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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 0-49710
PRINTCAFE SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 25-1854929
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
FORTY 24TH STREET
PITTSBURGH, PENNSYLVANIA 15222
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (412) 456-1141
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock, $.0001 par
value, outstanding as of the close of business on November 13, 2002 was
10,632,877.
PRINTCAFE SOFTWARE, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
-------
ITEM 1 - Financial Statements:
Consolidated Balance Sheets -
December 31, 2001 and September 30, 2002....................... 1
Consolidated Statements of Operations -
Three and nine months ended September 30, 2001 and 2002........ 2
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2002.................. 3
Notes to Consolidated Financial Statements...................... 4
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk...... 20
ITEM 4 - Controls and Procedures
PART II OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds...................... 20
ITEM 6 - Exhibits and Reports on Form 8-K............................... 20
Signatures............................................................... 21
PRINTCAFE SOFTWARE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, 2001 SEPTEMBER 30, 2002
(unaudited)
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 8,648 $ 9,903
Accounts receivable, net ................................. 7,146 11,622
Other current assets ..................................... 1,897 1,514
--------- ---------
Total current assets ................................. 17,691 23,039
--------- ---------
Property and equipment, net ................................. 4,699 3,222
Purchased technology, net ................................... 17,078 6,151
Customer lists, net ......................................... 16,725 6,047
Goodwill .................................................... 22,480 22,480
Other intangibles, net ...................................... 830 327
--------- ---------
Total assets .......................................... $ 79,503 $ 61,266
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ........................................... $ 2,000 $ 2,000
Accounts payable ......................................... 2,492 1,314
Accrued compensation and related liabilities ............. 1,047 1,365
Accrued and other liabilities ............................ 3,416 1,608
Deferred revenue ......................................... 9,109 9,228
Restructuring reserve .................................... 487 462
Current portion of long term debt- related party ......... -- 1,575
Current portion of long-term debt ........................ 184 195
Current portion of capital lease obligations ............. 65 45
--------- ---------
Total current liabilities ............................ 18,800 17,792
--------- ---------
Long-term debt- related party ............................... 35,323 16,643
Debt discount fees and deferred interest .................... (2,284) (4,296)
--------- ---------
Net long-term debt-related party ............................ 33,039 12,347
--------- ---------
Long-term debt .............................................. 326 178
Obligations under capital leases ............................ 34 --
Commitments and contingencies (Note 5) ...................... -- --
Redeemable preferred stock .................................. 132,675 --
Stockholders' equity:
Series A convertible preferred stock ..................... -- --
Series A-1 convertible preferred stock ................... 1 --
Common stock ............................................. -- 1
Additional paid-in capital ............................... 76,096 253,752
Warrants ................................................. 8,651 8,674
Deferred compensation .................................... (100) (4,404)
Accumulated other comprehensive loss:
Foreign translation adjustment ........................... (50) (36)
Retained deficit ......................................... (187,692) (225,191)
Treasury stock ........................................... (1,808) (1,808)
Notes receivable from stockholders ....................... (469) (39)
--------- ---------
Total stockholders' (deficit) equity .................. (105,371) 30,949
--------- ---------
Total liabilities and stockholders' (deficit) equity... $ 79,503 $ 61,266
========= =========
See accompanying notes to consolidated financial statements.
1
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenue:
License and subscription .................................. $ 4,654 $ 5,024 $ 13,151 $ 16,308
Maintenance ............................................... 5,279 5,413 15,225 16,176
Professional services and other ........................... 800 844 2,234 2,718
-------- -------- -------- --------
Total revenue ........................................... 10,733 11,281 30,610 35,202
Cost of revenues:
License and subscription .................................. 922 874 3,018 2,800
Maintenance ............................................... 1,507 1,237 4,774 3,842
Professional services and other ........................... 382 443 1,198 1,316
-------- -------- -------- --------
Total cost of revenues .................................. 2,811 2,554 8,990 7,958
-------- -------- -------- --------
Gross profit ................................................. 7,922 8,727 21,620 27,244
Operating expenses:
Sales and marketing (1) ................................... 4,023 4,090 15,265 12,611
Research and development .................................. 2,793 3,063 9,233 9,189
General and administrative (1) ............................ 1,647 1,556 5,956 4,790
Depreciation .............................................. 987 721 2,920 2,191
Amortization .............................................. 12,263 7,374 36,789 22,154
Stock-based compensation and warrants ..................... 95 358 1,091 895
Restructuring charge ...................................... -- 525 2,098 525
-------- -------- -------- --------
Total operating expenses ................................ 21,808 17,687 73,352 52,355
-------- -------- -------- --------
Loss from operations ......................................... (13,886) (8,960) (51,732) (25,111)
Amortization of debt origination fees ........................ -- (845) -- (1,263)
Interest expense, net ........................................ (1,799) (284) (3,840) (3,388)
Other......................................................... -- (196) -- (393)
-------- -------- -------- --------
Net loss before extraordinary item ........................... (15,685) (10,285) (55,572) (30,155)
Extraordinary item - Write off of debt origination fees ...... -- -- -- (1,143)
-------- -------- -------- --------
Net loss ..................................................... (15,685) (10,285) (55,572) (31,298)
-------- -------- -------- --------
Accretion of redeemable preferred stock ...................... (4,244) -- (11,929) (6,200)
-------- -------- -------- --------
Net loss attributable to common stock ........................ $(19,929) $(10,285) $(67,501) $(37,498)
======== ======== ======== ========
Net loss per share, basic and diluted ........................ $(122.32) $ (0.97) $(414.45) $ (9.15)
Weighted average shares used to compute basic and diluted loss
per share..................................................... 163 10,595 163 4,098
(1) Amounts exclude stock-based compensation as follows:
Sales and marketing .......................................... $ -- $ -- $ 971 $ --
General and administrative ................................... 95 358 120 895
-------- -------- -------- --------
Total ................................................... $ 95 $ 358 $ 1,091 $ 895
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
2
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (55,572) $ (31,298)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .............................. 40,709 24,345
Provision for doubtful accounts ............................ 181 (4)
Write-down of stockholder note principal ................... -- 392
Issuance of warrants ....................................... 1,600 23
Stock-based compensation ................................... 36 872
Interest on note receivable from stockholders .............. (44) (18)
Interest accretion on related party debt discount .......... -- 2,446
Changes in assets and liabilities:
Accounts receivable ........................................ (661) (4,472)
Other assets ............................................... (17) 398
Accounts payable ........................................... (3,637) (1,178)
Accrued liabilities ........................................ (964) (1,490)
Restructuring reserve ...................................... 194 (25)
Deferred revenue ........................................... 1,786 119
--------- ---------
Net cash used in operating activities .................... (16,389) (9,890)
CASH FLOWS FROM INVESTING ACTIVITIES:
Intellectual property acquisition costs ....................... (895) --
Purchases of property, plant and equipment .................... (824) (761)
--------- ---------
Net cash used in investing activities .................... (1,719) (761)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt - related party .................. (2,495) (17,800)
Principal payments on debt .................................... (114) (113)
Principal payments on capital lease obligations ............... (234) (54)
Net proceeds from debt - related party ....................... 729 --
Net proceeds from initial public offering ..................... -- 32,950
Issuance of redeemable preferred stock ........................ 6,367 755
Issuance of note receivable to management ..................... (664) --
Proceeds from note receivable repayment by stockholder ........ 404 56
Debt origination costs ........................................ -- (188)
Payment of debt restructuring fee to related party ............ -- (3,700)
Exercise of stock options ..................................... 12 --
--------- ---------
Net cash provided by financing activities ................ 4,005 11,906
--------- ---------
Increase (decrease) in cash and cash equivalents .............. (14,103) 1,255
Cash and cash equivalents - beginning of period ............... 15,206 8,648
--------- ---------
Cash and cash equivalents - end of period ..................... $ 1,103 $ 9,903
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred compensation .................................... $ -- $ 5,176
Accretion of preferred stock ............................. 11,929 6,201
Conversion of preferred stock to common stock upon initial
public offering......................................... -- 139,529
See accompanying notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Printcafe Software, Inc. (the Company) provides software solutions designed
specifically for the printing industry supply chain. The Company's procurement
applications, which are designed for print buyers, integrate with its software
solutions designed for printers, and facilitate collaboration between printers
and print buyers over the Web. The Company's enterprise resource planning and
collaborative supply chain software solutions are designed to enable printers
and print buyers to lower costs and improve productivity and enable printers
to increase revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior period balances and amounts have been reclassified to conform to
the current period presentation.
