SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Bottomline Technologies (de), Inc.
(Exact name of Registrant as Specified in Its Charter)
Commission file number: 0-25259
Delaware 02-0433294
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
155 Fleet Street, Portsmouth, New Hampshire 03801
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(Address of principal executive offices)
Registrant's telephone number, including area code: (603) 436-0700
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 [ ]
The number of shares outstanding of the registrant's common stock as of April
30, 2001 was 13,040,442.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2001 and June 30, 2000 1
Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended
March 31, 2001 and 2000 2
Unaudited Condensed Consolidated Statements of
Cash Flows for the nine months ended
March 31, 2001 and 2000 4
Notes to Unaudited Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis 9
ITEM 3. Quantitative and Qualitative Disclosure
about Market Risk 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes In Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
March 31, 2001 June 30, 2000
-------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 8,583 $27,292
Short term investments 4,124 11,222
Accounts receivable, net of allowance for doubtful accounts of
$1,456 at March 31, 2001 and $1,097 at June 30, 2000 17,533 14,571
Other current assets 5,839 1,760
----------- ----------
Total current assets 36,079 54,845
Property and equipment, net 6,889 5,172
Goodwill and other intangible assets, net 81,756 8,416
Other assets 1,604 2,847
----------- ----------
Total assets $126,328 $71,280
=========== ==========
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable $ 5,854 $ 2,004
Accrued expenses 6,050 4,930
Deferred revenue and deposits 9,821 6,034
Income taxes payable - 901
----------- ----------
Total current liabilities 21,725 13,869
Deferred income taxes payable 886 283
Notes payable 21,396 -
Stockholders' equity:
Common stock 13 11
Additional paid-in-capital 123,223 64,914
Deferred stock compensation (1,075) -
Accumulated other comprehensive loss (2,647) (8)
Retained deficit (37,193) (7,789)
----------- ----------
Total stockholders' equity 82,321 57,128
----------- ----------
Total liabilities and stockholders' equity $126,328 $71,280
=========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
1
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Three Months Ended
March 31,
2001 2000
------- ------
Revenues:
Software licenses $ 5,665 $ 5,951
Service and maintenance 8,054 5,796
Equipment and supplies 4,986 2,374
-------- -------
Total revenues 18,705 14,121
Cost of revenues:
Software licenses 1,125 90
Service and maintenance 4,585 2,684
Equipment and supplies 3,640 1,780
-------- -------
Total cost of revenues 9,350 4,554
-------- -------
Gross profit 9,355 9,567
Operating expenses:
Sales and marketing:
Sales and marketing 6,261 3,504
Product development and engineering:
Product development and engineering 4,103 2,456
Stock compensation expense 110 -
General and administrative:
General and administrative 3,568 2,283
Amortization of intangible assets 8,759 824
-------- -------
Total operating expenses 22,801 9,067
-------- -------
Income (loss) from operations (13,446) 500
Interest income (expense), net (398) 424
-------- -------
Income (loss) before provision (benefit) for income taxes (13,844) 924
Provision (benefit) for income taxes (499) 370
-------- -------
Net income (loss) $(13,345) $ 554
======== =======
Net earnings (loss) per share:
Basic and diluted $(1.03) $0.05
======== =======
Shares used in computing net earnings (loss) per share:
Basic 12,995 10,758
======== =======
Diluted 12,995 11,914
======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
2
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Nine Months Ended
March 31,
2001 2000
------- -------
Revenues:
Software licenses $ 18,999 $11,293
Service and maintenance 23,971 15,243
Equipment and supplies 13,966 7,184
-------- -------
Total revenues 56,936 33,720
Cost of revenues:
Software licenses 1,712 181
Service and maintenance 12,771 7,170
Equipment and supplies 9,893 5,374
-------- -------
Total cost of revenues 24,376 12,725
-------- -------
Gross profit 32,560 20,995
Operating expenses:
Sales and marketing:
Sales and marketing 18,554 9,566
Product development and engineering:
Product development and engineering 10,563 5,522
Acquired in-process research and development - 3,900
Stock compensation expense 256 -
General and administrative:
General and administrative 10,002 6,561
Amortization of intangible assets 20,763 1,431
-------- -------
Total operating expenses 60,138 26,980
-------- -------
Loss from operations (27,578) (5,985)
Interest income (expense), net (451) 1,381
-------- -------
Loss before provision (benefit) for income taxes (28,029) (4,604)
Provision (benefit) for income taxes 1,375 (1,841)
-------- -------
Net loss $(29,404) $(2,763)
======== =======
Net loss per share:
Basic and diluted $(2.34) $(0.26)
======== =======
Shares used in computing net loss per share:
Basic and diluted 12,577 10,676
======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
3
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended
March 31,
2001 2000
------- -------
Cash provided by (used in) operating activities $ (2,631) $ 1,660
Investing activities:
Purchases of property and equipment, net (1,767) (2,944)
Sales (purchases) of short-term investments, net 7,114 (9,144)
Increase in equity investments (1,400) -
Acquisition of businesses and assets, net of cash acquired (11,415) (13,835)
-------- --------
Net cash used in investing activities (7,468) (25,923)
Financing activities:
Proceeds from exercise of stock options and employee stock purchase plan 1,674 2,930
Payment of certain liabilities assumed upon acquisition (10,272) -
-------- --------
Net cash provided by (used in) financing activities (8,598) 2,930
Effect of exchange rate changes on cash (12) -
-------- --------
Decrease in cash and cash equivalents (18,709) (21,333)
Cash and cash equivalents at beginning of period 27,292 39,699
-------- --------
Cash and cash equivalents at end of period $ 8,583 $ 18,366
======== ========
Schedule of non-cash investing and financing activities
Issuance of common stock, common stock options and
common stock warrants in connection with acquisitions $ 56,651 -
Issuance of promissory notes in connection with acquisitions $ 20,356 -
See accompanying notes to unaudited condensed consolidated financial statements.
4
Bottomline Technologies (de), Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2001
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. Operating results for the three and
nine months ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2001. For further
information, refer to the financial statements and footnotes included in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission (SEC).
Note 2 - Business Combinations
On August 28, 2000, the Company acquired the stock of two companies,
Checkpoint Holdings, Ltd. (Checkpoint) and Flashpoint, Inc. (Flashpoint).
Accordingly, the accompanying unaudited condensed consolidated financial
statements include the results of operations and the estimated fair values of
the assets acquired and liabilities assumed from the respective date of
acquisition.
