
The computations of basic loss per share and diluted loss per share for the
three and six months ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (11,325) $ (9,586) $ (18,637) $ (16,736)
----------- ----------- ----------- -----------
Weighted average shares outstanding
used for Basic and diluted loss
per share 28,334,382 14,060,751 27,981,156 13,990,702
Basic and diluted loss per share* $ (0.40) $ (0.68) $ (0.67) $ (1.20)
=========== =========== =========== ===========
</TABLE>
* Common stock equivalents are not included since they would be antidilutive.
At June 30, 2000, outstanding options to purchase 6,684,243 shares of common
stock, with exercise prices ranging from $1.25 to $72.50 per share, and 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, have been excluded from the
computation of diluted loss per share as they are antidilutive. At June 30,
2000, outstanding warrants to purchase 150,158 shares of common stock, with an
exercise price of $9.775 per share, and at June 30, 1999, warrants to purchase
534,070 shares of mandatorily redeemable Series A Convertible Preferred Stock
(converted to common stock upon consummation of the initial public offering in
August 1999) with exercise prices ranging from $2.00 to $9.775, all of which are
antidilutive, have been excluded from the computation of diluted loss per share.
NOTE 5. STOCK PLANS
In January 2000, the Compensation Committee granted to an executive options to
purchase 150,000 shares of common stock at an exercise price of $15.00. After
determining that this below fair market grant was invalid under the 2000 Equity
Incentive Plan this grant was rescinded. No options were issued to the
executive. Subsequently, on April 5, 2000, the Compensation Committee granted an
aggregate of 109,500 shares of restricted common stock, of which 40,750 shares
were to be issued immediately and 6,250 shares on the first day following each
completed quarter thereafter. The executive may elect to have InterWorld reduce
the number of shares issued to him for payment of applicable federal, state and
local taxes. As a result, 21,681 shares were issued to the executive on April 5,
2000, net of his tax obligations. In connection with this issuance, InterWorld
recognized approximately $1,854 in stock-based compensation during the quarter
ended June 30, 2000, and will recognize approximately $2,465 in the subsequent
performance periods ending January 1, 2003.
In February 2000, InterWorld granted to a consultant options to purchase an
aggregate of 50,000 shares of common stock at exercise price of $72.50. The
options vest upon achievement of certain criteria, as determined by InterWorld's
Chief Executive Officer and President.
During the six months ended June 30, 2000, InterWorld issued 862,243 shares of
common stock from exercises of outstanding options, 285,585 shares of common
stock from warrant exercises, 7,158 shares of common stock under the Employee
Stock Purchase Plan and 87,931 shares in restricted stock grants.
NOTE 6. EMPLOYMENT AGREEMENTS
Effective May 31, 2000, Russell Fleischer, InterWorld's former Senior Vice
President, Finance, terminated his employment with InterWorld, at which point
all his unvested restricted stock and stock options were forfeited.
Effective June 16, 2000, Douglas Maio, InterWorld's Chief Financial Officer,
entered into an employment agreement with InterWorld for an initial term of two
years. This agreement establishes a base salary and bonus eligibility based on
performance. InterWorld also agreed to issue an aggregate of 100,000 shares of
restricted common stock to Mr. Maio, all of which were issued on June 16, 2000.
Mr. Maio elected to have InterWorld reduce the number of shares issued to him
for payment of applicable federal, state and local taxes. As a result, 52,950
shares were issued to Mr. Maio, net of his tax obligations. InterWorld
recognized approximately $1,850 in stock-based compensation during the three
months ended June 30, 2000 in connection with this issuance.
6
<PAGE>
NOTE 7. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject InterWorld to concentrations of
credit risk are primarily cash, accounts receivable, accounts payable, and notes
payable. InterWorld generally does not require collateral and the majority of
its trade receivables are unsecured.
During the three months ended June 30, 2000, two customers accounted for
approximately 22.5% of total revenues. For the three months ended June 30, 1999,
two customers accounted for approximately 28.6% of total revenues. At June 30,
2000, one customer accounted for approximately 18.0% of net accounts receivable.
NOTE 8. RECLASSIFICATION
Certain amounts in the financial statements have been reclassified to conform to
2000 classifications.
