SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-25259
Bottomline Technologies (de), Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 02-0433294
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
155 Fleet Street, Portsmouth, New Hampshire
03801
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(603) 436-0700
----------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the registrant's common stock as of January
31, 2002 was 15,825,210.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
December 31, 2001 and June 30, 2001 1
Unaudited Condensed Consolidated Statements of
Operations for the three and six months ended
December 31, 2001 and 2000 2
Unaudited Condensed Consolidated Statements of Cash
Flows for the six months ended December 31, 2001 and
2000 4
Notes to Unaudited Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis 9
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 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
December 31, June 30,
2001 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 14,345 $ 13,247
Short-term investments 2,000 --
Accounts receivable, net of allowance for doubtful
accounts and returns of $1,730 at December 31,
2001 and June 30, 2001 16,201 18,871
Other current assets 4,147 4,930
-------- ---------
Total current assets 36,693 37,048
Property, plant and equipment, net 5,162 6,316
Goodwill and other intangible assets, net 56,271 71,766
Other assets 1,740 1,319
-------- ---------
Total assets $ 99,866 $ 116,449
======== =========
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable $ 6,154 $ 6,408
Accrued expenses 5,797 5,579
Deferred revenue and deposits 12,730 11,498
-------- ---------
Total current liabilities 24,681 23,485
Stockholders' equity:
Common stock 14 14
Additional paid-in-capital 145,641 144,709
Deferred compensation (681) (902)
Accumulated other comprehensive loss (1,320) (3,069)
Treasury stock (1,292) --
Retained deficit (67,177) (47,788)
-------- ---------
Total stockholders' equity 75,185 92,964
-------- ---------
Total liabilities and stockholders' equity $ 99,866 $ 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
December 31,
2001 2000
-------- --------
Revenues:
Software licenses $ 4,465 $ 7,638
Service and maintenance 10,042 9,072
Equipment and supplies 5,681 5,761
-------- --------
Total revenues 20,188 22,471
Cost of revenues:
Software licenses 272 366
Service and maintenance 5,173 4,679
Equipment and supplies 4,178 3,853
-------- --------
Total cost of revenues 9,623 8,898
-------- --------
Gross profit 10,565 13,573
Operating expenses:
Sales and marketing:
Sales and marketing 4,916 6,223
Product development and engineering:
Product development and engineering 3,666 3,577
Stock compensation expense 104 109
General and administrative:
General and administrative 2,667 3,829
Amortization of intangible assets 8,366 8,684
-------- --------
Total operating expenses 19,719 22,422
-------- --------
Loss from operations (9,154) (8,849)
Other income (expense), net 78 (318)
-------- --------
Loss before provision (benefit) for income taxes (9,076) (9,167)
Provision (benefit) for income taxes 30 (49)
-------- --------
Net loss $ (9,106) $ (9,118)
======== ========
Net loss per share:
Basic and diluted $ (0.66) $ (0.71)
======== ========
Shares used in computing net loss per share:
Basic and diluted 13,822 12,916
======== ========
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)
Six Months Ended
December 31,
2001 2001
-------- --------
Revenues:
Software licenses $ 8,271 $ 13,334
Service and maintenance 19,320 15,917
Equipment and supplies 10,619 9,305
-------- --------
Total revenues 38,210 38,556
Cost of revenues:
Software licenses 668 587
Service and maintenance 9,543 8,186
Equipment and supplies 7,666 6,578
-------- --------
Total cost of revenues 17,877 15,351
-------- --------
Gross profit 20,333 23,205
Operating expenses:
Sales and marketing:
Sales and marketing 9,488 12,292
Product development and engineering:
Product development and engineering 7,116 6,461
Stock compensation expense 204 146
General and administrative:
General and administrative 5,851 6,434
Amortization of intangible assets 16,719 12,004
-------- --------
Total operating expenses 39,378 37,337
-------- --------
Loss from operations (19,045) (14,132)
Other expense, net (254) (54)
-------- --------
Loss before provision for income taxes (19,299) (14,186)
Provision for income taxes 90 1,873
-------- --------
Net loss $(19,389) $(16,059)
======== ========
Net loss per share:
Basic and diluted $ (1.41) $ (1.30)
======== ========
Shares used in computing net loss per share:
Basic and diluted 13,799 12,368
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
3
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
December 31,
2001 2000
-------- --------
Operating activities:
Net loss $(19,389) $(16,059)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of intangible assets 16,719 12,004
Depreciation and amortization of property and equipment 1,627 1,633