Checkpoint, a private company incorporated in England and Wales, is a
provider of electronic commerce and electronic payment software for the United
Kingdom. The acquisition was completed pursuant to a Share Purchase Agreement
dated August 28, 2000 between the Company and Checkpoint stockholders. The
consideration for the acquisition was approximately $60.4 million, consisting of
$4.7 million in cash, $19.8 million in loan notes, which, as described herein,
were subsequently redeemed, 1,013,333 shares of the Company's common stock,
warrants to purchase a total of 100,000 shares of common stock at an exercise
price of $50.00 per share and payment of transaction costs. In connection with
the acquisition, 336,667 shares of the Company's common stock were issued to
satisfy pre-existing loan note obligations of Checkpoint in the amount of $10.5
million. As a result of the acquisition and the preliminary allocation of the
purchase price, intangible assets of approximately $80.0 million were recorded
as identified in the table below.
Checkpoint designates the local currency as their functional currency and
related cumulative translation adjustments are included as a component of
accumulated other comprehensive income. Financial statements of the foreign
subsidiary are remeasured to U.S. dollars for consolidation purposes using
current rates of exchange for monetary assets and liabilities and historical
rates of exchange for nonmonetary assets and related elements of expense.
Revenue and other expense elements are remeasured at rates that approximate the
rates in effect on the transaction dates. Remeasurement gains and losses are
included in the Company's unaudited condensed consolidated statements of
operations.
Flashpoint, a Massachusetts corporation, is a developer of Web-based
software. The acquisition was completed pursuant to a Stock Purchase Agreement
dated August 28, 2000 by and among the Company, Flashpoint, and the sole
stockholder of Flashpoint. The consideration for the acquisition was
approximately $16.8 million, consisting of $4.5 million in cash, 242,199 shares
of the Company's common stock, the assumption of all outstanding stock options
of Flashpoint and payment of transaction costs. As a result of the acquisition
and the preliminary allocation of the purchase price, intangible assets of
approximately $16.9 million were recorded as identified in the table below.
5
Checkpoint Flashpoint Total
--------- --------- -------
(in thousands)
Customer list $15,867 $ - $ 15,867
Assembled workforce 4,442 1,509 5,951
Developed software 3,761 - 3,761
Trade name 1,543 - 1,543
Contract backlog - 435 435
Goodwill 54,351 14,929 69, 280
------- ------- -------
Total $79,964 $16,873 $ 96,837
======= ======= =======
The intangible assets will be amortized over their estimated useful lives, as
follows: customer list, assembled workforce, developed software, trade name and
goodwill - three years; contract backlog - ten months.
The acquisitions were accounted for using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). Under APB 16, purchase price allocations are made to
the assets acquired and the liabilities assumed based on their respective fair
values. The value of the Company's common stock was recorded at the average of
the last reported sales price on The Nasdaq National Market during the last
three consecutive trading days ending on and including August 28, 2000. The
value of the warrants and stock options were recorded at their fair values based
on the Black-Scholes valuation method.
The purchase price allocations are based on preliminary assessments.
Adjustments will be made to the purchase price allocations if changes to the
preliminary assessments occur prior to June 30, 2001. The Company has recorded
adjustments to the purchase price. However, the net effect of the adjustments
had no material effect on the purchase price in the aggregate.
During fiscal 2000, the Company acquired substantially all of the assets
and assumed certain liabilities of Integrated Cash Management Services, Inc.
(ICM) for an aggregate purchase price of $9.3 million in cash and payment of
transaction costs. Also during fiscal 2000, the Company acquired all of the
outstanding stock of OLC Software, Inc. (OLC) for an aggregate purchase price of
$1.5 million in cash and transaction costs.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, ICM, Checkpoint and Flashpoint as
if the acquisitions had occurred as of the beginning of the nine months ended
March 31, 2001 and March 31, 2000, after giving effect to certain adjustments,
including amortization of goodwill and other intangible assets. Since OLC had
limited operations prior to the acquisition, no OLC amounts are included in the
pro forma information below. The pro forma information does not necessarily
reflect the results of operations that would have occurred had the Company, ICM,
Checkpoint, and Flashpoint been a single entity during such period.
Pro Forma
Nine Months Ended
March 31,
2001 2000
------------ -----------
(unaudited)
(in thousands, except per share amounts)
Revenues $ 61,333 $ 60,813
Net loss $(38,578) $(33,871)
Net loss per share $ (2.99) $ (2.68)
6
Note 3 - Notes Payable
In connection with the acquisition of Checkpoint, the Company issued
promissory notes with an aggregate value of $20.4 million. Under the original
terms, the promissory notes, including accrued interest thereon, mature on
August 28, 2001. Prior to the maturity date, the Company may repay the
promissory notes, including accrued interest, in cash. On the maturity date, at
the Company's sole discretion, the promissory notes, including accrued interest,
may be repaid either in cash, the Company's common stock or a combination of
cash and common stock. If all, or a portion thereof, of the promissory notes are
paid in the Company's common stock, the number of shares to be issued shall be
calculated as the amount of promissory notes to be repaid divided by a fixed per
share stock price of $30.77. The promissory notes accrue interest at a rate of
10% for the period beginning on August 28, 2000 and ending on February 28, 2001
and at a rate of 14% for the period beginning on February 28, 2001 and ending on
August 28, 2001.
In April 2001, the Company and the promissory note holders agreed to retire
the promissory notes and accrued interest thereon in exchange for the issuance
of 732,798 shares of the Company's common stock, based on a conversion price of
$29.25 per share. Under the terms of the agreement, promissory note holders will
be entitled to a contingent payment of up to $10 million in the event of a
merger or acquisition announced by June 30, 2001, or closed by August 28, 2001,
in which the value of the Company's common stock is less than $30 per share.
Since the Company has determined at March 31, 2001 that the promissory
notes will be retired through the issuance of common stock, the promissory notes
have been classified as non-current in the Company's unaudited condensed
consolidated balance sheet at March 31, 2001.
Note 4 - Net Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted net
earnings (loss) per share:
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
-------- ------ ------- ------
(in thousands,
except per share amounts)
Numerator:
Numerator for basic and diluted net earnings (loss) per share $(13,345) $ 554 $(29,404) $(2,763)
======== ======= ======== =======
Denominator:
Denominator for basic net earnings (loss) per share -
weighted-average shares outstanding 12,995 10,758 12,577 10,676
Effect of employee stock options, warrants, and redeemable common stock - 1,156 - -
-------- ------- -------- -------
Denominator for diluted net earnings (loss) per share 12,995 11,914 12,577 10,676
======== ======= ======== =======
Net earnings (loss) per share:
Basic $ (1.03) $ 0.05 $ (2.34) $ (0.26)
Diluted $ (1.03) $ 0.05 $ (2.34) $ (0.26)
======== ======= ======== =======
The effect of outstanding stock options and warrants are excluded from the
calculation of diluted net loss per share for the three and nine months ended
March 31, 2001 and the nine months ended March 31, 2000, as their effect would
be anti-dilutive.