NOTE 9. FOLLOW-ON OFFERING
In January 2000, the Board of Directors of InterWorld authorized management to
pursue an underwritten sale of InterWorld's common stock in a follow-on public
offering (the "Offering") (File Number 333-96254) pursuant to the Securities Act
of 1933, in which 1,250,000 shares were to be offered by InterWorld, and
2,500,000 share were to be offered by the selling shareholders. Subsequently on
April 14, 2000, in view of the market conditions at that time, InterWorld filed
a request with the SEC for withdrawal of the contemplated offering of
InterWorld's common stock that had been filed with the SEC. InterWorld
recognized approximately $733 in costs associated with the cancelled offering.
NOTE 10. SUBSEQUENT EVENTS
In July 2000, the Compensation Committee granted an aggregate of 100,000 shares
of restricted common stock to an executive officer, of which 25,000 were to be
issued immediately and the remaining 75,000 shares vest in equal installments on
October 1, 2000, January 1, 2001 and April 1, 2001. InterWorld estimates that it
will recognize approximately $1,025 in stock-based compensation during the
quarter ended September 30, 2000, and approximately $1,025 in the subsequent
periods.
7
<PAGE>
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 may be
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; 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; lack of 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, including upgrades to meet international requirements; our inability
to successfully maintain or increase market share in our core business while
expanding our product base into other markets; our inability to enter into or
maintain relationships with system integration companies; the strength of our
distribution channels; our inability either internally or through third-party
service providers to support client implementation of our products; our
inability to recover our costs in sales of our products and services; product
defects; changes in our business strategies; as well as the other factors
discussed in this Form 10-Q and in other documents filed by InterWorld with the
SEC, including those under the caption "Certain Factors That May Affect Future
Results" in InterWorld's Annual Report on Form 10-K.
OVERVIEW
We derive revenues primarily from licensing our mission-ready(TM) e-commerce
software solution and providing related services and support to our clients. We
commercially introduced our first product in December 1995.
We generally price licenses of our platform and applications on a per server or
site basis. Standard per server license fees for the Windows NT(R) solutions are
$150,000 and for Unix(R) solutions are $250,000. The recommended production
configuration that supports redundancy, fault-tolerance and distributed load
balancing across multiple processors is generally available for a license fee of
approximately $300,000 to $500,000. Licenses for product configurations that
support additional servers and users are available. Additional applications,
tools, business adapters, professional services and maintenance services are
provided at an additional cost to the client. Site licenses are also available.
Site licenses typically require the client to pay additional fees based on the
client achieving specified electronic commerce revenues. Payment terms are
generally net 30 days.
Revenue from product licenses is recognized upon shipment to the client under an
executed software license agreement when no significant obligations or
contractual commitments remain and collection is probable. If acceptance by the
client is required, revenue is recognized upon client acceptance. License
revenue from resellers of our products is recognized upon shipment by the
reseller when collection is probable.
Revenue under multiple element arrangements are allocated to each element using
the "residual method", in accordance with Statement of Position No. 98-9,
"Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP98-9").
Under the "residual method", the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The fair value
of the undelivered elements is established based on the price when these
elements are sold separately and/or when stated renewal rates for maintenance
and post-contract support services and are included in the agreement.
Revenue from services is recognized as the services are rendered. Revenue from
maintenance and client support services is recognized ratably over the term of
the agreement for such services. Our license agreements typically require the
client to purchase one year of maintenance and client support services.
We continue to increase our use of systems integration companies for
implementation of our products. As a result, the cost of our service revenues
has increased substantially. We anticipate that our increased use of systems
integration companies will continue for the foreseeable future and, accordingly,
that our cost of services revenues will in all probability exceed historical
amounts. In addition, our service revenues may decrease as a percentage of our
aggregate revenues in future periods as a result of our increased use and
training of systems integration companies.
8
<PAGE>
We have incurred significant research and development expenses to develop our
products. We charge all research and development costs incurred to establish the
technological feasibility of a product or product enhancement to research and
development expense as incurred. In addition, we have made substantial
investments in our infrastructure to support revenue growth. We intend to
increase our staffing in all functional areas as required to accommodate any
revenue growth.
