SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
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) (Zip Code)
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 November
9, 2001 was 13,817,860.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2001 and
June 30, 2001 1
Unaudited Condensed Consolidated Statements of Operations for the three months
ended September 30, 2001 and 2000 2
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 2001 and 2000 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes In Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
September 30, 2001 June 30, 2001
----------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 14,451 $ 13,247
Marketable securities 248 -
Accounts receivable, net of allowance for doubtful accounts and
returns of $1,777 at September 31, 2001 and $1,730 at June 30,
2001 17,354 18,871
Other current assets 4,396 4,930
-------- --------
Total current assets 36,449 37,048
Property, plant and equipment, net 6,110 6,316
Goodwill and other intangible assets, net 65,220 71,766
Other assets 866 1,319
-------- --------
Total assets $108,645 $116,449
======== ========
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable $ 6,348 $ 6,408
Accrued expenses 4,813 5,579
Deferred revenue and deposits 12,213 11,498
-------- --------
Total current liabilities 23,374 23,485
Stockholders' equity:
Common stock 14 14
Additional paid-in-capital 144,800 144,709
Deferred compensation (784) (902)
Accumulated other comprehensive loss (688) (3,069)
Retained deficit (58,071) (47,788)
-------- --------
Total stockholders' equity 85,271 92,964
-------- --------
Total liabilities and stockholders' equity $108,645 $116,449
======== ========
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
September 30,
2001 2000
-------- --------
Revenues:
Software licenses $ 3,806 $ 5,696
Service and maintenance 9,279 6,845
Equipment and supplies 4,938 3,544
-------- -------
Total revenues 18,023 16,085
Cost of revenues:
Software licenses 396 221
Service and maintenance 4,370 3,507
Equipment and supplies 3,489 2,725
-------- -------
Total cost of revenues 8,255 6,453
-------- -------
Gross profit 9,768 9,632
Operating expenses:
Sales and marketing:
Sales and marketing 4,572 6,069
Product development and engineering:
Product development and engineering 3,450 2,884
Stock compensation expense 100 37
General and administrative:
General and administrative 3,184 2,605
Amortization of intangible assets 8,353 3,320
-------- -------
Total operating expenses 19,659 14,915
-------- -------
Loss from operations (9,891) (5,283)
Other income (expense), net (332) 264
-------- -------
Loss before provision for income taxes (10,223) (5,019)
Provision for income taxes 60 1,922
-------- -------
Net loss $(10,283) $(6,941)
======== =======
Net loss per share:
Basic and diluted $ (0.75) $ (0.59)
======== =======
Shares used in computing net loss per share:
Basic and diluted 13,776 11,820
======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
2
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
September 30,
2001 2000
--------- ---------
Operating activities:
Net loss $(10,283) $ (6,941)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Amortization of intangible assets 8,353 3,320
Depreciation and amortization of property and equipment 906 729
Deferred income tax expense 40 2,106
Provision for allowances on accounts receivable 265 75
Provision for allowances for obsolescence of inventory 21 -
Deferred compensation expense 100 37
Changes in operating assets and liabilities:
Accounts receivable 1,541 (4,154)
Inventory, prepaid expenses, refundable taxes, and other current assets and
other assets 1,282 (242)
Accounts payable, accrued expenses, income taxes payable and deferred
revenue and deposits (282) 2,040
-------- --------
Net cash provided by (used in) operating activities 1,943 (3,030)
Investing activities:
Purchases of property and equipment, net (608) (828)
Sales (purchases) of marketable securities, net (247) 5,030
Increase in equity investments - (1,400)
Acquisition of businesses and assets, net of cash acquired - (11,415)
-------- --------
Net cash used in investing activities (855) (8,613)
Financing activities:
Proceeds from exercise of stock options and employee stock purchase plan 372 784
Repurchase of common stock (264) -
Payment of certain liabilities assumed upon acquisition - (10,272)
-------- --------
Net cash provided by (used in) financing activities 108 (9,488)
Effect of exchange rate changes on cash 8 (12)
-------- --------
Increase (decrease) in cash and cash equivalents 1,204 (21,143)
Cash and cash equivalents at beginning of period 13,247 27,292
-------- --------
Cash and cash equivalents at end of period $ 14,451 $ 6,149
======== ========
Schedule of non-cash investing and financing activities
Issuance of common stock, common stock options and common stock warrants in
connection with acquisitions $ - $56,558
Issuance of promissory notes in connection with acquisitions $ - $20,356
See accompanying notes to unaudited condensed consolidated financial statements.