Provision for allowances on accounts receivable 313 156
Deferred compensation expense 204 146
Deferred income tax expense 40 2,107
Provision for allowances for obsolescence of inventory 21 --
Changes in operating assets and liabilities:
Accounts receivable 2,577 (2,844)
Other current assets 1,680 (1,211)
Accounts payable, accrued expenses and deferred revenue and
deposits
1,089 (1,155)
-------- --------
Net cash provided by (used in) operating activities 4,881 (5,223)
Investing activities:
Sales (purchases) of short-term investments, net (2,000) 7,166
Purchases of property and equipment, net (670) (1,219)
Increase in equity investments -- (1,400)
Acquisition of businesses and assets, net of cash acquired -- (11,415)
-------- --------
Net cash used in investing activities (2,670) (6,868)
Financing activities:
Repurchase of common stock (1,292) --
Proceeds from employee stock purchase plan and exercise of stock options 198 1,370
Payment of bank financing fees (25) --
Payment of certain liabilities assumed upon acquisition -- (10,272)
-------- --------
Net cash used in financing activities (1,119) (8,902)
Effect of exchange rate changes on cash 6 (33)
-------- --------
Increase (decrease) in cash and cash equivalents 1,098 (21,026)
Cash and cash equivalents at beginning of period 13,247 27,292
-------- --------
Cash and cash equivalents at end of period $ 14,345 $ 6,266
======== ========
Schedule of non-cash investing and financing activities
Issuance of common stock, common stock options and common stock
warrants $ 750 $ 56,558
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
December 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
six months ended December 31, 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 six months ended
December 31, 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
Six Months Ended
December 31, 2000
-------------------------
(unaudited)
(in thousands,
except per share amounts)
Revenues $ 43,083
Net loss $ (22,419)
Net loss per share $ (1.74)
5
Note 3 - Financing Arrangements
The Company entered into a Loan and Security Agreement (Credit Facility),
dated December 28, 2001, providing for borrowings of up to $5 million. Eligible
borrowings are based on a borrowing base calculation of the Company's eligible
accounts receivable as defined in the Credit Facility. Borrowings under the
Credit Facility bear interest at the bank's prime rate (4.75% at December 28,
2001) plus one-half of one percent and are due on December 28, 2002, the
expiration date of the Credit Facility. Borrowings under the Credit Facility are
secured by substantially all U.S. owned assets of the Company and the Company is
subject to certain financial covenants as outlined in the Credit Facility. The
Credit Facility also provides for the bank to issue up to $2 million in letters
of credit for, and on behalf of the Company. The borrowing capacity under the
Credit Facility is reduced by any outstanding letters of credit. At December 31,
2001, a $2 million letter of credit has been issued to the Company's landlord as
part of a lease amendment for a new corporate headquarters. There were no
borrowings under the Credit Facility at December 31, 2001.
The Company's subsidiary Bottomline Europe entered into a Committed
Overdraft Facility (Overdraft Facility), dated December 18, 2001, providing for
borrowings of up to 2 million British Pound Sterling. Borrowings under this
Overdraft Facility bear interest at the bank's base rate (4% at December 18,
2001) plus 2% and are due on December 31, 2002, the expiration date of the
Overdraft Facility. Borrowings under this Overdraft Facility are secured by
substantially all assets of Bottomline Europe. There were no borrowings under
the Overdraft Facility at December 31, 2001.
Note 4 - Commitments and Contingent Liabilities
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 occupancy until May 2002. In connection with the
lease amendment, the Company's bank issued a $2 million Letter of Credit to the
landlord under the Company's Credit Facility (see Note 3). 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, to purchase
an additional 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.
Note 5 - Net Loss Per Share
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------- ------- ------ --------
(in thousands,
except per share amounts)
Numerator:
Numerator for basic and diluted net loss per share $ (9,106) $ (9,118) $(19,389) $(16,059)
======== ======== ======== ========
Denominator:
Denominator for basic and diluted net loss per share -
weighted-average shares outstanding 13,822 12,916 13,799 12,368
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.66) $ (0.71) $ (1.41) $ (1.30)
======== ======== ======== ========
6
The effect of outstanding stock options and warrants are excluded from the
calculation of diluted net loss per share for the three and six months ended
December 31, 2001 and 2000, as their effect would be anti-dilutive.
