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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
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
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BOTTOMLINE TECHNOLOGIES (de), INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 02-0433294
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Organization or Incorporation)
155 Fleet Street 03801
Portsmouth, New Hampshire (Zip Code)
(Address of Principal Executive
Offices)
(603) 436-0700
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
Title of Class
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. [_]
The aggregate value of the voting stock held by non-affiliates of the
registrant, based on the last sale price of the registrant's common stock at
the close of business on September 22, 1999 was $114,218,412 (reference is made
to Part II, Item 5 herein for a statement of assumptions upon which this
calculation is based).
There were 10,636,809 shares of common stock, $.001 par value per share, of
the registrant outstanding as of September 22, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III (except for information required with
respect to our executive officers, which is set forth under "Part I--Business--
Executive Officers of the Registrant") have been omitted from this report, as
we expect to file with the Securities and Exchange Commission, not later than
120 days after the close of our fiscal year, a definitive proxy statement for
our annual meeting of stockholders. The information required by Items 10, 11,
12 and 13 of Part III of this report, which will appear in our definitive proxy
statement, is incorporated by reference into this report.
TABLE OF CONTENTS
PART I
Item Page
---- ----
1. Business......................................................... 1
2. Properties....................................................... 10
3. Legal Proceedings................................................ 10
4. Submission of Matters to a Vote of Security Holders.............. 10
PART II
Item
----
Market for the Registrant's Common Stock and Related Stockholder
5. Matters......................................................... 11
6. Selected Financial Data......................................... 11
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations........................................... 13
7A. Quantitative and Qualitative Disclosures About Market Risk...... 26
8. Financial Statements and Supplementary Data..................... 26
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure 26
PART III
Item
----
Directors and Executive
Officers of the
10. Registrant.............. 27
11. Executive Compensation.. 27
Security Ownership for
Certain Beneficial
12. Owners and Management... 27
Certain Relationships
and Related
13. Transactions............ 27
PART IV
Item
----
Exhibits, Financial Statements and Schedule, and Reports on Form
14. 8-K Signatures.................................................. 28
PART I
This annual report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Any statements (including statements to the
effect that we "believe," "expect," "anticipate," "plan" and similar
expressions) that are not statements relating to historical matters should be
considered forward-looking statements. Our actual results may differ materially
from the results discussed in the forward-looking statements as a result of
numerous important factors, including those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors That May Affect Future Results."
Item 1. Business.
The Company
We provide software solutions that create an automated e-business
infrastructure for use by businesses and financial institutions to make
payments and present bills. Our products and services enable organizations to
transition from traditional paper-based payment and billing processes to
electronic processes to facilitate e-commerce. Our PayBase payments software is
designed to control, manage and issue all payments, whether paper-based or
electronic, across an enterprise. Our recently announced electronic bill
presentment software, NetTransact, is designed to provide a secure, interactive
system for complex business-to-business transactions that will allow companies
to present billing information and accept payments over an extranet.
NetTransact is currently installed at three pilot sites, and we anticipate
commercial introduction of the product during the current fiscal year.
NetTransact, when combined with our electronic payment software, will provide
our customers with a complete business-to-business software solution for e-
commerce bill presentment and payment regardless of their size or location. Our
software products can be purchased as an entire suite or as separate
applications. Our PayBase products operate in different computer operating
environments that correspond to customer needs and infrastructure requirements,
providing high levels of performance and supporting high volumes of activity
across an organization.
Our products permit customers to leverage the Internet while increasing
security and fraud avoidance. They also complement our customers' existing
information systems and payment applications. We provide multiple options for
delivery of detailed payment or remittance information, including mail, fax and
the Internet. Our LaserCheck product is a cost-effective, software-based,
laser-printing system that allows an enterprise to streamline its paper payment
process and to generate checks at the point of need. We also offer consulting
services and related equipment and supplies to help customers plan, design and
implement the transition from paper to electronic payments.
PayBase Products
Our PayBase product suite offers customers the following benefits:
. Internet/intranets remote access capability. Our PayBase product suite
provides users with a secure, convenient means to remotely access and
transmit payment information. PayBase enables enterprises to manage and
control payments through the Internet and intranets. PayBase provides
users with a secure, convenient means to remotely access and transmit
payment information.
. Flexible, dual payment process. Our PayBase product suite has been
designed to provide customers with a single software solution that
permits both paper and electronic payments. PayBase's dual payment
capacity gives enterprises the flexibility to manage the transition to
electronic payments at a pace compatible with the needs of their
customers and business partners as they evolve in response to market
demands and government mandates. We have one allowed United States
patent application relating to certain security aspects of our dual
payment process.
. Enterprise-wide payment control. Our PayBase product suite offers
enterprises a centralized payment control and management system while
allowing users to make payments at the point of need. PayBase records
all payments, transactions and events in a central database, which
improves cash management, control of disbursement and receipt functions
and audit capabilities. In addition, our PayBase payment control
capabilities permit enterprises to readily outsource payment management
functions to banks or other third-party suppliers.
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. Cost-effective payment solution. Our PayBase product suite provides
operational efficiencies that reduce staffing, mailing, processing and
auditing costs as well as costs associated with float, risk of error,
fraud and fraud related inquiries. PayBase is designed to be easy to use
and implement and requires only limited commitment of an enterprise's
resources to achieve operational efficiencies.
. Open and scaleable technology. Our PayBase product suite runs on one or
more application servers using industry standard Unix or Microsoft
Windows NT operating systems and database servers such as Microsoft SQL
Server, Oracle, Sybase, IBM DB2 Universal Server and Informix. PayBase's
flexible design provides an enterprise with a scaleable solution to meet
growing needs and to manage the migration from a department-wide to an
enterprise-wide payment system.
. Enhanced security and fraud protection. Our PayBase product suite
reduces the risk of fraud through a secure, encrypted database and the
control of all payment and operator activity. In addition, PayBase can
automatically send a file of all checks issued instantaneously to the
payor's bank, enabling banks to quickly isolate fraudulent or incorrect
checks and to evaluate questionable payments. For its laser-printing
process, LaserCheck uses blank paper that is non-negotiable until it is
printed and can use specialized magnetic ink character recognition
printers for additional security.
NetTransact Product
Our newest product, NetTransact, is currently installed at three pilot sites
and we anticipate commercial introduction of the product during the current
fiscal year. NetTransact is designed to offer businesses and financial
institutions the following benefits:
. Open and interactive bill presentment technology. NetTransact is
designed to enable businesses and banks to leverage electronic billing
and maintain an open, interactive relationship with customers and
corporate account holders. It is configured to permit speedy and
efficient accessing to accounts receivable and accounts payable
departments, and to disseminate complex bill presentment information
wherever required across an organization, regardless of whether the bill
is one page or thousands of pages.
. Facilitate timely resolution of billing disputes. NetTransact is
designed to allow payors to review and, if necessary, make adjustments
to a bill on-line. For example, if an invoice incorrectly states the
number of products delivered, or if a number of items were damaged
during shipment, the payor can generate an adjustment that is e-mailed
to the biller for resolution and pay the undisputed amount, without
having to wait for a new invoice to be transmitted.
. Cost effective bill presentment solution. NetTransact is designed to
provide operational efficiencies to reduce staffing, mailing, processing
and audit costs, as well as costs associated with making adjustments and
resolving disputes arising in the billing process. It is being enhanced
by us to be as easy to use as our other products, facilitating its
introduction to and use by customers.
. Internet/Intranet based solution. NetTransact is designed to leverage
the Internet as an effective means of e-commerce and is being enhanced
to be integrated with our other Internet solutions to provide a complete
bill presentment and payment solution in an Internet environment.
. Savings to billers through reductions in float. By avoiding the delays
associated with preparation of paper bills, their submission through the
mail and correspondence relating to disputed matters, enterprises will
be able to reduce the expense associated with float on outstanding
receivables.
. Improved invoice management for payors. NetTransact will allow payors to
identify and manage invoices and schedule payments with time sensitive
priorities, enhancing their responsiveness and their vendor
relationships and enabling them to earn more discounts.
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Strategy
Our objective is to be the leading provider of software solutions that
enable businesses and financial institutions to create an automated e-business
infrastructure to initiate, implement and manage movements of cash resources,
including bill presentment and payment software. Key elements of our strategy
include the following:
. Focus on the Internet as the medium for billing and e-commerce. Our
PayBase product currently allows enterprises to use the Internet or a
corporate Intranet to make payments from a remote site and to send and
receive remittance advices via e-mail. We intend to provide our
customers with a fully-integrated bill presentment and payment solution
that can support e-commerce over the Internet. With the anticipated
commercial introduction during this current fiscal year of our
NetTransact billing presentment software, we will be able to provide
businesses and financial institutions with a fully integrated, secure,
medium both for the generation and payment of bills.
. Develop new products and technologies. We intend to develop new products
and technologies which leverage our existing offerings and customer
base. To capitalize on the growth of the Internet and e-commerce, and
changes in payment technologies and practices, we employ professionals
who are skilled in the complex environments of e-commerce, financial
EDI, banking and payment and billing systems. Furthermore, our technical
staff is experienced in the latest database, networking and software
development tools, technologies and methodologies. We intend to leverage
this combination of business expertise and technical knowledge to
deliver new products and technologies, including products incorporating
XML, an emerging e-commerce interface standard.
. Pursue strategic acquisitions. We believe that significant opportunities
exist to acquire technologies and industry expertise that complement our
existing product offerings and assist us in achieving our goal of
providing a comprehensive business-to-business e-commerce infrastructure
to initiate, implement and manage movements of cash resources, including
payment and bill presentment software. We therefore intend to actively
pursue acquisitions of such technologies, as well as opportunities to
broaden our client base and/or expand our geographic presence.
. Further penetrate customer base. We intend to further penetrate our
customer base, which we believe is only in the early stages of
implementing electronic bill presentment and payment solutions.
Additional sales opportunities to our existing customers include:
. expanding department level installations to encompass an
enterprise's entire payment system;
. taking advantage of the introduction of our electronic bill
presentment software to increase overall sales of an integrated
electronic payment solution to our existing customers;
. selling complementary payment capabilities through sales of
additional software modules, such as electronic payment and receipt
creation or check fraud avoidance;
. introducing software upgrades marketing new products; and
. generating additional revenues from our customer base by providing
maintenance and support services and selling supplies.
. Expand customer base. We intend to expand our broad customer base
through:
. enhancing our direct sales force to market to large enterprises;
. increasing indirect sales channels;
. targeting sales opportunities with financial institutions by
leveraging our experience and industry recognition as the developer
of FedEDI, the Federal Reserve System's financial Electronic Data
Interchange or EDI software solution;
. introducing complementary products, such as our NetTransact bill
presentment software, which will also present new sales
opportunities for our existing products;
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. developing additional marketing partnerships; and
. pursuing strategic acquisitions.
. Expand and leverage strategic relationships. We intend to expand and
leverage our relationships with business partners who play a key role in
the sales, marketing and distribution of our products. We plan to expand
sales through strategic alliances with technology providers and
financial institutions, and through existing reseller and co-marketing
relationships. For example, Arthur Andersen LLP offers PayBase as a Best
Practice solution for corporate payments and The Northern Trust Company
has agreed to market NetTransact with us to its principal commercial
customers. We also intend to expand our relationships with enterprise
resource planning and accounting system vendors, such as Baan, Oracle,
PeopleSoft and SAP, and with consulting firms that assist companies with
the implementation of our products.
. Expand international capabilities. We intend to enhance our products
with additional functionality to expand their use in international
markets. We believe that this will enable us to better accommodate
existing and future customer needs. We have begun initiatives extending
capabilities to accommodate multiple language output, multiple currency
requirements and international standards.
Products and Services
Our software products enable enterprises to control, manage and issue all
payments, whether paper-based or electronic, and electronically present bills
to their trading partners. We also offer complementary add-on functionality
software for our payment products that customers can select according to their
specific needs, as well as hardware to complement our software product
offerings. Our software products are further enhanced by a comprehensive and
experienced consulting service and support system. These consultants help
customers to plan, design, implement and manage an enterprise's transition from
paper to electronic payments and to enhance operational productivity and
customer satisfaction.
