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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2000.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________.
Commission file number _________
EXCHANGE APPLICATIONS, INC.
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(Exact name of registrant, as specified in its charter)
DELAWARE 04-3338916
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
89 SOUTH STREET, BOSTON, MASSACHUSETTS 02111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 617-737-2244
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
----- -----
State the number of shares outstanding of the registrant's common stock, as of
the latest practicable date.
Number of Shares 31,465,785 Outstanding as of August 10, 2000
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<PAGE>
Exchange Applications, Inc.
Form 10-Q for the Three Months Ended June 30, 2000
Table of Contents
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 (audited) 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE><CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 14,678 $ 6,440
Marketable securities........................................ 14,429 6,912
Accounts receivable, net..................................... 11,329 29,130
Prepaid expenses and other current assets.................... 2,538 3,008
-------- --------
Total current assets.................................. 42,974 45,490
Property and equipment, net.................................... 4,570 9,900
Long-term marketable securities................................ 5,030 1,998
Non current assets from MicroStrategy Incorporated transaction. 62,030 52,218
Other assets................................................... 461 9,832
Goodwill....................................................... -- 134,462
Other intangible assets........................................ -- 29,811
-------- --------
Total assets.......................................... $115,065 $283,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 701 $ 5,685
Accrued expenses............................................. 5,167 9,528
Current portion of obligations under capital leases.......... -- 57
Current portion of Microstrategy Incorporated obligation..... 15,377 21,766
Deferred revenue............................................. 6,455 12,857
-------- --------
Total current liabilities............................. 27,700 49,893
Long term portion of obligations under capital leases ......... -- 298
Note payable to certain former shareholders of Customer
Analytics, Inc............................................... -- 5,000
MicroStrategy Incorporated obligation, net of current portion.. 16,653 5,733
Stockholders' equity:
Preferred Stock; $.001 par value--
10,000,000 shares authorized, none issued and outstanding.. -- --
Common Stock, $.001 par value--
150,000,000 shares authorized; 31,793,029 and 24,053,471
shares issued at June 30, 2000 and December 31, 1999,
respectively............................................... 24 32
Additional paid-in capital................................... 56,869 238,768
Accumulated deficit.......................................... (5,513) (15,566)
Due from officer............................................. (125) (125)
Deferred compensation........................................ (517) (386)
Cumulative translation adjustment............................ 39 87
Unrealized gain (loss) on marketable securities.............. (65) (23)
StockSubscription............................................ 20,000 --
Treasury stock, at cost; 366,565 shares at December 31,
1999 and June 30, 2000,.................................... -- --
-------- --------
Total stockholders' equity............................ 70,712 222,787
-------- --------
Total liabilities and stockholders' equity ........... $115,065 $283,711
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE><CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
---------------------------- ----------------------------
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 6,051 $ 13,351 $ 11,059 $ 23,613
Services and maintenance 4,207 6,287 7,664 11,187
------------ ------------ ------------ ------------
Total revenues 10,258 19,638 18,723 34,800
Cost of revenues:
Software license fees 63 221 164 362
Services and maintenance 2,491 4,147 4,451 7,490
------------ ------------ ------------ ------------
Total cost of revenues 2,554 4,368 4,615 7,852
------------ ------------ ------------ ------------
Gross profit 7,704 15,270 14,108 26,948
Operating expenses:
Sales and marketing 3,544 6,188 6,739 11,029
Research and development 2,229 4,576 4,170 7,788
General and administrative 1,177 2,229 2,145 4,174
Amortization of goodwill and other
intangibles from acquisitions -- 3,321 -- 3,321
Amortization of MicroStrategy
investment -- 5,105 -- 10,010
------------ ------------ ------------ ------------
Total operating expenses 6,950 21,419 13,054 36,322
------------ ------------ ------------ ------------
Income (loss) from operations 754 (6,149) 1,054 (9,374)
Interest income 237 373 465 848
Interest expense from discount on
long-term MicroStrategy obligation -- (676) -- (1,321)
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes 991 (6,452) 1,519 (9,847)
Provision for income taxes (472) (21) (713) (21)
------------ ------------ ------------ ------------
Net income (loss) $ 519 $ (6,473) $ 806 $ (9,868)
============ ============ ============ ============
Basic net income (loss) per share $ 0.02 $ (0.25) $ 0.04 $ (0.39)
============ ============ ============ ============
Diluted net income (loss) per share $ 0.02 $ (0.25) $ 0.03 $ (0.39)
============ ============ ============ ============
Basic weighted average common shares
outstanding 21,351,056 26,367,838 20,957,864 25,506,414
============ ============ ============ ============
Diluted weighted average common
shares outstanding 25,517,136 26,367,838 24,913,683 25,506,414
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE><CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 806 $ (9,868)
Adjustments to reconcile net income (loss) to net cash used
in operating activities
Depreciation and other amortization 681 1,367
Amortization of MicroStrategy asset -- 9,811
Non cash interest expense related to MicroStrategy obligation -- 1,321
Compensation expense associated with stock options 133 117
Amortization of goodwill and other intangible assets -- 3,321
Changes in operating assets and liabilities--
Accounts receivable (2,627) (5,839)
Prepaid expenses and other current assets (463) (35)
Accounts payable 234 1,989
Accrued expenses 16 (3,011)
Deferred revenue 1,093 (2,264)
--------- ---------
Net cash used in operating activities (127) (3,091)
--------- ---------
Cash flows from investing activities:
Payment of acquired liabilities, net of cash acquired -- (5,063)
Sales (purchases) of marketable securities (2,490) 10,597
Purchases of property and equipment (1,871) (4,683)
Increase in other assets (8) (8,623)
--------- ---------
Net cash used in investing activities (4,369) (7,772)
--------- ---------
Cash flows from financing activities:
Repayments under capital leases (361) --
Issuance of common stock under ESPP -- 209
Issuance of common stock by eXstatic Software prior to acquisition 850 --
Issuance of common stock in second public offering, net of offering costs 20,010 --
Exercise of common stock options 192 2,368
--------- ---------
Net cash (used in) provided by financing activities 20,691 2,577
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (36) 48
--------- ---------
Net decrease in cash and cash equivalents 16,159 (8,238)
--------- ---------
Cash and cash equivalents, beginning of period 5,210 14,678
--------- ---------
Cash and cash equivalents, end of period $ 21,369 $ 6,440
========= =========
Supplemental disclosure of cash flow information--
Cash paid for interest $ 8 $ --
========= =========
Cash paid for income taxes $ 26 $ 127
========= =========
In connection with the acquisition of Knowledge Stream Partners on
March 31, 2000 and Customer Analytics on June 13, 2000, the following
non-cash transaction occurred:
Fair value of assets acquired $ -- $(182,714)
Fair value of liabilities assumed -- 26,314
Issuance of common stock and stock options -- 153,523
--------- ---------
Acquisition costs, net of cash acquired $ -- $ 2,877
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
Exchange Applications, Inc. and its subsidiaries (the "Company"), doing
business as Xchange Inc., provides eCustomer Relationship Management (eCRM)
solutions that help companies earn a greater share of their customers' business
through relevant, personalized customer communications. Xchange provides an
open-platform eCRM software and services solution that enables clients to
customize offers based on profile information, synchronize offers across all
customer channels in real-time and track the responses. This solution provides
companies with the opportunity to improve their acquisition and retention of
customers and increase customer relationship profitability.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements are unaudited, except
for the December 31, 1999 consolidated balance sheet, and have been prepared in
accordance with generally accepted accounting principles. These statements
include the accounts of Exchange Applications and its wholly owned subsidiaries.