Note 6 - 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 Six Months Ended
December 31, December 31,
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited)
(in thousands)
Net loss $ (9,106) $ (9,118) $(19,389) $(16,059)
Other comprehensive income (loss):
Foreign currency translation adjustments (632) 690 1,755 1,031
Unrealized gain (loss) on investments -- 4 (6) 20
-------- -------- -------- --------
Comprehensive loss $ (9,738) $ (8,424) $(17,640) $(15,008)
======== ======== ======== ========
Note 7 - Operations by Industry Segments and Geographic Area
The Company is a global technology provider 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 Bottomline Europe 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 Six Months Ended
December 31, December 31,
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited)
(in thousands)
Sales to unaffiliated customers:
United States $ 13,120 $ 14,639 $ 23,582 $ 27,444
United Kingdom 7,068 7,832 14,628 11,112
-------- -------- -------- --------
Total sales to unaffiliated customers $ 20,188 $ 22,471 $ 38,210 $ 38,556
======== ======== ======== ========
At December 31, 2001, long-lived assets of approximately $18,300,000 and
$44,900,000 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.
7
Note 8 - Income Taxes
In the three and six months ended December 31, 2001, the Company incurred
a substantial operating loss due primarily to the amortization of 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 December 31, 2001.
Note 9 - 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 provisions 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 are subject to the impairment
provisions of SFAS No. 144 (discussed below). Goodwill and intangible assets
with indefinite useful lives will be tested for impairment annually, or more
frequently when events or circumstances occur indicating that goodwill might be
impaired, 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, the Company is required to perform a transitional impairment
test on all indefinite lived intangible assets. To the extent that an impairment
charge is required, it will be treated as a cumulative effect of a change in
accounting principle.
The Company is in the process of determining the impact of SFAS 142 and
expects to complete its analysis, including the transitional impairment test,
during the first quarter of fiscal year 2003. Amounts that were previously
capitalized and treated as the separate intangible asset "Assembled Workforce"
will be reclassified to goodwill, since under SFAS 142 amounts paid relative to
assembled workforce do not meet the requirements of an intangible asset that can
be separately stated. Upon adoption, the Company will cease its annual
amortization of goodwill and any amounts reclassified to goodwill. The Company's
current annual amortization of goodwill and assembled workforce is approximately
$26 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.
In November 2001, the FASB issued Staff Announcement Topic No. D-103,
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred", which requires that all out-of-pocket
expenses billed to a customer be classified as revenue. The Company has
previously treated reimbursement for such expense as a reduction to cost of
sales, and will reclassify such amounts to revenue upon adoption. The Company is
required to adopt FASB Staff Announcement Topic No. D-103 for financial
reporting periods beginning after December 15, 2001. The Company plans to adopt
FASB Staff Announcement Topic No. D-103 effective January 1, 2002 and does not
believe it will have a significant impact on its consolidated financial
statements.
8
Note 10 - Subsequent Events
On January 8, 2002, the Company entered into a stock purchase agreement
with funds affiliated with General Atlantic Partners, LLC ("General Atlantic"),
a global private equity investment firm. General Atlantic paid $22.3 million for
2.7 million shares, 2.1 million of which were newly issued shares sold by the
Company generating gross proceeds of $17.3 million to the Company. The balance
of the shares were sold in equal amounts by two directors who were the
cofounders of the Company, one of whom is the chief executive officer. Pursuant
to the terms of the transaction, the Company entered into a registration rights
agreement dated January 15, 2002 with General Atlantic and a partner designee of
General Atlantic joined the Company's board of directors. The closing date of
this transaction was January 15, 2002.
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 December 31, 2001 Compared to Three Months Ended December 31,
2000
Revenues
Total revenues decreased by $2.3 million to $20.2 million in the three
months ended December 31, 2001 from $22.5 million in the three months ended
December 31, 2000, a decrease of 10%. The decrease in total revenues was due
primarily to delayed business decisions as a result of the economic slowdown.