PayBase Products
PayBase provides a single software solution to control, manage and issue all
payments across an entire enterprise. PayBase includes the following modules,
which can be purchased as separate products or together:
ESP (Electronically Sent Payments) Module. The ESP module allows users to
create electronic payments, facilitating the transition from paper checks to
electronic funds transfers. This module permits users to create standard files
that meet National Automated Clearing House Association standards and other
financial EDI protocols, and to transmit those files to their banks. The
PayBase ESP module can also create electronic tax payments in the formats
required by federal and state governments. With this module, users can process
payment instructions received from an external database, such as payroll or
accounts receivable. When installed with our LaserCheck printing software
module, PayBase can create both electronic payments and checks during the same
payment run. The ESP module also can be adapted to allow users to automatically
post financial EDI remittance information to their accounts receivable system.
This feature eliminates the need for manually entering information into
accounting ledgers, saving time and preventing mistakes.
ERADS (Electronic Remittance Advice Delivery System) Module. The ERADS
module allows an enterprise to convert to electronic payments immediately and
to deliver the remittance detail by fax, e-mail, communications networks or the
Internet, depending on the technology available to its payees. This module can
be used for payments to individuals (e.g., travel reimbursements) and to
enterprises (e.g., vendor payments). Whenever payments are sent electronically
through the secure Automated Clearing House network, the ERADS module
automatically channels the remittance details to each payee by the appropriate
media and the payee receives an electronic payment directly deposited into its
bank account. Enterprises can realize cost efficiencies through reduced check
printing or processing and the lower cost of transmitting remittance
information electronically.
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Secure WebPay Series (Internet/Intranet Access) Modules. The Secure WebPay
Internet/Intranet Access modules extend the functionality of PayBase to the
Internet. Secure WebPay allows enterprises to use the Internet or a corporate
intranet to request, approve and initiate payments from remote sites, including
locations which are not linked by a corporate network. Secure WebPay can also
provide automatic e-mail delivery of remittance advice both internally and to
third parties such as vendors, customers and employees. Secure WebPay
incorporates administration software that maintains central payment information
that can be accessed on the Internet or over an intranet by authorized users to
review payment status and correct data as appropriate.
LaserCheck Module. The LaserCheck module allows users to print checks,
including all variable data, such as magnetic ink character recognition lines,
logos and signatures, on blank paper using a laser printer. This module can be
deployed over the user's network or the Internet wherever it is needed, whether
in a centralized printing facility, the issuing department or in a remote
location. With LaserCheck's CheckSort feature, users can sort checks to lower
postage rates and produce copies in a specified order to simplify filing.
LaserCheck also provides password protection, as well as hardware and software
security features, and initiates printing of all checks, confirmation notices
and reports.
Check Fraud Avoidance Module. The Check Fraud Avoidance module allows users
to automatically send a digital file of all checks issued to their bank. Most
commercial banks employ a "Positive Pay" system that determines when the check
is presented to the bank and whether a bank customer has in fact issued it. A
number of banks will only reimburse customers for check fraud losses if the
customer uses Positive Pay. This module protects the user from having altered
or unissued checks paid from their account and protects banks from fraudulent
checks received from other institutions. The Check Fraud Avoidance software
receives its data input from PayBase, but can also receive input from a non-
PayBase system that uses printed checks.
NetTransact Product
NetTransact is currently installed at three pilot sites and we anticipate
commercial introduction of the product during the current fiscal year.
NetTransact supports corporate billing applications through features that meet
the unique needs of businesses and large organizations. NetTransact has been
designed as a secure interactive system that will allow companies to accept
payment and present billing information for complex business-to-business
transactions, which often consist of hundreds or thousands of pages of
information. NetTransact will operate on an extranet-based Web site in which
both billers and payors will have an electronic mailbox. The NetTransact system
will be fully integrated with the biller's receivables management process to
provide payors and billers new opportunities to communicate on-line before
funds are transferred. Payors will have the ability to review invoices online,
modify them if necessary and approve them for payment. The scheduling of
payments will be controlled by the payor. Initially, all payments will be
conducted using the Automated Clearing House and will represent authorized
debits to the payor's account. Other payment options that may be deployed
include credit card debits, wire transfers and check generation for non-
NetTransact presented invoices.
Professional Services
Our team of service professionals draws on extensive experience in e-
commerce to provide consulting services, project implementation and training
services to our clients. Consulting service professionals are available to
review clients' current bill presentment and payment methods and processes,
report findings and recommend changes and solutions. Project implementation
professionals are available to coordinate system installation, including
billing and payment design, reporting format and delivery, bank data and
communication requirements, signature and authority set up and security, audit
and control procedures. We offer training services to all customer personnel
involved in the billing and payment cycle, including management, users and
information technology personnel involved in the transition from paper-based
methods to electronic methods.
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Equipment and Supplies
We offer consumable products needed for payment disbursements and check
printing, including magnetic ink character recognition toner and blank-paper
check stock. We also provide printers and printer-related equipment, primarily
through drop-ship arrangements with our hardware vendors, to enhance our
software product offerings. We have reseller agreements with the two leading
secure magnetic ink character recognition printer manufacturers in the country,
Troy Systems, which uses Hewlett Packard printers, and Source Technology, which
uses primarily Lexmark printers.
Technology
Our technology focus is on industry standards, the Internet and client
server platforms. PayBase/32/, our advanced 32-bit payment processing software,
has been designed using a client server architecture. The server platform
supports open database connectivity (ODBC) compliant Unix and Windows NT
databases. The server platform is the warehouse for information relating to the
customer's payment solution, including security tables, application form
parameters and audit tables. The client workstation houses the PayBase
executable programs. This design enables PayBase to be highly scaleable for
both distributed and high volume centralized check printing, as well as
electronic payment origination. The client workstation interacts with the
database to ascertain authority, to retrieve information to create the form and
to update the audit tables with transaction information and payment result
information. Print output can be sent to any addressable network printer. The
ESP and Check Fraud Avoidance modules are bundled with communication software
that allows scripting of the data transmission. Transmission can be executed
from any client workstation.
PayBase is designed to be network independent and can be implemented in
leading network architectures, including Novell, Windows NT and TCP/IP. The
product design creates predictable low volume network traffic in order to
minimize the implementation concerns for corporate information technology.
Installation of the product is highly automated using InstallShield. PayBase
has been submitted and approved for the "Designed for BackOffice" logo from
Microsoft, indicating it conforms to Microsoft standards for design and
operation.
PayBase development methods conform to the latest Microsoft development
specifications, including extensive use of MFC (Microsoft Foundation Classes)
and the DCOM/COM ((Distributed) Component Object Model) standards. Components
are designed as OLE (Object Linking and Embedding) Automation Servers for ease
of future development and enhancement as well as interoperability. Web enabled
components of PayBase are written as ActiveX controls. The primary development
tool is Visual C++.
The PayBase suite also includes PayBase DesignerPlus, a sophisticated
proprietary data mapping and design tool. This tool is used to create
sophisticated payment applications using multiple form designs and multiple
payment methods, including all forms of electronic payments. It provides a
proprietary mapping tool to transform any type of host data file into the
format needed for efficient payment creation. The forms design function allows
easy creation of paper output formats from checks to W-2 forms and includes
design wizards to further automate the process. The data mapping and design are
securely linked to the desired business payment process.
NetTransact is a Java based program designed to operate on Unix servers in
conjunction with commercially available browsers. The security architecture for
NetTransact is based on industry standard security technologies including
firewalls, Secure Socket Layer, encrypted HTTP and digital certificates.
Product Development and Engineering
Our product development and engineering organization included 42 persons as
of June 30, 1999. There are three primary development groups: software
engineering, quality assurance and technical support. We spent $2.2 million in
fiscal year 1997, $3.2 million in fiscal year 1998 and $4.0 million in fiscal
year 1999 on product development and engineering costs.
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The software engineering team averages over nine years of development
experience per person and over seven years of payment systems design experience
per person. The software engineers have substantial experience in advanced
software development techniques as well as extensive knowledge of the complex
processes involved in business payment systems. Our engineers actively
participate in the Microsoft Developer Network programs and maintain extensive
knowledge of software development trends.
The quality assurance engineers have both extensive knowledge of our
products and expertise in software quality assurance techniques. Members of the
quality assurance group make extensive use of automated software testing tools
to facilitate comprehensive and timely testing of products. The quality
assurance group members participate in all beta releases, including all tests
of new products or enhancements, and provide initial training materials for
customer support and service.
The technical support group provides all product documentation as well as
technical support for released products. Members of the technical group include
experienced technical writers, business analysts and network analysts. The
technical writers are versed in current document technology and work closely
with the software engineers to ensure documentation is clear, current and
complete. The technical support engineers are responsible for the analysis of
reported software problems and work closely with customers and customer support
staff. The group's broad knowledge of our products, operating systems,
communications, and printers allows them to rapidly respond to software
configuration needs.
Customers
Our customer base includes over 2,500 companies in industries such as
financial services, health care, communications, education, media,
manufacturing and government.
Sales and Marketing
Sales
As of June 30, 1999, we employed 47 systems trained sales executives, 42 of
whom were divided among six geographical markets and focused on sales to large
and medium sized enterprises and five of whom focused exclusively on sales to
large banks and financial institutions. Our systems trained sales executives
are supported by six systems engineers. We also have a dedicated telephone-
sales team that markets new applications, software upgrades and additional
services to our existing customers. In addition to our direct selling efforts,
we promote our products and services through strategic relationships with
partners such as Arther Andersen LLP and The Northern Trust Company. We also
promote our products and services through relationships with enterprise
resource planning and accounting system vendors, such as Baan, Oracle,
PeopleSoft, and SAP.
Marketing
We promote products and services through conferences, seminars, direct
marketing and trade publications. Our marketing partners sponsor joint mailings
and seminars and issue joint press releases with us. We also maintain
membership in key industry organizations such as Financial Services Technology
Consortium, Microsoft Value Chain Initiative, American Bankers Association and
various operating committees of the National Automated Clearing House
Association. In addition, we participate in industry conferences such as
Treasury Management, National Automated Clearing House Association, Payments,
American Payroll Congress and National User Conferences of Software Partners.
We also promote brand awareness through our public relations program and by
advertising in respected buying guides.
Arthur Andersen LLP Working Agreement
Arthur Anderson LLP has designated PayBase as a Best Practice solution for
corporate payments and, under our working agreement with Arthur Andersen LLP,
it offers PayBase as part of its Electronic Commerce solutions. This
relationship allows us to utilize the enterprise consulting experience of
Arthur Andersen LLP to demonstrate to the users of our departmental payment
products the benefits of migrating to our PayBase enterprise-wide payment
solution.
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Northern Trust Marketing Relationship
We acquired our NetTransact electronic bill presentment software from The
Northern Trust Company in July 1999 and Northern Trust has agreed to market our
NetTransact product with us to its principal commercial customers.
Competition
We currently compete primarily with companies that offer a broad suite of
electronic data interchange products, such as Sterling Commerce, companies that
provide a broad spectrum of electronic payments solutions, such as CheckFree,
and companies that offer laser check printing software and services. To a
lesser extent, we compete with providers of enterprise resource planning
solutions, such as SAP and PeopleSoft, and providers of traditional payment
products, including check stock and check printing software and services, such
as Standard Register. In addition, we also experience competition from our
customers and potential customers who develop, implement and maintain their own
payment solutions.
We believe we compete on a number of factors, including:
. scope, quality and cost-effectiveness of our payment solutions;
. industry knowledge and expertise;
. interoperability of solutions with existing information technology and
payments infrastructure;
. product performance and technical features;
. patented and proprietary technologies; and
. customer service and support.
Although a number of our competitors may be better positioned to compete in
certain segments of the payments industry, we believe that our market position
is enhanced by:
. our ability to provide a single, scaleable, open, dual-payment platform
that provides customers with the flexibility to transition to electronic
payments solutions while maintaining the ability to make paper-based
payments using laser-printed checks;
. our relationships with our strategic partners;
. our large customer base; and
. the level of payments-industry expertise of our development, sales and
customer service and support professionals.
Most companies marketing electronic bill presentment solutions are currently
selling business-to-consumer applications, such as electronic presentment of
utility bills, telephone bills and cable service bills. Business-to-business
electronic bill presentment is significantly more complex and can involve
thousands of pages of information, require integration with existing accounting
systems and a method of resolving billing adjustments and dispute matters. With
the introduction of our NetTransact business-to-business electronic bill
presentment software, we expect to encounter competition from CheckFree, EDS,
PNC Bank, TransPoint and others.
Although we believe that we compete favorably in our industry, the markets
for payment management and electronic bill presentment software are intensely
competitive and characterized by rapid technological change and a number of
factors could adversely affect our ability to compete in the future.