(B) INTERIM FINANCIAL REPORTING
Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the operating results for the
interim periods ended June 30, 1999 and 2000, respectively. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the entire year. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1999,
which are contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 2000.
(C) NET INCOME ( LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE, basic and diluted net loss per common share for the
three and six months ended June 30, 2000 is calculated by dividing the net loss
applicable to common stockholders by the weighted average number of vested
common shares outstanding.
For the three and six months ended June 30, 1999 basic net income per
common share is calculated by dividing the net income applicable to common
stockholders by the weighted average number of vested common shares outstanding
for the three and six month periods then ended. Diluted net income per common
share for the three and six months ended June 30, 1999 is calculated by dividing
the net income applicable to common stockholders by the weighted average number
of vested common shares outstanding and the dilutive effect of potential common
shares, consisting of outstanding stock options and unvested common shares, as
determined using the treasury stock method in accordance with SFAS No. 128.
6
<PAGE>
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of basic and diluted weighted
average common shares outstanding:
<TABLE><CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding...................... 21,388,186 26,367,838 21,012,505 25,506,414
Less: Weighted average unvested
common shares outstanding........ 37,130 -- 54,641 --
---------- ---------- ---------- ----------
Basic and diluted weighted average
common shares outstanding........ 21,351,056 26,367,838 20,957,864 25,506,414
Add: Dilutive potential common
shares from stock options and
unvested common stock............ 4,166,140 -- 3,955,819 --
Diluted weighted average common
shares outstanding............... 25,517,196 26,367,838 24,913,683 25,506,414
========== ========== ========== ==========
</TABLE>
Diluted weighted average shares outstanding for the three months ended June
30, 2000 exclude the potential common shares from stock options because to
include such shares would have been antidilutive. As of June 30, 1999 and 2000,
the Company had 6,097,326 and 8,669,139 potential common shares outstanding,
respectively.
(D) COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME ("SFAS No. 130"). SFAS No. 130 requires that
items defined as other comprehensive income (loss), such as foreign currency
translation adjustments, be separately classified in the financial statements
and that the accumulated balance of other comprehensive income (loss) be
reported separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The components of comprehensive income
(loss) for the three and six months ended June 30, 1999 and 2000 are as follows
(in thousands):
<TABLE><CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $ 519 $ (6,473) $ 806 $ (9,868)
Other comprehensive income (loss):
Foreign currency adjustment (35) 84 (35) 48
Marketable securities adjustment (22) (3) (25) 42
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 462 $ (6,392) $ 746 $ (9,778)
========== ========== ========== ==========
</TABLE>
(E) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for cash equivalents and marketable securities in
accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. Cash equivalents are short-term, highly liquid investments
with original maturity dates of three months or less. Cash equivalents are
carried at amortized cost, which approximates fair market value. The Company's
marketable securities are classified as available-for-sale and are recorded at
fair value with any unrealized gain or loss recorded as an element of
stockholders' equity. As of December 31, 1999 and June 30, 2000, the Company's
marketable securities consisted of investment grade corporate
7
<PAGE>
bonds. As of December 31, 1999 and June 30, 2000, the Company had recorded
unrealized losses of approximately $65,000 and $23,000, respectively. At June
30, 2000, the weighted average number of days until maturity of the Company's
marketable securities was 292 days.
(F) ACQUISITION OF CUSTOMER ANALYTICS, INC.
On June 13, 2000, the Company acquired Customer Analytics, Inc. (CA), a
Company that specializes in the development and licensing of marketing campaign
management solutions targeted at the local branch level. The Company exchanged
4,461,684 shares of its common stock for all the outstanding shares of common
stock of CA; 761,602 of these shares issued were placed into escrow as security
for indemnification obligations of CA pursuant to the merger agreement. In
addition, the Company assumed all of the outstanding employee stock options of
CA which converted into options to aquire 758,712 shares of Exchange
Applications common stock. As of the date of the consummation of the
acquisition, the common stock issued by the Company and the issued stock options
had a market value of $113,944,000 based on a per share value of $22.20.
The purchase price was allocated based upon the fair value of the
identified assets acquired. These allocations represent the fair values
determined by an independent appraisal. The allocation has resulted in acquired
goodwill of $95,914,000 which is being amortized on a straight line basis over a
five year period. The Company has also allocated $3,700,000 to the assembled
work force, $8,000,000 to the customer base, and $17,750,000 to purchased
technology and technological know-how aquired from CA as determined by the
independent appraisal, which are being amortized on a straight line basis over a
three year period.
