Attached files
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 December 31, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number: 0-25259
Bottomline
Technologies (de), Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
02-0433294
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
325
Corporate Drive
Portsmouth,
New Hampshire
|
03801-6808
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(603)
436-0700
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer
|
¨
|
|
Accelerated Filer
|
x
|
||
Non-Accelerated
Filer
|
¨ (Do
not check if a smaller reporting company)
|
|
Smaller Reporting Company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares outstanding of the registrant’s common stock as of January 29,
2010 was
26,910,642.
1
INDEX
Page
No.
|
||||
PART
I. FINANCIAL INFORMATION
|
||||
Item 1.
Financial Statements
|
||||
Unaudited
Condensed Consolidated Balance Sheets as of December 31, 2009 and
June 30, 2009
|
3 | |||
Unaudited
Condensed Consolidated Statements of Operations for the three months ended
December 31, 2009 and 2008
|
4 | |||
Unaudited
Condensed Consolidated Statements of Operations for the six months ended
December 31, 2009 and 2008
|
5 | |||
Unaudited
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 2009 and 2008
|
6 | |||
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7 | |||
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
15 | |||
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
|
26 | |||
Item 4.
Controls and Procedures
|
26 | |||
PART
II. OTHER INFORMATION
|
||||
Item 1.
Legal Proceedings
|
26 | |||
Item 1A.
Risk Factors
|
27 | |||
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
34 | |||
Item 4.
Submission of Matters to a Vote of Security Holders
|
34 | |||
Item 6.
Exhibits
|
34 | |||
SIGNATURE
|
35 |
2
PART
I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Bottomline
Technologies (de), Inc.
Unaudited
Condensed Consolidated Balance Sheets
(in
thousands)
December
31,
2009
|
June
30,
2009
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 54,946 | $ | 50,255 | ||||
Marketable
securities
|
54 | 48 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $527 at December 31,
2009 and $645 at June 30, 2009
|
24,266 | 23,118 | ||||||
Other
current assets
|
6,934 | 5,531 | ||||||
Total
current assets
|
86,200 | 78,952 | ||||||
Property
and equipment, net
|
15,326 | 10,106 | ||||||
Intangible
assets, net
|
103,729 | 89,589 | ||||||
Other
assets
|
5,149 | 4,504 | ||||||
Total
assets
|
$ | 210,404 | $ | 183,151 | ||||
Liabilities
and stockholders’ equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 6,224 | $ | 5,955 | ||||
Accrued
expenses
|
8,178 | 9,290 | ||||||
Deferred
revenue
|
32,190 | 33,029 | ||||||
Total
current liabilities
|
46,592 | 48,274 | ||||||
Deferred
revenue, non-current
|
13,168 | 10,213 | ||||||
Deferred
income taxes
|
2,335 | 2,263 | ||||||
Other
liabilities
|
2,064 | 1,852 | ||||||
Total
liabilities
|
64,159 | 62,602 | ||||||
Stockholders’
equity:
|
||||||||
Preferred
Stock, $.001 par value:
|
||||||||
Authorized
shares—4,000; issued and outstanding shares—none
|
---- | ---- | ||||||
Common
Stock, $.001 par value:
|
||||||||
Authorized
shares—50,000; issued shares—27,697 at December 31, 2009, and 26,516 at
June 30, 2009; outstanding shares—25,563 at December 31, 2009, and 24,311
at June 30, 2009
|
28 | 27 | ||||||
Additional
paid-in capital
|
310,661 | 287,082 | ||||||
Accumulated
other comprehensive loss
|
(5,461 | ) | (4,920 | ) | ||||
Treasury
stock: 2,134 shares at December 31, 2009, and 2,205 shares at
June 30, 2009, at cost
|
(23,579 | ) | (24,360 | ) | ||||
Accumulated
deficit
|
(135,404 | ) | (137,280 | ) | ||||
Total
stockholders’ equity
|
146,245 | 120,549 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 210,404 | $ | 183,151 | ||||
See
accompanying notes.
3
Bottomline
Technologies (de), Inc.
Unaudited
Condensed Consolidated Statements of Operations
(in
thousands, except per share amounts)
Three Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Software
licenses
|
$ | 3,787 | $ | 3,597 | ||||
Subscriptions
and transactions
|
10,469 | 7,744 | ||||||
Service
and maintenance
|
23,775 | 20,527 | ||||||
Equipment
and supplies
|
2,091 | 2,466 | ||||||
Total
revenues
|
40,122 | 34,334 | ||||||
Cost
of revenues:
|
||||||||
Software
licenses
|
321 | 207 | ||||||
Subscriptions
and transactions (1)
|
5,160 | 3,792 | ||||||
Service
and maintenance (1)
|
10,405 | 9,513 | ||||||
Equipment
and supplies
|
1,590 | 1,824 | ||||||
Total
cost of revenues
|
17,476 | 15,336 | ||||||
Gross
profit
|
22,646 | 18,998 | ||||||
Operating
expenses:
|
||||||||
Sales
and marketing (1)
|
8,825 | 8,150 | ||||||
Product
development and engineering (1)
|
4,753 | 5,238 | ||||||
General
and administrative (1)
|
4,248 | 4,619 | ||||||
Amortization
of intangible assets
|
3,361 | 3,948 | ||||||
Total
operating expenses
|
21,187 | 21,955 | ||||||
Income
(loss) from operations
|
1,459 | (2,957 | ) | |||||
Other
(expense) income, net
|
(93 | ) | 615 | |||||
Income
(loss) before income taxes
|
1,366 | (2,342 | ) | |||||
Provision
for income taxes
|
662 | 527 | ||||||
Net
income (loss)
|
704 | (2,869 | ) | |||||
Basic
and diluted net income (loss) per share attributable to common
stockholders:
|
$ | 0.03 | $ | (0.12 | ) | |||
Shares
used in computing basic net income (loss) per share attributable to common
stockholders:
|
25,092 | 24,033 | ||||||
Shares
used in computing diluted net income (loss) per share attributable to
common stockholders:
|
25,933 | 24,033 | ||||||
(1)
|
Stock
based compensation is allocated as
follows:
|
Three Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Cost
of revenues: subscriptions and transactions
|
$ | 61 | $ | 49 | ||||
Cost
of revenues: service and maintenance
|
444 | 212 | ||||||
Sales
and marketing
|
838 | 648 | ||||||
Product
development and engineering
|
329 | 197 | ||||||
General
and administrative
|
728 | 1,097 |
See
accompanying notes.
4
Bottomline
Technologies (de), Inc.
Unaudited
Condensed Consolidated Statements of Operations
(in
thousands, except per share amounts)
Six
Months Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Software
licenses
|
$ | 6,750 | $ | 7,203 | ||||
Subscriptions
and transactions
|
18,750 | 15,973 | ||||||
Service
and maintenance
|
46,910 | 41,676 | ||||||
Equipment
and supplies
|
4,268 | 4,988 | ||||||
Total
revenues
|
76,678 | 69,840 | ||||||
Cost
of revenues:
|
||||||||
Software
licenses
|
540 | 407 | ||||||
Subscriptions
and transactions (1)
|
9,038 | 7,991 | ||||||
Service
and maintenance (1)
|
20,125 | 19,303 | ||||||
Equipment
and supplies
|
3,211 | 3,679 | ||||||
Total
cost of revenues
|
32,914 | 31,380 | ||||||
Gross
profit
|
43,764 | 38,460 | ||||||
Operating
expenses:
|
||||||||
Sales
and marketing (1)
|
16,708 | 16,788 | ||||||
Product
development and engineering (1)
|
8,843 | 10,660 | ||||||
General
and administrative (1)
|
8,538 | 9,792 | ||||||
Amortization
of intangible assets
|
6,667 | 8,384 | ||||||
Total
operating expenses
|
40,756 | 45,624 | ||||||
Income
(loss) from operations
|
3,008 | (7,164 | ) | |||||
Other
income, net
|
128 | 763 | ||||||
Income
(loss) before income taxes
|
3,136 | (6,401 | ) | |||||
Provision
for income taxes
|
1,260 | 317 | ||||||
Net
income (loss)
|
1,876 | (6,718 | ) | |||||
Basic
and diluted net income (loss) per share attributable to common
stockholders:
|
$ | 0.07 | $ | (0.28 | ) | |||
Shares
used in computing basic net income (loss) per share attributable to common
stockholders:
|
24,747 | 23,958 | ||||||
Shares
used in computing diluted net income (loss) per share attributable to
common stockholders:
|
25,372 | 23,958 | ||||||
(1)
|
Stock
based compensation is allocated as
follows:
|
Six Months Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Cost
of revenues: subscriptions and transactions
|
$ | 114 | $ | 131 | ||||
Cost
of revenues: service and maintenance
|
749 | 390 | ||||||
Sales
and marketing
|
1,487 | 1,343 | ||||||
Product
development and engineering
|
533 | 400 | ||||||
General
and administrative
|
1,425 | 2,149 |
See
accompanying notes.