INTERIM BASIS OF PRESENTATION
The Company's financial statements include the accounts of the Company and its
wholly-owned subsidiaries after the elimination of all significant intercompany
balances and transactions.
The accompanying consolidated financial statements as of September 30, 2002, and
for the three and nine-month periods ended September 30, 2001 and 2002,
respectively, are unaudited. The unaudited interim consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal, recurring accruals necessary to state fairly the
Company's financial position as of September 30, 2002, and the results of
operations and cash flows for the three and nine month periods ended September
30, 2001 and 2002, respectively. These consolidated financial statements and
notes thereto should be read in conjunction with the Company's audited
consolidated financial statements and related notes included in its prospectus,
as filed with the Securities and Exchange Commission on June 18, 2002. The
results for interim periods are not necessarily indicative of the expected
results for any other interim period or the year ending December 31, 2002.
REVENUE RECOGNITION
The Company's revenue recognition policy is governed by Statement of Position
(SOP) 97-2, Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants (AICPA). The Company derives its revenues from
licenses and subscriptions for its products as well as from the provision of
related services, including installation and training, consulting, customer
support, and maintenance contracts. Revenues are recognized only if persuasive
evidence of an agreement exists, delivery has occurred, all significant vendor
obligations are satisfied, the fee is fixed, determinable and collectible, and
there is vendor-specific objective evidence (VSOE) to support the allocation of
the total fee to a multi-element arrangement. The Company does not have VSOE for
the license component or the fixed price installation component and these have
historically been sold bundled together with post-contract support. Therefore,
the Company follows the residual method as outlined in SOP 98-9 "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions"
under which revenue is allocated to the undelivered elements and the residual
amounts of revenue are allocated to the delivered elements. Many of the
Company's agreements include warranty provisions. Historically, these provisions
have not had a significant impact on the Company's revenue recognition. In those
instances where customer acceptance may be in question, all revenue relating to
that arrangement is deferred until the warranty period has expired. Additional
revenue recognition criteria by revenue type are listed below.
License and Subscription Revenue
License and subscription revenue includes fees for perpetual licenses and
periodic subscriptions. The Company recognizes revenues on license fees after a
license agreement has been signed, the product has been delivered, the fee is
fixed, determinable and collectible, and there is VSOE to support the allocation
of the total fee to a multi-element arrangement (if applicable). If VSOE cannot
be obtained for certain elements of the contract, the Company recognizes revenue
using the residual method under which revenue is allocated to the undelivered
elements and the residual amounts of revenue are
4
allocated to the delivered elements. The Company recognizes revenues on periodic
subscriptions over the subscription term for unlimited subscriptions and based
on the value of orders processed for customers through the system for limited
subscriptions. Revenue is recognized for subscription orders processed through
resellers over the subscription term of the underlying agreement, beginning upon
installation.
Maintenance Revenue
Maintenance revenue is derived from the sale of maintenance and support
contracts, which provide customers with the right to receive maintenance
releases of the licensed products and access to customer support staff.
Maintenance revenue is recognized on a straight-line basis over the term of the
contract, which is typically one year. Payments for maintenance revenue are
normally received in advance and are nonrefundable.
Professional Services and Other Revenue
Professional services and other revenue is derived from variable fees for
installation, training, and consulting. Revenue for professional services such
as installation and training, system integration projects, and consulting is
primarily recognized as the services are performed. If these services are part
of a multi-element contract under which VSOE cannot be obtained for certain
elements, the revenue may be deferred either until acceptance of any related
software or over the license period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, and long-term debt, approximates fair
value. Financial instruments that subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains its cash and cash equivalents with high
quality financial institutions. The Company's customer base consists of
businesses primarily in North America and Europe. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral on
accounts receivable. The Company maintains allowances for potential credit
losses. Historically, such losses have been within management's expectations.
ACQUISITIONS
The Company's business combinations have been accounted for under the purchase
method of accounting. The Company includes the results of operations of the
acquired business from the acquisition date. Net assets of the companies
acquired are recorded at their fair value at the acquisition date. The excess of
the purchase price over the fair value of net assets acquired is included in
goodwill and other purchased intangibles in the accompanying consolidated
balance sheets.
RECENT ACCOUNTING PRONOUNCEMENTS
Impairment of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144). The provisions of SFAS 144 address
the financial accounting and reporting for impairment of long-lived assets. The
Company adopted SFAS 144 on January 1, 2002 and the adoption of this standard
did not have a significant impact on the Company's financial position, cash
flows, or results of operations.
Goodwill and Other Intangibles
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 prescribes that goodwill and other intangibles that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have definite lives will
continue to be amortized over their estimated useful lives. SFAS 142 provides
specific guidance for the testing of goodwill for impairment at least annually.
Initial impairment losses arising upon adoption of SFAS 142 are to be reported
as resulting from a change in accounting principle. The Company adopted SFAS 142
on January 1, 2002. See Note 3 for disclosure of the effects of adopting SFAS
142.
Debt Extinguishment Costs
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections
(SFAS 145). SFAS 145, which becomes effective for financial statements issued
for fiscal years beginning after May 15, 2002, requires gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
4 unless the extinguishment qualifies as an extraordinary item under the
provisions of Accounting Principles Board Opinion No. 30, Reporting the Results
of Operations---Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Upon adoption of SFAS 145, the Company expects to reclassify the extraordinary
loss of $1.1 million recognized in the second quarter of 2002.
5
Exit and Disposal Activities
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS 146). SFAS 146, which becomes effective for
exit or disposal activities that are initiated after December 31, 2002,
addresses financial accounting and reporting for costs associated with exit or
disposal activities and requires that a liability for a cost associated with an
exit or disposal activity be recognized at fair value when the liability is
incurred, rather than at the date of an entity's commitment to an exit plan. The
Company does not believe that SFAS 146 will have a material impact on its
financial position and results of operations.
2. NET LOSS PER SHARE
Basic and diluted net loss per share have been computed using the weighted
average number of shares of common stock outstanding during the period.
Potential common shares issuable upon conversion of convertible preferred stock
and exercise of stock options and warrants are excluded from historical diluted
net loss per share because they would be antidilutive. At September 30, 2001 and
2002, 5,620,604 and 1,495,621 potential common shares, respectively, are
excluded from the determination of diluted net loss per share, as the effect of
such shares is antidilutive.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2002 2001 2002
-------- -------- -------- --------
(in thousands, except per share data)
Numerator:
Net loss ....................... $(15,685) $(10,285) $(55,572) $(31,298)
Preferred stock accretion ...... (4,244) -- (11,929) (6,200)
-------- -------- -------- --------
Net loss attributable to common stock (19,929) (10,285) (67,501) (37,498)
Denominator:
Weighted average shares ............. 163 10,595 163 4,098
Basic and diluted net loss per share $(122.32) $ (0.97) $(414.45) $ (9.15)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and purchased technology are related mainly to the business
acquisitions consummated in early 2000. Amortization is recorded on a
straight-line basis over the estimated useful lives (generally three years) of
the remaining assets and consists of the following at December 31, 2001 and
September 30, 2002 (in thousands):
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
Customer list .............................. $ 42,713 $ 42,713
Purchased technology ....................... 43,708 43,708
Patent ..................................... 2,047 2,058
Goodwill ................................... 58,730 58,730
--------- ---------
147,198 147,209
Less: accumulated amortization ............. (90,085) (112,204)
--------- ---------
Goodwill and other intangible assets, net... $ 57,113 $ 35,005
========= =========
The Company adopted SFAS 142 on January 1, 2002. As a result, beginning January
1, 2002, the Company no longer amortizes goodwill. As of the adoption date,
goodwill had an unamortized balance of $22.5 million. Goodwill will be subject
to annual impairment testing.
The following unaudited pro-forma financial information presents the Company's
results of operations and earnings per share as if goodwill had not been
amortized in 2001 (in thousands, except for per share amounts).
6
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
Net loss:
Reported net loss attributable to common stock... $ (19,929) $ (10,285) $ (67,501) $ (37,498)
Goodwill amortization ........................... 4,894 -- 14,682 --
---------- ---------- ---------- ----------
Adjusted net loss .......................... (15,035) (10,285) (52,819) (37,498)
Basic and diluted loss per share:
Reported net loss per share ..................... $ (122.32) $ (0.97) $ (414.45) $ (9.15)
Goodwill amortization ........................... 30.59 -- 90.13 --
---------- ---------- ---------- ----------
Adjusted basic and diluted net loss per share ........ $ (91.73) $ (0.97) $ (324.32) $ (9.15)
4. INITIAL PUBLIC OFFERING
In June 2002, the Company issued 3,750,000 shares of its common stock at a price
of $10.00 per share in its initial public offering. The Company received
approximately $33.0 million in proceeds, net of underwriting discounts,
commissions, and offering expenses. Simultaneously with the closing of the
initial public offering, each outstanding share of preferred stock was
automatically converted into common stock based on the applicable conversion
ratio. In connection with the offering, the Company repaid approximately $17.8
million of related party debt (see Note 7).