The following unaudited proforma information presents a summary of
consolidated results of operations as if the acquisition had occurred on
January 1, 1999:
======================================================================
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 2000
----------- -----------
(IN THOUSANDS)
Revenues................................. $ 31,590 $ 48,526
Net Loss................................. (11,807) (28,093)
Basic and diluted net loss per share..... $ (0.46) $ (0.94)
Basic and diluted weighted average
common shares outstanding ............. 25,419,518 29,968,098
======================================================================
(F) LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company evaluates the realizability of its long-lived assets periodically
based on projected future cash flows. As of June 30, 2000 the Company's
long-lived assets consisted of technology and the related distribution rights
acquired from third parties, goodwill and other intangible assets from
acquisitions, and fixed assets. The Company has determined that no material
adjustment to the carrying value of its long lived assets was required June 30,
2000.
(G) RECLASSIFICATION
Certain reclassifications have been made to prior year's financial
statements to conform to the current year's presentation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. EXCHANGE APPLICATIONS' ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS FORM 10-Q.
OVERVIEW
BUSINESS OVERVIEW
Exchange Applications, Inc. and its subsidiaries (the "Company"), doing
business as Xchange Inc., provides eCustomer Relationship Management (eCRM)
solutions that help companies earn a greater share of their customers' business
through relevant, personalized customer communications. Xchange provides an
open-platform eCRM software and services solution that enables clients to
customize offers based on profile information, synchronize offers across
multiple customer channels in real-time and track the responses. This solution
provides companies with the opportunity to improve their acquisition and
retention of customers and increase customer relationship profitability.
Approximately 250 of the world's most innovative companies, including Citigroup,
DaimlerChrysler, drugstore.com and Vodafone are using Xchange's solutions to
drive personalized communications to millions of consumers and businesses around
the globe.
Xchange's products and services help organizations answer the critical
question: "How do we optimize the value we receive from a particular customer in
EXCHANGE for the dollars invested in that customer?" Our software helps
businesses identify profitable customer segments, invest in those segments
according to their expected return, and then measure the impact. By providing
selected customers with the right offers, at the right times, through the right
channels, companies can enjoy measurable returns on their marketing investments
as both revenues and customer satisfaction rise. In addition, our eCRM solutions
also ensure that customers receive consistent offers and a consistent experience
across all customer channels, by coordinating data across those channels. For
instance, a person visiting a bank's Web site should receive the same credit
card offer that he or she received by mail.
Several trends are driving the market for Xchange's solution - a market
that is expected to grow from $5.4 billion in 2000 to $16.8 billion in 2003,
according to AMR Research. Among them are:
THE EMERGENCE OF CLICK-AND-MORTAR COMPANIES. An emerging trend in the
ecommerce world has highlighted the issue of cross-channel synchronization - the
evolution of businesses known as "click-and-mortar" companies, who do business
both online and offline. Many of these businesses have traditionally conducted a
majority of their outbound customer communications via telephone and mail, and
did not have to worry about instant turnaround. For instance, in 1995 it would
not have been unusual to call and request a prospectus from a mutual fund
company and be told to expect the material in four to six weeks. With the advent
of the Internet as a customer communications channel, these click-and-mortar
firms are suddenly required to significantly increase the velocity with which
they communicate with customers, who have come to expect instant answers.
Xchange's eCRM software and services assist businesses in doing this.
THE GROWING REALIZATION THAT CUSTOMERS ARE IN CONTROL. Today more than
ever, customers are in the driver's seat. The advent of practices such as opt-in
email have forever changed the dynamics between businesses and their clients or
prospects. On the Internet, switching barriers are severely reduced as the
competition is only a click away. In order to build and maintain strong, loyal
customer relationships, companies need to be sensitive to what customers want,
and how they want it. Having permission to contact customers and prospects
should be considered a privilage, not a right, and companies who respect that
privilage stand a better chance of earnings their customers' trust and business.
Xchange's software provides businesses with tools to help foster strong, loyal
customer relationships by providing timely, relevant customer communications,
delivered via the customer's preferred channel.
9
<PAGE>
THE PROFITABILITY IMPERATIVE FOR NEW ECONOMY COMPANIES. Until the spring of
2000, manynew economy companies spent disproportionate amounts of money on
marketing, all for the sake of market share. But suddenly, profitability became
more important. Businesses that had been spending money on mass marketing
mediums such as advertising were finding it difficult to identify where their
marketing dollars had the most impact, and couldn't correlate sales with the
marketing efforts that may have incented them. Xchange's eCRM solutions not only
help institute more formal processes around making marketing investments, but
also enable businesses to measure the results, and learn what is and isn't
working so they can invest more wisely.
Xchange's eCRM solution, known as Xchange 4.0, consists of the following
elements:
XCHANGE DIALOGUE. An open-platform eCRM solution that combines campaign
management, email marketing, analytics and response management, Xchange
Dialogue is in its fifth generation and is licensed for use at more than
150 companies. The software component of Xchange Dialogue can be purchased
on CD as a standalone software, or implemented on an Application Service
Provider (ASP), or hosted, basis.
XCHANGE REAL TIME. Used for synchronizing customer data across multiple
customer channels in real time, Xchange Real Time is a new solution which
was released in the second quarter of 2000. Xchange Real Time is a key
element in Xchange's overall eCRM strategy, providing businesses with the
ability to promptly respond to customer inquiries based on their latest
profile information. Consider for instance a prospect that accepts a mobile
phone company's online offer for digital telephone service for $29.99 per
month. The company's customer database would be instantly updated, so that
if that customer called the call center immediately, the agent would be
aware of the transaction and wouldn't make another (conflicting) offer to
the customer. The agent would also be prepared to welcome that customer to
the company. Without Xchange Real Time, the company's customer database
would be updated nightly at best, putting the company at risk of treating a
customer or prospect inappropriately.
XCHANGE ENACT. Acquired as part of the CustomerAnalytics acquisition
completed in June 2000, Xchange EnAct is a local-level marketing solution
that enables retail branch managers to plan, create and execute campaigns
that are tailored for their local markets, yet coordinated with the
company's national-level efforts. EnAct is licensed for use at
approximately 100 businesses worldwide. In Q4 of 2000, Xchange plans to
ship a new version of EnAct that is more tightly integrated with Xchange
Dialogue.