5
Bottomline
Technologies (de), Inc.
Unaudited
Condensed Consolidated Statements of Cash Flows
(in
thousands)
Six Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Operating
activities:
|
||||||||
Net
income (loss)
|
$ | 1,876 | $ | (6,718 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Amortization
of intangible assets
|
6,667 | 8,384 | ||||||
Stock
compensation expense
|
4,308 | 4,413 | ||||||
Depreciation
and amortization of property and equipment
|
2,164 | 1,995 | ||||||
Deferred
income tax provision (benefit)
|
301 | (179 | ) | |||||
Provision
for allowances on accounts receivable
|
(99 | ) | 11 | |||||
Provision
for obsolete inventory
|
1 | 7 | ||||||
Excess
tax benefits associated with stock compensation
|
(130 | ) | (10 | ) | ||||
Gain
on foreign exchange
|
(136 | ) | (222 | ) | ||||
Loss
on disposal of equipment
|
--- | 12 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,089 | ) | (820 | ) | ||||
Inventory,
prepaid expenses and other assets
|
(565 | ) | (810 | ) | ||||
Accounts
payable, accrued expenses and other liabilities
|
(856 | ) | (3,040 | ) | ||||
Deferred
revenue
|
2,189 | 7,411 | ||||||
Net
cash provided by operating activities
|
14,631 | 10,434 | ||||||
Investing
activities:
|
||||||||
Acquisition
of business
|
(17,000 | ) | --- | |||||
Purchases
of held-to-maturity securities
|
(50 | ) | (53 | ) | ||||
Proceeds
from sales of held-to-maturity securities
|
50 | 53 | ||||||
Purchases
of property and equipment
|
(2,528 | ) | (2,060 | ) | ||||
Net
cash used in investing activities
|
(19,528 | ) | (2,060 | ) | ||||
Financing
activities:
|
||||||||
Proceeds
from employee stock purchase plan and exercise of stock options
|
9,560 | 961 | ||||||
Repurchase
of common stock
|
(23 | ) | (2,603 | ) | ||||
Excess
tax benefits associated with stock compensation
|
130 | 10 | ||||||
Capital
lease payments
|
(56 | ) | (65 | ) | ||||
Payment
of bank financing fees
|
(13 | ) | (20 | ) | ||||
Net
cash provided by (used in) financing activities
|
9,598 | (1,717 | ) | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
(10 | ) | (7,256 | ) | ||||
Increase
(decrease) in cash and cash equivalents
|
4,691 | (599 | ) | |||||
Cash
and cash equivalents at beginning of period
|
50,255 | 35,316 | ||||||
Cash
and cash equivalents at end of period
|
$ | 54,946 | $ | 34,717 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Issuance
of warrants in connection with acquisition of business
|
$ | 10,520 | ---- | |||||
See
accompanying notes.
6
Bottomline
Technologies (de), Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2009
Note
1—Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. Operating results for the three and
six months ended December 31, 2009 are not necessarily indicative of the results
that may be expected for any other interim period or for the fiscal year ending
June 30, 2010. For further information, refer to the financial statements
and footnotes included in the Company’s Annual Report on Form 10-K as filed with
the Securities and Exchange Commission (SEC) on September 11,
2009.
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
Note
2—Recent Accounting Pronouncements
Revenue
Recognition
In
October 2009, the Financial Accounting Standards Board (FASB) issued
authoritative guidance on two issues related to revenue
recognition.
The first
issue, Revenue Arrangements
with Multiple Deliverables, applies to multiple-deliverable revenue
arrangements and provides for two significant changes to existing
multiple-element revenue recognition guidance. The first change relates to the
determination of when individual deliverables within an arrangement should be
treated as separate units of accounting. Broadly, a deliverable should be
treated as a separate unit of accounting when it has value to the customer on a
standalone basis and when delivery or performance of any undelivered items is
considered to be probable and substantially within the control of the vendor.
The second change relates to the manner in which arrangement consideration
should be allocated to any separately identified deliverables. The consensus
requires that the allocation of revenue among deliverables be based on vendor
specific objective evidence or third-party evidence of selling price and, to the
extent that neither of these levels of evidence exist, that the allocation be
based on the vendor’s best estimate of selling price for each
deliverable. Use of the residual method of allocating revenue to
arrangement deliverables is prohibited unless the revenue transaction is
specifically governed by software revenue recognition
literature. Financial statement disclosure requirements have also
been significantly expanded.
The
second issue, Certain Revenue
Arrangements that Include Software Elements, focuses on redefining which
revenue arrangements are within the scope of software revenue recognition
literature and which are not. The issue provides guidance on
determining whether tangible products containing non-software and software
elements are governed by software revenue recognition literature and
significantly narrows the definition of what constitutes a “software”
transaction. In particular, non-software components of products that
include software, software products bundled with tangible products where the
non-software and software components function together to deliver the product’s
essential functionality, and undelivered elements related to non-software
components are, as a result of this issue, outside the scope of software revenue
recognition rules. The issue also provides guidance on allocating revenue
between non-software and software elements.
Each of
these issues is effective for fiscal years beginning on or after June 15, 2010.
The issues can be implemented prospectively to all revenue arrangements entered
or materially modified after the date of adoption, or retrospectively to all
revenue arrangements for all financial statement periods presented. Early
adoption is permitted. Both issues must be adopted in the same period and under
the same transition method. The Company expects to adopt these issues
prospectively as of July 1, 2010 and is currently evaluating the impact of the
pronouncements on its financial statements.
Note
3—Fair Value
Fair
Value of Assets and Liabilities
7
In
September 2006, the FASB issued financial statement disclosure standards,
effective for financial statements issued for fiscal years beginning after
November 15, 2007, regarding the fair value of assets and
liabilities. The Company adopted these standards in fiscal
2008. These standards define fair value, establish a framework for
measuring fair value and expand disclosures about fair value measurements. They
apply only to fair value measurements already required or permitted by other
accounting standards and do not require any new fair value
measurements.
For
nonfinancial assets and liabilities not recognized or disclosed at fair value in
the financial statements on a recurring basis, the effective date of these
standards was delayed until fiscal years beginning after November 15, 2008 (July
1, 2009 for the Company). The Company’s nonfinancial assets and
liabilities that met these deferral criteria included goodwill, intangible
assets, and property, plant and equipment. The adoption of the
remaining provisions of these standards on July 1, 2009 did not have an impact
on the Company’s financial position or results of
operations.
The
Company measures fair value at the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In determining fair value, the
assumptions that market participants would use in pricing an asset or liability
(the “inputs”) are based on a tiered fair value hierarchy consisting of three
levels, as follows:
Level
1: Observable inputs such as quoted prices for identical assets or
liabilities in active markets.
Level
2: Other inputs that are observable directly or indirectly, such as
quoted prices for similar instruments in active markets or for similar markets
that are not active.