Revenues, based on the point of sales, rather than the location of the customer,
were $13.1 million and $7.1 million in the United States and United Kingdom,
respectively, for the three months ended December 31, 2001. Revenues for the
three months ended December 31, 2000 were $14.7 million and $7.8 million in the
United States and United Kingdom, respectively.
Software Licenses. Software license revenues decreased by $3.1 million to
$4.5 million in the three months ended December 31, 2001 from $7.6 million in
the three months ended December 31, 2000, a decrease of 42%. Software license
revenues represented 22% of total revenues in the three months ended December
31, 2001 compared to 34% of total revenues in the three months ended December
31, 2000. The decrease in software license revenues was due primarily to delayed
business decisions as a result of the economic slowdown. Based on current
product plans, we anticipate software license revenues, as a percentage of total
revenues, will continue at levels consistent with or above the second quarter
throughout the remainder of the fiscal year.
9
Service and Maintenance. Service and maintenance revenues increased by
approximately $900,000 to $10.0 million in the three months ended December 31,
2001 from $9.1 million in the three months ended December 31, 2000, an increase
of 11%. Service and maintenance revenues represented 50% of total revenues in
the three months ended December 31, 2001 compared to 40% of total revenues in
the three months ended December 31, 2000. The increase in service and
maintenance revenues was the result of increased service and maintenance revenue
contribution by Bottomline Europe and increased revenue from our existing
installed customer base in the United States. Based on current product plans, we
anticipate service and maintenance revenue dollars will continue at levels
consistent with the second quarter throughout the remainder of the fiscal year.
Equipment and Supplies. Equipment and supplies sales decreased by
approximately $100,000 to $5.7 million in the three months ended December 31,
2001 from $5.8 million in the three months ended December 31, 2000, a decrease
of 1%. Equipment and supplies sales represented 28% of total revenues in the
three months ended December 31, 2001 compared to 26% of total revenues in the
three months ended December 31, 2000. Based on current product plans, we
anticipate equipment and supplies revenue dollars will not change significantly
during the remainder of the fiscal year.
Cost of Revenues
Software Licenses. Software license costs decreased by approximately
$94,000 to $272,000 in the three months ended December 31, 2001 from $366,000 in
the three months ended December 31, 2000. Software license costs were 6% of
software license revenues in the three months ended December 31, 2001 compared
to 5% of software license revenues in the three months ended December 31, 2000.
The decrease in software license costs was attributable to the associated
decrease in software license revenues. 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 $500,000 to $5.2 million in the three months ended December 31,
2001 from $4.7 million in the three months ended December 31, 2000, an increase
of 11%. Service and maintenance costs remained constant at 52% of service and
maintenance revenues in the three months ended December 31, 2001 and 2000. 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 $400,000 to $4.2 million in the three months ended December 31,
2001 from $3.8 million in the three months ended December 31, 2000, an increase
of 8%. Equipment and supplies costs were 74% of equipment and supplies sales in
the three months ended December 31, 2001 compared to 67% of equipment and
supplies sales in the three months ended December 31, 2000. The increase in
equipment and supplies costs as a percentage of equipment and supplies revenues
was due to a large equipment order for a single customer during the quarter at
lower than historic margins. We anticipate that equipment and supplies costs, as
a percentage of revenues, will return to historic levels 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 $1.3 million to $4.9 million in the
three months ended December 31, 2001 from $6.2 million in the three months ended
December 31, 2000, a decrease of 21%. Sales and marketing expenses were 24% of
total revenues in the three months ended December 31, 2001 compared to 28% of
total revenues in the three months ended December 31, 2000. The dollar decrease
was due primarily to cost reductions implemented in the fourth quarter of the
prior fiscal year. We anticipate that
10
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 $100,000
to $3.7 million in the three months ended December 31, 2001 from $3.6 million in
the three months ended December 31, 2000, an increase of 2%. Product development
and engineering expenses were 18% of total revenues in the three months ended
December 31, 2001 compared to 16% of total revenues in the three months ended
December 31, 2000. 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 decreased by $5,000 to approximately $104,000 in the three
months ended December 31, 2001 from $109,000 in the three months ended December
31, 2000, a decrease of 5%. We believe that the stock compensation expense will
not change significantly during the remainder of the fiscal year.