Note 5 - Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss) plus the results
of certain stockholders' equity changes not reflected in the unaudited condensed
consolidated statements of operations. The components of comprehensive income
(loss), net of tax, are as follows:
7
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
-------- ------- -------- --------
(unaudited)
(in thousands)
Net income (loss) $(13,345) $ 554 $(29,404) $(2,763)
Other comprehensive income:
Foreign currency translation adjustments (3,686) - (2,655) -
Unrealized gain (loss) on investments (4) 5 16 (18)
-------- ----- ------- ------
Comprehensive income (loss) $(17,035) $ 559 $(32,043) $(2,781)
======== ===== ======= ======
Note 6 - Operations by Industry Segments and Geographic Area
The Company is a global designer and developer of financial software
solutions that are sold to businesses and financial institutions. As permitted
by the provisions of Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosure About Segments of an Enterprise and Related Information", the
Company has one reportable segment for financial statement purposes.
Prior to the acquisition of Checkpoint on August 28, 2000, the Company did
not have material operations outside the United States. Net sales, based on the
point of sales, not the location of the customer are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
------- ------- ------- -------
(unaudited)
(in thousands)
Sales to unaffiliated customers:
United States $11,091 $14,121 $38,323 $33,720
United Kingdom 7,614 - 18,613 -
------- ------- ------- -------
Total sales to unaffiliated customers $18,705 $14,121 $56,936 $33,720
======= ======= ======= =======
At March 31, 2001, long-lived assets of $26.0 million and $64.2 million
were located in the United States and United Kingdom, respectively. At June 30,
2000, all long-lived assets were located in the United States.
Note 7 - Income Taxes
In the nine months ended March 31, 2001, the Company incurred a substantial
operating loss, a portion of which related to the amortization of recently
acquired intangible assets. Since amortization expense will continue to be
incurred over the next three years and the Company has utilized a significant
portion of the income tax loss carryback benefit, the Company determined that
the deferred tax assets are less likely, rather than more likely, to be
realized. Accordingly, the Company has recorded a full valuation allowance for
its deferred tax assets as of March 31, 2001.
Note 8 - Recent Accounting Pronouncements
In December 1999, the SEC published Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" that provides guidance on
the recognition, presentation, and disclosure of revenue in financial
statements. Effective July 1, 2000, the Company adopted SAB 101. The adoption of
SAB 101 did not have a material effect on our results of operations or financial
position for the nine months ended March 31, 2001.
On July 1, 2000, the Company adopted SFAS No. 133, as amended by SFAS Nos.
137 and 138, "Accounting for Derivative Instruments and Hedging Activities",
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. The adoption of SFAS 133, as amended, did not have a
material impact on our results of operations or financial position for the nine
months ended March 31, 2001.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Without limiting the foregoing, the words "may," will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this quarterly report are based on information available to us up to, and
including the date of this document, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain Factors
that May Affect Future Results" and elsewhere in this quarterly report. You
should carefully review those factors and also carefully review the risks
outlined in other documents that we file from time to time with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
On August 28, 2000, we acquired the stock of two companies, Checkpoint
Holdings, Ltd. (Checkpoint) and Flashpoint, Inc. (Flashpoint). Both transactions
have been accounted for as purchases. Accordingly, our unaudited condensed
consolidated financial statements include the results of operations and the
estimated fair values of the assets acquired and liabilities assumed from the
respective date of acquisition.
Checkpoint, a private company incorporated in England and Wales, is a
provider of electronic commerce and electronic payment software for the United
Kingdom. The acquisition was completed pursuant to a Share Purchase Agreement
dated August 28, 2000 between the Company and Checkpoint stockholders. The
consideration for the acquisition was approximately $60.4 million, consisting of
$4.7 million in cash, $19.8 million in loan notes, which, as described herein,
were subsequently redeemed, 1,013,333 shares of the Company's common stock,
warrants to purchase a total of 100,000 shares of common stock at an exercise
price of $50.00 per share and payment of transaction costs. In connection with
the acquisition, 336,667 shares of our common stock were issued to satisfy pre-
existing loan note obligations of Checkpoint in the amount of $10.5 million. As
a result of the acquisition, intangible assets of approximately $80.0 million,
consisting of developed software, trade name, customer list, assembled
workforce, and goodwill were recorded and will be amortized over a period of
three years.
Checkpoint designates the local currency as their functional currency and
related cumulative translation adjustments are included as a component of
accumulated other comprehensive income. Financial statements of the foreign
subsidiary are remeasured to U.S. dollars for consolidation purposes using
current rates of exchange for monetary assets and liabilities and historical
rates of exchange for nonmonetary assets and related elements of expense.
Revenue and other expense elements are remeasured at rates that approximate the
rates in effect on the transaction dates. Remeasurement gains and losses are
included in our unaudited condensed consolidated statements of operations.
Flashpoint, a Massachusetts corporation, is a developer of Web-based
software. The acquisition was completed pursuant to a Stock Purchase Agreement
dated August 28, 2000 by and among the Company, Flashpoint, and the sole
stockholder of Flashpoint. The consideration for the acquisition was
approximately $16.8 million, consisting of $4.5 million in cash, 242,199 shares
of the Company's common stock, the assumption of all outstanding stock options
of Flashpoint and payment of transaction costs. As a result of the acquisition,
intangible assets of approximately $16.9 million, consisting of contract
backlog, assembled workforce, and goodwill were recorded and will be amortized
over a period ranging from ten months to three years.
9
Revenues
Total revenues increased by $4.6 million to $18.7 million in the three
months ended March 31, 2001 from $14.1 million in the three months ended March
31, 2000, an increase of 32%. The increase was attributable to the revenue
contribution from Checkpoint, offset by delayed business decisions and slowed IT
and capital spending relating to our domestic products. Revenues, based on the
point of sales, rather than the location of the customer, were $11.1 million and
$7.6 million in the United States and United Kingdom, respectively, for the
three months ended March 31, 2001. All revenues for the three months ended March
31, 2000 were attributable to the United States.