Level
3: Unobservable inputs for which there is little or no market data
and which require the Company to develop its own assumptions about how market
participants would price the asset or liability.
Valuation techniques for assets and
liabilities include methodologies such as the market approach, the income
approach or the cost approach, and may use unobservable inputs such as
projections, estimates and management’s interpretation of current market
data. These unobservable inputs are only utilized to the extent that
observable inputs are not available or cost-effective to obtain.
At December 31, 2009, assets and
liabilities of the Company measured at fair value on a recurring basis included
money market funds of $0.2 million. At June 30, 2009, assets and
liabilities of the Company measured at fair value on a recurring basis included
money market funds and US Treasury securities funds of $2.6 million and $0.8
million, respectively. These amounts were reported as a
component of the Company’s cash and cash equivalents and were valued based on
reference to quoted prices in active markets (Level 1 inputs).
Fair
Value of Financial Instruments
The Company has certain financial
instruments which consist of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable. The Company’s marketable
securities are classified as held to maturity and recorded at amortized cost
which, at December 31, 2009 and June 30, 2009, approximated fair
value. These investments all mature within one year. The
fair value of the Company’s other financial instruments approximate their
carrying values, due to the short-term nature of those instruments.
Note
4 – Business Acquisitions
PayMode
On
September 14, 2009, the Company completed the purchase of substantially all of
the assets and related operations of PayMode from Bank of America (the
“Bank”). PayMode facilitates the electronic exchange of payments and
invoices between organizations and their suppliers and is operated as a Software
as a Service (SaaS) offering. There are currently in excess of 90,000
vendors participating in the PayMode network.
As a
result of the acquisition the Company acquired the PayMode operations including
the vendor network, application software, intellectual property rights and other
assets, properties and rights used exclusively or primarily in the PayMode
business. As purchase consideration, the Company paid the Bank cash of
$17.0 million and issued the Bank a warrant to purchase 1,000,000 shares of
common stock of the Company at an exercise price of $8.50 per
share. The warrants
8
were
exercisable upon issuance and were valued at $10.5 million using a Black Scholes
valuation model that used the following inputs:
Dividend
yield
|
0%
|
Expected
term
|
10
years
|
Risk
free interest rate
|
3.42%
|
Volatility
|
78%
|
The expected term of ten years equates
to the contractual life of the warrants. Volatility was based on the
Company’s actual stock price over a ten year historic period.
The
Company finalized its estimates of fair value for property, equipment and
intangible assets acquired during the period ended December 31,
2009. In the allocation of the purchase price set forth below, the
Company has recognized approximately $2.7 million of goodwill. This
amount is deductible for US income tax purposes and is arising principally due
to the assembled workforce of PayMode and due to expected product synergies
arising from the acquisition. Costs of the acquisition of
approximately $0.5 million were expensed during the six months ended December
31, 2009, principally as a component of general and administrative
expenses.
PayMode’s
operating results have been included in the Company’s operating results from the
date of the acquisition forward, as a component of the Outsourced Solutions
segment, and all of the PayMode goodwill was allocated to this
segment.
Upon
acquisition, PayMode was integrated into existing business lines of the Company
in a manner that makes tracking or reporting earnings specifically attributable
to PayMode impracticable. For the six months ended December 31, 2009,
revenues attributable to PayMode represented less than 5% of the Company’s
consolidated revenues.
The final
allocation of the purchase price as of December 31, 2009 is as
follows:
(in thousands)
|
||||
Current
assets
|
1,340 | |||
Property
and equipment
|
4,901 | |||
Intangible
assets
|
18,659 | |||
Goodwill
|
2,653 | |||
Current
liabilities
|
(33 | ) | ||
Total
purchase price
|
$ | 27,520 | ||
The
valuation of the acquired intangible assets was estimated by performing
projections of discounted cash flow, whereby revenues and costs associated with
each intangible asset are forecast to derive expected cash flow which is
discounted to present value at discount rates commensurate with perceived
risk. The valuation and projection process is inherently subjective
and relies on significant unobservable inputs (Level 3 inputs). The
valuation assumptions also take into consideration the Company’s estimates of
contract renewal, technology attrition and revenue growth
projections. The values for specifically identifiable intangible
assets, by major asset class, are as set forth below. Other intangible assets
consist of a tradename and a below market lease arrangement.
(in thousands)
|
||||
Customer
related intangible assets
|
$ | 9,349 | ||
Core
technology
|
7,648 | |||
Other
intangible assets
|
1,662 | |||
$ | 18,659 | |||
The
customer related intangible assets, core technology and other intangible assets
acquired are being amortized over weighted average lives of seventeen years,
seven years and fourteen years, respectively.
9
Pro-forma
Information
The
following unaudited pro-forma financial information presents the combined
results of operations of the Company and PayMode as if that acquisition had
occurred on July 1, 2009 and 2008, respectively, after giving effect to
certain adjustments such as decreased revenues formerly earned by PayMode from
interest income allocated to PayMode through Bank of America’s fund transfer
process since, in general terms, the Company will not be eligible to earn
revenues in this manner. The pro-forma adjustments also reflect an
increase in amortization expense as a result of acquired intangible assets and a
decrease in interest income as a result of the cash paid for the acquisition.
This pro-forma financial information does not necessarily reflect the results of
operations that would have actually occurred had the Company and PayMode been a
single entity during these periods.
Pro Forma
Three Months Ended
December 31,
|
Pro Forma
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(unaudited)
(in
thousands)
|
||||||||||||||||
Revenues
|
$ | 40,122 | $ | 35,817 | $ | 77,881 | $ | 72,785 | ||||||||
Net
income (loss)
|
$ | 704 | $ | (4,754 | ) | $ | 194 | $ | (10,191 | ) | ||||||
Net
income (loss) per basic and diluted share attributable to common
stockholders
|
$ | 0.03 | $ | (0.20 | ) | $ | 0.01 | $ | (0.43 | ) |
Note
5—Net Income (Loss) Per Share
The
following table sets forth the computation of basic and diluted net income
(loss) per share:
Three
Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Basic:
|
||||||||||||||||
Net
income (loss)
|
$ | 704 | $ | (2,869 | ) | $ | 1,876 | $ | (6,718 | ) | ||||||
Less: Net
income allocable to participating securities
|
(25 | ) | --- | (72 | ) | --- | ||||||||||
Net
income (loss) allocable to common stockholders – basic
|
$ | 679 | $ | (2,869 | ) | $ | 1,804 | $ | (6,718 | ) | ||||||
Basic
net income (loss) per share attributable to common
stockholders
|
$ | 0.03 | $ | (0.12 | ) | $ | 0.07 | $ | (0.28 | ) | ||||||
Shares
used in computing basic net income (loss) per share attributable to common
stockholders
|
25,092 | 24,033 | 24,747 | 23,958 | ||||||||||||
Diluted:
|
||||||||||||||||
Net
income (loss)
|
$ | 704 | $ | (2,869 | ) | $ | 1,876 | $ | (6,718 | ) | ||||||
Less: Net
income allocable to participating securities
|
(24 | ) | --- | (70 | ) | --- | ||||||||||
Net
income (loss) allocable to common stockholders – diluted
|
$ | 680 | $ | (2,869 | ) | $ | 1,806 | $ | (6,718 | ) | ||||||
Diluted
net income (loss) per share attributable to common
stockholders
|
$ | 0.03 | $ | (0.12 | ) | $ | 0.07 | $ | (0.28 | ) | ||||||
Shares
used in computing diluted net income (loss) per share attributable to
common stockholders
|
25,933 | 24,033 | 25,372 | 23,958 | ||||||||||||
Basic net
income per share excludes any dilutive effects of stock options, unvested
restricted stock and stock warrants. Basic and diluted earnings per
share is computed pursuant to the two-class method. The two-class
method calculates earnings for common stock and participating securities based
on their proportionate participation rights in undistributed
10
earnings. Certain
of the Company’s unvested restricted stock awards are considered to be
participating securities as they entitle the holder to receive non-forfeitable
rights to cash dividends at the same rate as common stock.