Benefits of the Xchange 4.0 solution for eCRM
With our solution, businesses seek to proactively manage the economics of
each customer relationship to enable businesses to reach their full profit
potential. Through Xchange 4.0, businesses gain an understanding of the
economics of customer relationships, measure customer value and provide
incentives through campaigns that influence and optimize customer behavior. Our
solution offers the following key benefits:
o IMPROVED PROFITABILITY AND REVENUE GROWTH. Through the use of our
solution, businesses have achieved increased customer retention rates, lower
acquisition costs, more efficient cross selling and better customer satisfaction
due to more relevant, less intrusive communications.
o ABILITY TO PROVIDE CUSTOMERS WITH A CONSISTENT EXPERIENCE. Xchange
believes that eCRM isn't about giving companies a 360-degree view of customers -
it's about giving customers a 360-degree view of companies. Our software
provides this capability by tying all the customer channels together, from the
customer's perspective, and ensuring that they receive consistent offers and
information regardless of the channel.
o INCREASED MARKETING VELOCITY. Xchange 4.0 is designed to allow
businesses to dramatically reduce the cycle time from planning through design,
execution and measurement of campaigns to better respond to competitive and
market pressures and to quickly evaluate new campaigns.
10
<PAGE>
o OPEN, EXTENSIBLE ARCHITECTURE. Xchange 4.0 is designed to be open,
easy-to-use and scaleable across a wide variety of computing environments, and
can be integrated with existing hardware and software environments.
Our objective is to be the leading provider of eCRM software and solutions.
Competitive advantages include:
o The size of our customer base and quantity of customer references;
o The open platform nature of our solutions, which translates into easy
integration;
o Our six years of domain expertise in eCRM;
o Our extensive experience in hosting eCRM applications (Xchange hosted
approximately 500 million personalized, outbound opt-in email messages
in 1999 alone);
o Our strong relationships with revenue-producing partners such as
Acxiom, Epsilon and PricewaterhouseCoopers; and
o The quality of our management team.
We have deployed our solution across many industries, with installations at
over 200 different locations in North and South America, Europe, the Middle
East, Africa and Asia. Our customers include Ameritrade, Bell Atlantic,
Citigroup, Federal Express, Fidelity Investments, Fleet Bank, Cable & Wireless
HKT, NatWest Bank (U.K.), Nextel, Staples and U S West. Our products and
services are distributed through our direct sales force, through re-seller
relationships with Acxiom, ClientLogic, , Epsilon, IBM, MicroStrategy,
NetPerceptions and others, and through co-marketing arrangements with companies
such as Andersen Consulting, Ernst & Young, Hewlett Packard, KPMG,
PricewaterhouseCoopers and SAS Institute.
CORPORATE OVERVIEW
The Company was incorporated in November 1996. Prior to incorporation, the
Company operated as a separate division of two entities, Grant & Partners, Inc.
("GPI") and Grant & Partners Limited Partnership ("GPLP"). The Company's
activities during its early stages of operation focused on the development of
software solutions to provide customer communications support to businesses. In
1995, the Company began providing professional services in the areas of
marketing program design and execution and data warehousing. In March 1997, the
Company ceased providing marketing program design services. The Company's
development efforts culminated in the introduction to the market in July 1996 of
the first module of the Xchange Dialogue product family, the Company's marketing
automation software product. Since this initial introduction of Xchange
Dialogue, the Company has continued to focus significant resources on the
development of additional functionality and features of the Xchange Dialogue
suite as well as the development and acquisition of additional solutions within
the Company's eCRM solution set including Xchange Real Time, Xchange EnAct, and
the email marketing and analytic modules of the Xchange Dialogue suite. The
Company also has continued to expand its marketing activities, build the Xchange
identity, develop the competencies of the professional services group, build
international sales and distribution channels and develop its general and
administrative infrastructure. The Company has shifted its primary business
focus from providing services to selling software products. However, the Company
believes that continuing to provide superior professional services will be
critical to maximizing its opportunities for future revenues.
In August 1999, the Company acquired eXstatic (formerly Gino Borland, Inc.)
in a transaction accounted for as a pooling of interest. eXstatic develops and
markets software products that enable businesses to plan, create and execute
highly personalized, permission-based email communications based on customer
profiles. In accordance with pooling of interests accounting, the results of
operations have been restated to reflect the historical results of
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eXstatic on an as combined basis. In March 2000, the Company aquired Knowledge
Stream Partners (KSP) in a transaction accounted for under the purchase method.
KSP specializes in consulting and software development for advanced data mining
and online/offline analytics. Most recently, in June 2000, the Company acquired
Customer Analytics, Inc. in a transaction accounted for under the purchase
method. Customer Analytics develops and markets campaign management solutions
focused on creating, executing, analyzing and measuring customer communications
at the local or branch level.
The Company generates revenue from software licenses, professional service
arrangements and software maintenance agreements. The Company recognizes
software license fee revenues upon execution of a license agreement and delivery
of the software, provided that the fee is fixed or determinable and deemed
collectible by management. If acceptance of the software by the licensee is
required, revenues are only recognized upon satisfaction of the foregoing
conditions and acceptance of the software. Furthermore, if services provided in
connection with a software arrangement are essential to the functionality of the
software, software license fee revenues are recognized on the
percentage-of-completion method as the services are performed.
Revenues from professional service arrangements are recognized on either a
time and materials or percentage-of-completion basis as the services are
performed, provided that amounts due from customers are fixed or determinable
and deemed collectible by management. Revenues related to software maintenance
agreements are recognized ratably over the term of the maintenance period.
Amounts collected prior to satisfying the above revenue recognition criteria are
reflected as deferred revenue.
In certain situations, the Company may enter into transactions with third
parties to acquire technology from those entities at the same time that the
Company sells its technology to those same third parties. In those instances,
the Company applies Accounting Principles Board Opinion No. 29 "Accounting for
Nonmonetary Transactions: and Emerging Issues Task Force Issue No. 86-29
"Nonmonetary Transactions: Magnitude of the Boot and the Exceptions to the Use
of Fair Value" to such transactions.