Proprietary Rights
We have one allowed United States patent application relating to certain
security aspects of our dual payment process. However, there can be no
assurance that our allowed patent, or any other patents that may be
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issued in the future, 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. In
addition, we rely upon a combination of copyright and trademark laws and non-
disclosure and other intellectual property contractual arrangements to protect
our proprietary rights. We own registered trademarks to "Bottomline
Technologies," "CheckGard," "LaserCheck" and "PayBase." We also enter into
agreements with our employees and clients that seek to limit and protect the
distribution of proprietary information. There can be no assurance that the
steps we have taken to protect our property rights, however, 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
proprietary rights. Although we believe that our products and services do not
infringe upon the intellectual property rights of others and that we have all
rights necessary to utilize the intellectual property employed in our business,
we are subject to the risk of claims alleging infringement of third-party
intellectual property rights. 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 any such infringement. Therefore,
these claims could have a material adverse effect on our business, operating
results and financial condition.
Government Regulation
Although our operations have not been subject to any material industry-
specific governmental regulation, some of our existing and potential customers
are subject to extensive federal and state governmental regulations. In
addition, governmental regulation in the financial services industry is
evolving, particularly with respect to payment technology, and our customers
may become subject to increased regulation in the future. Accordingly, our
products and services must be designed to work within the regulatory
constraints under which our customers operate.
Federal regulations require that all federal payments, other than payments
under the Internal Revenue Code of 1986, must be made electronically. These
regulations required that the conversion from checks to electronic payments be
made in two phases. During the first phase, recipients who became eligible to
receive federal payments on or after July 26, 1996, were required to receive
payments electronically unless they certified in writing that they did not have
an account with a financial institution or an authorized payment agent. The
second phase began on January 2, 1999. Beginning on that date, all federal
payments, except payments under the Internal Revenue Code, are required to be
made electronically.
The National Automated Clearing House Association now requires that, upon
the request of the receiver of an electronic payment, its bank must provide to
each receiver all payment-related information contained within the transmitted
remittance information. Banks must provide this information to their receivers
by the opening of business on the second banking day following the settlement
date of the entry.
Current treasury regulations require that a business that paid more than
$50,000 in annual employment or other depository taxes in 1995, 1996 or 1997
now make such payments electronically. This requirement is effective for return
periods beginning before January 1, 2000. The date upon which a business first
becomes subject to the electronic payments requirement depends on the year in
which the business first paid more than $50,000 in depository taxes. Businesses
that made in excess of $200,000 of aggregate federal tax deposits in 1998 must
make such deposits electronically for all return periods beginning on or after
January 1, 2000. If a business first exceeds the $200,000 threshold in 1999 or
in any subsequent year, the electronic deposit obligation will be imposed for
the return period beginning after December 31 of the year ending after the year
the threshold was surpassed and will continue for all succeeding years. Non-
complying taxpayers may be subject to a 10% penalty if they fail to comply with
such requirements. In addition, state and local taxing authorities have been
implementing electronic solutions for collecting tax payments. The electronic
payment of certain taxes is required by law in states such as New York,
California, Connecticut and Arkansas.
9
Executive Officers of the Registrant
Our executive officers and their respective ages as of June 30, 1999, are as
follows:
Name Age Positions
- ---- --- ---------
Daniel M. McGurl........ 63 Chairman of the Board, President and Chief Executive Officer
Joseph L. Mullen........ 46 Executive Vice President, Operations and Director
Robert A. Eberle........ 38 Executive Vice President, Chief Financial Officer and Treasurer
Leonard J. DiIuro, Jr... 52 Executive Vice President, Sales
Daniel M. McGurl, one of our founders, has served as Chairman of the Board
of Directors, President and Chief Executive Officer since May 1989. From 1987
to 1989, Mr. McGurl served as Senior Vice President of State Street Bank and
Trust Company. Prior to 1987, Mr. McGurl held a variety of positions at IBM
Corporation, including Director of Marketing Planning and Director of Far East
Operations.
Joseph L. Mullen has served as a director and Executive Vice President of
Operations since July 1996, and served as Vice President of Sales and Marketing
from July 1991 to July 1996. From 1977 to 1989, Mr. Mullen held a variety of
positions at IBM Corporation, including Marketing Manager and Northeast Area
Market Planning Manager.
Robert A. Eberle has served as Executive Vice President, Chief Financial
Officer and Treasurer since September 1998. From December 1996 to September
1998, Mr. Eberle served as Executive Vice President of Telxon Corporation, a
mobile computing and wireless data company, with primary responsibility for its
Technical Subsidiaries Group. From August 1994 to December 1996, Mr. Eberle
served as Executive Vice President and Chief Operating Officer of Itronix
Corporation, a designer and manufacturer of notebook and hand-held computers
and then a subsidiary of Telxon Corporation, with primary responsibility for
the financial and operational performance of the company. From August 1993 to
August 1994, Mr. Eberle served as Vice President of Corporate Development of
Telxon Corporation, with primary responsibility for acquisitions, strategic
relationships and its investment portfolio.
Leonard J. DiIuro, Jr. has served as Executive Vice President, Sales since
July 1998, and served as Vice President of Business Development from July 1996
to July 1998. From July 1994 to July 1996, Mr. DiIuro served as Vice President
of Strategic Alliances and Area Manager, and from May 1993 to July 1994 as Vice
President of Strategic Alliances. Prior to 1993, Mr. DiIuro held a variety of
positions at IBM Corporation, including Business Unit Executive, Branch Manager
and Area Marketing Planning Manager.
Employees
As of June 30, 1999, we had a total of 271 employees. None of our employees
is represented by a labor union. We have not experienced any work stoppages and
we consider relations with our employees to be good.
Item 2. Properties.
We currently lease approximately 34,000 square feet of space at our
headquarters in Portsmouth, New Hampshire under two leases that expire in 2002.
We also maintain field sales offices in San Francisco, California; Chicago,
Illinois; Lakewood, Colorado; and New York, New York.
Item 3. Legal Proceedings.
From time to time we may be named in claims arising in the ordinary course
of business. Currently, no legal proceedings or claims are pending.
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 fourth quarter of fiscal year
1999.
10
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Our common stock began trading on the Nasdaq National Market under the
symbol "EPAY" on February 12, 1999. Prior to that date, there was no
established public trading market for our common stock. The following table
sets forth the high and low sale prices of our common stock for the periods
indicated, as quoted on the Nasdaq National Market.
Period High Low
------ ---- ----
Fiscal 1999
Third quarter (commencing February 12, 1999)........... $ 98 $ 14
Fourth quarter......................................... $73 3/4 $ 32
Fiscal 2000
First Quarter (through September 22, 1999)............. $56 1/4 $12 5/8
As of September 22, 1999, there were approximately 13,000 holders of record
of our common stock.
The closing price for our common stock on September 22, 1999 was $16.50. For
purposes of calculating the aggregate market value of the shares of our common
stock held by non-affiliates, as shown on the cover page of this report, it has
been assumed that all the outstanding shares were held by non-affiliates except
for the shares held by our directors and executive officers. However, this
should not be deemed to constitute an admission that all these persons are, in
fact, affiliates of ours, or that there are not other persons who may be deemed
to be affiliates of ours.
We have never paid dividends on our common stock. We intend to retain our
earnings for use in our business and, therefore, do not anticipate paying any
cash dividends on our common stock for at least the next fiscal year.
Sales of Unregistered Securities and Use of Proceeds
In October 1998, we issued 107,145 shares of common stock to Arthur Anderson
LLP at a purchase price of $9.33 per share for an aggregate consideration of
$1,000,020. The proceeds were used for working capital purposes.
Use of Proceeds of Initial Public Offering
No net offering proceeds of our initial public offering were used during the
period between March 31, 1999 and June 30, 1999.
Item 6. Selected Financial Data.
You should read the following financial data in conjunction with the
Financial Statements, including the related notes, and "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Prior to our initial public offering of common stock in February 1999, there
were 801,000 shares of redeemable common stock outstanding which were
redeemable at the option of the holders at a redemption price that increased
over time. The redemption rights terminated upon the occurrence of our initial
public offering. The earnings (loss) per share available to common stockholders
shown below for periods prior and up to the initial public offering have been
adjusted to reflect the increase in the redemption price for each such period.
The shares used in computing diluted earnings per share available to common
stockholders for periods prior and up to the initial public offering include
the redeemable common stock. For periods occurring after our initial public
offering, such shares are included in the basic earnings per share available to
common stockholders.
11
Fiscal Year Ended June 30,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues:
Software licenses............... $ 4,144 $ 4,689 $ 6,392 $ 9,887 $ 15,885
Service and maintenance......... 3,083 4,580 6,729 9,701 12,422
Equipment and supplies.......... 7,888 8,798 9,005 9,449 10,996
------- ------- ------- ------- --------
Total revenues................ 15,115 18,067 22,126 29,037 39,303
Cost of revenues:
Software licenses............... 54 27 160 215 261
Service and maintenance......... 1,790 2,655 4,206 4,261 5,323
Equipment and supplies.......... 5,215 5,361 6,410 6,526 7,999
------- ------- ------- ------- --------
Total cost of revenues........ 7,059 8,043 10,776 11,002 13,583
------- ------- ------- ------- --------
Gross profit...................... 8,056 10,024 11,350 18,035 25,720
Operating expenses:
Sales and marketing............. 3,716 4,190 6,631 7,675 10,969
Product development and
engineering.................... 701 1,237 2,185 3,158 3,971
General and administrative...... 2,405 3,044 4,266 4,372 4,755
------- ------- ------- ------- --------
Total operating expenses...... 6,822 8,471 13,082 15,205 19,695
------- ------- ------- ------- --------
Income (loss) from operations..... 1,234 1,553 (1,732) 2,830 6,025
Interest income (expense), net.... 12 (6) (56) (50) 726
------- ------- ------- ------- --------
Income (loss) before provision
(benefit) for income taxes....... 1,246 1,547 (1,788) 2,780 6,751
Provision (benefit) for income
taxes............................ 471 664 (536) 1,177 2,700
------- ------- ------- ------- --------
Net income (loss)................. $ 775 $ 883 $(1,252) $ 1,603 $ 4,051
======= ======= ======= ======= ========
Earnings (loss) per share
available to common stockholders:
Basic........................... $ 0.12 $ 0.14 $ (0.23) $ 0.24 $ 0.50
======= ======= ======= ======= ========
Diluted......................... $ 0.10 $ 0.11 $ (0.23) $ 0.20 $ 0.43
======= ======= ======= ======= ========
Shares used in computing earnings
(loss) per share
available to common stockholders:
Basic........................... 5,523 5,693 5,986 6,314 7,988
======= ======= ======= ======= ========
Diluted......................... 6,850 7,001 5,986 7,316 9,170
======= ======= ======= ======= ========
Fiscal Year Ended June 30,
------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------ -------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents................ $ 632 $1,080 $ 827 $1,362 $39,699
Working capital.......................... 2,027 3,123 2,476 3,884 43,710
Total assets............................. 7,394 9,144 10,481 11,301 55,146
Short-term and long-term debt............ 499 597 1,384 75 --
Redeemable common stock, at redemption
value................................... 1,061 1,148 1,246 1,353 --
Stockholders' equity..................... 2,183 3,708 2,680 4,368 45,915
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
the financial statements and notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
Overview
We are a leading provider of software used to make and manage corporate
payments. In 1989, we released our first product, LaserCheck for DOS, to offer
enterprises a cost-effective method to issue checks using specialized laser
printers and toners, eliminating the need for pre-printed, negotiable check
stock. In 1992, we entered into an arrangement with Xerox to sell an advanced
laser printer and newly developed magnetic ink character recognition toners.
Over the next few years we became one of the largest re-sellers of Xerox
Corporation magnetic ink character recognition products; adapted our LaserCheck
products to run on Windows 3.X and Windows 95 operating platforms; and
developed new check fraud avoidance software applications.
In 1996, in order to expand our offerings to include an electronic-payment
solution, we acquired CertiSoft Solutions, Inc., a developer of software
designed to let users make secure electronic payments. In February 1997, we
built on the CertiSoft technology to introduce our PayBase software products,
which enable users to control, manage and issue electronic payments across an
entire enterprise, running on Microsoft's Windows 98 and Windows NT operating
systems. In the fiscal year ended June 30, 1997, we experienced significant
problems with a third-party printer we had been reselling. The printer problem
had an adverse effect on operating results, including reduced revenues due to
customer returns and reduced sales productivity, which resulted in our
reporting a net loss for the fiscal year ended June 30, 1997. In March 1998,
The Federal Reserve Board selected us to develop electronic payment-related
software that would be made available to its 12,000 member financial
institutions. Today, our customer base includes over 2,500 customers in
industries such as financial services, health care, communications, education,
media, manufacturing and government.