Diluted
net income per share is calculated using the more dilutive of the treasury stock
method (which assumes full exercise of in-the-money stock options and warrants
and full vesting of restricted stock) and the two-class method, described
above.
At
December 31, 2009 and 2008, 235,989 and 4,973,216 shares of unvested restricted
stock and stock options were excluded from the calculation of diluted earnings
per share, respectively, as their effect on the calculation would have been
anti-dilutive.
Note
6—Comprehensive Income or Loss
Comprehensive
income or loss represents the Company’s net income (loss) plus the results of
certain stockholders’ equity changes not reflected in the unaudited condensed
consolidated statements of operations. The components of comprehensive income or
loss are as follows:
Three Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Net
income (loss)
|
$ | 704 | $ | (2,869 | ) | $ | 1,876 | $ | (6,718 | ) | ||||||
Other
comprehensive income (loss):
|
||||||||||||||||
Foreign
currency translation adjustments
|
470 | (10,884 | ) | (541 | ) | (18,909 | ) | |||||||||
Comprehensive
income (loss)
|
$ | 1,174 | $ | (13,753 | ) | $ | 1,335 | $ | (25,627 | ) | ||||||
Note
7—Operations by Segments and Geographic Areas
Segment
Information
Operating
segments are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance.
The
Company’s operating segments are organized principally by the type of product or
service offered and by geography; similar operating segments have been
aggregated into three reportable segments as follows:
Payments and Transactional
Documents. The Company’s Payments and Transactional Documents segment is
a supplier of software products that provide a range of financial business
process management solutions including making and collecting payments, sending
and receiving invoices, and generating and storing business documents. This
segment also provides a range of standard professional services and equipment
and supplies that complement and enhance the Company’s core software products.
Revenue associated with this segment is typically recorded upon delivery or, if
extended payment terms have been granted to the customer, as payments become
contractually due. This segment incorporates the Company’s check printing
solutions in the UK, revenue for which is typically recorded on a per
transaction basis or ratably over the expected life of the customer
relationship, as well as certain solutions that are licensed on a subscription
basis, revenue for which is typically recorded ratably over the contractual
term.
Banking Solutions. The
Banking Solutions segment provides solutions that are specifically designed for
banking and financial institution customers. These solutions typically involve
longer implementation periods and a significant level of professional resources.
Due to the customized nature of these products, revenue is generally recognized
over the period of project performance, on a percentage of completion basis.
Periodically, the Company licenses these solutions on a subscription basis which
has the effect of contributing to recurring revenue and the revenue
predictability of future periods, but which also delays revenue recognition over
a period that is longer than the period of project performance.
Outsourced Solutions. The
Outsourced Solutions segment provides customers with outsourced and hosted
solution offerings that facilitate invoice receipt and presentment and spend
management. The Company’s Legal eXchange solution, which provides the
opportunity to create more efficient processes for managing invoices generated
by outside law firms while offering access to important legal spend factors such
as budgeting, expense monitoring and outside counsel
11
performance,
is included within this segment. This segment also incorporates the Company’s
hosted and outsourced accounts payable automation solutions, including PayMode,
which the Company acquired in September 2009. Revenue within this segment is
generally recognized on a subscription or transaction basis or proportionately
over the estimated life of the customer relationship.
Each
operating segment has separate sales forces and periodically a sales person in
one operating segment will sell products and services that are typically sold
within a different operating segment. In such cases, the transaction is
generally recorded by the operating segment to which the sales person is
assigned. Accordingly, segment results can include the results of transactions
that have been allocated to a specific segment based on the contributing sales
resources, rather than the nature of the product or service. Conversely, a
transaction can be recorded by the operating segment primarily responsible for
delivery to the customer, even if the sales person is assigned to a different
operating segment.
The
Company’s chief operating decision maker assesses segment performance based on a
variety of factors that can include segment revenue and a segment measure of
profit or loss. Each segment’s measure of profit or loss is on a pre-tax basis,
and excludes stock compensation expense, acquisition-related expenses,
amortization of intangible assets and restructuring related charges. There are
no inter-segment sales; accordingly, the measure of segment revenue and profit
or loss reflects only revenues from external customers. The costs of certain
corporate level expenses, primarily general and administrative expenses, are
allocated to the Company’s operating segments at predetermined rates that
approximate cost.
The
Company does not track or assign its assets by operating segment.
Segment
information for the three and six months ended December 31, 2009 and 2008
according to the segment descriptions above, is as follows:
Three
Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Revenues:
|
||||||||||||||||
Payments
and Transactional Documents
|
$ | 23,809 | $ | 22,955 | $ | 46,576 | $ | 46,331 | ||||||||
Banking
Solutions
|
7,595 | 5,433 | 14,703 | 11,106 | ||||||||||||
Outsourced
Solutions
|
8,718 | 5,946 | 15,399 | 12,403 | ||||||||||||
Total
revenues
|
$ | 40,122 | $ | 34,334 | $ | 76,678 | $ | 69,840 | ||||||||
Segment
measure of profit (loss):
|
||||||||||||||||
Payments
and Transactional Documents
|
$ | 5,457 | $ | 3,737 | $ | 10,433 | $ | 6,406 | ||||||||
Banking
Solutions
|
641 | (1,046 | ) | 1,626 | (2,027 | ) | ||||||||||
Outsourced
Solutions
|
1,249 | 503 | 2,453 | 1,289 | ||||||||||||
Total
measure of segment profit
|
$ | 7,347 | $ | 3,194 | $ | 14,512 | $ | 5,668 | ||||||||
A
reconciliation of the measure of segment profit to GAAP operating income before
income taxes is as follows:
Three Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Segment
measure of profit
|
$ | 7,347 | $ | 3,194 | $ | 14,512 | $ | 5,668 | ||||||||
Less:
|
||||||||||||||||
Amortization
of intangible assets
|
(3,361 | ) | (3,948 | ) | (6,667 | ) | (8,384 | ) | ||||||||
Stock
compensation expense
|
(2,400 | ) | (2,203 | ) | (4,308 | ) | (4,413 | ) | ||||||||
Acquisition
related expenses
|
(127 | ) | --- | (529 | ) | (35 | ) | |||||||||
Add:
|
||||||||||||||||
Other
(expense) income, net
|
(93 | ) | 615 | 128 | 763 | |||||||||||
Income
(loss) before income taxes
|
$ | 1,366 | $ | (2,342 | ) | $ | 3,136 | $ | (6,401 | ) | ||||||
12
The
following depreciation expense amounts are included in the segment measure of
profit:
Three Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Depreciation
expense:
|
||||||||||||||||
Payments
and Transactional Documents
|
$ | 415 | $ | 416 | $ | 789 | $ | 871 | ||||||||
Banking
Solutions
|
171 | 177 | 336 | 352 | ||||||||||||
Outsourced
Solutions
|
621 | 376 | 1,039 | 772 | ||||||||||||
Total
depreciation expense
|
$ | 1,207 | $ | 969 | $ | 2,164 | $ | 1,995 | ||||||||
Geographic
Information
The
Company has presented geographic information about its revenues, below. This
presentation allocates revenue based on the point of sale not the location of
the customer. Accordingly, the Company derives revenues from geographic
locations based on the location of the customer that would vary from the
geographic areas listed here, particularly in respect of a financial institution
customer located in Australia for which the point of sale was the United
States.