3
Bottomline Technologies (de), Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 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
months ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2002. 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).
In September 2000, the Financial Accounting Standards Board Emerging Issues
Task Force (EITF) published its consensus on EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs", which required that all shipping and
handling amounts billed to a customer be classified as revenue. The Company
adopted EITF 00-10 effective April 1, 2001. Prior to adoption, the Company had
recorded such amounts as a reduction to cost of sales. Financial statements for
prior periods presented for comparative purposes have been reclassified to
comply with the classification guidelines of EITF 00-10.
Note 2 - Business Combinations
The Company acquired the stock of two companies, Checkpoint Holdings, Ltd.
(Bottomline Europe) and Flashpoint, Inc. (Flashpoint) on August 28, 2000.
These acquisitions have been accounted for as purchases. 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.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, Bottomline Europe and Flashpoint
as if the acquisitions had occurred as of the beginning of the three months
ended September 30, 2000, after giving effect to certain adjustments, including
amortization of goodwill and other intangible assets. The pro forma information
does not necessarily reflect the results of operations that would have occurred
had the Company, Bottomline Europe and Flashpoint been a single entity during
such period.
Pro Forma
Three Months Ended
September 30, 2000
-----------
(unaudited)
(in thousands,
except per share amounts)
Revenues $ 20,612
Net loss $(13,301)
Net loss per share $ (1.04)
4
Note 3 - Net Loss Per Share
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended
September 30,
2001 2000
---------- ----------
(in thousands,
except per share amounts)
Numerator:
Numerator for basic and diluted net loss per share $(10,283) $(6,941)
======== ========
Denominator:
Denominator for basic and diluted net loss per share -
weighted-average shares outstanding 13,776 11,820
======== ========
Net loss per share:
Basic and diluted $ (0.75) $ (0.59)
======== ========
The effect of outstanding stock options and warrants are excluded from the
calculation of diluted net loss per share for the three months ended September
30, 2001 and 2000 as their effect would be anti-dilutive.
Note 4 - Comprehensive Loss
Comprehensive loss represents net loss plus the results of certain
stockholders' equity changes not reflected in the unaudited condensed
consolidated statements of operations. The components of comprehensive loss,
net of tax, are as follows:
Three Months Ended
September 30,
2001 2000
------- -------
(unaudited)
(in thousands)
Net loss $(10,283) $(6,941)
Other comprehensive income (loss):
Foreign currency translation adjustments 2,387 341
Unrealized gain (loss) on investments (6) 16
-------- -------
Comprehensive loss $ (7,902) $(6,584)
======== =======
Note 5 - 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:
5
Three Months Ended
September 30,
2001 2000
--------- ---------
(unaudited)
(in thousands)
Sales to unaffiliated customers:
United States $10,463 $12,805
United Kingdom 7,560 3,280
------- -------
Total sales to unaffiliated customers $18,023 $16,085
======= =======
At September 31, 2001, long-lived assets of approximately $20,208,000 and
$51,988,000 were located in the United States and United Kingdom, respectively.
At June 30, 2001, long-lived assets of approximately $22,900,000 and $56,500,000
were located in the United States and United Kingdom, respectively.
Note 6 - Income Taxes
In the three months ended September 30, 2001, the Company incurred a
substantial operating loss due primarily to the amortization of recently
acquired intangible assets. Since amortization expense will continue to be
incurred and the Company has utilized its 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 September 30, 2001.
Note 7 - Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. These standards, among other
things, eliminate the pooling of interests method of accounting for future
acquisitions and require that goodwill no longer be amortized, but instead be
subject to impairment testing on at least an annual basis. SFAS No. 141 was
effective for all business combinations completed after June 30, 2001.