Although the Company has experienced significant revenue growth recently,
there can be no assurance that such growth rates are sustainable and they should
not be relied upon as predictive of future performance. In addition, the timing
of license revenues is difficult to predict because of the length and
variability of the Company's sales cycle. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development, particularly in new
and rapidly evolving markets. There can be no assurance that the Company will be
successful in addressing such risks and difficulties or that it will continue to
increase revenues.
RISK FACTORS
Statements in this report concerning the future results of operations,
financial condition and business of the Company are "forward-looking" statements
as defined in the Securities Act of 1933 and the Securities Exchange Act of
1934. Investors are cautioned that information contained in these
forward-looking statements is inherently uncertain, and that actual performance
and results may differ materially due to numerous risk factors, including but
not limited to the following: LIMITED OPERATING HISTORY MAKES EVALUATING OUR
BUSINESS DIFFICULT; RECENT TRANSACTIONS, INCLUDING ACQUISITIONS OF KNOWLEDGE
STREAM PARTNERS AND CUSTOMER ANALYTICS AS WELL AS TRANSACTIONS WITH
MICROSTRATEGY INCORPORATED WILL RESULT IN SHORT TERM LOSSES; QUARTERLY OPERATING
RESULTS MAY FLUCTUATE SIGNIFICANTLY AND INVESTORS SHOULD NOT RELY ON THEM TO
PREDICT OUR FUTURE PERFORMANCE; OUR BUSINESS MAY SUFFER IF OUR SOLUTIONS ARE NOT
ACCEPTED BY NEW CUSTOMERS; IF WE DO NOT SUCCESFULLY INTEGRATE ACQUIRED
TECHNOLOGY INTO OUR PRODUCT OFFERING, OUR BUSINESS MAY SUFFER; THE LOSS OF ONE
OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP QUICKLY AND
UNEXPECTEDLY; WE NEED TO MANAGE OUR GROWTH EFFECTIVELY OR WE MAY NOT SUCCEED; IF
WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL,
OUR BUSINESS AND GROWTH MAY SUFFER; OUR BUSINESS WILL NOT GROW IF WE DO NOT KEEP
PACE WITH RAPIDLY CHANGING TECHNOLOGIES; OUR STOCK PRICE OR OUR BUSINESS COULD
BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO EFFICIENTLY INTEGRATE ACQUISITIONS;
COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS; IF WE DO NOT
SUCCESSFULLY MAINTAIN OUR RELATIONSHIPS WITH INDIRECT DISTRIBUTION CHANNELS, OUR
SALES COULD DECLINE OR COULD GROW MORE SLOWLY THAN EXPECTED; WE HAVE A LIMITED
ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND OTHERS COULD INFRINGE ON
OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS; IF WE DO NOT SUCCESSFULLY GROW AND
MANAGE OUR INTERNATIONAL OPERATIONS, OUR BUSINESS WILL SUFFER; CURRENCY
FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN OUR FOREIGN MARKETS MAY IMPACT
OUR CUSTOMERS' SPENDING AND THE VALUE OF MONEY OWED TO US; OUR FOUNDERS,
OFFICERS AND PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR VOTING
STOCK AND HAVE THE ABILITY TO MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR
STOCK PRICE; WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS; OUR COMMON
STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY; WE HAVE
ADOPTED ANTI-
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TAKEOVER PROVISIONS THAT COULD AFFECT THE MARKET PRICE OF OUR COMMON STOCK OR
OUR ABILITY TO SELL OUR BUSINESS. The Company's filings with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the year ended
December 31, 1999, contain additional information concerning such risk factors.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." This interpretation
clarifies the application of Opinion No. 25, among others issued, (a) the
definition of employees for the purpose of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequences of various modifications to the terms of a
previously issued stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. The interpretation is
effective July 1, 2000 and the effects of applying the Interpretation are
recognized on a prospective basis. The Company does not expect that the adoption
of the Interpretation will have a material impact on its financial condition or
results of operations.
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
The Company's total revenues increased 86% from $18.7 million in the six
months ended June 30, 1999 to $34.8 million for the six months ended June 30,
2000. This increase in total revenues can be attributed to a number of factors,
including:
o an increase in the Company's sales force from 21 direct sales
representatives at June 30, 1999 to 42 at June 30, 2000;
o an increase in international revenues from the Company's subsidiaries
in the United Kingdom and Australia; and
o an increase in services and maintenance revenues from the Company's
growing customer base
o an expansion in both the number of indirect sales channels, as well as
an increase in revenues generated through those channels
o incremental revenues from the delivery of product and services
acquired through transactions accounted for under the purchase
accounting method and therefore not included in the comparable period
last year
Software license fee revenues increased 114% from $11.1 million, or 59.1%
of total revenues, in the six months ended June 30, 1999 to $23.6 million, or
67.9% of total revenues, in the six months ended June 30, 2000. The increase in
software license fee revenues was primarily due to increased market awareness of
the Dialogue product family, including both the Company's original Dialogue
product as well as the email messaging module added in the second half of 1999.
In addition the Company realized incremental revenues in 2000 from the release
of two new products, Xchange Real Time and the analytical reporting module of
the Xchange Dialogue suite, as well as revenues associated with the Xchange
EnAct product acquired in June 2000.
Services and maintenance revenues increased 46% from $7.7 million or 40.9%
of total revenues for the six months ended June 30, 1999 to $11.2 million, or
32.1% of total revenues for the six months ended June 30, 2000. The growth of
services and maintenance revenues was directly attibutable to additional service
engagements and maintenance fees from the Company's increased base of customers.
The decrease in services and maintenance revenues as a percentage of total
revenues was primarily attributable to the increased software license fee
revenues resulting from the market acceptance of the Company's suite of
products. As the Company continues to expand its services offering to include
newly identified, more profitable opportunities, as well as projects that
require unique expertise or familiarity with the Company's products, it is
expected that services and maintenance revenues will remain constant or increase
slightly as a percentage of total revenues.
For the six months ended June 30, 2000, the Company's top five customers
accounted for 35.9% of total revenues as compared to 33.5% of total revenues for
the six months ended June 30, 1999. Only one of the top five customers during
the six months ended June 30, 2000 was a top five customer during the six months
ended June 30,
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1999. The largest customer during the six months ended June 30, 2000 represented
15.5% of total revenues, while the largest customer for the six months ended
June 30, 1999 represented 9.6% of the Company's total revenues.