RESULTS OF OPERATIONS
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, 1999, included in
InterWorld's Annual Report on Form 10-K.
Our operating results will generally depend on the volume and timing of our
product license sales, and to a lesser extent, services revenues and expenses,
all of 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 operations may not be meaningful, and should not be relied on as an
indication of future performance.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Total Revenues, net.
Total revenues, net include fees from product licenses and associated consulting
services engagements. Total revenues for the quarter ended June 30, 2000
increased $11.6 million, or 140%, to $19.9 million, from $8.3 million in the
quarter ended June 30, 1999. Product license revenues increased $6.7 million, to
$12.4 million in the quarter ended June 30, 2000, from $5.7 million in the
quarter ended June 30, 1999. This increase was largely the result of licensing
more of our software products at a higher average license fee per client.
Service revenues increased $4.9 million, to $7.5 million in the quarter ended
June 30, 2000, from $2.6 million in the quarter ended June 30, 1999, primarily
due to an increase in billings from a larger number of InterWorld professional
services employees, and the use of systems integration partners on a
subcontracting basis, to a larger client base.
Cost of Revenues.
Total cost of revenues increased to $7.3 million for the quarter ended June 30,
2000, from $5.4 million for the quarter ended June 30, 1999, an increase of $1.9
million. Total cost of revenues as a percent of total revenues decreased to 37%
for the quarter ended June 30, 2000 from 65% for the same period in 1999.
Cost of product license revenues consists of royalties payable to third parties
for software that is embedded in or bundled with our products, the costs of
product media, documentation and manufacturing costs. Cost of product license
revenues, which increased $0.9 million to $1.2 million for the quarter ended
June 30, 2000, from the same quarter in 1999, reflects the costs of higher third
party royalties and the increased volume of sales. We expect to incur increased
third party royalties in future periods.
9
<PAGE>
Cost of services revenues consists primarily of costs related to services
employees and systems integration consultants providing installation and
modification services and support. Cost of services revenues increased to $6.1
million in the second quarter of 2000, from $5.1 million in the second quarter
of 1999. This increase is attributable to the increased use and training of
InterWorld and third-party systems integration personnel, and to a lesser
extent, the training of clients and partners. We expect that our use of systems
integration companies will continue and that these expenses will increase
significantly in future periods.
Research and Development.
Research and development expenses consist of costs related to research and
development personnel, including salaries, related benefits costs and consulting
fees, as well as costs related to facilities and equipment used in research and
development. Research and development expenses increased $1.9 million, to $6.2
million in the second quarter of 2000 from $4.3 million in the second quarter of
1999. This increase was principally due to the addition of personnel to support
the continuous improvements and additions to our licensed products. We expect to
continue to increase our research and development expenses in future periods.
Sales and Marketing.
Sales and marketing expenses consist of salaries and related benefits costs for
sales and marketing personnel, sales commissions and other incentive
compensation, travel and entertainment expenses and the costs of marketing
programs, including trade shows, promotional materials and advertising. Sales
and marketing expenses increased to $10.0 million in the second quarter of 2000,
from $5.4 million in the second quarter of 1999, an increase of $4.6 million.
These increases were due primarily to the expansion of our sales and marketing
organizations and initiation of more extensive marketing activities, including
advertising designed to increase awareness of our brand. We expect to continue
to increase our sales and marketing expenses in future periods.
General and Administrative.
General and administrative expenses consist of salaries and related benefits
costs for administrative, finance and human resources personnel, plus related
facilities and equipment costs. General and administrative expenses increased to
$2.8 million from $1.9 million for the three months ended June 30, 2000 and
1999, respectively. This increase reflects additional administrative personnel
and infrastructure necessary to manage and support our growth. As our various
operations grow, we expect our general and administrative costs to increase as
well.
Charge for Follow-On Offering Costs.
Charge for follow-on offering costs consists of costs associated with the
contemplated underwritten sale of InterWorld's common stock in a follow-on
public offering. In view of the market conditions at that time, InterWorld
withdrew their request for the Offering. Subsequently, InterWorld recognized
approximately $0.7 million in costs associated with the cancelled offering
during the three months ended June 30, 2000. (Note 9)
Amortization of Stock-Based Compensation.