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
decreased by $1.1 million to $2.7 million in the three months ended December 31,
2001 from $3.8 million in the three months ended December 31, 2000, a decrease
of 30%. General and administrative expenses were 13% of total revenues in the
three months ended December 31, 2001 compared to 17% of total revenues in the
three months ended December 31, 2000. The dollar decrease was due primarily to
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 decreased by approximately $300,000 to $8.4 million
in the three months ended December 31, 2001 from approximately $8.7 million in
the three months ended December 31, 2000. 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 $396,000 to other
income, net of $78,000 in the three months ended December 31, 2001 from other
expense, net of $318,000 in the three months ended December 31, 2000. The
expense in the prior fiscal year was due to interest on promissory notes issued
in connection with the acquisition of Bottomline Europe, which were retired in
the quarter ended June 30, 2001. We expect to generate a slight increase in
other income during the remainder of the fiscal year as a result of additional
interest income earned on the proceeds of the equity transaction described in
Note 10 of our unaudited condensed consolidated financial statements.
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Provision (Benefit) for Income Taxes:
The provision for income taxes was approximately $30,000 in the three
months ended December 31, 2001 compared with a benefit for income taxes of
approximately $49,000 in the three months ended December 31, 2000. In the three
months ended December 31, 2001, we incurred a substantial operating loss due
primarily to the amortization of intangible assets. At December 31, 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 United Kingdom. At
December 31, 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.
Six Months Ended December 31, 2001 Compared to Six Months Ended December 31,
2000
Revenues
Total revenues decreased by approximately $400,000 to $38.2 million in the
six months ended December 31, 2001 from $38.6 million in the six months ended
December 31, 2000, a decrease of 1%. The decrease was due primarily to delayed
business decisions as a result of the economic slowdown, offset by a full six
months of revenues contribution from Bottomline Europe. Revenues, based on the
point of sales, rather than the location of the customer, were $23.6 million and
$14.6 million in the United States and United Kingdom, respectively, for the six
months ended December 31, 2001. Revenues for the six months ended December 31,
2000 were $27.5 million and $11.1 million in the United States and United
Kingdom, respectively.
Software Licenses. Software license revenues decreased by $5.0 million to
$8.3 million in the six months ended December 31, 2001 from $13.3 million in the
six months ended December 31, 2000, a decrease of 38%. Software license revenues
represented 22% of total revenues in the six months ended December 31, 2001
compared to 35% of total revenues in the six months ended December 31, 2000. The
decrease in software license revenues was due primarily to delayed business
decisions as a result of the economic slowdown, offset by a full six months of
revenues contribution from Bottomline Europe.
Service and Maintenance. Service and maintenance revenues increased by
$3.4 million to $19.3 million in the six months ended December 31, 2001 from
$15.9 million in the six months ended December 31, 2000, an increase of 21%.
Service and maintenance revenues represented 51% of total revenues in the six
months ended December 31, 2001 compared to 41% of total revenues in the six
months ended December 31, 2000. The increase in service and maintenance revenues
was due primarily to a full six months of revenues contribution from Bottomline
Europe and several large service contracts from our installed customer base.
Equipment and Supplies. Equipment and supplies revenues increased by $1.3
million to $10.6 million in the six months ended December 31, 2001 from $9.3
million in the six months ended December 31, 2000, an increase of 14%. Equipment
and supplies sales represented 28% of total revenues in the six months ended
December 31, 2001 compared to 24% of total revenues in the six months ended
December 31, 2000. The increase in equipment and supplies revenues was due
primarily to a full six months of revenues contribution from Bottomline Europe
and several large equipment orders during the period.
Cost of Revenues
Software Licenses. Software license costs increased by $81,000 to $668,000
in the six months ended December 31, 2001 from $587,000 in the six months ended
December 31, 2000. Software license costs were 8% of software license revenues
in the six months ended December 31, 2001 compared to 4% of software license
revenues in the six months ended December 31, 2000. The increase in software
license costs was attributable to a full six months of contribution from
Bottomline Europe, which generates lower software license margins than
historically experienced in the United States.