Our revenues are primarily derived from the following three sources:
. Software License Fees. We derive software license revenues primarily
from PayBase software license fees, which are generally based on the
number of software applications and user licenses purchased. Fees from
the sale of software licenses are generally recognized upon delivery of
the software to the customer.
. Service and Maintenance Fees. We derive service and maintenance revenues
from (a) consulting, design, project management and training fees which
are fixed on a project-to-project basis and (b) customer support and
maintenance fees. Revenues relating to custom consulting, design and
service fees are recognized at the time services are rendered. Customer
support and training fees are established as a percentage, typically 18%
of the list price for the software license, and are prepaid annually.
Support and maintenance agreements generally have a term of 12 months
and are renewable annually. We recognize revenues related to customer
support and maintenance fees ratably over the life of the agreement.
. Equipment and Supply Sales. We derive equipment and supply revenues from
the sales of printers, check paper and magnetic ink character
recognition toners that are recognized at the time of delivery.
We expect to continue making significant investments in product development
and engineering in order to enhance our current products, develop new products
and further advance our Internet and payment technologies. Future investments
in product development and engineering will generally be related to the hiring
of additional software engineering personnel.
We record software development costs in accordance with Financial Accounting
Standards Board Statement No. 86. We have not had any software development
costs that were capitalized during the last fiscal year and do not currently
have any software development costs that are being capitalized.
13
Recent Accounting Pronouncements
In October 1997, the Accounting Standards Executive Committee of the
American Institute (ACSEC) of Certified Public Accountants issued Statement of
Position (SOP) 97-2 "Software Revenue Recognition," which we adopted effective
July 1, 1998. SOP 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition" deferred the effective date of certain
aspects of SOP 97-2. These statements supersede SOP 91-1, Software Revenue
Recognition, and provide guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions entered into in
fiscal years beginning after December 15, 1997. The adoption of SOP 97-2, as
amended by SOP 98-4, did not have a material impact on our revenues and results
of operations.
Recent Developments
On September 21, 1999, we announced that we anticipated that our revenues
for the quarter ended September 30, 1999 would be between $8.2 million and $8.5
million, higher compared to the $8.1 million of revenues reported during the
same quarter of the prior year, but below what we had previously anticipated.
We believe that the lower than anticipated revenue level in our first fiscal
quarter is primarily the result of prospective customers for our internet
payment and electronic commerce solutions delaying their buying decisions until
after January 1, 2000 as a result of their concerns regarding potential year
2000 issues. We believe that financial institutions and large corporate
entities will continue to remain very cautious about adding new applications
that interact with their mission critical payment operations through the end of
the calendar year and, as a result our revenues for our second fiscal quarter
could be adversely affected.
In July 1999, we acquired NetTransact from The Northern Trust Company.
NetTransact is currently installed at three pilot sites and we anticipate
commercial introduction of the product during the current fiscal year. As part
of the acquisition, The Northern Trust Company agreed to market NetTransact
with us to its principal commercial customers for a commission, and it may also
be entitled to royalty fees on NetTransact sales. We anticipate selling
NetTransact based on a pricing model that would generate both software license
fees and transaction fees. While we anticipate commercial introduction of
NetTransact during the current fiscal year, we do not expect the introduction
of NetTransact to generate any significant revenues in the current fiscal year.
14
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
Fiscal Year Ended
June 30,
--------------------
1997 1998 1999
----- ----- -----
Revenues:
Software licenses..................................... 28.9% 34.0% 40.4%
Service and maintenance............................... 30.4 33.4 31.6
Equipment and supplies................................ 40.7 32.6 28.0
----- ----- -----
Total revenues...................................... 100.0 100.0 100.0
Cost of revenues:
Software licenses..................................... 0.7 0.7 0.7
Service and maintenance............................... 19.0 14.7 13.5
Equipment and supplies................................ 29.0 22.5 20.4
----- ----- -----
Total cost of revenues.............................. 48.7 37.9 34.6
----- ----- -----
Gross profit............................................ 51.3 62.1 65.4
Operating expenses:
Sales and marketing................................... 29.9 26.4 27.9
Product development and engineering................... 9.9 10.9 10.1
General and administrative............................ 19.3 15.1 12.1
----- ----- -----
Total operating expenses............................ 59.1 52.4 50.1
----- ----- -----
Income (loss) from operations........................... (7.8) 9.7 15.3
Interest income (expense), net.......................... (0.3) (0.1) 1.9
----- ----- -----
Income (loss) before provision (benefit) for income
taxes.................................................. (8.1) 9.6 17.2
Provision (benefit) for income taxes.................... (2.4) 4.1 6.9
----- ----- -----
Net income (loss)....................................... (5.7)% 5.5% 10.3%
===== ===== =====
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenues
Total revenues increased by $10.3 million to $39.3 million in the fiscal
year ended June 30, 1999 from $29.0 million in the fiscal year ended June 30,
1998, an increase of 35%.
Software Licenses. Software license fees increased by $6.0 million to $15.9
million in the fiscal year ended June 30, 1999 from $9.9 million in the fiscal
year ended June 30, 1998, an increase of 61%. Software license fees
represented 40% of total revenues in the fiscal year ended June 30, 1999
compared to 34% of total revenues for the fiscal year ended June 30, 1998. The
increase in software license fees was due primarily to growing market
acceptance of our PayBase product suite; and the delivery of software to The
Federal Reserve System, which resulted in recognition of software license fees
of approximately $1.1 million in the fiscal year ended June 30, 1999.
Service and Maintenance. Service and maintenance fees increased by $2.7
million to $12.4 million in the fiscal year ended June 30, 1999 from $9.7
million in the fiscal year ended June 30, 1998, an increase of 28%. Service
and maintenance fees represented 32% of total revenues in the fiscal year
ended June 30, 1999 compared to 33% of total revenues in the fiscal year ended
June 30, 1998. The dollar increase was due primarily to an increase in the
number of sales of software licenses, which resulted in increased orders for
services and sales of software maintenance and technical support.
15
Equipment and Supplies. Equipment and supplies sales increased by $1.5
million to $11.0 million in the fiscal year ended June 30, 1999 from $9.5
million in the fiscal year ended June 30, 1998, an increase of 16%. Equipment
and supplies sales represented 28% of total revenues in the fiscal year ended
June 30, 1999 compared to 33% of total revenues in the fiscal year ended June
30, 1998. The increase in equipment and supplies sales was due primarily to an
increase in printer sales.
Cost of Revenues
Software Licenses. Software license costs consist of expenses incurred by us
to manufacture, package and distribute our software products and related
documentation and costs of licensing third-party software incorporated into our
products. Software license costs increased by $46,000 to $261,000 in the fiscal
year ended June 30, 1999 from $215,000 in the fiscal year ended June 30, 1998,
an increase of 21%. Software license costs remained constant at 2% of software
license fees in each of the fiscal years ended June 30, 1999 and June 30, 1998.
The increase in software license costs was due primarily to third-party royalty
payments of approximately $100,000 made in connection with the software
delivered to The Federal Reserve System, which was offset by other small
reductions.
Service and Maintenance. Service and maintenance costs include salary
expense and other related costs for our customer service, maintenance and
telephone support staffs, as well as third-party contractor expenses. Service
and maintenance costs increased by $1.1 million to $5.3 million in the fiscal
year ended June 30, 1999 from $4.3 million in the fiscal year ended June 30,
1998, an increase of 25%. Service and maintenance costs were 43% of service and
maintenance revenues in the fiscal year ended June 30, 1999 compared to 44% of
service and maintenance revenues in the fiscal year ended June 30, 1998. The
increase in service and maintenance costs was due primarily to increased
staffing and personnel related costs.
Equipment and Supplies. Equipment and supplies costs increased by $1.5
million to $8.0 million in the fiscal year ended June 30, 1999 from $6.5
million in the fiscal year ended June 30, 1998, an increase of 23%. Equipment
and supplies costs were 73% of equipment and supplies sales in the fiscal year
ended June 30, 1999 compared to 69% of equipment and supplies sales in the
fiscal year ended June 30, 1998. The increase in equipment and supplies costs
as a percentage of equipment and supplies sales was due primarily to
competitive pressure on the pricing of both hardware and supplies.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and trade shows.
Sales and marketing expenses increased by $3.3 million to $11.0 million in the
fiscal year ended June 30, 1999 from $7.7 million in the fiscal year ended June
30, 1998, an increase of 43%. Sales and marketing expenses were 28% of total
revenues in the fiscal year ended June 30, 1999 compared to 26% of total
revenues in the fiscal year ended June 30, 1998. The increase was due primarily
to increases in staffing and personnel related costs.
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 $813,000 to $4.0
million in the fiscal year ended June 30, 1999 from $3.2 million in the fiscal
year ended June 30, 1998, an increase of 26%. Product development and
engineering expenses were 10% of total revenues in the fiscal year ended June
30, 1999 compared to 11% of total revenues in the fiscal year ended June 30,
1998. The dollar increase was due primarily to increases in staffing and
personnel related costs.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and certain facilities-related
expenses. General and administrative expenses increased by $383,000 to $4.8
million in the fiscal year ended June 30, 1999 from $4.4 million in the fiscal
year ended June 30, 1998, an increase of 9%. General and
16
administrative expenses were 12% of total revenues in the fiscal year ended
June 30, 1999 compared to 15% of total revenues in the fiscal year ended June
30, 1998. The dollar increase was due primarily to staffing and personnel
related costs and, to a lesser extent, facility, information system and other
expenses necessary to support our expanding operations.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income and interest expense. Interest income (expense), net increased
by $776,000 to $726,000 of interest income, net of interest expense, in the
fiscal year ended June 30, 1999 from $50,000 of interest expense, net of
interest income, in the fiscal year ended June 30, 1998. The increase in
interest income was due to higher available cash and cash equivalent balances
on hand as a result of our initial public offering in February 1999 and lower
average balances outstanding under our revolving credit agreement.
Provision for Income Taxes. The provision for income taxes increased by $1.5
million to $2.7 million in the fiscal year ended June 30, 1999 from $1.2
million in the fiscal year ended June 30, 1998. The effective tax rate in the
fiscal year ended June 30, 1999 was 40% compared to 42% in the fiscal year
ended June 30, 1998.
Net Income. Net income increased by $2.5 to $4.1 million in the fiscal year
ended June 30, 1999 from $1.6 in the fiscal year ended June 30, 1998.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Revenues
Total revenues increased by $6.9 million to $29.0 million in the fiscal year
ended June 30, 1998 from $22.1 million in the fiscal year ended June 30, 1997,
an increase of 31%. The increase was primarily attributable to the growing
market acceptance of PayBase/32/, which we released in February 1997, and the
addition of new clients to our customer base, resulting in substantial growth
in software license fees and related services and maintenance fees.
Software Licenses. Software license fees increased by $3.5 million to $9.9
million in the fiscal year ended June 30, 1998 from $6.4 million in the fiscal
year ended June 30, 1997, an increase of 55%. Software license fees represented
34% of total revenues in the fiscal year ended June 30, 1998 compared to 29% of
total revenues in the fiscal year ended June 30, 1997. In February 1997, we
released PayBase/32/. PayBase/32/ is a more advanced, higher priced product.
The increase in software license fees during the fiscal year ended June 30,
1998 was due primarily to the higher price of the PayBase/32/ product and an
increase in the number of customers as a result of growing market acceptance of
PayBase/32/. Revenues from our existing product line were consistent with the
prior year.
Service and Maintenance. Service and maintenance fees increased by $3.0
million to $9.7 million in the fiscal year ended June 30, 1998 from $6.7
million in the fiscal year ended June 30, 1997, an increase of 45%. Service and
maintenance fees represented 33% of total revenues in the fiscal year ended
June 30, 1998 compared to 30% of total revenues in the fiscal year ended June
30, 1997. The increase in service and maintenance fees was due primarily to an
increase in the number of customers and sales of software licenses, which
resulted in increased orders for services and sales of software maintenance and
technical support.
Equipment and Supplies. Equipment and supplies sales increased by $400,000
to $9.4 million in the fiscal year ended June 30, 1998 from $9.0 million in the
fiscal year ended June 30, 1997, an increase of 4%. Equipment and supplies
sales represented 33% of total revenues in the fiscal year ended June 30, 1998
compared to 41% of total revenues in the fiscal year ended June 30, 1997. The
increase in equipment and supplies sales was due primarily to increased sales
of magnetic ink character recognition toners and check stock.