Software Licenses. Software license fees decreased by approximately
$300,000 to $5.7 million in the three months ended March 31, 2001 from $6.0
million in the three months ended March 31, 2000, a decrease of 5%. Software
license fees represented 30% of total revenues in the three months ended March
31, 2001 compared to 42% of total revenues in the three months ended March 31,
2000. The decrease in software license fees was due to the slowdown in IT and
capital spending, offset by revenue contribution from Checkpoint. Based on
current product plans, we anticipate software license fees will not change
significantly as a percentage of total revenues during the remainder of the
fiscal year.
Service and Maintenance. Service and maintenance fees increased by $2.3
million to $8.1 million in the three months ended March 31, 2001 from $5.8
million in the three months ended March 31, 2000, an increase of 39%. Service
and maintenance fees represented 43% of total revenues in the three months ended
March 31, 2001 compared to 41% of total revenues in the three months ended March
31, 2000. The increase in service and maintenance fees was the result of the
revenue contribution from Checkpoint. Based on current product plans, we
anticipate service and maintenance revenues will not change significantly as a
percentage of total revenues during the remainder of the fiscal year.
Equipment and Supplies. Equipment and supplies sales increased by $2.6
million to $5.0 million in the three months ended March 31, 2001 from $2.4
million in the three months ended March 31, 2000, an increase of 110%. Equipment
and supplies sales represented 27% of total revenues in the three months ended
March 31, 2001 compared to 17% of total revenues in the three months ended March
31, 2000. The increase in equipment and supplies sales was the result of revenue
contribution from Checkpoint. Based on current product plans, we anticipate
equipment and supplies revenues will not change significantly as a percentage of
total revenues during the remainder of the fiscal year.
Cost of Revenues
Software Licenses. Software license costs increased by $1.0 to $1.1 million
in the three months ended March 31, 2001 from approximately $100,000 in the
three months ended March 31, 2000. Software license costs were 20% of software
license fees in the three months ended March 31, 2001 compared to 2% of software
license fees in the three months ended March 31, 2000. The increase in software
license costs was attributable to a write down of third-party software acquired
for resale and held in inventory. The write down was necessary due to the
slowdown in IT and capital spending. We anticipate software license costs will
return to historical levels in future quarters.
Service and Maintenance. Service and maintenance costs increased by $1.9
million to $4.6 million in the three months ended March 31, 2001 from $2.7
million in the three months ended March 31, 2000, an increase of 71%. Service
and maintenance costs were 57% of service and maintenance fees in the three
months ended March 31, 2001 compared to 46% of service and maintenance fees in
the three months ended March 31, 2000. Service and maintenance costs increased
due principally to historically lower service and maintenance margins
experienced by Checkpoint. We anticipate that service and maintenance costs will
return to levels experienced in the fiscal quarter ended December 31, 2000.
10
Equipment and Supplies. Equipment and supplies costs increased by $1.8
million to $3.6 million in the three months ended March 31, 2001 from $1.8
million in the three months ended March 31, 2000, an increase of 104%. Equipment
and supplies costs were 73% of equipment and supplies sales in the three months
ended March 31, 2001 compared to 75% of equipment and supplies sales in the
three months ended March 31, 2000. Equipment and supplies costs increased in
absolute dollars primarily due to the corresponding increase in equipment and
supplies sales. Equipment and supplies costs decreased as a percentage of
revenue principally due to higher equipment and supplies margins experienced by
Checkpoint. We anticipate that equipment and supplies costs as a percentage of
revenues will not change significantly during the remainder of the fiscal year.
Operating Expenses
Sales and Marketing:
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and trade shows.
Sales and marketing expenses increased by $2.8 million to $6.3 million in the
three months ended March 31, 2001 from $3.5 million in the three months ended
March 31, 2000, an increase of 79%. Sales and marketing expenses were 33% of
total revenues in the three months ended March 31, 2001 compared to 25% of total
revenues in the three months ended March 31, 2000. The dollar increase was due
primarily to additional sales and marketing expenses associated with our
Checkpoint and Flashpoint acquisitions, the NetTransact product and increases in
staffing and personnel related costs. We anticipate that sales and marketing
expenses will decrease as a percentage of revenues during the remainder of the
fiscal year.
Product Development and Engineering:
Product Development and Engineering. Product development and engineering
expenses consist primarily of personnel costs to support product development.
Product development and engineering expenses increased by $1.6 million to $4.1
million in the three months ended March 31, 2001 from $2.5 million in the three
months ended March 31, 2000, an increase of 67%. Product development and
engineering expenses were 22% of total revenues in the three months ended March
31, 2001, compared to 17% of total revenues in the three months ended March 31,
2000. The increase was due primarily to additional product development and
engineering expenses associated with our investment in the NetTransact product
and our acquisitions of Checkpoint and Flashpoint. We believe that product
development and engineering costs, as a percentage of revenues, will not change
significantly during the remainder of the fiscal year.
Stock Compensation Expense. In connection with our acquisition of
Flashpoint, we assumed all of the outstanding common stock options of
Flashpoint, which were exchanged for our common stock options, and recorded
deferred compensation of $1.3 million at the date of acquisition relating to the
intrinsic value of the unvested options. The deferred compensation is being
amortized to expense over the remaining vesting period of the options, resulting
in $110,000 of stock compensation expense during the three months ended March
31, 2001. There was no comparable amount for the three months ended March 31,
2000.
General and Administrative:
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations and finance
employees and legal and accounting services. General and administrative expenses
increased by approximately $1.3 million to $3.6 million in the three months
ended March 31, 2001 from $2.3 million in the three months ended March 31, 2000,
an increase of 56%. General and administrative expenses were 19% of total
revenues in the three months ended March 31, 2001 compared to 16% of total
revenues in the three months ended March 31, 2000. The dollar increase was due
primarily to additional general and administrative expenses as a result of our
acquisitions of Checkpoint and Flashpoint. We anticipate that general and
administrative expenses will not change significantly during the remainder of
the fiscal year.
11
Amortization of Intangible Assets. Amortization of intangible assets
related to our acquisitions increased by $8.0 million to $8.8 million in the
three months ended March 31, 2001 from approximately $800,000 in the three
months ended March 31, 2000. We expect to incur a consistent amount of such
amortization expense during the remaining quarter of the fiscal year.
Interest Income (Expense), Net:
Interest Income (Expense), net consists of interest income less interest
expense. Interest expense, net increased by $822,000 to $(398,000) in the three
months ended March 31, 2001 from interest income, net of $424,000 in the three
months ended March 31, 2000. The increase was due to interest expense on
promissory notes issued in connection with our acquisition of Checkpoint in
August 2000 and lower interest income due to a reduced cash balance in the
current period as a result of cash used in our acquisitions. We expect interest
expense, net, to decrease in the fourth quarter due to the retirement of
promissory notes issued in the acquisition of Checkpoint.