SFAS No. 142 must be adopted for fiscal years beginning after December 15,
2001 (fiscal 2003 for the Company). Under the provision of SFAS No. 142,
intangible assets with definite useful lives will be amortized to their
estimable residual values over those estimated useful lives in proportion to the
economic benefits consumed. Such intangible assets remain subject to the
impairment provisions of SFAS No. 121. Goodwill and intangible assets with
indefinite useful lives will be tested for impairment annually in lieu of being
amortized. Goodwill and intangible assets acquired prior to July 1, 2001 will
continue to be amortized until adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, we will cease our annual amortization of
goodwill. Our current annual amortization of goodwill is approximately $24
million. The Company currently plans to adopt SFAS No. 142 effective July 1,
2002 (fiscal year 2003).
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets. " SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and provides a single accounting model for the
disposal of long-lived assets. The Company is required to adopt SFAS No. 144 for
the fiscal year beginning after December 15, 2001 (fiscal year 2003) and does
not believe it will have a significant impact on its consolidated financial
statements.
Note 8 - Subsequent Events
In October 2001, the Company entered into a lease amendment for its new
headquarters facility. In connection with the amendment, the Company reduced
the amount of space leased from approximately 83,000 square feet to
approximately 62,000 square feet and delayed
6
occupancy to May 2002. In connection with this lease amendment, the Company
issued a $2 million irrevocable Letter of Credit to the landlord, secured by $2
million in cash. The Company anticipates closing on an unsecured credit facility
during the second quarter of fiscal 2002 and as such, anticipates that the cash
will not be secured at December 31, 2001. Also in connection with the lease
amendment, the Company issued to the landlord 100,000 shares of common stock and
a warrant, valued using the Black-Scholes method, for the right to purchase a
total of 100,000 shares of common stock at an exercise price of $4.25 per share.
The warrant, which expires in October 2004, was fully vested and exercisable
upon issuance. The fair value of the common stock and warrant issued, $750,000,
will be capitalized and amortized as rent expense over the term of the lease.
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 September 30, 2001 Compared to Three Months Ended
September 30, 2000
Revenues
Total revenues increased by $1.9 million to $18.0 million in the three
months ended September 30, 2001 from $16.1 million in the three months ended
September 30, 2000, an increase of 12%. The increase was attributable to a full
quarter of revenue contribution from Bottomline Europe, offset by delayed
business decisions and the disruption of business experienced in the U.S.
marketplace during September. Revenues, based on the point of sales, rather than
the location of the customer, were $10.4 million and $7.6 million in the United
States and United Kingdom, respectively, for the three months ended September
30, 2001. Revenues for the three months ended September 30, 2000 were $12.8
million and $3.3 million in the United States and United Kingdom, respectively.
Software Licenses. Software license fees decreased by $1.9 million to $3.8
million in the three months ended September 30, 2001 from $5.7 million in the
three months ended September 30, 2000, a decrease of 33%. Software license fees
represented 21% of total revenues in the three months ended September 30, 2001
compared to 35% of total revenues in the three months ended September 30, 2000.
The decrease in software license fees was due primarily to the disruption of
business experienced in the U.S. marketplace during September, offset by a full
quarter of revenue contribution from Bottomline Europe. Based on current product
plans, we anticipate software license fees, as a percentage of total revenues,
will return to historic percentages by the end of the fiscal year.
Service and Maintenance. Service and maintenance fees increased by $2.5
million to $9.3 million in the three months ended September 30, 2001 from $6.8
million in the three months ended September 30, 2000, an increase of 36%.
Service and maintenance fees represented 52% of total revenues in the three
months ended September 30, 2001 compared to 43% of total
7
revenues in the three months ended September 30, 2000. The increase in service
and maintenance fees was the result of a full quarter of revenue contribution
from Bottomline Europe as well as large service contracts from our installed
customer base. Based on current product plans, we anticipate service and
maintenance revenue dollars will continue to increase, but will decrease as a
percentage of total revenues by the end of the fiscal year.