17
Cost of Revenues
Software Licenses. Software license costs increased by $55,000 to $215,000
in the fiscal year ended June 30, 1998 from $160,000 in the fiscal year ended
June 30, 1997, an increase of 34%, due to increased software sales. Software
license costs were 2% of software revenues in the fiscal year ended June 30,
1998 compared to 3% of software revenues in the fiscal year ended June 30,
1997.
Service and Maintenance. Service and maintenance costs increased by $100,000
to $4.3 million in the fiscal year ended June 30, 1998 from $4.2 million in the
fiscal year ended June 30, 1997, an increase of 2%. Service and maintenance
costs were 44% of service and maintenance revenues in the fiscal year ended
June 30, 1998 compared to 63% of service and maintenance revenues in the fiscal
year ended June 30, 1997. Service and maintenance costs as a percentage of
service and maintenance revenues were significantly higher in the fiscal year
ended June 30, 1997 as a result of increased maintenance costs and charges
incurred in fiscal year 1997 by us due to a problem with a third-party printer
that we had been reselling.
Equipment and Supplies. Equipment and supplies costs increased by $100,000
to $6.5 million in the fiscal year ended June 30, 1998 from $6.4 million in the
fiscal year ended June 30, 1997, an increase of 2%. Equipment and supplies
costs were 69% of equipment and supplies sales in the fiscal year ended June
30, 1998 compared to 71% in the fiscal year ended June 30, 1997. The decrease
in equipment and supplies costs as a percentage of equipment and supplies sales
was due primarily to a higher provision for inventory obsolescence of $217,000
recognized during fiscal year 1997 related to a third-party printer that we had
been reselling.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by $1.1 million
to $7.7 million in the fiscal year ended June 30, 1998 from $6.6 million in the
fiscal year ended June 30, 1997, an increase of 17%. Sales and marketing
expenses were 26% of total revenues in the fiscal year ended June 30, 1998
compared to 30% of total revenues in the fiscal year ended June 30, 1997. The
dollar increase was due primarily to an increase in sales and marketing
personnel costs which increased by $816,000 and, to a lesser extent, increased
marketing expenditures relating to the introduction of PayBase/32/.
Product Development and Engineering. Product development and engineering
expenses increased by $1.0 million to $3.2 million in the fiscal year ended
June 30, 1998 from $2.2 million in the fiscal year ended June 30, 1997, an
increase of 45%. Product development and engineering expenses were 11% of total
revenues in the fiscal year ended June 30, 1998 compared to 10% of total
revenues in the fiscal year ended June 30, 1997. The dollar increase was due
primarily to the hiring of additional personnel to develop new software
products.
General and Administrative. General and administrative expenses increased by
$100,000 to $4.4 million in the fiscal year ended June 30, 1998 from $4.3
million in the fiscal year ended June 30, 1997, an increase of 2%. General and
administrative expenses were 15% of total revenues in the fiscal year ended
June 30, 1998 compared to 19% of total revenues in the fiscal year ended June
30, 1997. The dollar increase was due primarily to increased personnel costs
which increased by $88,000 and, to a lesser extent, facility expenses necessary
to support our expanding operations.
Interest Income (Expense), Net. Interest income (expense), net decreased by
$6,000 to $50,000 in the fiscal year ended June 30, 1998 from $56,000 in the
fiscal year ended June 30, 1997. The decrease was due to lower prevailing
interest rates and lower borrowings in fiscal year 1998 compared to fiscal year
1997.
Provision (Benefit) for Income Taxes. We had income tax expense of $1.2
million in the fiscal year ended June 30, 1998 compared to an income tax
benefit of $536,000 in the fiscal year ended June 30, 1997. The effective tax
rate used to calculate our income tax expense in the fiscal year ended June 30,
1998 was 42% compared to an effective tax rate of 30.0% used to calculate our
income tax benefit in the fiscal year ended June 30, 1997. The effective tax
rate in the fiscal year ended June 30, 1998 differed from the federal statutory
18
rate due principally to the effect of state income taxes and reduced levels of
available research and development credits. The effective tax rate in the
fiscal year ended June 30, 1997 differed from the federal statutory rate due
principally to the effect of non-deductible expenses associated principally
with the CertiSoft acquisition, which were offset partially by research and
development credits.
Net Income (Loss). Net income increased by $2.9 million to $1.6 million in
the fiscal year ended June 30, 1998 from a net loss of $1.3 million in the
fiscal year ended June 30, 1997.
Liquidity and Capital Resources
We have financed our operations primarily from cash provided by operating
activities, the sale of our common stock and bank credit facilities for
leasehold improvements and working capital. We had net working capital of $43.7
million at June 30, 1999, including cash and cash equivalents totaling $39.7
million.
Net cash provided by operating activities was $3.7 million in the fiscal
year ended June 30, 1999 and $2.6 million in the fiscal year ended June 30,
1998. Net cash used in operating activities was $668,000 in the fiscal year
ended June 30, 1997. Net cash provided by operating activities for each of the
fiscal years ended June 30, 1999 and June 30, 1998 was primarily the result of
net income and increases in deferred revenues, accounts payable and accrued
expenses, partially offset by increases in accounts receivable and prepaid
expenses. During the fiscal year ended June 30, 1997, net cash used in
operations was primarily the result of net losses, an increase in accounts
receivable and refundable income taxes partially offset by increases in
deferred revenues, accounts payable and accrued expenses.
Net cash used in investing activities was $1.4 million in the fiscal year
ended June 30, 1999, $993,000 in the fiscal year ended June 30, 1998 and
$694,000 in the fiscal year ended June 30, 1997. Cash was used during these
periods to acquire property and equipment and for software development costs.
We currently have no significant capital spending or purchase commitments, but
expect to continue to engage in capital spending in the ordinary course of
business.
Net cash provided by financing activities was $36.1 million in the fiscal
year ended June 30, 1999. The net increase was primarily the result of our
initial public offering of common stock in February 1999. Net cash used in
financing activities was $1.1 million in the fiscal year ended June 30, 1998.
Net cash provided by financing activities was $1.1 million in the fiscal year
ended June 30, 1997. Net cash used in financing activities during the fiscal
year ended June 30, 1998 primarily represented repayment of indebtedness. Net
cash provided by financing activities during the fiscal year ended June 30,
1997 primarily represented borrowings under our revolving credit agreement.
In December 1998, we renewed our revolving credit agreement with a bank
which provides for borrowings of up to $5.0 million. Borrowings under our
revolving credit agreement bear interest at the bank's prime rate, are due on
demand and are secured by substantially all of our assets. As of June 30, 1999,
we had no outstanding balance under our revolving credit agreement. The
agreement expires on December 30, 1999.
We believe that the cash generated from operations and cash and cash
equivalents on hand will be sufficient to meet our working capital requirements
for the foreseeable future.
Year 2000 Considerations
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many software and
computer systems may need to be upgraded in order to be year 2000 compliant.
The vendors of each of our major internal software systems, such as
accounting and database management, have certified that their software is year
2000 compliant. In addition, we have assessed our currently supported products,
including tools, equipment and software provided by others, for possible
19
problems in processing, reporting, displaying, functioning with and otherwise
handling date data containing the year 2000 and beyond and have concluded that
such products are year 2000 compliant. We have completed testing our internal
systems, including hardware and software used to support the internal systems
and networks, and have received compliance statements from our outside service
providers that are responsible for telecommunications and other services used
for internal and external operations. Facility management systems have been
verified for compliance. We do not plan to assess specifically year 2000
compliance of external forces such as utility or transportation systems or year
2000 compliance failures that might generally affect industry and commerce.
We have conducted extensive tests to validate the year 2000 compliance of
our products installed after February 1997 and we believe that these products
were year 2000 compliant at the time of installation. However, products
installed prior to that time that operated in the DOS operating system
environment are not year 2000 compliant. In 1997, we notified customers that
had purchased DOS based products that their products were not year 2000
compliant and that we would no longer be supporting those products. We have no
plan to address year 2000 readiness for these older products. Based on the
notification we provided and the contractual provisions limiting liability
contained in our standard terms and conditions which governed the sale of our
DOS based products, we do not believe there are significant risks to our
business relating to year 2000 compliance of these products.
Contingency plans have been formalized that will provide alternate methods
of providing the services and tools should unexpected problems develop with
tested applications and systems. These include, but are not limited to,
additional standby compliant hardware and systems. These are in addition to
standard redundant systems and services and spares kits.
During the past two years, we have purchased approximately $2.0 million in
information systems, hardware and software, some of which purchases were
accelerated in connection with year 2000 compliance. We do not expect any
future material expenses to be incurred in connection with year 2000
compliance.
20
FACTORS THAT MAY AFFECT FUTURE RESULTS
Substantially all of our revenues to date have come from our payment management
offerings and our performance will depend on continued market acceptance of
these offerings
Substantially all 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 solutions, or
lack of meaningful growth in the market for electronic and payment management
solutions could have a material adverse effect on our business, operating
results and financial condition. Our PayBase software products are designed to
provide a single platform to control, manage and issue all payments, whether
paper-based or electronic, across an enterprise. Our future performance will
depend to a large degree upon the market acceptance of PayBase 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 LaserCheck
solution, as well as our ability to introduce enhancements to meet the market's
evolving needs for secure, payment management solutions.
The year 2000 issue may cause our current and potential customers to delay
implementing our products and services
We believe that the adoption of our products and services by existing and
potential customers and subscribers has been, and may continue to be, adversely
affected by the year 2000 issue. Once companies have tested and upgraded their
current software systems for year 2000 compliance, they may be reluctant to
introduce new software systems into the tested environment and may delay or
cancel decisions to adopt our products and services. If this occurs, it could
have a material adverse effect on our business, financial condition and results
of operations. In addition, companies that have not completed all testing and
upgrades of their current software systems may not have the resources to allow
them to go forward and may deter or cancel decisions to purchase our products.
Our future results will depend upon market acceptance of our new bill
presentment product
Our objective is to be the leading provider of software solutions that
enable businesses and financial institutions to create an automated e-business
infrastructure to enable, implement and manage movements of cash resources. An
integral part of that strategy is the successful implementation of our
NetTransact bill presentment software. We acquired NetTransact from The
Northern Trust Company, a financial institution, in July 1999. NetTransact is
currently installed at three pilot sites and we anticipate commercial
introduction of the product during the current fiscal year. However, if the
product has any unanticipated performance problems or bugs, its introduction
could be delayed. If NetTransact is delayed, or does not enjoy wide commercial
success when it is introduced to the general marketplace, our long-term
business strategy would be adversely affected.
Our fixed costs may lead to fluctuations in operating results if our revenues
are below expectations
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 variations in operating results in any quarter.
Factors that could cause these fluctuations include the following:
. The potential delay in sales of our products and services if companies
elect not to introduce new software applications into existing systems
which have been tested for Y2K compliance;
. the timing of orders and longer sales cycles, particularly due to
increased average selling prices of our payment solutions;
21
. the timing and market acceptance of new products or product enhancements
by either us or our competitors;
. the timing of product implementations, which are highly dependent on
customers' resources and discretion;
. the incurrence of costs relating to the integration of software products
and operations in connection with acquisitions of technologies or
businesses;
. delivery interruptions relating to equipment and supplies purchased from
third-party vendors, which could delay system sales; and
. economic conditions which may affect our customers' and potential
customers' budgets for technological expenditures.
Because of these factors, we believe that period to period comparisons of
our results of operations are not necessarily meaningful. In addition, it is
possible that in some future quarters our results of operations will be below
the expectations of public market analysts and investors, and in that case the
price of our common stock could be materially adversely affected.
Our first and third quarter revenues can be less than the preceding quarter's
revenues
During our second fiscal quarter ended December 31, revenues have typically
increased as customers on a calendar-based fiscal year completed their capital
spending plans. During our third fiscal quarter ended March 31, revenues have
typically declined as customers focus internal resources on statutory and
regulatory reporting requirements. Our fourth fiscal quarter ended June 30,
generally has the highest revenues as customers complete projects before
summer, when activity in many corporate financial departments tends to slow. As
a result, we have historically experienced first quarter revenues that are
lower than those of the immediately preceding quarter.
Our success depends on our ability to develop new and enhanced payment
management software and services
The payment management software market is subject to rapid technological
change and our success is dependent on our ability to develop new and enhanced
payment management software, services and related products. Trends which 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 and by the Debt Collection
Improvement Act of 1996; and
. developments and changes relating to the Internet that we must address
as we introduce Internet-capable 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.
22
We are subject to risks associated with the Internet
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-
commerce. There are critical issues involved in the commercial use of the
Internet which are not yet fully resolved, including concerns regarding the
Internet's:
. security;
. reliability;
. ease of access; and
. quality of services.