Provision (Benefit) for Income Taxes:
The benefit for income taxes was ($499,000) in the three months ended March
31, 2001 compared with a provision for income taxes of $370,000 in the three
months ended March 31, 2000. The benefit was a result of the adjustment of the
year to date effective tax rate to reflect additional utilization of deferred
tax assets, which had been previously reserved.
NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO NINE MONTHS ENDED MARCH 31, 2000
Revenues
Total revenues increased by $23.2 million to $56.9 million in the nine
months ended March 31, 2001 from $33.7 million in the nine months ended March
31, 2000, an increase of 69%. The increase was primarily attributable to the
revenue contribution from Checkpoint, in addition to continued demand for our
PayBase, BankQuest, and NetTransact products. Revenues, based on the point of
sales, not on the location of the customer, were $38.3 million and $18.6 million
in the United States and United Kingdom, respectively, for the nine months ended
March 31, 2001. All revenues for the nine months ended March 31, 2000 were
attributable to the United States.
Software Licenses. Software license fees increased by $7.7 million to $19.0
million in the nine months ended March 31, 2001 from $11.3 million in the nine
months ended March 31, 2000, an increase of 68%. Software license fees
represented 33% of total revenues in the nine months ended March 31, 2001
compared to 34% of total revenues for the nine months ended March 31, 2000. The
dollar increase in software license fees was primarily attributable to the
revenue contribution from Checkpoint, along with continued demand for our
PayBase, BankQuest and NetTransact products.
Service and Maintenance. Service and maintenance fees increased by $8.8
million to $24.0 million in the nine months ended March 31, 2001 from $15.2
million in the nine months ended March 31, 2000, an increase of 57%. Service and
maintenance fees represented 42% of total revenues in the nine months ended
March 31, 2001 compared to 45% of total revenues in the nine months ended March
31, 2000. The increase in service and maintenance fees was due primarily to the
revenue contribution of Checkpoint and several large BankQuest service
contracts.
Equipment and Supplies. Equipment and supplies sales increased by $6.8
million to $14.0 million in the nine months ended March 31, 2001 from $7.2
million in the nine months ended March 31, 2000, an increase of 94%. Equipment
and supplies sales represented 25% of total revenues in the nine months ended
March 31, 2001 compared to 21% of total revenues in the nine months ended March
31, 2000. The dollar increase in equipment and supplies sales was the result of
revenue contribution from Checkpoint.
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Cost of Revenues
Software Licenses. Software license costs increased by $1.5 million to $1.7
million in the nine months ended March 31, 2001 from approximately $200,000 in
the nine months ended March 31, 2000, an increase of 846%. Software license
costs were 9% of software license fees in the nine months ended March 31, 2001
compared to 2% of software license fees in the nine months ended March 31, 2000.
The increase in software license costs was attributable to a write down of
third-party software acquired for resale and held in inventory. The write down
was necessary due to the slowdown in IT and capital spending.
Service and Maintenance. Service and maintenance costs increased by $5.6
million to $12.8 million in the nine months ended March 31, 2001 from $7.2
million in the nine months ended March 31, 2000, an increase of 78%. Service and
maintenance costs were 53% of service and maintenance fees in the nine months
ended March 31, 2001 compared to 47% of service and maintenance fees in the nine
months ended March 31, 2000. Service and maintenance costs increased primarily
due to the acquisition of Checkpoint.
Equipment and Supplies. Equipment and supplies costs increased by $4.5
million to $9.9 million in the nine months ended March 31, 2001 from $5.4
million in the nine months ended March 31, 2000, an increase of 84%. Equipment
and supplies costs were 71% of equipment and supplies sales in the nine months
ended March 31, 2001 compared to 75% of equipment and supplies sales in the nine
months ended March 31, 2000. The dollar increase in equipment and supplies costs
was primarily due to the corresponding increase in equipment and supplies sales.
The decrease as a percentage of revenue was due to higher equipment and supplies
margins experienced by Checkpoint.
Operating Expenses
Sales and Marketing:
Sales and Marketing. Sales and marketing expenses increased by $9.0 million
to $18.6 million in the nine months ended March 31, 2001 from $9.6 million in
the nine months ended March 31, 2000, an increase of 94%. Sales and marketing
expenses were 33% of total revenues in the nine months ended March 31, 2001
compared to 28% of total revenues in the nine months ended March 31, 2000. The
increase was due primarily to additional sales and marketing expenses associated
with our ICM, Checkpoint and Flashpoint acquisitions, the NetTransact product
and increases in staffing and personnel related costs.
Product Development and Engineering:
Product Development and Engineering. Product development and engineering
expenses increased by $5.1 million to $10.6 million in the nine months ended
March 31, 2001 from $5.5 million in the nine months ended March 31, 2000, an
increase of 91%. Product development and engineering expenses were 19% of total
revenues in the nine months ended March 31, 2001 compared to 16% of total
revenues in the nine months ended March 31, 2000. The increase was due primarily
to additional product development and engineering expenses associated with our
investment in the NetTransact product and our acquisitions of ICM, Checkpoint
and Flashpoint.
Acquired in-process research and development. In-process research and
development of $3.9 million represents non-cash charges, related to the
NetTransact and ICM acquisitions for in-process research and development during
the nine months ended March 31, 2000. The in-process research and development
projects were valued using an Income Approach, which included the application of
a discounted future earnings methodology. Using this methodology, the value of
the in-process technology is comprised of the total present value of the future
earnings stream attributable to the technology throughout its anticipated life.
No alternative future uses were identified prior to reaching technological
feasibility. There was no comparable amount for the nine months ended March 31,
2001.
13
Stock compensation expense. In connection with our acquisition of
Flashpoint, we assumed all of the outstanding common stock options of
Flashpoint, which were exchanged for our common stock options, and recorded
deferred compensation of $1.3 million at the date of acquisition relating to the
intrinsic value of the unvested options. The deferred compensation is being
amortized to expense over the remaining vesting period of the options resulting
in $256,000 of stock compensation expense during the nine months ended March 31,
2001. There was no comparable amount for the nine months ended March 31, 2000.
General and Administrative:
General and Administrative. General and administrative expenses increased
by approximately $3.4 million to $10.0 million in the nine months ended March
31, 2001 from $6.6 million in the nine months ended March 31, 2000, an increase
of 52%. General and administrative expenses were 18% of total revenues in the
nine months ended March 31, 2001 compared to 19% of total revenues in the nine
months ended March 31, 2000. The dollar increase was due primarily to additional
general and administrative expenses as a result of our acquisitions of ICM,
Checkpoint and Flashpoint.