Revenues from customers outside North America were $8.0 million for the six
months ended June 30, 2000, representing approximately 23% of total revenues as
compared to $5.8 million or 31% of total revenues for the comparable period in
the prior year.
COST OF REVENUES
The Company's cost of revenues consists of costs associated with software
license fees and costs associated with services and maintenance. Total cost of
revenues as a percentage of total revenues declined from 24.6% in the six months
ended June 30, 1999 to 22.6% in the six months ended June 30, 2000.
Cost of software license fees consists primarily of royalty payments made
to third parties for licensed intellectual property included in the Xchange
Dialogure and Xchange Real Time products, and costs associated with software
packaging and distribution. Cost of software license fees increased from
$164,000, or 0.8% of total revenues for the six months ended June 30, 1999 to
$362,000, or 1.0% of total revenues for the six months ended June 30, 2000. Cost
of software license fees as a percentage of software license fee revenues were
1.5% during both six month periods. The increase in cost of software license
fees for the six months ended June 30, 2000 over June 30, 1999 primarily
resulted from increased shipments of Xchange Dialogue software and, therefore,
the associated royalty expense payable to third parties and costs associated
with software packaging and distribution. In addition, the Company incurred
incremental royalty obligations associated with the shipment of Xchange Real
Time in the second quarter of 2000. The Company has added additional components
to its software products offering through strategic partnerships with third
party suppliers. As the Company realizes software revenue from these additional
components we expect cost of revenues to increase both in absolute dollars and
as a percentage of total revenues. The Company anticipates cost of software
revenues to be between two and four percent of total revenues in the future,
depending on the exact mix of third party leveraged components to total software
revenue.
The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, and customer support services. As a result of the
increased software license fee revenues, cost of services and maintenance
revenues as a percentage of total revenues decreased from 23.8% for the six
months ended June 30, 1999 to 21.5% for the six months ended June 30, 2000. Cost
of services and maintenance as a percentage of services and maintenance revenues
was 58.1% and 67.0% for the six months ended June 30, 1999 and 2000,
respectively. The increase was attributable primarily to the increased
investment in personnel and capital expenditures associated with the Company's
application service provider (ASP) service offering.
As the Company sells more of its software products through re-seller and
co-marketing relationships, it is anticipated that the re-sellers will provide
certain of the consulting and maintenance services associated with these sales.
By using the services resources of the re-sellers and co-marketers, the Company
plans to allocate its own professional services resources to:
o direct-sale customers;
o projects that require unique expertise or familiarity with the
Dialogue and Real Time product families; and
o newly identified, more profitable opportunities.
Due to this fact, and to the increase in contribution from higher margin
maintenance revenues, the Company expects cost of services and maintenance to
decrease slightly as a percentage of both total revenues and service and
maintenance revenues in the foreseeable future.
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Overall gross margin increased from 75.4% for the six months ended June 30,
1999 to 77.4% for the six months ended June 30, 2000 due primarily to increased
software contribution to the revenue mix.
OPERATING EXPENSES
SALES AND MARKETING. The Company's sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, commissions, travel and
promotional expenses. For the six months ended June 30, 1999 and 2000, sales and
marketing expenses were 36.0% and 31.7% of total revenues, or $6.7 million and
$11.0 million, respectively. The increase in absolute dollars is primarily
attributable to an increase in sales and marketing personnel from 53 at June 30,
1999 to 111 at June 30, 2000, as well as increased spending on certain
promotional activities including trade shows, seminars, and the development of
collateral materials designed to increase awareness of the Company and it
products. The investment in the sales and marketing personnel and activities has
contributed to increased software license revenues and expansion of the customer
installation base to over 200 locations in 33 countries. As the Company expands
its business into new vertical markets and continues the expansion
internationally into Europe and the Asia/Pacific region, the Company expects to
continue to invest resources into the sales and marketing arena. While sales and
marketing expenses are expected to continue to grow in absolute dollars, the
Company expects these expenses to remain the same as a percentage of total
revenues due to economies of scale and increased contribution from indirect
sales channels.
RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consist primarily of employee salary and benefits, consultant costs, and
equipment and purchased software depreciation costs associated with new product
development, enhancement of existing products and quality assurance activities.
For the six months ended June 30, 1999 and 2000, research and development
expenses were 22.3% and 22.4% of total revenues, or $4.2 million and $7.8
million, respectively. This increase in absolute dollars was primarily a result
of the addition of 89 research and development personnel, including contractors,
in the six months ended June 30, 2000 as compared to the same period in 1999.
The Company anticipates that research and development expenses will continue to
increase in absolute dollars but decrease as a percentage of total revenues as
it continues to commit substantial resources to enhancing existing product
functionality and to developing new products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of:
o salaries and related costs;
o outside professional fees; and
o equipment and software depreciation costs associated with our finance,
legal, human resources, information systems, and administrative
functions.
General and administrative expenses increased from $2.1 million, or 11.5%
of total revenues, for the six months ended June 30, 1999 to $4.2 million, or
12.0% of total revenues, for the six months ended June 30, 2000. Expenses
increased in absolute dollars as the Company added 48 employees to its finance,
information systems, and human resource departments between June 30, 1999 and
June 30, 2000. The Company expects general and administrative expenses to
continue to grow in absolute dollars but to decrease as a percentage of total
revenues as a result of the following factors:
o the implementation of additional management information systems;
o the continuation of the Company's domestic and international
expansion; and
o the costs that the Company is incurring as a result of being a
publicly-held company.
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INTEREST INCOME (EXPENSE), NET
Net interest income increased from $465,000 for the six months ended June
30, 1999 to $848,000 for the six months ended June 30, 2000 primarily as a
result of interest earned on proceeds from the Company's initial public offering
completed in December 1998 and its second public offering completed in June
1999.
PROVISION FOR INCOME TAXES.