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Service and Maintenance. Service and maintenance costs increased by $1.3
million to $9.5 million in the six months ended December 31, 2001 from $8.2
million in the six months ended December 31, 2000, an increase of 17%. Service
and maintenance costs were 49% of service and maintenance revenues in the six
months ended December 31, 2001 compared to 51% of service and maintenance
revenues in the six months ended December 31, 2000 due to higher margins on
certain large service contracts. Service and maintenance costs increased
primarily due to a full six months of revenues contribution from Bottomline
Europe.
Equipment and Supplies. Equipment and supplies costs increased by $1.1
million to $7.7 million in the six months ended December 31, 2001 from $6.6
million in the six months ended December 31, 2000, an increase of 17%. Equipment
and supplies costs were 72% of equipment and supplies revenues in the six months
ended December 31, 2001 compared to 71% of equipment and supplies revenues in
the six months ended December 31, 2000. Equipment and supplies costs increased
primarily due to a full six months of revenues contribution from Bottomline
Europe and the increase in equipment and supplies costs as a percentage of
equipment and supplies revenues was due to a large equipment order for a single
customer during the period at lower than historic margins.
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 $2.8 million to $9.5 million in the
six months ended December 31, 2001 from $12.3 million in the six months ended
December 31, 2000, a decrease of 23%. Sales and marketing expenses were 25% of
total revenues in the six months ended December 31, 2001 compared to 32% of
total revenues in the six months ended December 31, 2000. The dollar decrease
was due primarily to cost reductions implemented in the fourth quarter of the
prior fiscal year, offset by a full six months of sales and marketing expenses
from our Bottomline Europe and Flashpoint acquisitions.
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 $7.1 million in the six months ended December 31, 2001 from $6.5 million in
the six months ended December 31, 2000, an increase of 10%. Product development
and engineering expenses were 19% of total revenues in the six months ended
December 31, 2001 compared to 17% of total revenues in the six months ended
December 31, 2000. The dollar increase was due primarily to a full six months of
product development and engineering expenses from our Flashpoint and Bottomline
Europe acquisitions, partially offset by cost reductions implemented in the
fourth quarter of the prior 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 $58,000 to $204,000 in the six months ended
December 31, 2001 from $146,000 in the six months ended December 31, 2000, an
increase of 40%. The increase was due to a full six months of stock compensation
expense recorded in the current fiscal year.
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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
decreased by approximately $500,000 to $5.9 million in the six months ended
December 31, 2001 from $6.4 million in the six months ended December 31, 2000, a
decrease of 9%. General and administrative expenses were 15% of total revenues
in the six months ended December 31, 2001 compared to 17% of total revenues in
the six months ended December 31, 2000. The dollar decrease was due primarily to
cost reductions implemented in the fourth quarter of the prior fiscal year,
offset by a full six months of general and administrative expenses from our
Bottomline Europe and Flashpoint acquisitions.
Amortization of Intangible Assets. Amortization of intangible assets
related to our acquisitions increased by $4.7 million to $16.7 million in the
six months ended December 31, 2001 from $12.0 million in the six months ended
December 31, 2000. The increase was due to a full six months of amortization
expense, associated with the acquisitions of Bottomline Europe and Flashpoint,
recorded in the current fiscal year.
Other Expense, Net:
Other expense, net consists of interest income less interest and other
expense. Other expense, net increased by $200,000 to other expense, net of
$254,000 in the six months ended December 31, 2001 from $54,000 in the six
months ended December 31, 2000. The increase in expense was due primarily to a
$450,000 write down due to impairment of an equity investment in a non-public
entity, accounted for under the cost method, in which indicators of impairment
became present during the quarter resulting in a decline in investment value
that the Company judged to be other than temporary. After the write down, the
carrying value of this investment is $450,000.
Provision (Benefit) for Income Taxes:
The provision for income taxes was approximately $90,000 in the six months
ended December 31, 2001 compared with $1.9 million in the six months ended
December 31, 2000. In the six months ended December 31, 2001, we incurred a
substantial operating loss due primarily to the amortization of intangible
assets. At December 31, 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 United Kingdom. At December 31, 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
$12.0 million at December 31, 2001, which included cash, cash equivalents and
short-term investments totaling $16.3 million.
In January 2002, we entered into a stock purchase agreement with funds
affiliated with General Atlantic Partners, LLC, a global private equity
investment firm, whereby we issued 2.1 million shares of common stock at $8.25
per share generating gross proceeds of $17.3 million to us.