5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in disputes and litigation in the normal course of
business. In the opinion of management, the ultimate disposition of these
matters is not expected to have a material adverse effect on the Company's
business, financial condition, or results of operations. The Company has accrued
for estimated losses in the accompanying financial statements for those matters
where it believes that the likelihood that a loss has occurred is probable and
the amount of loss is reasonably estimable. Although management currently
believes the outcome of other outstanding legal proceedings, claims, and
litigation involving the Company will not have a material adverse effect on its
business, financial condition, or results of operations, litigation is
inherently uncertain and there can be no assurance that existing or future
litigation will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
Restructuring and Lease Abandonment Costs
In August 2002, the Company announced a restructuring effecting an
organizational realignment of its product management and customer service and
support operations. This resulted in a restructuring charge of $525,000 in the
quarter ended September 30, 2002. This charge consisted primarily of severance
and benefits, including involuntary termination and COBRA benefits, outplacement
costs, and payroll taxes for the approximately 40 employees impacted by this
restructuring. During the quarter ended September 30, 2002, the Company paid
approximately $220,000 of these severance and benefits costs. The Company
expects that substantially all remaining expenditures relating to this
restructuring will be disbursed prior to December 31, 2002.
In May 2001, the Company announced a restructuring that primarily related to the
consolidation of certain client support operations into existing facilities,
resulting in a restructuring charge of $2,098,000. The plan included
terminations of 45 employees and the reduction of leased office space. As of
September 30, 2002, approximately $155,000 remained in the reserve related to
lease obligations. All remaining cash expenditures relating to these lease
obligations will have been made by March 31, 2003.
6. COMPREHENSIVE LOSS
The components of our comprehensive loss for each period presented are as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2001 2002 2001 2002
---------- ---------- ---------- ---------
Net loss.................................. $ (15,685) $ (10,285) $ (55,572) $ (31,298)
Foreign currency translation adjustments.. 2 8 (17) 14
---------- ---------- ---------- ---------
Comprehensive loss................... $ (15,683) $ (10,277) $ (55,589) $ (31,284)
========== ========== ========== =========
7
7. DEBT
On May 31, 2002 and June 10, 2002, the Company executed agreements with certain
of its debt holders to modify the terms of certain related-party debt, effective
upon the completion of the Company's initial public offering. An amendment to
the promissory note issued to the former shareholders of M Data, Inc. dated as
of May 31, 2002, provided for an increase in the principal amount of the note to
$4,200,000 from $4,000,000 in return for a reduction in the annual interest rate
to 8.0% from 12.0%. Principal payments are due in 24 equal monthly installments
commencing January 2003. Interest is payable monthly and commenced in June 2002.
The $200,000 increase in principal was accounted for as deferred interest and
will be amortized as interest expense in addition to the 8.0% stated rate over
the remaining term of the loan (resulting in an effective annual interest rate
of approximately 11.1%).
An amendment to the credit agreement with Iris Graphics, dated as of June 10,
2002: (i) reduced the annual interest rate to a fixed rate of 4.0%; (ii)
provided for the payment of a total of $11,800,000 of the outstanding principal
balance of $23,600,000 at March 31, 2002 and all accrued and deferred interest
upon the completion of the Company's initial public offering; and (iii)
eliminated the financial covenants. In return, the Company paid a $3,700,000
restructuring fee upon completion of the initial public offering. The
restructuring fee was accounted for as deferred interest and will be amortized
as interest expense in addition to the stated 4.0% rate over the remaining term
of the loan (resulting in an effective annual interest rate of approximately
23.8%). The $11,800,000 remaining principal balance is due in one installment on
January 2, 2004. Interest is payable quarterly and commenced in June 2002.
Under an amendment to the loan agreement with the former shareholders of Hagen
Systems, dated as of June 10, 2002, the Company was not required to prepay
$2,000,000 of the $8,000,000 otherwise due upon an initial public offering and
the annual interest rate was reduced to 8.0%, in return for an increase of
$350,000 to the remaining principal balance of the loan. The remaining principal
amount due under the restructured agreement is $2,350,000, which is due on
January 2, 2004. Interest at an annual rate of 8.0% is payable monthly and
commenced in June 2002. The $350,000 increase in principal was accounted for as
deferred interest and will be amortized as interest expense in addition to the
stated 8.0% rate over the remaining term of the loan (resulting in an effective
annual interest rate of approximately 17.4%).
As of September 30, 2002, the Company had a total of $4.3 million of unamortized
deferred interest and debt discount fees, which are reflected within the
long-term debt related-party section of the Company's balance sheet.
8. NON-CASH DEFERRED STOCK-BASED COMPENSATION
In February 2002, the Company's board of directors adopted the 2002 Key
Executive Stock Incentive Plan. The Company reserved 766,520 shares of common
stock for grants under the plan. As of September 30, 2002, the Company had
granted options to purchase 766,520 shares of common stock with an exercise
price of $4.21 per share. These option grants resulted in $288,000 and $769,000
in non-cash stock compensation for the three and nine month periods ended
September 30, 2002, respectively.
In March 2002, the Company's board of directors adopted the 2002 Stock Incentive
Plan. The Company has reserved 765,765 shares of common stock for grants under
the plan. In April 2002, the Company granted options to purchase 381,603 shares
of common stock, with an exercise price of $15.54 per share, to certain
employees. In June 2002, the Company granted an additional 92,910 options to
purchase common stock at an exercise price of $2.00 per share. This option grant
resulted in $46,000 and $82,000 in non-cash stock compensation for the three and
nine month periods ended September 30, 2002, respectively. The remainder of the
stock-based compensation recognized in the nine months ended September 30, 2002
relates to options granted in 2000.
Also in March 2002, the Company's board of directors approved the 2002 Employee
Stock Purchase Plan which became effective upon completion of the Company's
initial public offering. The Company has reserved 337,837 shares of common stock
for issuance under the plan.
9. SUBSEQUENT EVENT
On October 31, 2002, the Company purchased substantially all the assets and
intellectual property of printChannel, Inc. The Company did not assume any
liabilities or obligations of printChannel except in connection with certain
customer contracts.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this discussion contains forward-looking statements that
involve risks and uncertainties. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results,
performance, or achievements to be materially different from any future results,
performances, or achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking statements by terms
such as "may," "might," "will," "should," "could," "would," "plan," "expect,"
"intend," "believe," "goal," "estimate," "anticipate," "predict," "potential,"
or the negative of these terms, and similar expressions intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on
these forward-looking statements. Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this Quarterly
Report on Form 10-Q ("Form 10-Q"). You should read this Form 10-Q completely and
with the understanding that our actual future results may be materially
different from what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed under the heading "Risk Factors That May Affect Future Results and
Market Price of Stock" elsewhere in this Form 10-Q and the Risk Factors in our
prospectus dated June 18, 2002 filed with the Securities and Exchange
Commission.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes contained in this Form 10-Q.
OVERVIEW
GENERAL
The Company has focused on developing software solutions designed specifically
for the printing industry supply chain since our inception in 1987. In February
2000, Prograph Systems, our predecessor company, changed its name to printCafe,
Inc., and we launched our Web-based products to complement our enterprise
resource planning software. From February through April 2000, we acquired five
complementary businesses for an aggregate purchase price of $137.3 million. We
have also committed significant resources to develop, integrate, and market our
products, expand our management team, and hire additional personnel. We incurred
a net loss of $70.0 million for the year ended December 31, 2001 and $31.3
million in the first nine months of 2002 and had an accumulated deficit of
$225.2 million as of September 30, 2002.
The acquisitions which we completed in early 2000 generated goodwill of $57.7
million, of which $22.5 million remained unamortized as of September 30, 2002,
and other intangible assets of $86.4 million, of which $12.5 million remained
unamortized as of September 30, 2002. In accordance with SFAS No. 142, we have
performed the first of the required impairment tests of goodwill and
indefinite-lived assets as of January 1, 2002, and have determined that no
impairment loss is required to be recognized. The other intangible assets are
being amortized over a three-year period. We will further assess impairment as
of December 31, 2002. Any future write-off of goodwill or other intangible
assets as a non-cash charge could be significant and would likely harm our
operating results. In addition, any future impairment loss recognition may
adversely affect our ability to comply with the financial covenants in our
installment note with National City Bank. As of September 30, 2002, the
outstanding principal balance of this note was $0.4 million.