No provision for foreign, federal, or state income taxes was recorded for
the six months ended June 30, 2000 because the Company incurred a net loss
during the six month period. For the six months ended June 30, 1999 the Company
recorded a provision for income taxes of $713,000 or 46.9% of income before
income taxes. The Company had been using an effective tax rate of 37% of income
before income taxes prior to the GBI acquisition in August 1999, which was
accounted for as a pooling. Prior to its acquisition, GBI was structured as a
sub-chapter S corporation and, as such, the tax benefit of losses incurred
through August 20, 1999 reverted to that company's principals. Therefore, the
historical effective tax rate after incorporating the GBI statement of
operations is significantly higher than the 37% provided for by the Company
through the period.
THREE MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
The Company's total revenues increased 91.4% from $10.3 million in the
three months ended June 30, 1999 to $19.6 million for the three months ended
June 30, 2000. This increase in total revenues can be attributed to a number of
factors, including:
o an increase in the Company's sales force from 21 direct sales
representatives at June 30, 1999 to 42 at June 30, 2000;
o an increase in services and maintenance revenues from the Company's
growing customer base
o an expansion in the number of indirect sales channels, as well as an
increase in revenues generated through indirect sales channels
o incremental revenues from the delivery of product and services
acquired through transactions accounted for under the pruchase
accounting method and therefore not included in the comparable period
last year
Software license fee revenues increased 120.6% from $6.1 million, or 59.0%
of total revenues, in the three months ended June 30, 1999 to $13.4 million, or
68.0% of total revenues, in the three months ended June 30, 2000. The increase
in software license fee revenues was due to increased market awareness of the
Xchange Dialogue product family, including the email messaging module which was
not available in the three months ended June 30, 1999, and revenues generated by
new strategic partnerships with resellers and value added service providers.
Services and maintenance revenues increased 49.4% from $4.2 million or
41.0% of total revenues, in the three months ended June 30, 1999 to $6.3
million, or 32.0% of total revenues, in the three months ended June 30, 2000.
The growth of services and maintenance revenues was directly attributable to
additional service engagements and maintenance fees from the Company's increased
base of customers. The decrease in services and maintenance revenues as a
percentage of total revenues was primarily attributable to the growth in
software license fee revenues at a faster pace than services and maintenance
revenues.
For the three months ended June 30, 2000, the Company's top five customers
accounted for 39.2% of total revenues as compared to 43.0% of total revenues for
the three months ended June 30, 1999. Only one of the top five customers during
the three months ended June 30, 2000 was a top five customers during the three
months ended June 30, 1999. The two largest customers during the three months
ended June 30, 2000 represented 9.9% and 9.7% of total revenues, respectively,
while the two largest customers for the three months ended June 30, 1999
represented 11.1%, and 10.1%, respectively, of the Company's total revenues.
Revenues from customers outside North America were $4.6 million for the
three months ended June 30, 2000,
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representing approximately 23% of total revenues as compared to $4.2 million or
approximately 41% of total revenues for the comparable period in the prior year.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues declined from
24.9% in the three months ended June 30, 1999 to 22.2% in the three months ended
June 30, 2000.
Cost of software license fees consists primarily of royalty payments made
to third parties for licensed intellectual property included in the Xchange
Dialogue and Xchange Real Time products, and costs associated with software
packaging and distribution. Cost of software license fees increased from
$63,000, or 0.6% of total revenues, for the three months ended June 30, 1999 to
$221,000, or 1.1% of total revenues for the three months ended on June 30, 2000.
Cost of software license fees as a percentage of software license fee revenues
increased from 1.0% to 1.7% for the three months ended June 30, 1999 and 2000,
respectively. The increase in cost of software license fees for the three months
ended June 30, 2000 over June 30, 1999 resulted from increased shipments of
Xchange Dialogue as well as the shipment in 2000 of Xchange Real Time software,
which carries a significant third party royalty or cost of sale with each unit
shipped.
The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, hosted software services for the Xchange Dialogue
product suite, and customer support services. As a result of the increased
software license fee revenues, cost of services and maintenance revenues as a
percentage of total revenues decreased from 24.3% for the three months ended
June 30, 1999 to 21.1% for the three months ended June 30, 2000. Cost of
services and maintenance as a percentage of services and maintenance revenues
was 59.2% and 66.0% for the three months ended June 30, 1999 and 2000,
respectively. The increase was attributable primarily to the increased
investments by the Company in the services infrastructure, including hardware
and personnel requirements associated with the hosted Xchange Dialogue services
offering.
Overall gross margin increased from 75.1% for the three months ended June
30, 1999 to 77.8% for the three months ended June 30, 2000 due primarily to
increased software sales of Xchange Dialogue products.
OPERATING EXPENSES
SALES AND MARKETING. The Company's sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, commissions, travel and
promotional expenses. For the three months ended June 30, 1999 and 2000, sales
and marketing expenses were 34.5% and 31.5% of total revenues, or $3.5 million
and $6.2 million, respectively. The increase is primarily attributable to an
increase in sales and marketing personnel from 53 at June 30, 1999 to 111 at
June 30, 2000, as well as increased spending on certain promotional activities
including trade shows, seminars, and the development of collateral materials
designed to increase awareness of the Company and its eCRM solution set.
RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consist primarily of employee salary and benefits, consultant costs, and
equipment and purchased software depreciation costs associated with new product
development, enhancement of existing products and quality assurance activities.
For the three months ended June 30, 1999 and 2000, research and development
expenses were 21.7% and 23.3% of total revenues, or $2.2 million and $4.6
million, respectively. This increase in absolute dollars was primarily a result
of the addition of 89 research and development personnel, including contractors,
in the three months ended June 30, 2000 as compared to the same period in 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.2 million, or 11.5% of total revenues, for the three months ended June
30, 1999 to $2.2 million, or 11.4% of total revenues, for the three months ended
June 30, 2000. The increase in absolute dollars was the result of the addition
of 48 employees to its finance, information systems, and human resource
departments between June 30, 1999 and June 30, 2000.
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INTEREST INCOME (EXPENSE), NET
Net interest income increased from $237,000 for the three months ended June
30, 1999 to $373,000 for the three months ended June 30, 2000 primarily as a
result of interest earned on proceeds from the Company's second public offering
completed in June 1999. Interest expense of $676,000 for the three months ended
June 30, 2000 related to the MicroStrategy obligation.