The adoption of the use of the Internet by enterprises which have
historically relied on traditional means of commerce and communication will
require them to accept a new medium for conducting business and exchanging
information. These entities will probably accept this new medium only if the
Internet provides substantially greater efficiency and enhances their
competitiveness. To the extent that any of these issues inhibit or limit the
continued adoption of the Internet for e-commerce, our business prospects could
be adversely affected.
Our business can be adversely affected by problems with third-party hardware
In fiscal 1997, 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. We revised and enhanced our quality assurance control
programs and now utilize multiple printers and printer vendors. However, 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.
Increased competition may result in price reductions and decreased demand for
our products and services
The market for payment management and electronic bill presentment 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. See "Part I, Item I, Business--
Competition."
Rapid growth could strain our personnel, systems and controls
Our rapid growth has sometimes strained, and may in the future strain, our
managerial and other resources. Our ability to manage 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 our growth. If we are unable
to manage growth effectively, the quality of our services, our ability to
retain key personnel and our business, operating results and financial
condition could be materially adversely affected.
23
We depend on a few key employees who are skilled in e-commerce, payment
methodology and Internet and other technologies
Our success depends upon the efforts and ability 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 payments and bill presentment 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 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. In addition, we plan to expand our sales and
marketing and customer support organizations. Based on our experience, it takes
an average of six 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 year 2000 problems and claims regarding non-compliant discontinued
products could have an adverse effect on our business
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many software and
computer systems may need to be upgraded in order to be year 2000 compliant.
Significant uncertainties exist in the software industry concerning the
potential effects associated with year 2000 compliance. We have assessed the
impact of year 2000 compliance on our products and systems. We cannot, however,
be certain that we have identified all of the potential risks to our business
that could result from matters related to the year 2000. We have identified the
following risks that you should be aware of:
. Year 2000 problems that affect our internal systems. We have obtained
certifications by our software vendors regarding the year 2000 readiness
of our internal software systems and have conducted independent tests of
these systems. It is possible, however, that these systems could contain
undetected problems that could cause serious and costly disruptions
which would have a material adverse effect on our business, operating
results and financial condition.
. Year 2000 problems that affect our discontinued products. We have
notified customers that had purchased DOS based products that their
products were not year 2000 compliant and that we would no longer be
supporting those products. Based on the notification we provided and the
contractual provisions limiting liability contained in our standard
terms and conditions which governed the sale of our DOS based products,
we do not believe there are significant risks to our business relating
to year 2000 compliance of these products. However, we cannot assure you
that customers who purchased these products will not assert claims
against us, which could result in costly litigation which diverts
management's attention and could have a material adverse effect on our
business, operating results and financial condition.
. Undetected year 2000 problems that could affect our currently supported
products. We believe that all of our products that have been installed
after February 1997 were year 2000 compliant at the time of
installation. However, although we have tested such products for year
2000 compliance, we cannot be certain that these tests have detected all
potential year 2000 problems. The failure of our currently supported
products to be fully year 2000 compliant could result in claims by or
liability to our customers, which could have a material adverse effect
on our business, operating results and financial condition.
24
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. Additionally, we regularly introduce new releases and
periodically introduce new versions of our software products. Any defects or
errors in new products, such as NetTransact, or enhancements could result in
adverse customer reactions and negative publicity regarding us and our products
and could have a material adverse effect on our business, operating results and
financial condition.
Our business could be subject to product liability claims
Our software and hardware products are designed to provide critical payment
management functions and to limit the risk of fraud or loss in effecting such
transactions. As a result, our products are critical to our customers and there
is the potential for significant product liability claims. Our license
agreements with customers typically place the responsibility for use of the
system on the customer and contain provisions intended to limit our exposure to
product liability claims. However, these limitation provisions may not preclude
all potential claims. We have not experienced any product liability claims to
date. However, a product liability claim brought against us, even if not
successful, would likely be time consuming and costly. A successful liability
claim could have a material adverse effect on our business, operating results
and financial condition.
We intend to pursue strategic acquisitions and our business could be materially
adversely affected if we fail to adequately integrate acquired businesses
As part of our overall business strategy, we pursue strategic acquisitions
that would provide us with additional product or service offerings, additional
industry expertise, a broader client base or an expanded geographic presence.
Any future acquisition could result in the use of significant amounts of cash,
potentially dilutive issuances of equity securities, or the incurrence of debt
or amortization expenses related to goodwill and other intangible assets, any
of which could materially adversely affect our business, operating results and
financial condition. In addition, acquisitions involve numerous risks,
including:
. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experience; and
. the potential loss of key employees of the acquired company.
From time to time, we engage in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
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. We have one allowed United States patent application
relating to certain security aspects of our dual payment process. However, we
cannot assure you that our allowed patent, or any other patents that may be
issued in the future, 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 property rights, however, 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.
25
Others could claim that we infringe their intellectual property
Although we believe that our products and services do not infringe upon the
intellectual property rights of others and that we have all rights necessary to
utilize the intellectual property employed in our business, we are subject to
the risk of claims alleging infringement of third-party intellectual property
rights. 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. Therefore, these claims could have a material adverse
effect on our business, operating results and financial condition.
Trading in our common stock is subject to extreme price fluctuations
The market for our common stock is subject to extreme price fluctuations.
Since our initial public offering of common stock in February 1999 through
September 22, 1999, our stock has traded as high as $98 per share and as low as
$12 5/8 per share.
Declines in our common stock price could lead to costly litigation that could
adversely affect our business
Securities class action litigation has often been brought against companies
that experience declines in the market price of their securities. Litigation
brought against us could result in substantial costs and a diversion of
management's attention, which could have a material adverse effect on our
business, operating results and financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We maintain an investment portfolio consisting of demand deposit accounts, a
money market mutual fund and an overnight investment account. Due to the short-
term average maturity of the investment portfolio, a sudden sharp change in
interest rates would not have a material adverse effect on the value of the
portfolio. Based on our investment portfolio and interest rates at June 30,
1999, a 100 basis point increase or decrease in interest rates would result in
an increase or decrease of $400,000, respectively, in our results from
operations and cash flows.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements, Financial Statements and Supplementary Data
appear on pages 33 to 48 of this Annual Report on Form 10-K.
Item 9. Changes In and Disagreements with Accountants in Accounting and
Financial Disclosure.
None.
26
PART III
Item 10. Directors and Executive Officers of the Registrant.
See "Executive Officers of the Registrant" in Part I of this Annual Report
on Form 10-K. We will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days
after the close of the fiscal year ended June 30, 1999. The information
required by this item is incorporated herein by reference to the Proxy
Statement.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to
the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to
the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference to
the Proxy Statement.
27
PART IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedule and Exhibits
Page
----
(1) Financial Statements--see "Index to Financial Statements"....... 33
(2) Financial Statement Schedule for the Years Ended June 30, 1997,
1998 and 1999:
Schedule II--Valuation and Qualifying Accounts.................. 30
Financial statement schedules not included have been omitted
because of the absence of conditions under which they are
required or because the required information, where material, is
shown in the financial statements or notes
(3) Exhibits:....................................................... 31
Exhibits submitted with the Annual Report on Form 10-K as filed
with the Securities and Exchange Commission and those
incorporated by reference to other filings are listed on the
Exhibit Index
(b) Reports on Form 8-K
None.
28
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS
Years Ended June 30, 1997, 1998 and 1999
Additions
--------------------
(Charged
Balance at to Costs
Beginning and Balance at
Year ended of Year Expenses) Recoveries Deductions End of Year
---------- ---------- --------- ---------- ---------- -----------
(in thousands)
June 30, 1997..... $157 487 -- -- $ 644
June 30, 1998..... $644 326 -- -- $ 970
June 30, 1999..... $970 302 176 125 $1,323
29
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.1* Specimen certificate for shares of common stock.
10.1* 1989 Stock Option Plan, as amended, including form of stock option
agreement for incentive and non-statutory stock options.
10.2* Amended and Restated 1997 Stock Incentive Plan, including form of
stock option agreement for incentive and non-statutory stock options.
10.3* 1998 Director Stock Option Plan, including form of non-statutory stock
option agreement.
10.4* 1998 Employee Stock Purchase Plan.
10.5* First Amendment and Restatement of Stock Rights and Voting Agreement,
as amended.
10.6* Second Stock Rights Agreement, as amended.
10.7* Lease dated November 28, 1994, between the Registrant and Wenberry
Associates L.L.C.
10.8* Employment Agreement between the Registrant and Mr. McGurl.
10.9* Employment Agreement between the Registrant and Mr. Mullen.
10.10* Employment Agreement between the Registrant and Mr. Eberle.
10.11* Revolving Credit Agreement between the Registrant and Shawmut Bank
N.A., dated January 13, 1995.
10.12* Secured Revolving Time Note between the Registrant and Shawmut Bank
N.A., dated January 13, 1995.
10.13* First Amendment of the Loan Agreement between the Registrant and Fleet
National Bank of Massachusetts, dated December 29, 1995.
10.14* Secured Revolving Time Note between the Registrant and Fleet National
Bank of Massachusetts, dated December 29, 1995.
10.15* Second Amendment of the Loan Agreement between the Registrant and
Fleet National Bank, dated December 20, 1996.
10.16* Secured Revolving Time Note between the Registrant and Fleet National
Bank, dated December 20, 1996.
10.17* Third Amendment of the Loan Agreement between the Registrant and Fleet
National Bank, dated December 29, 1997.
10.18* Secured Revolving Time Note between the Registrant and Fleet National
Bank, dated December 29, 1997.
10.19* Fourth Amendment of the Loan Agreement between the Registrant and
Fleet National Bank, dated December 29, 1998.
10.20* Secured Revolving Time Note between the Registrant and Fleet National
Bank, dated December 29, 1998.
10.21* Line of Credit Agreement for the Acquisition of Equipment between the
Registrant and Shawmut Bank N.A., dated January 13, 1995.
10.22* Secured Term Note between the Registrant and Shawmut Bank N.A., dated
June 28, 1995.
10.23* Security Agreement between the Registrant and Shawmut Bank N.A., dated
January 13, 1995.
10.24 Asset Purchase Agreement between the Registrant and The Northern Trust
Company, dated June 30, 1999 (filed herewith).
23 Consent of Ernst & Young LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
- --------
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-67309)
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Robert A. Eberle
By: _________________________________
Robert A. Eberle
Executive Vice President, Chief
Financial Officer and Treasurer
Date: September 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 24, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated:
Signature Title
--------- -----
/s/ Daniel M. McGurl
_______________________________________________ Chairman of the Board,
Daniel M. McGurl President and Chief Executive Officer
/s/ Joseph L. Mullen
_______________________________________________ Executive Vice President, Operations
Joseph L. Mullen and Director
/s/ Robert A. Eberle
_______________________________________________ Executive Vice President,
Robert A. Eberle Chief Financial Officer and Treasurer
/s/ James L. Loomis
_______________________________________________
James L. Loomis Senior Executive Advisor and Director
/s/ Joseph L. Barry Jr.
_______________________________________________
Joseph L. Barry Jr. Director
/s/ Bruce E. Elmblad
_______________________________________________
Bruce E. Elmblad Director
/s/ James W. Zilinski
_______________________________________________
James W. Zilinski Director
31
BOTTOMLINE TECHNOLOGIES (de), INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors........................................... 33
Balance Sheets as of June 30, 1998 and 1999.............................. 34
Statements of Operations for the years ended June 30, 1997, 1998 and
1999.................................................................... 35
Statements of Stockholders' Equity for the years ended June 30, 1997,
1998 and 1999........................................................... 36
Statements of Cash Flows for the years ended June 30, 1997, 1998 and
1999.................................................................... 37
Notes to Financial Statements............................................ 38
32
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Bottomline Technologies (de), Inc.
We have audited the accompanying balance sheets of Bottomline Technologies
(de), Inc. as of June 30, 1998 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1999. Our audits also included the financial
statement schedule listed in the index at Item 14 (a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bottomline Technologies
(de), Inc. at June 30, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the financial statements, effective July 1, 1998,
the Company adopted Statement of Position 97-2 "Software Revenue Recognition"
as amended by Statement of Position 98-4.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 2, 1999
33
BOTTOMLINE TECHNOLOGIES (de), INC.