Three
Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Revenues
from unaffiliated customers:
|
||||||||||||||||
United
States
|
$ | 26,479 | $ | 20,789 | $ | 50,248 | $ | 42,407 | ||||||||
Europe
|
13,140 | 13,196 | 25,517 | 26,666 | ||||||||||||
Australia
|
503 | 349 | 913 | 767 | ||||||||||||
Total
revenues from unaffiliated customers
|
$ | 40,122 | $ | 34,334 | $ | 76,678 | $ | 69,840 | ||||||||
Long-lived
assets, which are based on geographical location, were as follows:
December
31,
|
June 30,
|
|||||||
2009
|
||||||||
(in
thousands)
|
||||||||
Long-lived
assets, net
|
||||||||
United
States
|
$ | 17,728 | $ | 12,160 | ||||
Europe
|
2,631 | 2,313 | ||||||
Australia
|
116 | 137 | ||||||
Total
long-lived assets, net
|
$ | 20,475 | $ | 14,610 | ||||
Note
8—Income Taxes
The Company recorded income tax expense
of $0.7 million and $0.5 million for the three months ended December 31, 2009
and 2008, respectively. The income tax expense recorded for the
quarter ended December 31, 2009 was due to tax expense associated with the
Company’s UK, Australian and US operations. The US income tax expense
was principally due to alternative minimum tax arising from the utilization of
net operating losses, state income tax expense, and an increase in deferred tax
liabilities for goodwill that is deductible for tax purposes but not amortized
for financial reporting purposes. The income tax expense recorded for
the quarter ended December 31, 2008 was due to tax expense associated with the
Company’s UK, German, Australian and US operations. The US income tax
expense was principally due an increase in deferred tax liabilities for goodwill
that is deductible for tax purposes but not amortized for financial reporting
purposes.
13
The
Company recorded income tax expense of $1.3 million and $0.3 million for the six
months ended December 31, 2009 and 2008, respectively. The income tax
expense for the six months ended December 31, 2009 was due to tax expense
associated with the Company’s UK, Australian and US operations. The
US income tax expense was principally due to alternative minimum tax arising
from the utilization of net operating losses, state income tax expense, and an
increase in deferred tax liabilities for goodwill that is deductible for tax
purposes but not amortized for financial reporting purposes. The
income tax expense for the six months ended December 31, 2008 was net of
approximately $0.4 million of non-recurring tax benefits arising from a
reduction in the Company’s unrecognized tax benefits upon the expiration of
certain statutes of limitations, from the enactment of legislation during fiscal
year 2009 that allowed the Company to claim a tax refund for a portion of its
unused research and development credit carryforwards in the US, and from a
decrease in the Company’s German tax rate as a result of a restructuring of the
Company’s German operations. The Company’s net income tax expense
also reflected expense associated with the Company’s German, French, and
Australian operations, as well as income tax expense in the
US.
The
Company currently anticipates that its unrecognized tax benefits will decrease
within the next twelve months by approximately $0.3 million as a result of the
expiration of certain statutes of limitations associated with intercompany
transactions subject to tax in multiple jurisdictions.
Note
9—Goodwill and Other Intangible Assets
The
following tables set forth the information for intangible assets subject to
amortization and for intangible assets not subject to
amortization. Other intangible assets consist of acquired tradenames,
backlog and below market lease arrangements.
As of December
31, 2009
|
||||||||||||||||
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying Value
|
Weighted
Average Remaining Life
|
|||||||||||||
(in
thousands)
|
(in
years)
|
|||||||||||||||
Amortized
intangible assets:
|
||||||||||||||||
Customer
related
|
$ | 59,374 | $ | (34,470 | ) | $ | 24,904 | 7.8 | ||||||||
Core
technology
|
33,040 | (23,525 | ) | 9,515 | 5.5 | |||||||||||
Patent
|
953 | (278 | ) | 675 | 9.5 | |||||||||||
Other
intangible assets
|
2,331 | (409 | ) | 1,922 | 12.1 | |||||||||||
Total
|
$ | 95,698 | $ | (58,682 | ) | $ | 37,016 | |||||||||
Unamortized
intangible assets:
|
||||||||||||||||
Goodwill
|
66,713 | |||||||||||||||
Total
intangible assets
|
$ | 103,729 | ||||||||||||||
As of
June 30, 2009
|
||||||||||||||||
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying Value
|
Weighted
Average Remaining Life
|
|||||||||||||
(in
thousands)
|
(in
years)
|
|||||||||||||||
Amortized
intangible assets:
|
||||||||||||||||
Customer
related
|
$ | 50,194 | $ | (29,753 | ) | $ | 20,441 | 3.0 | ||||||||
Core
technology
|
28,093 | (24,633 | ) | 3,460 | 1.7 | |||||||||||
Patent
|
953 | (243 | ) | 710 | 10.0 | |||||||||||
Other
intangible assets
|
1,045 | (636 | ) | 409 | 1.8 | |||||||||||
Total
|
$ | 80,285 | $ | (55,265 | ) | $ | 25,020 | |||||||||
Unamortized
intangible assets:
|
||||||||||||||||
Goodwill
|
64,569 | |||||||||||||||
Total
intangible assets
|
$ | 89,589 | ||||||||||||||
14
Estimated
amortization expense for fiscal year 2010 and subsequent fiscal years is as
follows:
(in thousands)
|
||||
2010
|
$ | 13,254 | ||
2011
|
10,091 | |||
2012
|
5,188 | |||
2013
|
3,616 | |||
2014
|
1,772 | |||
2015
and thereafter
|
9,762 |
Note
10— Restructuring Costs
During
the fourth quarter of fiscal 2009, the Company reduced its workforce by
approximately 40 full time positions and announced the departure of its Chief
Operating Officer. In connection with these events, the Company incurred
expenses of approximately $3.0 million associated with severance related
benefits, including stock compensation expense. As these events were completed
in fiscal 2009, the Company did not recognize additional expense during the six
months ended December 31, 2009 and does not expect to recognize additional
expense in future periods relating to these actions.
As of
December 31, 2009, the Company’s remaining liability for severance related
benefits was as follows:
(in thousands)
|
||||
Accrued
severance benefits at June 30, 2009
|
$ | 426 | ||
Payments
charged against the accrual
|
(370 | ) | ||
Impact
of changes in foreign currency exchange rates
|
1 | |||
Accrued
severance benefits at December 31, 2009
|
$ | 57 | ||
Note
11 – Subsequent Events
On
January 27, 2010, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission that, once effective, will allow it
to offer and sell up to $100,000,000 of common stock, preferred stock, debt
securities, warrants, depository shares, stock purchase contracts and stock
purchase units. These securities may be offered and sold by the
Company in one or more offerings.
For
purposes of assessing whether there were any subsequent events warranting
disclosure, the Company evaluated events occurring between December 31, 2009 and
February 8, 2010.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Without limiting the foregoing, the words
“may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential” and similar expressions are
intended to identify forward-looking statements. All forward-looking statements
included in this Quarterly Report on Form 10-Q are based on information
available to us up to, and including, the date of this report, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth below under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Item 1A. Risk Factors” and elsewhere in this Form 10-Q. You
should carefully review those factors and also carefully review the risks
outlined in other documents that we file from time to time with the Securities
and Exchange Commission.
Overview
We
provide electronic payment, invoice and document management solutions to
corporations, financial institutions and banks around the world. Our solutions
are used to streamline, automate and manage processes and transactions involving
global payments, invoice receipt and approval, collections, cash management,
risk mitigation, document management,
15
reporting
and document archive. We offer software designed to run on-site at the
customer’s location as well as hosted solutions. Historically, our software has
been sold predominantly on a perpetual license basis. Today, however, a growing
portion of our offerings are being sold on a subscription and transaction
basis.
Our
corporate customers rely on our solutions to automate their payment and accounts
payable processes and to streamline and manage the production and retention of
electronic documents. We offer Legal eXchange®, a
Software as a Service (SaaS) offering that receives, manages and controls legal
invoices and the related spend management for insurance companies and other
large consumers of outside legal services. Our offerings also include software
solutions that banks use to provide web-based payment and reporting capabilities
to their corporate customers.