PROVISION FOR INCOME TAXES.
No provision for foreign, federal, or state income taxes was recorded for
the three months ended June 30, 2000 because the Company incurred a net loss
during the three month period. For the three months ended June 30, 1999 the
Company recorded an income tax provision of $472,000, or 47.6% of income before
income taxes. The Company had been using an effective tax rate of 37% of income
before income taxes prior to the GBI acquisition in August 1999, which was
accounted for as a pooling. Prior to its acquisition, GBI was structured as a
sub-chapter S corporation and, as such, the tax benefit of losses incurred
through August 20, 1999 reverted to that company's principals. Therefore, the
historical effective tax rate after incorporating the GBI statement of
operations is significantly higher than the 37% provided for by the Company
through the period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000 the Company had $13.4 million in cash and short-term
investments and an additional $2.0 million of long-term investments. In June
1999, the Company modified the terms of its revolving note agreement with Fleet
National Bank, increasing the credit limit from $2.0 million to $5.0 million. It
is the Company's belief that its existing balance of cash, cash equivalents and
short-term investments, combined with its $5.0 million revolving note agreement
will be sufficient to meet the Company's current working capital and anticipated
capital expenditure needs for at least the next 12 months. However, if the
Company continues to expand its product and service offerings through
acquisition we may require additional sources of funds to continue to support
our business. There can be no assurance that such capital, if needed, will be
available or will be available on terms the Company finds acceptable.
Cash and cash equivalents as of June 30, 2000 decreased $8.2 million from
December 31, 1999. Net cash used in operations of approximately $11.2 million
resulted primarily from the payment of commissions and bonuses, an increase in
accounts receivable due to the increase in revenue, and an increase in prepaid
expenses and other current assets primarily from the acquisition of technology
used in the Company's Dialogue solution set These amounts are offset by non-cash
related expenses including the amortization of goodwill and other intangibles
from the KSP and Customer Analytics acquisitions as well as the amortization of
the asset from the MicroStrategy Incorporated investment.
Net cash used provided by investing activities of $697,000 for the six
months ended June 30, 2000 was a result of property and equipment purchases
related to the increase in headcount, expansion and integration of the Company's
operating sites, and the acquisition of computer hardware and software for
development and internal operating systems. In addition, the Company used $5.1
million of cash to fund acquisition liabilities arising from the KSP and
Customer Analytics acquisitions. These uses of cash were offset by the proceeds
from the maturity of short term and long term investmetns. Net cash provided by
financing activities of $2.6 million consisted of $2.4 million in proceeds from
the exercise of common stock options during the six months ended June 30, 2000,
and $209,000 in proceeds from the issuance of common stock under the Company's
Employee Stock Purchase Plan.
The Company currently has sales offices in the United Kingdom, Japan, and
Australia, in addition to the United States. The Company's revenues from
international operations have been denominated in foreign currencies which
historically have been stable in relation to U.S. dollars. As a result, the gain
or loss from foreign currency transactions has not been material to its
operating results. As of June 30, 2000, the material assets and liabilities
denominated in foreign currencies include accounts receivable, accounts payable
and cash and cash equivalents. Due
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to the stability of the foreign economies where these assets and liabilities are
denominated, the Company has not adopted a policy of hedging foreign currency
risks. While it is anticipated that foreign transactions will continue to be
denominated in local currencies, the Company expects to use hedging instruments
to offset potential currency exposures arising as its international operations
expand into less stable economic environments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency treasury bills and notes with an average maturity of less then twelve
months. These available-for-sale securities are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels at
June 30, 2000, the fair value of the portfolio would decline by an immaterial
amount.
FOREIGN CURRENCY EXCHANGE RISK. With sales and services offices in the
United States, United Kingdom and Australia, and a global customer base, the
Company faces exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as business practices evolve and could have
a material adverse impact on the Company's financial results. Historically the
Company's primary exposure has been nondollar-denominated operating expenses and
sales by its United Kingdom subsidiary. The introduction of the Euro as a common
currency for members of the European Monetary Union, of which the United Kingdom
is not a member, occurred in January 1999. To date, we have not noticed any
material impact from the introduction of the Euro. In addition, as the Company
expands its sales and service presence in the Asia/Pacific region in 2000, its
exposure to foreign currency exchange rate risks from the more volatile
economies of this region will increase. The Company is prepared to hedge against
fluctuations in the British Sterling, Euro, or other foreign currency if the
exposure becomes material. As of June 30, 2000 the Company's material
nondollar-denominated assets and liabilities primarily consisted of cash,
accounts receivable, and accounts payable denominated in British Sterling and
Australian dollars.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on
June 14, 2000
(b) The Annual Meeting was held to consider and vote upon three proposals
submitted by the Company as follows:
(1) The Company submitted a proposal to re-elect Mr. Dean F.
Goodermote as a director of the Company to hold office for a
three-year term and until his successor has been duly elected and
qualified. The results of the votes cast are as follows:
For Against Withheld
--- ------- --------
19,597,252 -0- 71,969
(2) The Company submitted a proposal to ratify the action of the
Board of Directors in amending the 1998 Stock Incentive Plan to
increase the number of shares of common stock authorized for
issuance thereunder from 5,400,000 to 9,400,000. The results of
the votes cast are as follows:
For Against Withheld No Vote
--- ------- -------- -------
9,124,228 8,471,888 47,990 1,781,771
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<PAGE>
(3) The Company submitted a proposal to approve the amendment to the
Company's Certificate of Incorporation to change the Company's
name to Xchange, Inc The results of the votes cast are as
follows:
For Against Withheld
--- ------- --------
4,700,261 2,462,322 23,526
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
As a result of the acquisition of Customer Analytics on June 30,2000 , the
Company filed a report on Form 8-K on July 12, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Exchange Applications, Inc.
(Registrant)
Dated: August 14, 2000
By: /s/ JOHN G. O'BRIEN
------------------------------
John G. O'Brien
Chief Financial Officer, Treasurer, Secretary
(authorized officer and principal finance and
accounting officer)
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