Equipment and Supplies. Equipment and supplies sales increased by $1.3
million to $4.9 million in the three months ended September 30, 2001 from $3.6
million in the three months ended September 30, 2000, an increase of 39%.
Equipment and supplies sales represented 27% of total revenues in the three
months ended September 30, 2001 compared to 22% of total revenues in the three
months ended September 30, 2000. The increase in equipment and supplies sales
was primarily the result of a full quarter of revenue contribution from
Bottomline Europe offset by delayed IT and capital spending by businesses in the
U.S. marketplace during the fiscal quarter. Based on current product plans, we
anticipate equipment and supplies revenues will not change significantly during
the remainder of the fiscal year.
Cost of Revenues
Software Licenses. Software license costs increased by $175,000 to $396,000
in the three months ended September 30, 2001 from $221,000 in the three months
ended September 30, 2000. Software license costs were 10% of software license
fees in the three months ended September 30, 2001 compared to 4% of software
license fees in the three months ended September 30, 2000. The increase in
software license costs was attributable to a full quarter of contribution from
Bottomline Europe which generates lower software license margins than
historically experienced by the Company in the U.S. We anticipate software
license costs, as a percentage of software license revenues, will not change
significantly during the remainder of the fiscal year.
Service and Maintenance. Service and maintenance costs increased by
approximately $900,000 to $4.4 million in the three months ended September 30,
2001 from $3.5 million in the three months ended September 30, 2000, an increase
of 25%. Service and maintenance costs were 47% of service and maintenance fees
in the three months ended September 30, 2001 compared to 51% of service and
maintenance fees in the three months ended September 30, 2000 due to higher
margins on certain large service contracts. Service and maintenance costs
increased due to a full quarter of contribution from Bottomline Europe. We
anticipate service and maintenance costs, as a percentage of service and
maintenance revenues, will not change significantly during the remainder of the
fiscal year.
Equipment and Supplies. Equipment and supplies costs increased by
approximately $800,000 to $3.5 million in the three months ended September 30,
2001 from $2.7 million in the three months ended September 30, 2000, an increase
of 28%. Equipment and supplies costs were 71% of equipment and supplies sales in
the three months ended September 30, 2001 compared to 77% of equipment and
supplies sales in the three months ended September 30, 2000. Equipment and
supplies costs increased due to a full quarter of contribution from Bottomline
Europe, offset by lower costs associated with the lower equipment and supplies
revenue of the Company in the U.S. Equipment and supplies costs decreased as a
percentage of revenue principally due to higher equipment and supplies margins
experienced by Bottomline Europe. 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 decreased by $1.5 million to $4.6 million in the
three months ended September 30, 2001 from $6.1 million in the three months
ended September 30, 2000, a decrease of 25%. Sales and marketing expenses were
25% of total revenues in the three months ended September 30, 2001 compared to
38% of total
8
revenues in the three months ended September 30, 2000. The dollar decrease was
due primarily to cost reductions implemented in the fourth quarter of the prior
fiscal year offset by a full quarter of contribution from Bottomline Europe. We
anticipate that sales and marketing expenses will not change significantly 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 approximately $600,000
to $3.5 million in the three months ended September 30, 2001 from $2.9 million
in the three months ended September 30, 2000, an increase of 20%. Product
development and engineering expenses were 19% of total revenues in the three
months ended September 30, 2001 compared to 18% of total revenues in the three
months ended September 30, 2000. The increase was due primarily to the full
quarter contribution of product development and engineering expenses from
Flashpoint and Bottomline Europe offset by cost reductions implemented in the
fourth quarter of the prior fiscal year. 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. Stock
compensation expense increased by $63,000 in the three months ended September
30, 2001 from $37,000 in the three months ended September 30, 2000, an increase
of 170%. The increase was due to a full quarter of stock compensation expense
recorded in the current quarter.
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 $600,000 to $3.2 million in the three months ended
September 30, 2001 from $2.6 million in the three months ended September 30,
2000, an increase of 22%. General and administrative expenses were 18% of total
revenues in the three months ended September 30, 2001 compared to 16% of total
revenues in the three months ended September 30, 2000. The dollar increase was
due primarily to a full quarter of general and administrative expenses from our
Bottomline Europe and Flashpoint acquisitions, offset by cost reductions
implemented in the fourth quarter of the prior fiscal year. We anticipate that
general and administrative expenses will not change significantly during the
remainder of the fiscal year.