Amortization of Intangible Assets. Amortization of intangible assets
related to our acquisitions increased by $19.4 million to $20.8 million in the
nine months ended March 31, 2001 from $1.4 million in the nine months ended
March 31, 2000. The increase is attributable to the Checkpoint and Flashpoint
acquisitions completed during the nine months ended March 31, 2001.
Interest Income (Expense), Net:
Interest income (expense), net consists of interest income less interest
expense. Interest expense, net increased by $1.8 million to approximately
$(400,000) in the nine months ended March 31, 2001 from interest income, net of
$1.4 million in the nine months ended March 31, 2000. The increase was due to
interest expense on promissory notes issued in connection with our acquisition
of Checkpoint in August 2000 and lower interest income due to a reduced cash
balance in the current period as a result of cash used in our acquisitions.
Provision (Benefit) for Income Taxes:
The provision for income taxes was $1.4 million in the nine months ended
March 31, 2001 compared with a benefit of $(1.8) million in the nine months
ended March 31, 2000. In the nine months ended March 31, 2001 we incurred a
substantial operating loss due primarily to the amortization of recently
acquired intangible assets. Since amortization expense will continue to be
incurred over the next three years and we have utilized a significant portion of
our income tax loss carryback benefit, we determined that a portion of the
existing deferred tax assets are less likely, rather than more likely, to be
realized. Accordingly, in the current year, we provided a valuation reserve
against such assets that resulted in an income tax provision of $2.8 million. In
the nine months ended March 31, 2000, we had sufficient income tax loss
carryback available to benefit a portion of the operating loss.
Liquidity and Capital Resources
We have financed our operations primarily from cash provided by the sale of
our common stock and operating activities. We had net working capital of $14.4
million at March 31, 2001, which included cash, cash equivalents and short-term
investments totaling $12.7 million.
In August 2000, we entered into a ten-year lease for approximately 83,000
square feet of space for a new headquarters facility in Portsmouth, New
Hampshire. Total lease payments for this new facility will be approximately
$15.0 million, which we anticipate will commence in October 2001.
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Cash used in operating activities was $2.6 million in the nine months ended
March 31, 2001 and cash provided by operating activities was $1.7 million in the
nine months ended March 31, 2000. Net cash used in operating activities, for the
nine months ended March 31, 2001, was primarily the result of the net loss and,
after excluding the effects of assets and liabilities from acquisitions, from
decreases in accounts payable, accrued expenses and deferred revenues offset by
decreases in accounts receivable, inventory and prepaid expenses.
Net cash used in investing activities was $7.5 million in the nine months
ended March 31, 2001 and $25.9 million in the nine months ended March 31, 2000.
Cash was used in the nine months ended March 31, 2001 for the acquisition of
businesses and to acquire property and equipment and equity investments, offset
by proceeds from the sale of short-term investments.
Net cash used in financing activities was $8.6 million in the nine months
ended March 31, 2001 and net cash provided by financing activities was $2.9
million in the nine months ended March 31, 2000. Net cash used in financing
activities was the result of the payment of certain liabilities assumed in the
acquisition of Checkpoint, offset by the net proceeds from the exercise of
options pursuant to our stock incentive plans and employee stock purchase plan.
While we have used approximately $2.6 million in operations during the nine
months ended March 31, 2001, we generated positive cash flow from operations
during the current quarter. We believe that our cash, cash equivalents and
short-term investments on hand will be sufficient to meet our working capital
requirements for at least the next twelve months. We also may receive additional
investments from, and make investments in other companies.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before purchasing
our common stock. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In that case,
the trading price of our common stock could fall, and you may lose all or part
of the money you paid to buy our common stock.
THE MARKET PRICE OF OUR COMMON STOCK HAS EXPERIENCED, AND MAY CONTINUE TO BE
SUBJECT TO, EXTREME PRICE AND VOLUME FLUCTUATIONS
Stock markets, in general, and The NASDAQ Stock Market in particular, have
experienced extreme price and volume fluctuations. Broad market fluctuations of
this type may adversely affect the market price of our common stock.
The market price of our common stock has experienced, and may continue to
be subject to, extreme fluctuations due to a variety of factors, including:
. public announcements concerning us, our competitors or our industry;
. fluctuations in operating results;
. introductions of new products or services by us or our competitors;
. adverse developments in patent or other proprietary rights;
. changes in analysts' earnings estimates;
. announcements of technological innovations by our competitors; and
. general and industry-specific business, economic and market
conditions.
15
THE SLOWDOWN IN THE ECONOMY HAS AFFECTED THE MARKET FOR INFORMATION TECHNOLOGY
SOLUTIONS, INCLUDING OUR PRODUCTS, AND OUR FUTURE FINANCIAL RESULTS WILL DEPEND,
IN PART, UPON WHETHER THIS SLOWDOWN CONTINUES
As a result of recent unfavorable economic conditions and reduced capital
spending, demand for our products and services has been adversely affected. If
the economic conditions worsen, we may experience a material adverse impact on
our business, operating results, and financial condition.
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OPERATING RESULTS IF OUR REVENUES
ARE BELOW EXPECTATIONS, AND IF OUR OPERATING RESULTS ARE BELOW EXTERNAL
EXPECTATIONS, THE MARKET PRICE OF OUR COMMON STOCK MAY FALL
A significant percentage of our expenses, particularly personnel costs and
rent, are relatively fixed, and based in part on expectations of future
revenues. We may be unable to reduce spending in a timely manner to compensate
for any significant fluctuations in revenues. Accordingly, shortfalls in
revenues may cause significant fluctuations in operating results in any quarter.
Quarterly operating results that are below the expectations of public market
analysts could adversely affect the market price for our common stock. Factors
that could cause these fluctuations include the following:
. the timing of orders and longer sales cycles, particularly due to any
increase in average selling prices of our software solutions;
. the timing and market acceptance of new products or product
enhancements by either us or our competitors;
. the timing of product implementations, which are highly dependent on
customers' resources and discretion;
. the incurrence of costs relating to the integration of software
products and operations in connection with acquisitions of
technologies or businesses;
. delivery interruptions relating to equipment and supplies purchased
from third-party vendors, which could delay system sales; and
. economic conditions which may affect our customers' and potential
customers' budgets for technological expenditures.
Because of these factors, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful.