The Company acquired substantially all the assets and intellectual property of
printChannel, Inc. in October 2002. The Company does not anticipate that the
transaction will have a material impact on its fourth quarter financial results.
SOURCES OF REVENUE
Our revenue is derived principally from licenses and subscriptions of our
products, maintenance contracts, and professional and other services, including
implementation, consulting, and training. Our products are typically purchased
under either a perpetual license or a time-based or usage-based subscription. We
offer our enterprise resource planning and other client/server software to
printers and print buyers under license agreements. We offer our Web-based
products to printers and print buyers under subscription agreements, which
typically have a term of three years. Our print buyer customers pay a
subscription fee for our Web-based products based on the number of users of the
website. Our printer customers can purchase either an unlimited subscription or
a limited subscription for our Web-based products. The fee for the limited
subscription is based on the value of print orders processed through the
customer's website. Maintenance contracts are sold to customers, usually at the
time of sale of a software license, under annual agreements that provide for
automatic renewal, unless the customer cancels. We also provide professional
services, which are offered at an hourly rate.
We have derived most of our revenue from licenses of our software and the sale
of related maintenance to printers. In the
9
first quarter of 2001, we began to recognize revenue from the sale of our
Web-based products to printers and began to market our Web-based solutions for
print buyers.
For the three and nine month periods ended September 30, 2002 revenues from
foreign customers approximated 20% and 15%, respectively, of our total revenues.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of the financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amount of assets,
liabilities, revenues, and expenses, and related disclosure of contingent assets
and liabilities. Our actual results may differ from those estimates.
The following critical accounting policies affect the significant judgments and
estimates we use in preparing our consolidated financial statements.
REVENUE RECOGNITION
We recognize revenue on our software products in accordance with Statement of
Position (SOP) 97-2, Software Revenue Recognition, which provides for
recognition of revenue when persuasive evidence of an arrangement exists,
delivery of the product has occurred, no significant obligations remain on our
part with regard to implementation, the fee is fixed and determinable, and
collectibility is probable. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair value of each element. Revenue recognized
from multiple-element arrangements is allocated to undelivered elements of the
arrangement, such as maintenance and professional services, based on the
relative fair value of each element. Our determination of fair value of each
element in multi-element arrangements is based on vendor-specific objective
evidence (VSOE). We limit our assessment of VSOE for each element to either the
price charged when the same element is sold separately or the price established
by management for an element not yet sold separately. We have VSOE for
maintenance services and professional services.
If evidence of fair value of all undelivered elements exists but evidence does
not exist for one or more delivered elements, then revenue is recognized using
the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the total fee is
recognized as revenue. We generally recognize license revenue under the residual
method upon delivery of our software to the customer, provided collection is
probable. Revenue allocated to maintenance is recognized ratably over the
maintenance term and revenue allocated to training and other service elements is
recognized as the services are performed. Revenue from Web-based products is
recognized ratably over the term of the subscription for unlimited subscriptions
and is recognized based on usage, subject to a fixed term, for limited
subscriptions. Many of our agreements include warranty provisions. Historically,
these provisions have not had a significant impact on our revenue recognition.
In those instances where customer acceptance may be in question, all revenue
relating to that arrangement is deferred until the warranty period has expired.
CONTINGENCIES
We are involved in disputes and litigation in the normal course of business. We
are required to assess the likelihood of any adverse judgments or outcomes to
these matters as well as potential ranges of probable losses. A determination of
the amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. The required reserves may change in
the future due to new developments in each matter or changes in insurance
coverage or our approach, such as a change in settlement strategy.
STOCK-BASED COMPENSATION
We have elected to follow Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations for our employee
stock options because the alternative fair value accounting provided under SFAS
No. 123, Accounting for Stock Based Compensation (SFAS 123), requires use of
valuation models that were not developed for use in valuing employee stock
options.
In the first quarter of 2002, we granted options to purchase 766,520 shares of
common stock, with an exercise price of $4.21 per share, to certain employees
and directors. As a result, we recorded approximately $4.3 million of deferred
compensation. This amount represents the difference between the exercise price
and the fair market value of our common stock on the date we granted these stock
options. We will record stock-based compensation expense of approximately $1.1
million annually over the vesting period of these options, which is generally
four years.
10
In April 2002, we granted options to purchase 381,603 shares of common stock,
with an exercise price of $15.54 per share, to certain employees. We do not
expect to record any stock-based compensation expense related to these options.
We also granted options to purchase 92,910 shares of common stock to employees
in June 2002, with an exercise price of $2.00 per share. As a result, we will
record approximately $0.2 million of stock-based compensation expense annually
over the vesting period of these options, which is three years.
For the three and nine month periods ended September 30, 2002 we recorded $0.4
million and $0.9 million, respectively, of stock-based compensation expense.
WARRANTS
We account for equity instruments issued to nonemployees and pursuant to
strategic alliance agreements in accordance with the provisions of SFAS 123,
Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring or in Conjunction with Selling
Goods or Services, and Emerging Issues Task Force No. 01-9, Accounting for
Consideration Given by Vendor to a Customer or a Reseller of the Vendor's
Product. Warrant expense represents charges associated with the issuance of
warrants to purchase our common stock. To the extent that we derive revenue from
agreements entered into in connection with the issuance of warrants, we offset
this revenue by the expense associated with these warrants. Any amount of
expense that exceeds revenue is recorded in sales and marketing, general and
administrative, or interest expense, based upon the nature of the agreement. The
amount of expense is equal to the fair value of vested warrants determined using
Black-Scholes pricing models. The following table sets forth the amount of
expense and reduction to revenue associated with the issuance of these warrants
for the nine months ended September 30, 2001 and 2002, respectively (in
thousands):
Nine months ended
September 30,
2001 2002
----- -----
Reduction in revenue............................... $ -- $ --
Increase in sales and marketing.................... 971 --
Increase in general and administrative............. -- 23
Increase in interest expense....................... -- --
As of September 30, 2002, we had unvested warrants to purchase 50,659 shares of
common stock, which have exercise prices ranging from $266.40 to $999.00 and
vest upon attainment of performance criteria. Upon the vesting of warrants to
purchase 19,878 of these shares of common stock, we will record warrant expense
based upon fair value for each warrant, and upon the vesting of warrants to
purchase 30,781 of these shares of common stock, we will reduce revenue
generated from the warrant holder during the period when vesting occurs. We
cannot predict the timing or amount of this reduction in revenue and increase in
expense because the amount is calculated using the fair market value at the time
of vesting.
INCOME TAXES
Deferred income taxes are recognized for all temporary differences between tax
and financial bases of our assets and liabilities, using the tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. As of September 30, 2002, we had significant net
operating loss carryforwards available to offset future taxable income. The net
operating loss carryforwards will expire beginning 2015 through 2021. Federal
and state tax rules impose substantial restrictions on the utilization of net
operating loss and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. Utilization of our carryforwards is
limited because of past ownership changes. In the event that we have a future
change in ownership, utilization of these carryforwards could be further
limited.
We have established a 100% valuation allowance against deferred tax assets due
to the uncertainty that future tax benefits can be realized from our net
operating loss carryforwards and other deferred tax assets.
11
RESTRUCTURING
In August 2002, the Company announced a restructuring effecting an
organizational realignment of the product management and customer service and
support operations. This resulted in a restructuring charge of $525,000 in the
quarter ended September 30, 2002. This charge consisted primarily of severance
and benefits including involuntary termination and COBRA benefits, outplacement
costs, and payroll taxes for the approximately 40 employees impacted by this
restructuring. During the quarter ended September 30, 2002, the Company paid
approximately $220,000 of these severance and benefits costs. The Company
expects that substantially all remaining expenditures relating to this
restructuring will be disbursed prior to December 31, 2002.
In May 2001, the Company announced a restructuring that primarily related to the
consolidation of certain client support operations into existing facilities,
resulting in a restructuring charge of $2,098,000. The plan included
terminations of 45 employees and the reduction of leased office space. As of
September 30, 2002, approximately $155,000 remained in the reserve related to
lease obligations. All remaining cash expenditures relating to these lease
obligations will have been made by March 31, 2003.