Amortization of Intangible Assets. Amortization of intangible assets
related to our acquisitions increased by $5.1 million to $8.4 million in the
three months ended September 30, 2001 from approximately $3.3 million in the
three months ended September 30, 2000. The increase was due to a full quarter of
amortization expense recorded in the current quarter. We expect to incur a
consistent amount of such amortization expense during the remainder of the
fiscal year.
Other Income (Expense), Net:
Other income (expense), net consists of interest income less interest and
other expense. Other income (expense), net increased by $596,000 to net expense
of $332,000 in the three months ended September 30, 2001 from income of $264,000
in the three months ended September 30, 2000. The increase in expense was due
primarily to a write down of an equity investment during the quarter. We expect
to generate other income during the remainder of the fiscal year.
9
Provision (Benefit) for Income Taxes:
The provision for income taxes was approximately $60,000 in the three
months ended September 30, 2001 compared with a provision of $1.9 million in the
three months ended September 30, 2000. In the three months ended September 30,
2001, we incurred a substantial operating loss due primarily to the amortization
of recently acquired intangible assets. At September 30, 2001, the provision for
income taxes consisted of a small amount of U.S. state tax expense which will be
incurred irrespective of our net operating loss position, and tax expense
associated with the activities of Bottomline Europe which files a statutory tax
return under the tax jurisdiction of the U.K. At September 30, 2001, we had
utilized our income tax loss carryback benefit and, accordingly, had recorded a
full valuation allowance for our deferred tax assets since they are less likely,
rather than more likely, to be realized.
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 $13.1
million at September 30, 2001, which included cash, cash equivalents and
marketable securities totaling $14.7 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. In October 2001, we entered into a lease amendment for the new
headquarters facility. In connection with the amendment, the Company reduced
the amount of space leased from approximately 83,000 square feet to
approximately 62,000 square feet and delayed occupancy to May 2002. Total lease
payments for this new facility, which we anticipate will commence with occupancy
in May 2002, will be approximately $11.2 million. In connection with this lease
amendment, the Company issued a $2 million irrevocable Letter of Credit to the
landlord, secured by $2 million in cash. We anticipate closing on an unsecured
credit facility during the second quarter of fiscal 2002 and as such, anticipate
that the cash will not be secured at December 31, 2001. Also in connection with
the lease amendment, we issued to the landlord 100,000 shares of our common
stock and a warrant, valued using the Black-Scholes method, for the right to
purchase a total of 100,000 shares of common stock at an exercise price of $4.25
per share. The warrant, which expires in October 2004, was fully vested and
exercisable upon issuance. The fair value of the common stock and warrant
issued, $750,000, will be capitalized and amortized as rent expense over the
term of the lease.
Cash provided by operating activities was $1.9 million in the three months
ended September 30, 2001 and cash used in operating activities was $3.0 million
in the three months ended September 30, 2000. Net cash provided by operating
activities for the three months ended September 30, 2001 was the result of
decreases in accounts receivable, inventory and prepaid expenses and increases
in deferred revenue, offset by the net loss and decreases in accounts payable
and accrued expenses.
Net cash used in investing activities was $855,000 in the three months
ended September 30, 2001 and $8.6 million in the three months ended September
30, 2000. Cash was used in the three months ended September 30, 2001 to acquire
property and equipment and short-term investments.
Net cash provided by financing activities was $108,000 in the three months
ended September 30, 2001 and net cash used in financing activities was $9.5
million in the three months ended September 30, 2000. Net cash provided by
financing activities was the result of net proceeds from the issuance of stock
pursuant to our employee stock purchase plan offset by the repurchase of common
stock under our Stock Repurchase Program, approved by the Board of Directors on
September 17, 2001. Common shares repurchased during the quarter and held in
the treasury had been reissued as of September 30, 2001 in connection with
shares issued under our employee stock purchase plan.