A SIGNIFICANT PERCENTAGE OF OUR REVENUES TO DATE HAVE COME FROM OUR PAYMENT
MANAGEMENT OFFERINGS AND OUR PERFORMANCE WILL DEPEND ON CONTINUED MARKET
ACCEPTANCE OF THESE OFFERINGS
A significant percentage of our revenues to date have come from the license
and maintenance of our payment management offerings and sales of related
products and services. Any reduction in demand for our payment management
offerings could have a material adverse effect on our business, operating
results and financial condition. Our future performance will depend to a large
degree upon the market acceptance of our payment management offerings as a
payment management solution. Our prospects will also depend upon enterprises
seeking to enhance their payment functions to integrate electronic payment
capabilities. In addition, our future results will depend on the continued
market acceptance of desktop software for use in a departmental setting,
including our laser check printing solutions, as well as our ability to
introduce enhancements to meet the market's evolving needs for secure, payment
management solutions.
OUR FUTURE FINANCIAL RESULTS WILL DEPEND UPON CONTINUED MARKET ACCEPTANCE OF OUR
NETTRANSACT, BANKQUEST AND IPOINT PRODUCT OFFERINGS
If the NetTransact, BankQuest and iPoint products that we offer as the
result of our acquisitions do not continue to achieve market acceptance, our
future financial results will be adversely affected. We acquired the NetTransact
bill presentment software from The Northern Trust Company, a financial
institution, in July 1999. General availability of the NetTransact product was
announced in February 2000. We acquired the web-based BankQuest cash management
software in our acquisition of
16
Integrated Cash Management Services, Inc. in October 1999. BankQuest was
commercially introduced in April 2000 and is now generally available.
Checkpoint, which we acquired in August 2000, offers the iPoint solution, which
was introduced to the market in April 2000. If any of these products has any
unanticipated performance problems or bugs, or does not enjoy wide commercial
success, our long-term business strategy would be adversely affected.
INTEGRATION OF ACQUISITIONS OR STRATEGIC INVESTMENTS COULD DISRUPT OUR BUSINESS
AND OUR FINANCIAL CONDITION COULD BE HARMED
We have made acquisitions of companies, including our recent acquisitions
of Checkpoint and Flashpoint, and we may acquire or make investments in other
businesses, products or technologies in the future. Our acquisitions of
Checkpoint and Flashpoint, as well as any other acquisitions or strategic
investments, if any, may entail numerous risks that include the following:
. difficulties in assimilating acquired operations, technologies or
products;
. diversion of management's attention from our core business concerns;
. risks of entering markets in which we have no or limited prior
experience;
. substantial dilution of our current stockholders' ownership;
. incurrence of substantial debt;
. incurrence of significant amortization expenses related to goodwill
and other intangible assets; and
. incurrence of significant immediate write-offs.
Any such difficulties encountered as a result of any mergers or
acquisitions could adversely affect our business, operating results and
financial condition.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our future growth rates and success are in part dependent on continued
growth and success in international markets. As is the case with most
international operations, the success and profitability of our international
operations are subject to numerous risks and uncertainties that include the
following:
. difficulties and costs of staffing and managing foreign operations;
. certification requirements and differing regulatory and industry
standards;
. reduced protection for intellectual property rights in some countries;
. fluctuations in currency exchange rates; and
. import or export licensing requirements.
OUR SUCCESS DEPENDS ON THE WIDESPREAD ADOPTION OF THE INTERNET AND GROWTH OF
ELECTRONIC BUSINESS
Our future success will in large part depend upon the willingness of
businesses and financial institutions to adopt the Internet as a medium of e-
business. These entities will probably accept this medium only if the Internet
provides substantially greater efficiency and enhances their competitiveness.
There are critical issues involved in the commercial use of the Internet that
are not yet fully resolved, including concerns regarding the Internet's:
. security;
. reliability;
. ease of access; and
. quality of services.
17
To the extent that any of these issues inhibit or limit the adoption of the
Internet as a medium of e-commerce, our business prospects could be adversely
affected. If electronic business does not continue to grow or grows more slowly
than expected, demand for our products and services may be reduced.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED SOFTWARE,
SERVICES AND RELATED PRODUCTS
The bill presentment, payment and cash management software markets in which
we compete are subject to rapid technological change and our success is
dependent on our ability to develop new and enhanced software, services and
related products that meet our evolving market needs. Trends that could have a
critical impact on us include:
. rapidly changing technology that could require us to make our products
compatible with new database or network systems;
. evolving industry standards and mandates, such as those mandated by
the National Automated Clearing House Association, the Association for
Payment Clearing Services and the Debt Collection Improvement Act of
1996; and
. developments and changes relating to the Internet that we must address
as we introduce new products.
If we are unable to develop and introduce new products, or enhancements to
existing products, in a timely and successful manner, our business, operating
results and financial condition could be materially adversely affected.
WE MUST ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL WITH KNOWLEDGE OF ELECTRONIC
PAYMENT AND BILL PRESENTMENT TECHNOLOGY AND THE BANKING INDUSTRY
We are dependent upon the ability to attract, hire, train and retain highly
skilled technical, sales and marketing, and support personnel, particularly with
expertise in electronic payment and bill presentment technology and knowledge of
the banking industry. Competition for qualified personnel is intense. In
addition, our corporate headquarters location in Portsmouth, New Hampshire may
limit our access to skilled personnel. Any failure to attract, hire or retain
qualified personnel could have a material adverse effect on our business,
operating results and financial condition. Based on our experience, it takes an
average of nine months for a salesperson to become fully productive. We cannot
assure you that we will be successful in increasing the productivity of our
sales personnel, and the failure to do so could have a material adverse effect
on our business, operating results and financial condition.
IF THE INTERNET INFRASTRUCTURE IS NOT ADEQUATELY MAINTAINED, THE DEMAND FOR OUR
PRODUCTS AND SERVICES MAY DECREASE
Our future success will depend, in part, on the maintenance of the Internet
infrastructure. To the extent that the Internet continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users, the Internet infrastructure may not continue to support the demands
placed on it and, as a result, the performance or reliability of the Internet
may be adversely affected. In addition, the Internet could lose its viability as
a form of media due to delays in the development or adoption of new standards
and protocols that can handle increased levels of activity. The infrastructure
and complementary products and services necessary to maintain the Internet as a
viable communications and commercial medium may not be developed or maintained.
Any failure in performance or reliability of the Internet could adversely affect
the demand for our products and services and, consequently, adversely affect our
operating results.
INCREASED GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY IMPAIR THE GROWTH OF
THE INTERNET AND DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws, including those governing intellectual property,
privacy, libel and taxation, apply to the Internet generally and to e-commerce
in particular.
18
Legislation could limit the growth in the use of the Internet generally and
decrease the acceptance of the Internet as a communications and commercial
medium, which may decrease demand for our products and services and thus have a
material adverse effect on our business, operating results and financial
condition.