These restructuring plans focused on reducing our cost structure and improving
the efficiency of our operations to respond to changing market conditions and to
realize the anticipated benefits of the acquisitions made in early 2000. We
believe that these actions will not adversely impact our operations in the
future because we have undertaken initiatives to manage and monitor our client
and employee relations during the execution of these plans and subsequent to
their completion.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data for the periods
indicated. The data has been derived from the unaudited consolidated financial
statements contained in this Form 10-Q which, in the opinion of our management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position and results of operations for
the interim periods. The operating results for any period should not be
considered indicative of results for any future period. This information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in our financial statements for the fiscal year ended December
31, 2001 filed on June 18, 2002 with the Securities and Exchange Commission as
part of our prospectus.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenue:
License and subscription .................................. $ 4,654 $ 5,024 $ 13,151 $ 16,308
Maintenance ............................................... 5,2795 5,413 15,225 16,176
Professional services and other ........................... 800 844 2,234 2,718
-------- -------- -------- --------
Total revenue ........................................... 10,733 11,281 30,610 35,202
Cost of revenues:
License and subscription .................................. 922 874 3,018 2,800
Maintenance ............................................... 1,507 1,237 4,774 3,842
Professional services and other ........................... 382 443 1,198 1,316
-------- -------- -------- --------
Total cost of revenues .................................. 2,811 2,554 8,990 7,958
-------- -------- -------- --------
Gross profit ................................................. 7,922 8,727 21,620 27,244
Operating expenses:
Sales and marketing (1) ................................... 4,023 4,090 15,265 12,611
Research and development .................................. 2,793 3,063 9,233 9,189
General and administrative (1) ............................ 1,647 1,556 5,956 4,790
Depreciation .............................................. 987 721 2,920 2,191
Amortization .............................................. 12,263 7,374 36,789 22,154
Stock-based compensation and warrants ..................... 95 358 1,091 895
Restructuring charge ...................................... -- 525 2,098 525
-------- -------- -------- --------
Total operating expenses ................................ 21,808 17,687 73,352 52,355
-------- -------- -------- --------
Loss from operations ......................................... (13,886) (8,960) (51,732) (25,111)
Amortization of debt origination fees ........................ -- (845) -- (1,263)
Interest and other expense, net .............................. (1,799) (284) (3,840) (3,388)
Other ........................................................ -- (196) -- (393)
-------- -------- -------- --------
Net loss before extraordinary item ........................... (15,685) (10,285) (55,572) (30,155)
Extraordinary item - Write off of debt origination fees ...... -- -- -- (1,143)
-------- -------- -------- --------
Net loss ..................................................... (15,685) (10,285) (55,572) (31,298)
-------- -------- -------- --------
Accretion of redeemable preferred stock ...................... (4,244) -- (11,929) (6,200)
-------- -------- -------- --------
Net loss attributable to common stock ........................ $(19,929) $(10,285) $(67,501) $(37,498)
======== ======== ======== ========
Net loss per share, basic and diluted ........................ $(122.32) $ (0.97) $(414.45) $ (9.15)
Weighted average shares used to compute basic and diluted loss
per share..................................................... 163 10,595 163 4,098
(1) Amounts exclude stock-based compensation as follows:
Sales and marketing .......................................... $ -- $ -- $ 971 $ --
General and administrative ................................... 95 358 120 895
-------- -------- -------- --------
Total ................................................... $ 95 $ 358 $ 1,091 $ 895
======== ======== ======== ========
12
The following table sets forth other financial data for the periods indicated.
EBITDA, net of other charges, is not a measurement that is in accordance with
generally accepted accounting principles and is presented as other financial
data. EBITDA, net of other charges, represents the net loss we would have shown
if we did not take into consideration our total other expense (which includes
interest expense), depreciation, amortization, stock-based compensation and
warrants, and restructuring charges. EBITDA, net of other charges, is presented
as supplemental information and should not be considered as an alternative to
net income as an indicator of our operating performance, or to cash flow from
operating activities as an indicator of our liquidity. EBITDA, net of other
charges, as presented herein may not be comparable to similarly titled measures
reported by other companies. We believe that EBITDA, net of other charges,
serves as an important operating measurement when evaluating our performance.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2001 2002 2001 2002
-------- -------- -------- --------
EBITDA, net of other charges ................... $ (541) $ 18 $ (8,834) $ 654
Net cash used in operating activities .......... (3,875) (1,546) (4,388) (9,890)
Net cash used in investing activities .......... (323) (121) (1,718) (761)
Net cash provided (used) by financing
activities ................................... 667 (59) 4,005 11,906
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
REVENUE
License and subscription
License and subscription revenue for the three months ended September 30, 2002
was $5.0 million, an 8.0% increase from license and subscription revenue of $4.7
million for the quarter ended September 30, 2001. License and subscription
revenue for the nine months ended September 30, 2002 was $16.3 million, a 24.0%
increase from license and subscription revenue of $13.2 million for the nine
months ended September 30, 2001. The increases in license and subscription
revenue were primarily due to an increased number of sales of licenses for our
enterprise resource planning products as well as an increase in subscription and
transaction fees generated by our Web-based products. The increase in revenue
from our Web-based products has largely resulted from sales and marketing
initiatives focused upon increasing sales for these products.
Maintenance
Maintenance revenue for the three months ended September 30, 2002 was $5.4
million, a 2.5% increase from maintenance revenue of $5.3 million for the
quarter ended September 30, 2001. Maintenance revenue for the nine months ended
September 30, 2002 was $16.2 million, a 6.2% increase from maintenance revenue
of $15.3 million for the nine months ended September 30, 2001. These increases
in maintenance revenue were primarily due to the increased number of license
sales of our enterprise resource planning products which, in turn, resulted
in an increase in the number of our customers paying maintenance fees.
Professional services and other
Professional services and other revenue for the three months ended September 30,
2002 was $0.8 million, which is consistent with professional services and other
revenue for the quarter ended September 30, 2001. Professional services and
other revenue for the nine months ended September 30, 2002 was $2.7 million, a
21.7% increase from professional services and other revenue of $2.2 million for
the nine months ended September 30, 2001. This increase in professional services
and other revenue during the nine months ended September 30, 2002 was primarily
due to the increased sales of licenses for our enterprise resource planning
products, which resulted in an increase in customer implementations and training
fees.
13
TOTAL COST OF REVENUE
Cost of revenue includes direct labor and other direct costs relating to the
delivery of our products and services. The cost of license and subscription
revenue is primarily related to third party licenses that we resell with
licenses and subscriptions of our products, as well as any hosting and
communication costs. Cost of revenue for the quarter ended September 30, 2002
was $2.6 million, a 9.1% decrease from cost of revenue of $2.8 million for the
quarter ended September 30, 2001. Cost of revenue for the nine months ended
September 30, 2002 was $8.0 million, an 11.5% decrease from cost of revenue of
$9.0 million for the nine months ended September 30, 2001.
These decreases were the result of a reduction in the number of employees in our
client and professional services areas along with lower third-party license
costs due to the renegotiation of certain of our vendor agreements.
Cost of revenue as a percentage of revenue decreased from 26.2% and 29.4% for
the three and nine months ended September 30, 2001, respectively, to 22.6% for
the three and nine months ended September 30, 2002. This decrease is
attributable to an increase in higher margin revenue and the aforementioned
reduction in costs.
OPERATING EXPENSES
We classify our operating expenses into six general categories, based on the
nature of the expenditure: sales and marketing, research and development,
general and administrative, depreciation, amortization, and stock-based
compensation and warrants. We allocate our total costs for overhead and
facilities to each of the functional areas of our business that use these
services based upon estimated usage. These allocated charges include general
overhead items such as administrative salaries, professional fees, building
rent, equipment leasing costs, and telecommunication charges.
Sales and marketing
Sales and marketing expenses consist primarily of costs related to sales and
marketing, employee compensation, travel, public relations, trade shows, and
advertising. Sales and marketing expenses for the quarter ended September 30,
2002 were $4.1 million, a slight increase from sales and marketing expenses of
$4.0 million for the quarter ended September 30, 2001. Sales and marketing
expenses for the nine months ended September 30, 2002 were $12.6 million, a
17.4% decrease from sales and marketing expenses of $15.3 million for the nine
months ended September 30, 2001. Sales and marketing expenses as a percentage of
revenue (i) decreased from 37.5% for the three months ended September 30, 2001
to 36.3% for the three months ended September 30, 2002, and (ii) decreased from
49.9% for the nine months ended September 30, 2001 to 35.8% for the nine months
ended September 30, 2002. The decrease in sales and marketing expenditures as a
percentage of revenue for the respective periods was primarily due to a
reduction in the number of sales and marketing employees in addition to
reductions in travel, advertising, promotion, public relations, and general
marketing expenses.