14
In December 2001, we entered into a Loan and Security Agreement (Credit
Facility), providing for borrowings of up to $5 million. Eligible borrowings are
based on a borrowing base calculation of our eligible accounts receivable as
defined in the Credit Facility. Borrowings under the Credit Facility bear
interest at the bank's prime rate (4.75% at December 28, 2001) plus one-half of
one percent and are due on December 28, 2002, the expiration date of the Credit
Facility. Borrowings under the Credit Facility are secured by substantially all
U.S. owned assets and we are subject to certain financial covenants as outlined
in the Credit Facility. The Credit Facility also provides for the bank to issue
up to $2 million in letters of credit for, and on behalf of us. The borrowing
capacity under the Credit Facility is reduced by any outstanding letters of
credit. At December 31, 2001, a $2 million letter of credit has been issued to
our landlord as part of a lease amendment for a new corporate headquarters.
There were no borrowings under the Credit Facility at December 31, 2001.
In December 2001, our subsidiary, Bottomline Europe, entered into a
Committed Overdraft Facility (Overdraft Facility), providing for borrowings of
up to 2 million British Pound Sterling. Borrowings under this Overdraft Facility
bear interest at the bank's base rate (4% at December 18, 2001) plus 2% and are
due on December 31,2002, the expiration date of the Overdraft Facility.
Borrowings under this Overdraft Facility are secured by substantially all assets
of Bottomline Europe. There were no borrowings under the Overdraft Facility at
December 31, 2001.
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, we 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 the lease amendment, we issued a
$2 million letter of credit to the landlord under our credit facility. 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, to
purchase an additional 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 $4.9 million in the six months
ended December 31, 2001 and cash used in operating activities was $5.2 million
in the six months ended December 31, 2000. Net cash provided by operating
activities for the six months ended December 31, 2001 was the result of
decreases in accounts receivable, inventory and prepaid expenses and increases
in deferred revenue and accrued expenses, offset by the net loss and decreases
in accounts payable.
Net cash used in investing activities was $2.7 million in the six months
ended December 31, 2001 and $6.9 million in the six months ended December 31,
2000. Cash was used in the six months ended December 31, 2001 to acquire
property and equipment and short-term investments.
Net cash used in financing activities was $1.1 million in the six months
ended December 31, 2001 and $8.9 million in the six months ended December 31,
2000. Net cash used in financing activities was the result of the repurchase of
common stock under our stock repurchase program, approved by the Board of
Directors on September 17, 2001, offset by net proceeds from the issuance of
stock pursuant to our employee stock purchase plan.
We have generated positive cash flow from operations of approximately $4.9
million during the six months ended December 31, 2001. In addition, the equity
transaction with funds affiliated with General Atlantic Partners, LLC, closed in
January 2002, generated $17.3 million in cash from the sale of 2.1 million
shares of common stock. We also may receive additional investments from, and
make investments in other companies. 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
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:
15
o public announcements concerning us, including announcements of
litigation, our competitors or our industry;
o fluctuations in operating results;
o introductions of new products or services by us or our competitors;
o adverse developments in patent or other proprietary rights;
o changes in analysts' earnings estimates;
o announcements of technological innovations by our competitors; and
o 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 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 several cost reduction
initiatives in order to improve our profitability. 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. 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:
o the timing of orders and longer sales cycles, particularly due to
any increase in average selling prices of our software solutions;
o economic conditions which may affect our customers' and potential
customers' budgets for technological expenditures;
o the timing and market acceptance of new products or product
enhancements by either us or our competitors;
o the timing of product implementations, which are highly dependent on
customers' resources and discretion;
o the incurrence of costs relating to the integration of software
products and operations in connection with acquisitions of
technologies or businesses; and
o 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.
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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 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
WebSeries, NetTransact and iPoint product offerings
If the WebSeries, NetTransact and iPoint products that we offer do not
continue to achieve market acceptance, our future financial results will be
adversely affected. WebSeries, the NetTransact product and the iPoint product
solution are still in early stages of adoption. If any unanticipated performance
problems or bugs occur, or these products do not enjoy wide commercial success,
our long-term business strategy will 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 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:
o entering markets in which we have no or limited prior experience;
o difficulties in assimilating acquired operations, technologies or
products;
o diversion of management's attention from our core business concerns;
o write-offs related to impairment of goodwill and other intangible
assets;
o incurrence of substantial debt; and
o substantial dilution of our current stockholders' ownership.