Our
solutions complement and leverage our customers’ existing information systems,
accounting applications and banking relationships. As a result, our solutions
can be deployed quickly and efficiently. To help our customers receive the
maximum value from our products and meet their own particular needs, we also
provide professional services for installation, training, consulting and product
enhancement.
In
September 2009 we acquired PayMode from Bank of America. PayMode
facilitates the electronic exchange of payments and invoices between
organizations and suppliers and is a SaaS offering. As part of the
acquisition, we also entered into a multi-year agreement with Bank of America to
operate PayMode on its behalf.
For the
first six months of fiscal year 2010, our revenue increased to $76.7 million
from $69.8 million in the same period of fiscal year 2009. This revenue increase
was primarily attributable to revenue increases in our Banking Solutions
segment, our European operations and the revenue contribution from
PayMode. These increases were offset in part by a decrease of $1.3
million due to declining foreign exchange rates primarily associated with the
British Pound Sterling, which depreciated against the US Dollar compared to
the same period in the prior fiscal year.
We had
net income of $1.9 million in the six months ended December 31, 2009 compared to
a net loss of $6.7 million in the same period of fiscal year 2009. The increase
in net income was due largely to improved gross margins and a reduction in
operating expenses. The decreases in our cost of revenue and
operating expense categories were due largely to cost savings related to our
fourth quarter fiscal 2009 headcount reduction and a decrease in foreign
exchange rates of approximately $0.6 million associated with the British Pound
Sterling.
In the
first six months of fiscal 2010, we derived approximately 46% of our revenue
from customers located outside of North America, principally in the UK and
Australia. We expect future revenue growth to be driven by the
revenue contribution from PayMode, increased purchases of our products by new
and existing bank and financial institution customers in both North America and
international markets and increased sales of our payments and transactional
documents products.
While we
continue to grow our business, the overall economic environment has remained
challenging. While we have not experienced any significant decline in our
expected volume of customer orders we are observing that, in some cases, closing
new business is taking somewhat longer and, in some cases, customer buying
decisions are being postponed. Our customers operate in many different
industries, a diversification that we believe helps us in this economic climate.
Additionally, we believe that our recurring and subscription revenue base helps
position us defensively against any short term economic downturn. While we
believe that we continue to compete favorably in all of the markets we serve,
ongoing or worsening economic stresses could impact our business more
significantly in the future.
Critical
Accounting Policies
We
believe that several accounting policies are important to understanding our
historical and future performance. We refer to these policies as “critical”
because these specific areas generally require us to make judgments and
estimates about matters that are uncertain at the time we make the estimate, and
different estimates—which also would have been reasonable—could have been
used.
The
critical accounting policies we identified in our most recent Annual Report on
Form 10-K for the fiscal year ended June 30, 2009 related to stock-based
compensation, revenue recognition, the valuation of goodwill and intangible
assets and the valuation of acquired deferred revenue. It is important that the
discussion of our operating results that follows be read in conjunction with the
critical accounting policies disclosed in our Annual Report on Form 10-K, as
filed with the SEC on September 11, 2009. There have been no changes to our
critical accounting policies during the three months ended December 31,
2009.
16
Recent
Accounting Pronouncements
Revenue
Recognition
In
October 2009, the Financial Accounting Standards Board (FASB) issued
authoritative guidance on two issues related to revenue
recognition.
The first
issue, Revenue Arrangements
with Multiple Deliverables, applies to multiple-deliverable revenue
arrangements and provides for two significant changes to existing
multiple-element revenue recognition guidance. The first change relates to the
determination of when individual deliverables within an arrangement should be
treated as separate units of accounting. Broadly, a deliverable should be
treated as a separate unit of accounting when it has value to the customer on a
standalone basis and when delivery or performance of any undelivered items is
considered to be probable and substantially within the control of the vendor.
The second change relates to the manner in which arrangement consideration
should be allocated to any separately identified deliverables. The issue
requires that the allocation of revenue among deliverables be based on vendor
specific objective evidence or third-party evidence of selling price and, to the
extent that neither of these levels of evidence exist, that the allocation be
based on the vendor’s best estimate of selling price for each
deliverable. Use of the residual method of allocating revenue to
arrangement deliverables is prohibited unless the revenue transaction is
specifically governed by software revenue recognition
literature. Financial statement disclosure requirements have also
been significantly expanded.
The
second issue, Certain Revenue
Arrangements that Include Software Elements, focuses on redefining which
revenue arrangements are within the scope of software revenue recognition
literature and which are not. The issue provides guidance on
determining whether tangible products containing non-software and software
elements are governed by software revenue recognition literature and
significantly narrows the definition of what constitutes a “software”
transaction. In particular, non-software components of products that
include software, software products bundled with tangible products where the
non-software and software components function together to deliver the product’s
essential functionality, and undelivered elements related to non-software
components are, as a result of this issue, outside the scope of software revenue
recognition rules. The issue also provides guidance on allocating revenue
between non software and software elements.
Each of
these issues is effective for fiscal years beginning on or after June 15, 2010.
The issues can be implemented prospectively to all revenue arrangements entered
or materially modified after the date of adoption, or retrospectively to all
revenue arrangements for all financial statement periods presented. Early
adoption is permitted. Both issues must be adopted in the same period and under
the same transition method. We expect to adopt these issues prospectively as of
July 1, 2010 and are currently evaluating the impact of the pronouncements on
our financial statements.
Three
Months Ended December 31, 2009 Compared to the Three Months Ended December 31,
2008
Revenues by
segment
Operating
segments are components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance.
Our
operating segments are organized principally by the type of product or service
offered and by geography. Similar operating segments have been
aggregated into three reportable segments: Payments and Transactional Documents,
Banking Solutions and Outsourced Solutions. The following table
represents our revenues by segment:
Three Months
Ended December 31,
|
Increase
(Decrease)
Between Periods
2009 Compared to 2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of total
Revenues
|
(in thousands)
|
As % of total
Revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Payments
and Transactional Documents
|
$ | 23,809 | 59.4 | $ | 22,955 | 66.9 | $ | 854 | 3.7 | |||||||||||||||
Banking
Solutions
|
7,595 | 18.9 | 5,433 | 15.8 | 2,162 | 39.8 | ||||||||||||||||||
Outsourced
Solutions
|
8,718 | 21.7 | 5,946 | 17.3 | 2,772 | 46.6 | ||||||||||||||||||
$ | 40,122 | 100.0 | $ | 34,334 | 100.0 | $ | 5,788 | 16.9 | ||||||||||||||||
17
Payments and Transactional
Documents. The revenue increase for the three months ended December 31,
2009 was primarily attributable to an increase in maintenance revenues from our
US and European payments and document automation products and an increase of
$0.3 million as a result of an increase in foreign exchange rates associated
with the British Pound Sterling and European Euro. We expect
revenue for the Payments and Transactional Documents segment to increase during
the remainder of fiscal 2010 as a result of increased sales of our payment and
document automation solutions.
Banking Solutions. Revenues
from our Banking Solutions segment increased as compared to the same period in
the prior fiscal year due to an increase in professional services revenue
associated with large ongoing projects. We expect revenues for the Banking
Solutions segment to increase during the remainder of the fiscal year as a
result of the contribution of revenue from ongoing projects and from additional
purchases by new and existing bank and financial institution customers in both
North America and international markets.
Outsourced Solutions.
Revenues from our Outsourced Solutions segment increased as compared to
the same period in the prior fiscal year due primarily to the revenue
contribution from PayMode. We expect revenue for the Outsourced Solutions
segment to increase during the remainder of the fiscal year as a result of the
revenue contribution from PayMode.