Research and development
Research and development expenses consist primarily of expenses related to the
development and upgrade of our existing proprietary software and expenses
related to research and development for new product offerings. These expenses
primarily consist of employee compensation for research and development.
Research and development expenses for the quarter ended September 30, 2002 were
$3.1 million, a 9.7% increase from research and development expenses of $2.8
million for the quarter ended September 30, 2001. Research and development
expenses for the nine months ended September 30, 2002 and 2001 were $9.2
million. Research and development expenses as a percentage of revenue increased
from 26.0% for the three months ended September 30, 2001 to 27.2% for the three
months ended September 30, 2002. However, research and development expenses as a
percentage of revenue decreased from 30.2% for the nine months ended September
30, 2001 to 26.1% for the nine months ended September 30, 2002, primarily as a
result of increased revenue.
General and administrative
General and administrative expenses consist primarily of compensation for
executive and administrative personnel, travel expenses, professional advisory
fees, and general overhead expenses, including costs associated with being a
public entity, that are not allocated to cost of revenue, research and
development, or sales and marketing. General and administrative expenses for the
quarter ended September 30, 2002 were $1.6 million, a decrease of 5.5% from
general and administrative expenses of $1.7 million for the quarter ended
September 30, 2001. General and administrative expenses for the nine months
ended September 30, 2002 were $4.8 million, a decrease of 19.6% from general and
administrative expenses of $6.0 million for the nine months ended September 30,
2001. General and administrative expenses as a percentage of revenue decreased
from 15.3% and 19.5% for the three and nine months ended September 30, 2001,
respectively, to 13.8% and 13.6% for the three and nine months ended September
30, 2002. These decreases were primarily due to a reduction in general and
administrative employees in addition to an increase in revenue during the nine
months ended September 30, 2002.
14
Depreciation
Depreciation expense consists primarily of the depreciation of equipment,
furniture, fixtures, and leasehold improvements. Depreciation expense for the
quarter ended September 30, 2002 was $0.7 million, a decrease of 27.0% from
depreciation expense of $1.0 million for the quarter ended September 30, 2001.
Depreciation expense for the nine months ended September 30, 2002 was $2.2
million, a decrease of 25.0% from depreciation expense of $2.9 million for the
nine months ended September 30, 2001. These decreases are primarily attributable
to certain computer equipment becoming fully depreciated and new equipment being
purchased at a slower rate compared to prior periods.
Amortization
Amortization expense consists of the amortization of intangible assets such as
goodwill (in 2001 only), purchased technology, customer lists, and patents.
Amortization expense for the quarter ended September 30, 2002 was $7.4 million,
a decrease of 39.9% from amortization expense of $12.3 million for the quarter
ended September 30, 2001. Amortization expense for the nine months ended
September 30, 2002 was $22.2 million, a decrease of 39.8% from amortization
expense of $36.8 million for the nine months ended September 30, 2001. These
decreases were due to the adoption of SFAS 142 effective January 1, 2002. Under
these guidelines, goodwill is no longer amortized but is subject to annual
impairment tests. The Company performed the first of the required impairment
tests of goodwill and indefinite-lived intangible assets as of January 1, 2002,
and determined that no impairment loss was required to be recognized.
Stock-based compensation and warrants
Stock-based compensation and warrant expense relates to grants of employee stock
options and issuances of stock with exercise prices lower than the fair value of
the underlying shares at the time of grant or issuance, issuance of stock to
employees as compensation and the issuance of options and warrants to third
parties for services rendered. Stock-based compensation and warrants expense for
the quarter ended September 30, 2002 was $0.4 million, an increase from $0.1
million for the quarter ended September 30, 2001. Stock-based compensation and
warrants expense for the nine months ended September 30, 2002 was $0.9 million,
a decrease from stock-based compensation of $1.1 million for the nine months
ended September 30, 2001. This decrease is primarily attributable to warrant
expense recognized during the first quarter of 2001 partially offset by the
stock-based compensation expense recognized in 2002 related to the stock options
granted in 2002.
INTEREST EXPENSE, NET
Interest expense, net consists primarily of interest expense related to our
borrowings, offset by interest income received from the investment of proceeds
from our financing activities. Interest expense for the quarter ended September
30, 2002 was $1.3 million, a decrease of 26.3% from other expense of $1.8
million for the quarter ended September 30, 2001. This decrease is a result of
the Company having a lower average outstanding indebtedness and a lower weighted
interest rate during the quarter ended September 30, 2002 compared to the prior
year.
Interest expense for the nine months ended September 30, 2002 was $5.0 million,
an increase of 31.4% from other expense of $3.8 million for the nine months
ended September 30, 2001. The increase is primarily due to a higher weighted
average interest rate on outstanding indebtedness during the first two quarters
of 2002 as compared to the same periods of 2001, in addition to higher
amortization expense recognized in relation to debt origination fees on related
party debt in 2002 compared to 2001. Amortization expense related to debt
origination fees will be approximately $1.3 million per quarter through December
31, 2003.
OTHER EXPENSE
Other expense for the three months and nine months ended September 30, 2002
primarily relates to a fair value adjustment to notes receivable from certain
stockholders.
INCOME TAXES
During the three and nine months ended September 30, 2001 and 2002, we incurred
net losses for federal and state tax purposes and have not recognized any tax
provision or benefits. At September 30, 2002, we had significant accumulated net
operating loss carryforwards for federal and state tax purposes. The federal tax
carryforwards expire in various years beginning in 2015 through 2021.
Utilization of certain net operating loss carryforwards is subject to certain
limitations. Events which cause limitations on the amount of net operating
losses that we may use in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period.
15
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had $9.9 million in cash and cash equivalents, an
increase of approximately $1.3 million from December 31, 2001. This increase was
primarily attributable to our receipt of $33.0 million in net proceeds from our
initial public offering in September 2002 offset by debt repayments of $17.8
million, principal prepayment fees of $3.7 million and cash used by operations
during the period.
Net cash used by operating activities totaled $9.9 million for the nine months
ended September 30, 2002, compared to $16.4 million of net cash used by
operating activities for the nine months ended September 30, 2001. Net cash used
in operating activities for the nine months ended September 30, 2002 is
primarily attributable to the net loss for the period (less non-cash expenses)
in addition to an increase in accounts receivable as well as decreases in
accounts payable and accrued liabilities.
Net cash used by investing activities totaled $0.8 million for the nine months
ended September 30, 2002, compared to $1.7 million of net cash used by investing
activities for the nine months ended September 30, 2001. Cash used by investing
activities during the first nine months of 2002 was primarily the result of the
purchase of computer equipment and software licenses associated with the
implementation of a new customer relationship management system. Cash used by
investing activities in 2001 included payment for the license of a patent in
2000, purchase of computer equipment and software, and the acquisition of
certain technology-related assets of another business.
Net cash provided by financing activities was $11.9 million for the nine months
ended September 30, 2002, compared to $4.0 million of net cash provided by
financing activities for the nine months ended September 30, 2001. Cash from
financing activities during the first nine months of 2002 was primarily
attributable to our receipt of $33.0 million in net proceeds from our initial
public offering in June 2002 offset, in part, by debt repayments of $17.8
million and principal prepayment fees of $3.7 million. Cash from financing
activities in 2001 was primarily attributable to the issuance of shares of our
common and preferred stock, offset, in part, by the repayment of certain
indebtedness.
We have a $2.0 million demand line of credit with National City Bank, all of
which was drawn as of September 30, 2002. Borrowings under the facility bear
interest, which is payable monthly, at the prime rate. We also have entered into
a $0.9 million commercial installment note with National City Bank, which is
payable monthly and matures on July 1, 2004. Borrowings under the installment
note bear interest, which is payable monthly, at the annual rate of 7.62%. As of
September 30, 2002, the outstanding principal balance of this note was $0.4
million. The installment note contains restrictive covenants, including a
limitation on our ability to incur additional indebtedness or grant security
interests in our assets, as well as requirements that we satisfy various
financial conditions, including minimum tangible net worth and debt service
coverage. As of September 30, 2002, we were not in compliance with the debt
service coverage covenant of the installment note. We have received a waiver
with respect to this default from National City Bank, which expires January 1,
2003. If we violate any of these financial covenants and are unable to obtain a
waiver from National City Bank, then National City Bank could declare all
amounts outstanding, together with accrued interest, to be immediately due and
payable. Obligations under the installment note and line of credit are secured
by all of our tangible and intangible personal property.