Amortization of stock-based compensation consists primarily of non-cash charges
for stock options granted to employees, directors and consultants, as well as
grants of restricted common stock. For option grants to employees with exercise
prices deemed below the fair market value of our common stock at the time of
grant, the amount of the charge 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, three to five
years). For option grants to non-employees, the charge is equal to the
difference between the fair market value of our common stock on the date vested
and the exercise price. For restricted stock grants, the amount of the charge is
equal to the number of shares granted multiplied by the fair market value on the
date of issuance.
Amortization of stock-based compensation increased to $4.7 million for the
quarter ended June 30, 2000 from $0.6 million for the quarter ended June 30,
1999. This increase was due largely to restricted stock grants to four
executives. We estimate that we will recognize approximately $11.5 million of
non-cash employee compensation expense in future periods (of which approximately
$6.2 million is related to restricted stock grants) through October 2004,
including approximately $2.1 million during the remainder of 2000. (Notes 5 and
10)
10
<PAGE>
Total Other Income (Expense).
Other income (expense) consists primarily of interest income earned on cash and
cash equivalents, net of cash and non-cash interest expense for leased
equipment.
Other income for the second quarter of 2000 increased by approximately $0.4
million from the second quarter of 1999. This increase was largely attributable
to interest income earned on higher cash and short-term investment balances
resulting from the proceeds from our August 1999 initial public offering.
Other expense decreased by approximately $0.3 million in the three months ended
June 30, 2000 from the quarter ended June 30, 1999. This decrease was primarily
due to the elimination of interest expenses associated with warrants issued in
conjunction with our secured loan agreement with Comdisco, Inc., which was
terminated upon consummation of our initial public offering.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Total Revenues, Net.
Our total revenues, net increased to $35.1 million for the six months ended June
30, 2000, from $15.3 million for the six months ended June 30, 1999. Product
license revenues increased 114% or $11.4 million to $21.4 million for the six
months ended June 30, 2000, from $10.0 million for the six months ended June 30,
1999. Services revenues increased 163% or $8.5 million to $13.7 million for the
six months ended June 30, 2000, from $5.2 million for the six months ended June
30, 1999. These increases were primarily due to licensing more of our software
products at a higher average license fee per client, and to a lesser extent,
from the provision of services to a larger client base.
Cost of Revenues.
Total cost of revenues increased to $12.6 million for the six months ended June
30, 2000, from $8.2 million for the six months ended June 30, 1999. Cost of
services revenues increased to $10.4 million for the six months ended June 30,
2000, from $7.7 million for the six months ended June 30, 1999. This increase
was principally due to hiring additional professional services personnel and the
increased use and training of systems integration companies. Cost of license
revenues increased to $2.2 million for the six months ended June 30, 2000, from
$0.6 million for the six months ended June 30, 1999 due to the costs of higher
third party royalties on an increased volume of sales. We expect that our
professional services personnel and the 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 to $11.5 million for the six months
ended June 30, 2000, from $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 to $17.0 million for the six months ended
June 30, 2000 from $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 increased to $5.7 million for the six months
ended June 30, 2000, from $2.8 million for the six months ended June 30, 1999.
This increase reflects $1.5 in bad debt expenses related to two customers, as
well as, the addition of administrative personnel and infrastructure necessary
to manage and support our growth. We intend to increase our general and
administrative staff and infrastructure to accommodate our expanding
organization.
11
<PAGE>
Charge for Follow-On Offering Costs.
Charge for follow-on offering costs associated with the cancelled offering
(which occurred in the second quarter of 2000) were $0.7 million during the six
months ended June 30, 2000. (Note 9)
Amortization of Stock-Based Compensation.
During the six months of 2000, we recognized $7.0 million of stock-based
compensation expense related to stock options and restricted stock grants, an
increase of $4.9 million from the first six months of 1999. This increase was
due largely to restricted stock grants to four executives, which represent
approximately $5.9 million of the $7.0 million of stock-based compensation
expense recognized during the first six months of 2000.
Total Other Income (Expense).
Other income (expense) for the first six months of 2000 increased by
approximately $1.5 million from the first six months of 1999 to $1.0 million.