BALANCE SHEETS
June 30,
---------------
1998 1999
------- -------
(in thousands,
except
per share data)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 1,362 $39,699
Accounts receivable, net of allowances for doubtful accounts
and returns of $970 at June 30, 1998 and $1,323 at June 30,
1999........................................................ 6,997 11,631
Inventory, net............................................... 174 322
Deferred income taxes........................................ 724 665
Prepaid expenses and other current assets.................... 89 371
------- -------
Total current assets........................................... 9,346 52,688
Property and equipment, net.................................... 1,865 2,392
Other assets................................................... 90 66
------- -------
Total assets............................................. $11,301 $55,146
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 1,177 $ 1,376
Accrued expenses............................................. 2,030 3,478
Deferred revenue and deposits................................ 2,121 3,467
Income taxes payable......................................... 59 657
Current portion of long-term debt............................ 75 --
------- -------
Total current liabilities...................................... 5,462 8,978
Deferred income taxes payable.................................. 118 253
Commitments and contingent liabilities
Redeemable Common Stock, at redemption value (Authorized,
issued and outstanding shares--801 at June 30, 1998 and none
at June 30, 1999)............................................. 1,353 --
Stockholders' equity:
Preferred Stock, $ .001 par value:
Authorized shares--4,000; issued and outstanding shares--
none
Common Stock, $.001 par value:
Authorized shares--50,000; issued and outstanding shares--
6,360 at June 30, 1998, and 10,476 at June 30, 1999....... 6 10
Additional paid-in-capital................................. 1,867 39,429
Retained earnings.......................................... 2,495 6,476
------- -------
Total stockholders' equity..................................... 4,368 45,915
------- -------
Total liabilities and stockholders' equity............... $11,301 $55,146
======= =======
See accompanying notes.
34
BOTTOMLINE TECHNOLOGIES (de), INC.
STATEMENTS OF OPERATIONS
Year ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
(in thousands, except
per share data)
Revenues:
Software licenses................................ $ 6,392 $ 9,887 $15,885
Service and maintenance.......................... 6,729 9,701 12,422
Equipment and supplies........................... 9,005 9,449 10,996
------- ------- -------
Total revenues................................. 22,126 29,037 39,303
Cost of revenues:
Software licenses................................ 160 215 261
Service and maintenance.......................... 4,206 4,261 5,323
Equipment and supplies........................... 6,410 6,526 7,999
------- ------- -------
Total cost of revenues......................... 10,776 11,002 13,583
------- ------- -------
Gross profit....................................... 11,350 18,035 25,720
Operating expenses:
Sales and marketing.............................. 6,631 7,675 10,969
Product development and engineering.............. 2,185 3,158 3,971
General and administrative....................... 4,266 4,372 4,755
------- ------- -------
Total operating expenses....................... 13,082 15,205 19,695
------- ------- -------
Income (loss) from operations...................... (1,732) 2,830 6,025
Interest income.................................... 53 35 730
Interest expense................................... (109) (85) (4)
------- ------- -------
(56) (50) 726
------- ------- -------
Income (loss) before provision (benefit) for income
taxes............................................. (1,788) 2,780 6,751
Provision (benefit) for income taxes............... (536) 1,177 2,700
------- ------- -------
Net income (loss).................................. $(1,252) $ 1,603 $ 4,051
======= ======= =======
Earnings (loss) per share available to common
stockholders:
Basic............................................ $ (0.23) $ 0.24 $ 0.50
======= ======= =======
Diluted.......................................... $ (0.23) $ 0.20 $ 0.43
======= ======= =======
Shares used in computing earnings (loss) per share
available to common stockholders:
Basic............................................ 5,986 6,314 7,988
======= ======= =======
Diluted.......................................... 5,986 7,316 9,170
======= ======= =======
See accompanying notes.
35
BOTTOMLINE TECHNOLOGIES (de), INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1997, 1998 and 1999
Common Stock Additional Total
------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ---------- -------- -------------
(in thousands)
Balances at June 30, 1996...... 5,844 $ 6 $ 1,354 $2,348 $ 3,708
Issuance of common stock upon
exercise of stock options... 135 -- 297 -- 297
Issuance of common stock upon
exercise of stock warrants.. 327 -- 24 -- 24
Accretion to redemption value
on redeemable common stock.. -- -- -- (97) (97)
Net loss..................... -- -- -- (1,252) (1,252)
------ ---- ------- ------ -------
Balances at June 30, 1997...... 6,306 6 1,675 999 2,680
Issuance of common stock upon
exercise of stock options... 54 -- 192 -- 192
Accretion of redemption value
on redeemable common stock.. (107) (107)
Net income................... -- -- -- 1,603 1,603
------ ---- ------- ------ -------
Balances at June 30, 1998...... 6,360 6 1,867 2,495 4,368
Issuance of common stock upon
exercise of stock options... 54 -- 297 -- 297
Issuance of common stock upon
exercise of stock warrants.. 125 -- -- -- --
Accretion to redemption value
on redeemable common stock.. -- -- -- (70) (70)
Termination of redemption
rights upon initial public
offering.................... 801 1 1,422 -- 1,423
Proceeds from sale of common
stock, net of offering ex-
penses...................... 3,136 3 35,843 -- 35,846
Net income................... -- -- -- 4,051 4,051
------ ---- ------- ------ -------
Balances at June 30, 1999...... 10,476 $ 10 $39,429 $6,476 $45,915
====== ==== ======= ====== =======
See accompanying notes.
36
BOTTOMLINE TECHNOLOGIES (de), INC.
STATEMENTS OF CASH FLOWS
Year ended June 30,
--------------------------
1997 1998 1999
-------- ------- -------
(in thousands)
Operating activities
Net income (loss)................................. $ (1,252) $ 1,603 $ 4,051
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating activities:
Depreciation and amortization................. 1,174 827 873
Provision for allowances on accounts
receivable................................... 487 326 302
Provision for allowances for obsolescence of
inventory.................................... 217 -- 132
Deferred income tax (benefit) expense......... (297) (270) 194
Changes in operating assets and liabilities:
Accounts receivable......................... (1,452) (1,727) (4,936)
Inventory, prepaid expenses and other cur-
rent assets
and other assets........................... (138) 530 (538)
Refundable income taxes..................... (905) 905 --
Accounts payable, accrued expenses and de-
ferred
revenue and deposits....................... 1,907 392 2,993
Income taxes payable........................ (409) 59 598
-------- ------- -------
Net cash provided by (used in) operating
activities....................................... (668) 2,645 3,669
Investing activities
Purchases of property and equipment, net.......... (580) (993) (1,400)
Increase in capitalized software costs............ (114) -- --
-------- ------- -------
Net cash used in investing activities............. (694) (993) (1,400)
Financing activities
Net borrowings (repayments) on revolving credit
arrangement...................................... 1,045 (1,045) --
Repayments on note payable........................ (258) (264) (75)
Proceeds from exercise of stock options and stock
warrants......................................... 321 192 297
Proceeds from sale of common stock, net........... -- -- 35,846
-------- ------- -------
Net cash provided by (used in) financing
activities....................................... 1,108 (1,117) 36,068
-------- ------- -------
Increase (decrease) in cash and cash equivalents.. (254) 535 38,337
Cash and cash equivalents at beginning of year.... 1,081 827 1,362
-------- ------- -------
Cash and cash equivalents at end of year.......... $ 827 $ 1,362 $39,699
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................... $ 106 $ 85 $ 4
Income taxes.................................. $ 1,017 $ 464 $ 2,096
See accompanying notes.
37
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 1997, 1998 and 1999
1. Organization and Nature of Business
Bottomline Technologies (de), Inc. (the Company) was originally incorporated
as a New Hampshire corporation in 1989 and was reincorporated as a Delaware
corporation in August 1997. The Company is a domestic software company that
creates an automated e-business infrastructure for use by businesses and
financial institutions to make payments and present bills. The Company's
products and services are sold to customers operating in many different
industries. The Company does not require collateral on its accounts receivable,
which is in accordance with industry practice.
On January 6, 1999, the Company's Board of Directors approved a three for
one stock split of the Company's common stock. All share and per share amounts
in the accompanying financial statements have been restated to reflect the
stock split.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts, a money market
mutual fund and an overnight investment account at a financial institution. The
Company considers all highly liquid instruments with an original maturity of
ninety days or less to be cash equivalents. The carrying value of these
instruments approximates their fair value. Cash and cash equivalents subject
the Company to concentrations of credit risk as the Company had approximately
$37,800,000 invested with a single financial institution at June 30, 1999. The
Company invests its excess cash and cash equivalents in high quality short-term
money market investments.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, principally
from 3-7 years. Leasehold improvements are amortized over their useful lives or
the term of the lease, whichever is less.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$114,000, $129,000, and $136,000 for the years ended June 30, 1997, 1998 and
1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates include, but are not limited to the allowances
for doubtful accounts and returns and accrued liabilities. Actual results could
differ from those estimates.
38
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Deferred income taxes are provided for differences in bases of assets and
liabilities for financial reporting and income tax purposes. Temporary
differences relate primarily to depreciation, various accruals, and allowances
for doubtful accounts, returns and inventory.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123) encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for stock based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
Prior to the Company's initial public offering on February 12, 1999, the
Board of Directors of the Company determined the fair value of the Company's
common stock in its good faith judgement at each option grant date for grants
under the Company's equity plans. In determining the fair value, the Board of
Directors considered a number of factors including the financial and operating
performance of the Company, recent transactions in the Company's common stock,
if any, the values of similarly situated companies and the lack of
marketability of the Company's common stock.
Capitalized and Acquired Software Costs
Costs incurred to develop software to be sold, leased or otherwise marketed
are capitalized upon attainment of technological feasibility and amortized on a
product-by-product basis over the estimated useful life of the related
software. Such software costs totaled $1,089,000 at June 30, 1997. Also
included in capitalized software costs was $546,000 attributable to acquired
software in connection with a prior acquisition. Capitalized and acquired
software costs charged to operations were $631,000 and $253,000 for the years
ending June 30, 1997 and 1998, respectively. At June 30, 1998, capitalized
software costs had been fully amortized.
The carrying value of intangible assets is periodically reviewed by the
Company based on the expected future undiscounted operating cash flows of the
related asset. If an impairment is indicated, the Company will adjust the
carrying value of the intangible assets.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the
American Institute (ACSEC) of Certified Public Accountants issued Statement of
Position (SOP) 97-2 "Software Revenue Recognition", which the Company adopted
effective July 1, 1998. SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" deferred the effective
date of certain aspects of SOP 97-2. These statements supersede SOP 91-1,
Software Revenue Recognition, and provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions
entered into in fiscal years beginning after December 15, 1997. The adoption of
SOP 97-2, as amended by SOP 98-4, did not have a material impact on the
Company's revenues and results of operations.
Revenue earned on software arrangements involving multiple elements which
qualify for separate element treatment is allocated to each element based on
the relative fair values of those elements based on vendor specific objective
evidence. Accordingly, revenue for software licenses is recognized when the
product is shipped. Revenue for services is recognized as the services are
provided to the customer. Revenue under
39
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
software maintenance agreements is recognized ratably over the term of the
agreement, generally one year. Revenue for hardware is recognized when the
product is shipped.
For the years ended June 30, 1997 ands 1998, revenue was recognized in
accordance with SOP 91-1 and, accordingly, revenue for software was recognized
when the product was shipped and there were no significant remaining
obligations of the Company.
Customer Returns
Customer returns are estimated and accrued for when known based on return
authorizations and past history.
Earnings per Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS
128 requires calculation and presentation of basic and diluted earnings per
share. Basic earnings per share is calculated based on the weighted average
number of common shares outstanding and excludes any dilutive effects of
warrants, stock options or other type securities. Diluted earnings per share is
calculated based on the weighted average number of common shares outstanding
and the dilutive effect of stock options, warrants and related securities
calculated using the treasury stock method. Dilutive securities are excluded
from the diluted earnings per share calculation if their effect is
antidilutive.
401(k) Plan
The Company has a 401(k) Profit Sharing Plan (the Plan), whereby eligible
employees may contribute up to 15% (20% in 1997 and 15% in 1998) of their
compensation, subject to limitations established by the Internal Revenue Code.
The Company may contribute a discretionary matching contribution annually equal
to 30% (25% in 1997 and 1998) of each such participant's deferred compensation
up to 5% of their annual compensation. The Company charged $26,000, $98,000 and
$129,000 to expense in the years ended 1997, 1998 and 1999, respectively, under
the Plan.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements. The Company adopted these new accounting standards on
July 1, 1998 and the adoption did not have a material impact on the Company's
financial statements. Comprehensive income is equal to net income for the years
ended June 30, 1997, 1998, and 1999 as the Company has no components of
comprehensive income.