Revenues by
category
Three Months
Ended December 31,
|
Increase
(Decrease)
Between
Periods
2009 Compared to 2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of total
Revenues
|
(in thousands)
|
As % of total
Revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Software
licenses
|
$ | 3,787 | 9.4 | $ | 3,597 | 10.5 | $ | 190 | 5.3 | |||||||||||||||
Subscriptions
and transactions
|
10,469 | 26.1 | 7,744 | 22.5 | 2,725 | 35.2 | ||||||||||||||||||
Service
and maintenance
|
23,775 | 59.3 | 20,527 | 59.8 | 3,248 | 15.8 | ||||||||||||||||||
Equipment
and supplies
|
2,091 | 5.2 | 2,466 | 7.2 | (375 | ) | (15.2 | ) | ||||||||||||||||
Total
revenues
|
$ | 40,122 | 100.0 | $ | 34,334 | 100.0 | $ | 5,788 | 16.9 | |||||||||||||||
Software Licenses. The
increase in software license revenues was due to an increase in revenue from
certain of our US and European payment products, offset in part by decreases in
software license revenue from certain of our US document process automation
products. We expect software license revenues to increase during the
remainder of fiscal year 2010, principally as a result of increased software
license revenue from our domestic and international Payments and Transactional
Documents products and from software license revenues within our Banking
Solutions segment.
Subscriptions and Transactions.
The increase in subscription and transaction revenues was due principally
to the revenue contribution from PayMode. We expect subscription and
transaction revenues to increase during the remainder of the fiscal year as a
result of the revenue contribution from PayMode.
Service and Maintenance. The
increase in service and maintenance revenues was primarily the result of an
increase in professional services revenues associated with several large banking
projects, increased professional service revenues in Europe, increases in
software maintenance revenues in the US and Europe and an increase of $0.2
million as a result of an increase in foreign exchange rates associated with the
British Pound Sterling and European Euro. We expect that service
and maintenance revenues will increase during the remainder of the fiscal year
as a result of new and existing projects within our Banking Solutions segment
and as a result of additional revenues from our domestic and international
payments and documents products.
Equipment and Supplies. The
decrease in equipment and supplies revenues was principally due to a decrease in
revenues from our US and European paper supplies and printing equipment
products. We expect that equipment and supplies revenues will remain relatively
consistent during the remainder of 2010.
Cost of revenues by
category
18
Three Months
Ended December 31,
|
Increase
(Decrease)
Between
Periods
2009 Compared to 2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of total
Revenues
|
(in thousands)
|
As % of total
Revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||||||
Software
licenses
|
$ | 321 | 0.8 | $ | 207 | 0.6 | $ | 114 | 55.1 | |||||||||||||||
Subscriptions
and transactions
|
5,160 | 12.9 | 3,792 | 11.1 | 1,368 | 36.1 | ||||||||||||||||||
Service
and maintenance
|
10,405 | 25.9 | 9,513 | 27.7 | 892 | 9.4 | ||||||||||||||||||
Equipment
and supplies
|
1,590 | 4.0 | 1,824 | 5.3 | (234 | ) | (12.8 | ) | ||||||||||||||||
Total
cost of revenues
|
$ | 17,476 | 43.6 | $ | 15,336 | 44.7 | $ | 2,140 | 14.0 | |||||||||||||||
Gross
profit
|
$ | 22,646 | 56.4 | $ | 18,998 | 55.3 | $ | 3,648 | 19.2 |
Software Licenses. Software
license costs consist of expenses incurred by us to manufacture, package and
distribute our software products and related documentation and costs of
licensing third party software that is incorporated into or sold with certain of
our products. Software license costs increased slightly to 8% of software
license revenues in the three months ended December 31, 2009 as compared to 6%
for the three months ended December 31, 2008. The increase was related to higher
costs of third party software that we license alongside our solutions during the
three months ended December 31, 2009. We expect that software license
costs will remain relatively consistent, as a percentage of software license
revenues, during the remainder of the fiscal year.
Subscriptions and Transactions.
Subscriptions and transaction costs include salaries and other related
costs for our professional services teams as well as costs related to our
hosting infrastructure such as depreciation and facilities related expenses.
Subscriptions and transactions costs remained consistent at 49% of subscription
and transaction revenues in the three months ended December 31, 2009 and
2008. The increase in subscription and transaction costs in dollar
terms was due principally to in the costs associated with our PayMode product
offering. We expect that subscription and transaction costs will increase as a
percentage of subscription and transaction revenue during the remainder of the
fiscal year due to continued investment in PayMode.
Service and Maintenance.
Service and maintenance costs include salaries and other related costs
for our customer service, maintenance and help desk support staffs, as well as
third party contractor expenses used to complement our professional services
team. Service and maintenance costs decreased as a percentage of service and
maintenance revenues to 44% in the three months ended December 31, 2009 as
compared to 46% in the three months ended December 31, 2008. The decrease in
service and maintenance costs as a percentage of service and maintenance
revenues was due to improved gross margins for professional services in our
Banking Solutions segment and due to the impact of cost reduction measures
implemented in our prior fiscal year. We expect that service and
maintenance costs will remain relatively consistent, as a percentage of service
and maintenance revenues, during the remainder of the fiscal year.
Equipment and Supplies.
Equipment and supplies costs include the costs associated with equipment and
supplies that we resell, as well as freight, shipping and postage costs
associated with the delivery of our products. Equipment and supplies costs
remained relatively consistent at 76% of equipment and supplies revenues in the
three months ended December 31, 2009 as compared to 74% for the three months
ended December 31, 2008. We expect that equipment and supplies costs
will remain relatively consistent as a percentage of equipment and supplies
revenues for the remainder of the fiscal year.
Operating
Expenses
Three Months
Ended December 31,
|
Increase (Decrease)
Between Periods
2009
Compared
to 2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of total
revenues
|
(in thousands)
|
As % of total
revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Sales
and marketing
|
$ | 8,825 | 22.0 | $ | 8,150 | 23.7 | $ | 675 | 8.3 | |||||||||||||||
Product
development and engineering
|
4,753 | 11.8 | 5,238 | 15.3 | (485 | ) | (9.3 | ) | ||||||||||||||||
General
and administrative
|
4,248 | 10.6 | 4,619 | 13.5 | (371 | ) | (8.0 | ) | ||||||||||||||||
Amortization
of intangible assets
|
3,361 | 8.4 | 3,948 | 11.5 | (587 | ) | (14.9 | ) | ||||||||||||||||
Total
operating expenses
|
$ | 21,187 | 52.8 | $ | 21,955 | 64.0 | $ | (768 | ) | (3.5 | ) | |||||||||||||
19
Sales and Marketing. Sales
and marketing expenses consist primarily of salaries and other related costs for
sales and marketing personnel, sales commissions, travel, public relations and
marketing materials and trade show participation. Sales and marketing expenses
increased in the three months ended December 31, 2009 as compared to the three
months ended December 31, 2008 as a result of an increase in headcount related
costs due to our acquisition of PayMode, an increase of $0.1 million as a result
of an increase in foreign exchange rates associated with the British
Pound Sterling and European Euro, and an increase in advertising and
product promotion costs. We expect that sales and marketing expenses
will increase over the remainder of the fiscal year as we continue to focus on
our marketing initiatives to support our new products, including
PayMode.
Product Development and Engineering.
Product development and engineering expenses consist primarily of
personnel costs to support product development which consists of enhancements
and revisions to our products based on customer feedback and general marketplace
demands, as well as development of our newer accounts payable automation
products. The decrease in product development and engineering expenses in the
three months ended December 31, 2009 as compared to the three months ended
December 31, 2008 was primarily attributable to a decrease in the use of
contract employees and an increase in the use of development resources in
revenue generating roles during the period, the cost of which is recorded as
cost of sales. These decreases were offset in part by increases
related to our PayMode development and enhancement efforts. We expect
that product development and engineering expenses will increase during the
remainder of the fiscal year as we devote more resources to the enhancement of
the PayMode product.
General and Administrative.