Interest income increased by approximately $0.9 million from the first six
months of 1999, primarily due to interest income earned on higher cash and
short-term investment balances. Interest expense decreased by approximately $0.6
million from the first six months of 1999, primarily due to the elimination of
interest expense associated with warrants issued to Comdisco, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we 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 in August 1999), $40.8 million in proceeds from our August 1999
initial public offering (after deducting underwriting discounts and commissions
and estimated expenses) and an additional $6.3 million from the purchase of
additional shares to cover underwriter overallotments. At June 30, 2000, we had
cash and cash equivalents and short-term investments of $28.4 million and
working capital of $23.3 million.
We have had significant negative cash flows from operating activities to date.
Net cash used in operating activities for the six months ended June 30, 2000 and
1999 were $12.5 and $10.2 million, respectively. Net cash used in operating
activities in each of these periods was primarily the result of expenditures for
product development, sales and marketing and infrastructure enhancements. For
the six months ended June 30, 2000, our net accounts receivable increased $4.9
million, to $11.4 million in 2000 from $6.5 million in 1999. This increase was
primarily attributable to the signing of an increased number of license and
maintenance agreements at the end of the period.
Net cash provided by (used in) investing activities consists primarily of the
purchase of short-term investments, specifically three to six month government
securities and capital expenditures for computer equipment, purchased software,
office equipment, furniture, fixtures and leasehold improvements. Capital
expenditures for the six months ended June 30, 2000 aggregated $2.0 million,
primarily for computer equipment and leasehold improvements. Net cash used in
short-term investments in securities exceeding three months were $3.6 million
for the six months ended June 30, 2000.
We believe that our available cash resources 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 and/or to respond to
competitive pressures or unanticipated cash requirements. Additional financing,
if needed, may not be available on satisfactory terms or at all.
12
<PAGE>
PART II
Item 1. LEGAL PROCEEDINGS
On April 19, 2000, InterWorld filed a suit in the Arizona Superior Court,
Maricopa County, to enforce the payment terms and conditions of its software
license and maintenance agreement with Insight Enterprises, Inc. The amount of
relief requested is approximately $1.6 million, plus associated legal costs.
There can be no assurance that we will prevail in this action or that, in the
event we do prevail, we will be able to collect on a judgement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of InterWorld was held on May 22, 2000.
Shares outstanding and shares present counted as 28,208,870 and 24,005,223,
which represented 85.07% of total shares outstanding.
The first matter before the Shareholders was the election of directors. The
voting of the Shareholders was as follows:
<TABLE>
<CAPTION>
Name of Votes Votes
Nominee For % Withheld %
------- --- - -------- -
<S> <C> <C> <C> <C>
Michael Donahue 23,997,456 85.07% 7,767 0.03%
Alan J. Andreini 23,995,206 85.06% 10,017 0.04%
Jeremy M. Davis 23,997,556 85.07% 7,667 0.03%
Kenneth G. Langone 23,996,106 85.07% 9,117 0.03%
Joseph Robinson 23,996,206 85.07% 9,017 0.03%
Yves Sisteron 23,996,206 85.07% 9,017 0.03%
Jack Slevin 23,995,206 85.06% 10,017 0.04%
Russell West 23,996,206 85.07% 9,017 0.03%
</TABLE>
Mr. Joseph Robinson elected to resign from the Board citing a lack of
availability necessary to devote to his Board position.
The second matter before the Shareholders was the ratification of
PricewaterhouseCoopers LLP as InterWorld's independent auditors for 2000. The
voting of the Shareholders were as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For % Against % Abstained %
--- - ------- - --------- -
<S> <C> <C> <C> <C> <C>
23,998,780 85.08% 3,350 0.01% 3,093 0.01%
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
27.1 - Financial Data Schedule
13
<PAGE>
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: August 14, 2000 BY: /s/ Jeremy. M Davis
-------------------------- ----------------------------------------
Jeremy M. Davis
President, Chief Executive Officer
DATE: August 14, 2000 BY: /s/ Douglas Maio
-------------------------- ----------------------------------------
Douglas Maio
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
27.1 Financial Data Schedule for the six-month period ended June 30, 2000