RAPID GROWTH COULD STRAIN OUR PERSONNEL, SYSTEMS AND CONTROLS
In the past, rapid growth has strained our managerial and other resources.
Our ability to manage any future growth will depend in part on our ability to
continue to enhance our operating, financial and management information systems.
We cannot assure you that our personnel, systems and controls will be adequate
to support any future growth. If we are not able to manage growth effectively,
should it occur, the quality of our services, our ability to retain key
personnel and our business, operating results and financial condition could be
materially adversely affected.
INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
OUR PRODUCTS AND SERVICES
The market for bill presentment, payment and cash management software is
intensely competitive and characterized by rapid technological change. Growing
competition may result in price reductions of our products and services, reduced
revenues and gross margins and loss of market share, any one of which could have
a material adverse effect on our business, operating results and financial
condition. Some competitors in our market have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater brand recognition and a larger installed customer base than we do. In
addition, current and potential competitors may make strategic acquisitions or
establish cooperative relationships to expand their product offerings and to
offer more comprehensive solutions. We also expect to face additional
competition as other established and emerging companies enter the market for
payment management solutions.
OUR BUSINESS CAN BE ADVERSELY AFFECTED BY PROBLEMS WITH THIRD-PARTY HARDWARE
THAT WE RESELL
Any problems with third-party hardware that we resell could harm our
customer relationships, industry credibility and financial condition. In a prior
fiscal year, we experienced a significant problem with a third-party printer
that we were then reselling which had a material adverse effect on our operating
results. Any repetition of these or similar problems with third party hardware
could have a material adverse effect on our business, operating results and
financial condition.
WE DEPEND ON A FEW KEY EMPLOYEES WHO ARE SKILLED IN E-COMMERCE, PAYMENT AND BILL
PRESENTMENT METHODOLOGY AND INTERNET AND OTHER TECHNOLOGIES
Our success depends upon the efforts and abilities of our executive
officers and key technical employees who are skilled in e-commerce, payment
methodology and regulation, and Internet, database and network technologies. We
currently do not maintain "key man" life insurance policies on any of our
employees. While some of our executive officers have employment agreements with
us, the loss of the services of any of our executive officers or other key
employees could have a material adverse effect on our business, operating
results and financial condition.
UNDETECTED BUGS IN OUR SOFTWARE COULD ADVERSELY AFFECT THE PERFORMANCE OF OUR
SOFTWARE AND DEMAND FOR OUR PRODUCTS
Our software products could contain errors or "bugs" that we have not been
able to detect which could adversely affect their performance and reduce demand
for our products. Any defects or errors in new products, such as NetTransact,
BankQuest or iPoint, or enhancements could harm our customer relationships and
result in negative publicity regarding us and our products, which could have a
material adverse effect on our business, operating results and financial
condition.
OUR BUSINESS COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS
Because our software and hardware products are designed to provide critical
payment management, invoicing and cash management functions, we may be subject
to significant product liability claims. Our insurance may not be sufficient to
cover us against these claims or may not be available at all. A product
liability claim brought against us, even if not successful, could require us to
spend significant
19
time and money in litigation. As a result, any such claim, whether successful or
not, could seriously damage our reputation and harm our business, operating
results and financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY TECHNOLOGY
We rely upon a combination of patent, copyright and trademark laws and non-
disclosure and other intellectual property contractual arrangements to protect
our proprietary rights. However, we cannot assure you that our patents, pending
applications that may be issued in the future, or other intellectual property
will be of sufficient scope and strength to provide meaningful protection of our
technology or any commercial advantage to us, or that the patents will not be
challenged, invalidated or circumvented. We enter into agreements with our
employees and clients that seek to limit and protect the distribution of
proprietary information. We cannot assure you that the steps we have taken to
protect our intellectual property rights will be adequate to deter
misappropriation of proprietary information, and we may not be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of the intellectual property of others. These claims
could require us to spend significant sums in litigation, pay damages, delay
product installments, develop non-infringing intellectual property or acquire
licenses to intellectual property that is the subject of the infringement claim.
These claims could have a material adverse effect on our business, operating
results and financial condition.
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO THE EXPECTED
VOLATILITY OF OUR COMMON STOCK
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, we could incur
substantial costs and experience a diversion of our management's attention and
resources and such securities class action litigation could have a material
adverse effect on our business, financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
On August 28, 2000, we acquired the stock of Checkpoint, a private company
incorporated in England and Wales and a provider of electronic commerce and
electronic payments software for the United Kingdom. Checkpoint's functional
currency is the British pound. As a result, we are exposed to changes in foreign
exchange rates. When the U.S. dollar strengthens against the British pound, the
value of nonfunctional currency sales decreases. This exposure may change over
time and could have a material adverse impact on our financial results. We
currently do not enter into foreign currency hedge transactions.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be named in claims arising in the ordinary course
of business. Currently, no significant legal proceedings or claims are pending.
Item 2. Changes In Securities And Use Of Proceeds
Changes in Rights and Classes of Stock
None.
Sales of Unregistered Securities
On August 28, 2000, in connection with our acquisition of Checkpoint
Holdings, Ltd. (Checkpoint) for an aggregate purchase price of approximately
$60.4 million, we issued to the selling stockholders of Checkpoint
promissory notes, which were, at the option of the Company, convertible into our
common stock or redeemable in cash. On April 26, 2001, pursuant to agreements
we entered into with the selling stockholders, we retired the promissory
notes and accrued interest thereon in exchange for the issuance by us of 732,798
shares of common stock, par value $.001 per share (the "Common Stock"), based on
a conversion price of $29.25 per share. All of the shares of common stock were
offered and issued in reliance upon the exemption from registration set forth in
section 4(2) under the Securities Act of 1933, as amended. No underwriters were
involved in such issuance of securities.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To a Vote Of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
See the Exhibit Index on page 23 for a list of exhibits filed as
part of this Quarterly Report on Form 10-Q, which Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K:
None.
21
SIGNATURE
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.
Bottomline Technologies (de), Inc.
Date: May 15, 2001 By: /s/ Robert A. Eberle
Robert A. Eberle
Executive Vice President,
Chief Operating Officer, Chief Financial
Officer And Secretary
(Principal Financial and Accounting Officer)
22
Exhibit Index
Exhibit Number Description
- --------------- ------------
10.1 Form of Letter Agreement, dated April 26, 2001, to
former Stockholders of CheckPoint Holdings, Ltd.
retiring promissory notes issued by Bottomline
Technologies (de), Inc. on August 28, 2000.