On May 31, 2002 and June 10, 2002, the Company executed agreements with certain
of its debt holders to modify the terms of certain related-party debt, effective
upon the completion of the Company's initial public offering. An amendment to
the promissory note issued to the former shareholders of M Data, Inc. dated as
of May 31, 2002, provided for an increase in the principal amount of the note to
$4,200,000 from $4,000,000 in return for a reduction in the annual interest rate
to 8.0% from 12.0%. Principal payments are due in 24 equal monthly installments
commencing January 2003. Interest is payable monthly and commenced in June 2002.
Obligations under the note are secured by all of the intellectual property of
our subsidiary, M Data, Inc. and related intellectual property.
An amendment to the credit agreement with Iris Graphics, dated as of June 10,
2002: (i) reduced the annual interest rate to a fixed rate of 4.0%; (ii)
provided for the payment of a total of $11,800,000 of the outstanding principal
balance of $23,600,000 at March 31, 2002 and all accrued and deferred interest
upon the completion of the Company's initial public offering; and (iii)
eliminated the financial covenants. In return, the Company paid a $3,700,000
restructuring fee upon completion of the initial public offering. The
$11,800,000 remaining principal balance is due in one installment on January 2,
2004. Interest is payable quarterly and commenced in June 2002. The agreement
includes restrictive covenants customary for agreements of this type. If we fail
to comply with these restrictive covenants, then the lender could declare all
outstanding amounts, together with accrued interest, to be immediately due and
payable. Obligations under this agreement are secured by substantially all of
our assets.
Under an amendment to the loan agreement with the former shareholders of Hagen
Systems, dated as of June 10, 2002, the Company was not required to prepay
$2,000,000 of the $8,000,000 otherwise due upon an initial public offering and
16
the annual interest rate was reduced to 8.0%, in return for an increase of
$350,000 to the remaining principal balance of the loan. The remaining principal
amount due under the restructured agreement is $2,350,000, which is due on
January 2, 2004. Interest at an annual rate of 8.0% is payable monthly and
commenced in June 2002. The agreement includes restrictive covenants customary
for agreements of this type. If we fail to comply with these restrictive
covenants, then the lender could declare all outstanding amounts, together with
accrued interest, to be immediately due and payable. Obligations under this
agreement are secured by substantially all of our assets.
We believe that, based on current levels of operations and anticipated growth,
our cash from operations, together with cash currently available, will suffice
to fund our operations for the next 12 months. Poor financial results,
unanticipated expenses or unanticipated opportunities that require financial
commitments could give rise to additional financing requirements sooner than we
expect. We will need to refinance our debt due in January 2004 or raise
additional funds to repay it. However, we may not secure financing when we need
it or we may not secure it on acceptable terms. If we do not raise additional
funds when we need them, we might have to delay, scale back or eliminate
expenditures for expansion of our product plans and other strategic initiatives.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
In addition to other information in this Form 10-Q, the following risk factors
should be carefully considered in evaluating our business because such factors
currently may have a significant impact on our business, operating results and
financial condition. As a result of the risk factors set forth below and
elsewhere in this Form 10-Q and in any other documents we file with the SEC,
actual results could differ materially from those projected in any
forward-looking statements.
THE SLOWDOWN IN THE ECONOMY HAS AFFECTED THE MARKET FOR INFORMATION TECHNOLOGY
SOLUTIONS, INCLUDING DEMAND FOR OUR SOFTWARE PRODUCTS, AND OUR FUTURE FINANCIAL
RESULTS MAY DEPEND, IN PART, UPON WHETHER THIS SLOWDOWN CONTINUES.
A downturn in the demand for information technology products among our current
and potential customers may result in decreased revenues or a lower growth rate
for us. Potential customers may delay or forego the purchase of our products or
may demand lower prices in order to purchase our products. A reduction in the
demand for our software products or in the average selling price of our products
would reduce our operating margins and adversely affect our operating results.
IF OUR SOFTWARE PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, WE MAY NOT
BECOME PROFITABLE AND OUR STOCK PRICE COULD DECLINE.
Most print buyers, printers, and print industry raw material suppliers currently
coordinate the design, specification, purchasing, and manufacture of print
orders either through a combination of telephone, facsimile, e-mail, and
paperwork or through proprietary software solutions. Web-based products are
relatively new and rapidly evolving, and these products change the way in which
print buyers, printers, and print industry raw material suppliers interact with
one another. Widespread commercial acceptance of our Web-based products is
important to our future success. If the market for Web-based print management
products fails to grow or grows more slowly than we anticipate, then our
operating results could be adversely affected. To date, most of our sales have
been to printers, and our future growth is dependent upon our ability to
increase sales to print buyers. The growth of our business also depends on our
ability to enhance and develop our software products and to identify and develop
new products that serve the needs of our customers. If our existing and
potential customers do not adopt our software products, we may be unable to
continue to grow our business and increase our revenues. As a result, we may not
become profitable, or maintain profitability, and our stock price could decline.
THE SALES CYCLE FOR MANY OF OUR PRODUCTS IS LONG, WHICH COULD CAUSE OUR REVENUE
AND OPERATING RESULTS TO VARY SIGNIFICANTLY AND INCREASE THE RISK OF AN
OPERATING LOSS FOR ANY GIVEN FISCAL QUARTER.
A customer's decision to purchase and implement many of our products often
involves a significant commitment of its resources and a lengthy product
evaluation and qualification process. Approval at a number of management levels
within a customer's organization is typical for many of our products. Companies
often consider a wide range of issues before committing to purchase our
software, including anticipated benefits and cost savings, ease of installation,
ability to work with existing computer systems, functionality, and reliability.
Many of our potential customers may be addressing these issues for the first
time, and the use of our products may represent a significant change in their
current print management practices. As a result, we often devote significant
time and resources to educate potential customers about the use and benefits of
our products. The sales process for most of our products frequently takes
several months to complete, which may have an adverse impact on the timing of
our revenue, and our operating results could be adversely affected.
17
COMPETITION IN THE PRINTING INDUSTRY SUPPLY CHAIN FOR SOFTWARE PRODUCTS IS
INTENSE, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
Our current and potential competitors include companies that offer software
products and services to the printing industry supply chain, and companies that
offer software products for enterprise resource planning, supply chain
management, and procurement that are not customized for the printing industry.
We expect competition to increase in the future. Some of our current or
potential competitors have longer operating histories, larger customer bases,
greater brand recognition, and significantly greater financial, marketing, and
other resources. As a result, these competitors may be able to devote greater
resources to the development, promotion, sale, and support of their products. In
addition, these companies may adopt aggressive pricing policies and leverage
their customer bases to gain market share. Moreover, our current and potential
competitors may develop software products that are superior to or achieve
greater market acceptance than ours. If we are unable to offer competitive
software products and services, then our revenues will decline.
UNPLANNED SYSTEM INTERRUPTIONS, CAPACITY CONSTRAINTS, OR SECURITY BREACHES COULD
DISRUPT OUR BUSINESS AND DAMAGE OUR REPUTATION.
We must offer customers of our Web-based products reliable, secure, and
continuous service to attract and retain customers and persuade them to increase
their reliance on our software products. As the volume of data traffic on our
hosted Web sites increases, we must continually upgrade and enhance our
technical infrastructure to accommodate the increased demands placed on our
systems. Our operations also depend in part on our ability to protect our
systems against physical damage from fire, earthquakes, power loss,
telecommunications failures, computer viruses, unauthorized user access,
physical break-ins, and similar events. Any interruption or increase in response
time of our software products could damage our reputation, reduce customer
satisfaction, and decrease usage of our services and the purchase of our
products. The secure transmission of confidential information over public
networks is a fundamental requirement for online communications and
transactions. Third parties may attempt to breach our security or that of our
customers. Any breach in our online security could make us liable to our
customers, damage our reputation, and cause a decline in our revenues. We may
need to spend significant resources to license technologies to protect against
security breaches or to address problems caused by a security breach.
IF OUR TECHNOLOGIES CONTAIN UNDETECTED ERRORS OR DEFECTS, WHICH INTERRUPT OUR
OPERATIONS OR THOSE OF OUR CUSTOMERS, OUR BUSINESS COULD BE HARMED.
Our technologies are highly technical and may contain undetected software code
or other errors or suffer unexpected failures. Because of their nature, our
client/server-based enterprise resource planning and other products can only be
fully tested when deployed in our customers' networks. These errors or failures
may disrupt our operations or those of our customers, damage our reputation, and
result in loss of, or delay in, market acceptance of our software products. We
may discover software errors in new releases of our software products after
their introduction. We may experience delays in release, legal action by our
customers, lost revenues, and customer frustration during the period required to
correct these errors. Any of these problems could adversely affect our operating
results.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
COULD BE HARMED.