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:
o difficulties and costs of staffing and managing foreign operations;
o certification requirements and differing regulatory and industry
standards;
o reduced protection for intellectual property rights in some
countries;
17
o fluctuations in currency exchange rates; and
o 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.
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:
o rapidly changing technology that could require us to make our
products compatible with new database or network systems;
o 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
o 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
18
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:
o security;
o reliability;
o ease of access; and
o 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.
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 key employees who are skilled in e-commerce, payment, cash
management 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.
19
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 WebSeries,
NetTransact 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, 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 for patents 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 rights or
as a result of an alleged infringement of the intellectual property rights 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.
20
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 plaintiffs' and the 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 ourself against this
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
In October 2001, we entered into a lease amendment for our new
headquarters facility. In connection with the lease amendment, on October 1,
2001 we issued to the landlord, 325 Corporate Drive II, LLC, 100,000 shares of
common stock and an immediately exercisable warrant to purchase an additional
100,000 shares of common stock at an exercise price of $4.25 per share. This
warrant expires on October 1, 2004. The fair value of the shares of common stock
and the warrant is $750,000. These securities were offered and issued in
reliance upon the exemption for registration set forth in Section 4(2) under the
Securities Act of 1933, as amended.
Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
We held our 2001 Annual Meeting of Shareholders on November 15, 2001. The
following matters were voted upon at the Annual Meeting.
1. Holders of 12,411,340 shares of our common stock voted to
elect Daniel M. McGurl to serve for a term of three years as a
Class III Director. Holders of 85,341 shares of our common
stock withheld votes from such director. Holders of 12,094,832
shares of our common stock voted to elect James L. Loomis to
serve for a term of three years as a Class III Director.
Holders of 401,849 shares of our common stock withheld votes
from such director. Joseph L. Barry, Jr., Robert A. Eberle,
Dianne Gregg, Joseph L. Mullen and James W. Zillinski also
continue as directors.
2. Holders of 12,474,020 shares of our common stock voted to
ratify the selection of Ernst & Young LLP as our independent
auditors for the current fiscal year. Holders of 18,160 shares
of our common stock voted against ratifying such selection and
4,501 shares abstained from voting.
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:
On December 10, 2001, we filed a Current Report on Form 8-K dated December
10, 2001 reporting under Item 9 (Regulation FD Disclosure) that we had entered
into a significant customer agreement.
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: February 14, 2002 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
- -------------- -----------
4.1(1) Registration Rights Agreement, dated January 15, 2002, among
Bottomline Technologies (de), Inc., General Atlantic Partners
74, L.P., GAP Coinvestment Partners II, L.P., GapStar, LLC and
GAPCO Gmbh & Co. KH.
10.1* Loan and Security Agreement dated as of December 28, 2001
between the Registrant and Silicon Valley Bank.
10.2 Negative Pledge Agreement dated as of December 28, 2001
between the Registrant and Silicon Valley Bank.
10.3 Committed Business Overdraft Facility dated as of December 18,
2001 between Bottomline Technologies Europe Ltd and National
Westminster Bank Plc.
10.4 Legal Charge dated as of December 17, 2001 between Bottomline
Technologies Europe Ltd and National Westminster Bank Plc.
10.5 Debenture dated as of December 17, 2001 between Bottomline
Technologies Europe Ltd and National Westminster Bank Plc.
10.6(2) Second Amendment to Sublease, effective as of October 1, 2001,
between the Registrant and 325 Corporate Drive II, LLC.
10.7(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.
10.8(1) Stock Purchase Agreement, dated January 8, 2002, by and among
Bottomline Technologies (de), Inc., General Atlantic Partners
74, L.P., GAP Coinvestment Partners II, L.P., GapStar, LLC,
GAPCO Gmbh & Co. KG and the Stockholders named on Schedule I
thereto.
- ----------
* Certain schedules to this agreement were omitted by the Registrant. The
Registrant agrees to furnish any schedule to this agreement supplementally
to the Securities and Exchange Commission upon written request.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated January 8, 2002 (File No. 000-25259).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 000-25259) for the Fiscal Quarter Ended September 30, 2001.
23