40
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consists of the following:
June 30,
-------------
1998 1999
------ ------
(in
thousands)
Furniture and fixtures........................................ $ 399 $ 465
Technical equipment........................................... 2,693 3,551
Software...................................................... 453 803
Leasehold improvements........................................ 151 277
------ ------
3,696 5,096
Less: Accumulated depreciation and amortization............... 1,831 2,704
------ ------
$1,865 $2,392
====== ======
4. Accrued Expenses
Accrued expenses consist of the following:
June 30,
-------------
1998 1999
------ ------
(in
thousands)
Employee compensation and benefits............................ $1,392 $2,598
Sales taxes................................................... 214 220
Other......................................................... 424 660
------ ------
$2,030 $3,478
====== ======
5. Borrowing Arrangements
The Company has a revolving credit agreement (the revolving agreement) with
a bank which provides for available borrowings of up to $5,000,000. Borrowings
under the revolving agreement bear interest at the bank's prime rate (8.5% and
7.75% at June 30, 1998 and 1999) and are due on demand. There were no
borrowings outstanding under the revolving agreement at June 30, 1998 and 1999.
The revolving agreement expires on December 30, 1999. Borrowings under the
revolving agreement are secured by substantially all assets of the Company.
Additionally, the Company is subject to certain tangible net worth and debt
service coverage covenants as defined in the revolving agreement.
In connection with an acquisition in 1996, the Company assumed a $250,000
promissory note payable to the former majority owner of the acquired company.
The note was due in 10 equal installments of $25,000, beginning November 1996
and every third month thereafter, plus accrued interest at 8.25% per annum.
This note was guaranteed by the Company. The balance outstanding at June 30,
1998 and 1999 was $75,000 and $-0-, respectively.
6. Commitments and Contingent Liabilities
The Company leases its principal office facility under a noncancellable
operating lease expiring in 2002. In addition to the base term, the Company has
two five-year options to extend the term of the lease. Rent payments are fixed
for the initial two years of the lease and may be increased after that during
the initial term of the lease by the Consumer Price Index. In addition, the
Company is obligated to pay certain incremental operating costs over the base
amount.
41
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also leases office space in other cities. All such leases expire
by fiscal year 2004.
Future minimum annual rental commitments under this lease at June 30, 1999
are as follows:
(in thousands)
2000.......................................................... $ 446
2001.......................................................... 410
2002.......................................................... 375
2003.......................................................... 70
2004.......................................................... 12
------
$1,313
======
Rent expense charged to operations for the years ended June 30, 1997, 1998
and 1999 was $338,000, $342,000, and $454,000, respectively.
7. Capital Transactions
Preferred Stock
On November 12, 1998, the Company's Board of Directors authorized a class of
preferred stock, $.001 par value with 4,000,000 shares available for issuance.
Common Stock
On November 12, 1998, the Company's Board of Directors approved an increase
in the number of authorized shares of common stock from 15,000,000 to
50,000,000.
In connection with the sale of its common stock in 1992, the Company agreed
with certain stockholders to redeem, at the stockholders' option, 801,000
shares of common stock anytime after June 29, 1995. The initial redemption
value was $1.00 per share and increased each year in accordance with the
agreement. The redemption value was $1,353,000 at June 30, 1998. These
redemption rights terminated in February 1999 upon the effectiveness of the
Company's initial public offering. The redemption value at termination was
$1,423,000.
In February 1999, the Company completed the sale of 3,029,466 shares of its
common stock in its initial public offering for proceeds of approximately
$34,874,000, net of expenses of the offering.
Equity Plans
1989 Stock Option Plan
The Company adopted the Bottomline Technologies, Inc. Stock Option Plan, as
amended, (the Plan) on August 1, 1989, which provides for the issuance of
incentive stock options and nonstatutory stock options. The Plan is
administered by the Board of Directors, which has the authority to determine to
whom options may be granted, the period of exercise and what other
restrictions, if any, should apply. Vesting for options granted under the Plan
is principally over three years from the date of the grant. The Company has
reserved up to 1,440,000 shares of its common stock for issuance under the
Plan. Incentive stock options may be granted to employees at a price of no less
than 100% of the fair market value of the common stock at the date of grant.
Options expire a maximum of ten years from the date of grant.
42
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1997 Stock Incentive Plan
On August 21, 1997, the Company adopted the 1997 Stock Incentive Plan (the
1997 Plan), which provides for the issuance of stock options and nonstatutory
stock options. The 1997 Plan is administered by the Board of Directors which
has the authority to determine to whom options may be granted, the period of
exercise and what other restrictions, if any, should apply. Vesting for options
granted under the 1997 Plan is principally over four years from the date of the
grant. The Company has reserved up to 2,700,000 shares of its common stock for
issuance under the 1997 Plan to employees at a price of no less than 100% of
the fair market value of the common stock at the date of grant. Options expire
a maximum of ten years from the date of grant.
1998 Non-Employee Director Stock Option Plan
On November 12, 1998, the Company adopted the 1998 Non-Employee Director
Stock Option Plan (the Director Plan), which provides for the issuance of non-
statutory stock options. The Company has reserved up to 300,000 shares of its
common stock for issuance under the Director Plan. Under the terms of the
Director Plan, each non-employee director is granted an option to purchase
15,000 shares of common stock upon his or her initial election to the Board of
Directors. Such options vest ratably over four years from the date of the
grant. Additionally, each non-employee director is granted an option to
purchase 7,500 shares of common stock at each annual meeting of stockholders
following the annual meeting of the initial year of the election. Such options
principally vest over one year from the date of the grant.
1998 Employee Stock Purchase Plan
On November 12, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the Stock Purchase Plan), which provides for the issuance of up to a
total of 750,000 shares of common stock to participating employees. Eligible
employees may contribute between 1% and 10% of their base pay to the Stock
Purchase Plan. At the end of a designated offering period, employees purchase
shares of the Company's common stock with their contributions at an amount
equal to 85% of the closing market price per share of the common stock on
either the first day or the last day of the offering period, whichever is
lower.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, as the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Option valuation models have been developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. Such models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The following
assumptions were made for grants in 1997, 1998 and 1999, respectively:
1997 1998 1999
----- ----------- -----------
Dividend yield.................................... 0% 0% 0%
Expected lives of options (years)................. 4 4 4
Risk-free interest rate........................... 6.02% 5.65--6.20% 4.37--5.75%
Volatility........................................ -- -- 45.0%
43
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For purposes of the required pro forma disclosures, the estimated fair value
of the options is amortized over the options' vesting period. Had compensation
cost for the Company's stock option plan been determined based on the fair
value at the grant dates for awards under those plans consistent with the
Black-Scholes method subsequent to the Company's initial public offering in
February 1999 and the minimum value method prior to February 1999, the
Company's pro forma net income (loss) and pro forma earnings (loss) per share
available to common stockholders would have been as follows:
Years Ended June 30,
----------------------------------
1997 1998 1999
----------- ---------- ----------
(In thousands, except per share
data)
Pro forma net income (loss)............. $ (1,320) $ 1,488 $ 3,433
Pro forma earnings (loss) per share
available to common stockholders:
Basic................................. $ (0.24) $ 0.22 $ 0.42
Diluted............................... $ (0.24) $ 0.19 $ 0.37
As the provisions of SFAS 123 are effective only for fiscal years beginning
after December 15, 1994, the effects of applying SFAS 123 for pro forma
disclosures are not necessarily representative of the effects on net income
(loss) for future years.
A summary of option activity is as follows:
Year Ended June 30,
-----------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(in thousands, except per share data)
Outstanding, beginning
of year................ 279 $3.17 339 $5.10 885 $ 6.69
Options granted......... 195 5.84 600 7.91 756 14.05
Options exercised....... (135) 2.20 (54) 3.67 (54) 5.55
Options canceled........ -- -- (26) 7.44
---- ----- --- ----- ----- ------
Outstanding, end of
year................... 339 5.10 885 6.69 1,561 10.51
Exercisable at end of
year................... 75 $3.87 102 $5.20 364 $ 6.63
Weighted average fair
value of options
granted during the
year................... $1.52 $1.53 $ 5.00
44
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of June 30, 1998 and 1999, options to purchase 645,000 and 1,709,000
shares, respectively, were collectively available for grant under the Company's
three stock option plans. The following table presents weighted-average price
and life information about significant option groups outstanding at June 30,
1999:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
(in thousands, except per share and life data)
$ 4.33--$6.67... 302 3.95 years $ 5.67 205 $5.51
$ 8.00--$13.00.. 1,216 8.96 years 10.33 159 8.08
$39.25--$39.25.. 20 9.94 years 39.25 0 0.00
$56.50--$59.00.. 23 9.79 years 58.35 0 0.00
----- ---
1,561 364
===== ===
Warrants
In connection with the sale of its common stock in March 1992, the Company
issued warrants for the purchase of an aggregate 644,000 shares of common stock
at exercise prices ranging from $1.00 to $2.00 per share. During 1997, warrants
for 12,000 shares were exercised at a price of $2.00 per share. Additionally,
under the terms of the warrant agreement, certain warrant holders elected a
non-cash exercise under which 489,000 warrants with a weighted average exercise
price of $2.00 were exercised and the Company issued 315,000 shares to the
warrant holders. The shares issued, as a result of this non-cash exercise, were
based on the relationship of the exercise price to the fair market value of the
Company's stock at the exercise date, as defined in the original agreement.
During 1999, the remaining warrants for 143,000 shares were exercised at a
weighted average price of $1.19.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Year Ended June 30,
-----------------------
1997 1998 1999
------- ------ ------
(in thousands, except
per share data)
Numerator:
Net income (loss)................................... $(1,252) $1,603 $4,051
Accretion to redemption value on redeemable common
stock.............................................. (97) (107) (70)
------- ------ ------
Numerator for basic and diluted earnings (loss) per
share available to common stockholders............... $(1,349) $1,496 $3,981
======= ====== ======
Denominator:
Denominator for basic earnings (loss) per share
available to common stockholders--weighted-average
shares outstanding................................. 5,986 6,314 7,988
Effect of employee stock options, warrants and
redeemable common stock............................ -- 1,002 1,182
------- ------ ------
Denominator for diluted earnings (loss) per share
available to common stockholders..................... 5,986 7,316 9,170
======= ====== ======
Earnings (loss) per share available to common
stockholders:
Basic............................................... $ (0.23) $ 0.24 $ 0.50
======= ====== ======
Diluted............................................. $ (0.23) $ 0.20 $ 0.43
======= ====== ======
45
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Options for 18,000 shares were excluded from the calculation of diluted
earnings per share for the year ended June 30, 1999 as the effect would have
been anti-dilutive.
9. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS
No. 109 requires the use of the liability method in which income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30,
----------------
1998 1999
------- -------
(in thousands)
Deferred tax assets:
Allowances............................................... $ 572 $ 516
Various accrued expenses................................. 115 60
Inventory................................................ 37 89
------- -------
Total deferred tax assets.............................. 724 665
Deferred tax liabilities:
Property, plant and equipment............................ (118) (253)
------- -------
Total deferred tax liabilities........................... (118) (253)
------- -------
Net deferred tax assets.................................. $ 606 $ 412
======= =======
The provision (benefit) for income taxes consisted of the following:
Year Ended June 30,
----------------------
1997 1998 1999
------ ------ ------
(in thousands)
Current:
Federal............................................. $ (247) $1,238 $2,021
State............................................... 8 209 485
------ ------ ------
(239) 1,447 2,506
Deferred:
Federal............................................. (252) (241) 156
State............................................... (45) (29) 38
------ ------ ------
(297) (270) 194
------ ------ ------
$ (536) $1,177 $2,700
====== ====== ======
46
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation of the federal statutory rate to the effective income tax
is as follows:
Year Ended June
30,
------------------
1997 1998 1999
----- ---- ----
Tax (benefit) at federal statutory rate.................. (34.0)% 34.0% 34.0%
State taxes, net of federal benefit...................... (1.4) 6.5 4.7
Non-deductible expenses.................................. 12.6 .6 .3
Research and development tax credits..................... (7.2) (3.6) --
Other.................................................... -- 4.8 1.0
----- ---- ----
(30.0)% 42.3% 40.0%
===== ==== ====
The principal non-deductible expense for income tax purposes is the
amortization related to the acquired software costs recorded in connection with
a prior acquisition.
10. Subsequent Event
In July 1999, the Company acquired certain software and related proprietary
intellectual property from The Northern Trust Company for $3,700,000 in cash.
This software product, called NetTransact, allows for the electronic
presentment of bills and related dispute resolution in a business-to-business
environment.
47