10
We have generated positive cash flow from operations of approximately $1.9
million during the three months ended September 30, 2001. 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 making an
investment decision involving 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, including announcements of litigation,
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.
THE SLOWDOWN IN THE ECONOMY HAS AFFECTED THE MARKET FOR INFORMATION TECHNOLOGY
SOLUTIONS, INCLUDING OUR PRODUCTS AND SERVICES, 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. In
connection with the slowdown, we previously announced in the fourth quarter of
fiscal 2001 that we instituted several cost reduction initiatives in order to
improve our profitability, including the reduction of U.S. headcount by
approximately 10%, the elimination of two group executive positions and the
consolidation of two satellite offices. If current economic conditions continue
or 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.
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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;
. economic conditions which may affect out customers' and potential
customers' budgets for technological expenditures;
. 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; and
. delivery interruptions relating to equipment and supplies purchased from
third-party vendors, which could delay system sales.
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. The NetTransact product was generally available in
February 2000. We acquired the web-based BankQuest cash management software in
our acquisition of Integrated Cash Management Services, Inc. in October 1999.
The BankQuest software was generally available in April 2000. Bottomline Europe,
which we acquired in August 2000, offers the iPoint solution, which became
generally available 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
12
We have made acquisitions of companies, including our acquisitions in
fiscal 2001 of Bottomline Europe and Flashpoint, and we may acquire or make
investments in other businesses, products or technologies in the future. Any
future 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, in
addition to the risks our business as a whole faces, 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.
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.
13
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 any 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.
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.
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.
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.
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.
14
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.
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.
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.
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 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 time and money in litigation. As a result, any such claim,
15
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. In
August 2001, we were named in a securities class action litigation in connection
with our initial public offering of common stock. We could incur substantial
costs and experience a diversion of our management's attention and resources in
connection with such litigation and it could have a material adverse effect on
our business, financial condition and results of operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 25, 2001, an action was filed against BancBoston Robertson
Stephens, an underwriter of our initial public offering, in the United States
District Court for the Southern District of New York. The complaint in the
action does not name us, or any of our officers or directors, and asserts claims
against the underwriter similar to those described in the Cyrek action described
below. As the Cyrek action also names BancBoston Robertson Stephens as a
defendant, there is a possibility that this action will be consolidated with the
Cyrek action.
On August 10, 2001, a class action complaint was filed against us in the
United States District Court for the Southern District of New York: Paul Cyrek
v. Bottomline Technologies, Inc.; Daniel M. McGurl; Robert A. Eberle;
Fleetboston Robertson Stephens, Inc.; Deutsche Banc Alex Brown Inc.; CIBC World
Markets; and J.P. Morgan Chase & Co. The complaint filed in the action asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, as
amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended. The complaint asserts, among other things, that the description in
our prospectus for our initial public offering was materially false and
misleading in describing the compensation to be earned by the underwriters of
our offering, and in not describing certain alleged arrangements among
underwriters and initial purchasers of our common stock from the underwriters.
The complaint seeks damages (or in the alternative tender of the plaintiff and
class's Bottomline common stock and rescission of their purchases of our
common stock purchased in the initial public offering), costs, attorneys' fees,
experts' fees and other expenses.
We intend to vigorously defend our self against such complaint. While this
proceeding is in its early stages, we do not currently believe that the outcome
will have a material adverse impact on our financial condition. There have not
been any material developments in this litigation since it first became a
reportable event.
Item 2. Changes In Securities And Use Of Proceeds
Changes in Rights and Classes of Stock
None.
Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To a Vote Of Security Holders
No matter was submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fiscal quarter ended September
30, 2001.
Item 5. Other Information
None.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
See the Exhibit Index on page 19 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.
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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: November 13, 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)
18
Exhibit Index
Exhibit Number Description
- -------------- -----------
10.1 Second Amendment to Sublease, effective as of October 1, 2001,
between the Registrant and 325 Corporate Drive II, LLC.
10.2 Common Stock Purchase Warrant for 100,000 shares of common
stock, $.001 par value of the Registrant, issued to 325
Corporate Drive II, LLC as of October 1, 2001.
19