We regard our patents, copyrights, service marks, trademarks, trade secrets, and
similar intellectual property as critical to our success. We rely on patent,
trademark, and copyright law, trade secret protection, and confidentiality
and/or license agreements with our employees, customers, and strategic partners
to protect our proprietary rights. These precautions may not prevent
misappropriation or infringement of our intellectual property. In addition, the
status of United States patent protection in the software and Web industries is
not well defined and will evolve as the United States Patent and Trademark
Office grants additional patents. We do not know if any of our future patent
applications will result in a patent being issued within the scope of the claims
we seek, if at all, or whether any patents we may receive will be challenged or
invalidated. In addition, the laws in foreign countries may not protect our
proprietary rights to the same extent as laws in the United States.
WE MAY FACE INTELLECTUAL PROPERTY CLAIMS THAT COULD BE COSTLY TO DEFEND AND
COULD PREVENT US FROM SELLING OUR SOFTWARE PRODUCTS.
Third parties may infringe or misappropriate our intellectual property or assert
infringement claims against us. In addition, because the contents of patent
applications in the United States are not publicly disclosed until the patent is
18
issued, applications may have been filed by others that relate to our software
products. From time to time we receive communications from third parties
asserting that our products infringe, or may infringe, the intellectual property
rights of third parties. Intellectual property litigation is expensive and time
consuming and could divert management's attention from our business operations.
This litigation could also require us to develop non-infringing technology or
enter into royalty or license agreements with third parties. These royalty or
license agreements, if required, may not then be available on acceptable terms,
if at all. If we cannot develop or license non-infringing technology, then our
operating results could be adversely affected.
CREO COULD SUBSTANTIALLY INFLUENCE CORPORATE ACTIONS THAT CONFLICT WITH THE
INTERESTS OF OUR PUBLIC STOCKHOLDERS. WE ALSO HAVE COMMERCIAL AGREEMENTS WITH
CREO THAT ARE IMPORTANT TO OUR BUSINESS.
Creo Inc. is our largest stockholder, has two representatives on our board of
directors, and is a party to several commercial agreements with us. Creo,
through its wholly-owned subsidiary, Creo SRL, beneficially owns 3,204,083
shares of our common stock which represents 30.2% of the voting power of our
outstanding common stock. In addition, the two members of our board of directors
appointed by Creo, Amos Michelson, chairman of our board of directors, and Judi
Hess, are employees of Creo. Creo could use its stock ownership or
representation on our board of directors to substantially influence corporate
actions that conflict with the interests of our public stockholders.
In addition to the loan agreement we have with Iris Graphics, an affiliate of
Creo, we have a strategic alliance agreement and a sales channel agreement with
Creo. Under the strategic alliance agreement, we agreed with Creo to undertake
joint sales and marketing efforts, not to compete with each other's business,
and not to solicit the employment of each other's employees. In addition, we
granted Creo an exclusive and perpetual right to provide, and a right of first
refusal to develop, any content management and workflow products for us. Because
we have granted these rights to Creo, we may not be able to obtain terms as
favorable as those that might otherwise be available if we were able to
negotiate freely with third parties. Under the sales channel agreement, Creo has
agreed to provide sales representatives to sell our Web-based products in North
America. The strategic alliance agreement does not specify a termination date.
The sales channel agreement renews annually if the parties agree upon renewal
terms. Creo may terminate the strategic alliance agreement or the sales channel
agreement if we breach any provision of the agreements and do not remedy that
breach within 30 days. If the agreements were to terminate, we could lose access
to Creo's sales force and the other benefits derived from our joint marketing
efforts, and Creo would be permitted to compete with us. The termination of
these agreements and the resulting loss of these benefits could, among other
things, reduce our revenues and significantly harm our business.
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED. ANY ADDITIONAL
FINANCING MAY RESULT IN RESTRICTIONS ON OUR OPERATIONS OR SUBSTANTIAL DILUTION
TO OUR STOCKHOLDERS.
We currently anticipate that our current cash and cash equivalents, and cash
from operations, will be sufficient for us to meet our anticipated cash needs
for working capital, capital expenditure, and debt service requirements for the
next 12 months. We will need to refinance our debt which is due in January 2004
or raise additional funds to repay it. In addition, we may need additional
financing sooner if we fail to achieve our anticipated revenue levels, need to
make unplanned expenditures or change our pricing structure in response to
competition, decide to develop products ahead of schedule or decide to acquire
complementary products, businesses, or technologies.
WE MAY FAIL TO MEET QUARTERLY FINANCIAL EXPECTATIONS, WHICH MAY CAUSE THE MARKET
PRICE OF OUR COMMON STOCK TO DECLINE.
Our operating results are difficult to predict and may vary significantly from
quarter to quarter in the future. Our historical financial results are not
indicative of our future results. Our quarterly operating results may fluctuate
as a result of many factors, including, but not limited to:
o the size and timing of sales and deployment of our products;
o market acceptance of and demand for our products;
o variation in capital spending budgets of our customers;
o the mix of distribution channels through which our products are sold;
o the impairment of goodwill related to our past acquisitions;
o the costs of integrating acquired companies;
19
o technical difficulties or system outages;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business;
o the announcement or introduction of new products or services by our
competitors;
o changes in our pricing structure or that of our competitors; and
o the relatively fixed nature of our operating expenses.
As a result of the above factors, our quarterly operating results may fall below
market analysts' expectations in future quarters, which could lead to a decline
in the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For the nine months ended September 30, 2002, revenue from foreign customers
approximated 15% of our total revenue. We have not had any material exposure to
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. However, in future periods, we expect to increase
sales in foreign markets, including Canada and Europe. As our sales are made in
U.S. dollars, a strengthening of the U.S. dollar could cause our products to be
less attractive in foreign markets. At September 30, 2002, a total of $2.0
million of outstanding debt accrues interest based on the prime rate. Most of
our cash equivalents, short-term investments, and capital lease obligations are
at fixed interest rates. Therefore, the fair value of these investments is
affected by changes in the market interest rates. However, because our
investment portfolio is primarily composed of investments in money market funds
and high-grade commercial paper with short maturities, we do not believe an
immediate 10% change in market interest rates would have a material effect on
the fair market value of our portfolio. Therefore, we would not expect our
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on our investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of October 9, 2002 was conducted under the
supervision and with the participation of the Company's management, including
the Company's chief executive officer and chief financial officer. Based on that
evaluation, the Company's management, including its chief executive officer and
chief financial officer, concluded that the Company's disclosure controls and
procedures were effective as of October 9, 2002. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to October 9, 2002.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 17, 2002, the Securities and Exchange Commission declared effective the
Company's Registration Statement on Form S-1 (File No. 333-82646). The
Registration Statement covered the sale of 4,212,000 shares of the Company's
Common Stock (including an option to purchase 462,000 shares solely to cover
over-allotment, if any) at an offering price of $10.00 per share. The managing
underwriters in the offering were UBS Warburg LLC, Robertson Stephens, Inc.,
U.S. Bancorp Piper Jaffray Inc., and McDonald Investments Inc. (the
"Underwriters"). On June 21, 2002, the Company sold to the Underwriters
3,750,000 shares of Common Stock for aggregate consideration of $37,500,000,
less underwriting discounts and commissions of $2,625,000, and other expenses of
$1,925,000 for net proceeds to the Company of $32,950,000. The other expenses of
$1,925,000 were paid to third parties not affiliated with the Company. From the
amount of net proceeds $23,200,000 million in cash was used to pay outstanding
debt, deferred interest, and prepayment fees. Of this amount, $16,900,000 was
paid to Creo, Inc., which owns, through its subsidiary Creo SRL, approximately
30.2% of our outstanding common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
99.1 Certification by Chief Executive Officer and Chief Financial Officer.
(b) Reports on Form 8-K.
None.
* * * *
20
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.
PRINTCAFE SOFTWARE, INC.
/s/ Marc D. Olin
-----------------------------------------
Marc D. Olin
President and Chief Executive Officer
/s/ Joseph J. Whang
-----------------------------------------
Joseph J. Whang
Chief Financial Officer and Chief
Operating Officer
(Chief Accounting Officer)
Date: November 14, 2002
21
CERTIFICATIONS
I, Marc D. Olin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Printcafe
Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Marc D. Olin
------------------------------------
MARC D. OLIN
President and Chief Executive Officer
(Principal Executive Officer)
I, Joseph J. Whang, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Printcafe
Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Joseph J. Whang
-------------------------------
JOSEPH J. WHANG
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------------------
99.1 Certification by Chief Executive Officer and Chief Financial Officer.
22