General and administrative expenses consist primarily of salaries and
other related costs for operations and finance employees and legal and
accounting services. General and administrative expenses decreased in the three
months ended December 31, 2009 as compared to the three months ended December
31, 2008 due principally to cost reduction initiatives implemented in our prior
fiscal year, including a reduction in compensation expense as a result of the
departure of our Chief Operating Officer in fiscal 2009. We expect
that general and administrative expenses will increase slightly during the
remainder of the fiscal year.
Amortization of Intangible Assets.
We amortize our intangible assets in proportion to the estimated rate at
which the asset provides economic benefit to us. Accordingly, amortization
expense rates are often higher in the earlier periods of an asset’s estimated
life. The decrease in amortization expense in the quarter ended December 31,
2009 as compared to the quarter ended December 31, 2008 occurred as expense from
intangible assets arising in prior acquisitions decreased as those assets aged,
offset in part by an increase in amortization expense from intangible assets
arising through our acquisition of PayMode. We expect that total amortization
expense for fiscal 2010 will approximate $13.3 million.
Other
Income, Net
Three Months Ended
December
31,
|
Increase (Decrease)
Between Periods
|
|||||||||||||||
2009
|
2008
|
2009 Compared
to
2008
|
||||||||||||||
(in
thousands)
|
%
|
|||||||||||||||
Interest
income
|
$ | 50 | $ | 189 | $ | (139 | ) | (73.5 | ) | |||||||
Interest
expense
|
(17 | ) | (3 | ) | (14 | ) | (466.7 | ) | ||||||||
Other
(expense) income, net
|
(126 | ) | 429 | (555 | ) | (129.4 | ) | |||||||||
Other
(expense) income, net
|
$ | (93 | ) | $ | 615 | $ | (708 | ) | (115.1 | ) | ||||||
Other (Expense) Income,
Net. In the three months ended December 31, 2009 as compared
to the three months ended December 31, 2008, interest income decreased as a
result of declining marketplace yields associated with our cash and short-term
investment accounts. Interest expense remained insignificant during
the three months ended December 31, 2009 and 2008. Other (expense)
income, net decreased as a result of realized foreign exchange losses. We expect
that the individual components of other income and expense will continue to
represent minor components of our overall operations during the remainder of
fiscal 2010.
Provision for Income Taxes.
We recorded income tax expense of $0.7 million and $0.5 million for the
three months ended December 31, 2009 and 2008, respectively. The
income tax expense recorded for the quarter ended December 31, 2009 was due to
tax expense associated with our UK, Australian and US operations. The
US income tax expense was principally due to alternative minimum tax arising
from the utilization of net operating losses, state income tax expense and an
increase in deferred tax liabilities for goodwill that is deductible for tax
purposes but not amortized for financial reporting purposes. The
income tax expense recorded for the quarter ended December 31, 2008 was due to
tax expense associated with our UK, German and Australian operations and due to
income tax in the US. The US income tax expense was principally
20
due an
increase in deferred tax liabilities for goodwill that is deductible for tax
purposes but not amortized for financial reporting
purposes.
Six
Months Ended December 31, 2009 Compared to the Six Months Ended
December 31, 2008
Revenues
by segment
We have
aggregated similar operating segments into three reportable segments: Payments
and Transactional Documents, Banking Solutions and Outsourced
Solutions. The following table represents our revenues by
segment:
Six Months
Ended December 31,
|
Increase
(Decrease)
Between Periods 2009
Compared to
2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of
total
Revenues
|
(in thousands)
|
As % of
total
Revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Payments
and Transactional Documents
|
$ | 46,576 | 60.7 | $ | 46,331 | 66.3 | $ | 245 | 0.5 | |||||||||||||||
Banking
Solutions
|
14,703 | 19.2 | 11,106 | 15.9 | 3,597 | 32.4 | ||||||||||||||||||
Outsourced
Solutions
|
15,399 | 20.1 | 12,403 | 17.8 | 2,996 | 24.2 | ||||||||||||||||||
$ | 76,678 | 100.0 | $ | 69,840 | 100.0 | $ | 6,838 | 9.8 | ||||||||||||||||
Payments and Transactional
Documents. The slight revenue increase for the six months ended December
31, 2009 was primarily attributable to increases in maintenance and services
revenue from certain of our European payment and document automation products,
offset in part by a decrease in equipment and supplies, software license and
services revenues from certain of our US document automation products and a
decrease of approximately $1.1 million as a result of declining foreign exchange
rates associated with the British Pound Sterling.
Banking Solutions. Revenues
from our Banking Solutions segment increased as compared to the same period in
the prior fiscal year due to an increase in professional services revenue
associated with several large ongoing banking projects.
Outsourced Solutions.
Revenues from our Outsourced Solutions segment increased as compared to
the same period in the prior fiscal year due to the revenue contribution from
PayMode, offset in part by a decrease in foreign currency exchange rates
associated with the British Pound Sterling of $0.2 million.
Revenues
by category
Six Months
Ended December 31,
|
Increase
(Decrease)
Between
Periods 2009
Compared to
2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of
total
Revenues
|
(in thousands)
|
As % of
total
Revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Software
licenses
|
$ | 6,750 | 8.8 | $ | 7,203 | 10.3 | $ | (453 | ) | (6.3 | ) | |||||||||||||
Subscriptions
and transactions
|
18,750 | 24.4 | 15,973 | 22.9 | 2,777 | 17.4 | ||||||||||||||||||
Service
and maintenance
|
46,910 | 61.2 | 41,676 | 59.7 | 5,234 | 12.6 | ||||||||||||||||||
Equipment
and supplies
|
4,268 | 5.6 | 4,988 | 7.1 | (720 | ) | (14.4 | ) | ||||||||||||||||
Total
revenues
|
$ | 76,678 | 100.0 | $ | 69,840 | 100.0 | $ | 6,838 | 9.8 | |||||||||||||||
Software Licenses. The
decrease in software license revenues was due to a decrease in revenue from
certain of our US document automation products, a decrease in software license
revenues within our Banking Solutions segment, and a decrease in foreign
currency exchange rates associated with the British Pound Sterling of
approximately $0.2 million. These decreases were offset in part by
increases in software license revenue from our US and European payments and
outsourced solutions products.
21
Subscriptions and Transactions.
The increase in subscription and transaction revenues was due principally
to the revenue contribution from PayMode, offset in part by a decrease of $0.3
million as a result of declining foreign exchange rates associated with the
British Pound Sterling.
Service and Maintenance. The
increase in service and maintenance revenues was primarily the result of an
increase in professional services revenues associated with several large banking
projects, increased professional service revenues in Europe and increases in
software maintenance revenues in the US and Europe. These increases were offset
in part by lower document automation services revenue in the US and a decrease
of approximately $0.7 million as a result of declining foreign exchange rates
associated with the British Pound Sterling.
Equipment and Supplies. The
decrease in equipment and supplies revenues was principally due to a decrease in
revenues from our US and European paper supplies and printing equipment as well
as a decrease of approximately $0.2 million as a result of decreasing foreign
exchange rates associated with the British Pound Sterling.
Cost
of revenues by category
Six Months
Ended December 31,
|
Increase
(Decrease)
Between
Periods 2009
Compared to
2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of
total
Revenues
|
(in thousands)
|
As % of
total
Revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||||||
Software
licenses
|
$ | 540 | 0.7 | $ | 407 | 0.6 | $ | 133 | 32.7 | |||||||||||||||
Subscriptions
and transactions
|
9,038 | 11.8 | 7,991 | 11.4 | 1,047 | 13.1 | ||||||||||||||||||
Service
and maintenance
|
20,125 | 26.2 | 19,303 | 27.6 | 822 | 4.3 | ||||||||||||||||||
Equipment
and supplies
|
3,211 | 4.2 | 3,679 | 5.3 | (468 | ) | (12.7 | ) | ||||||||||||||||
Total
cost of revenues
|
$ | 32,914 | 42.9 | $ | 31,380 | 44.9 | $ | 1,534 | 4.9 | |||||||||||||||
Gross
profit
|
$ | 43,764 | 57.1 | $ | 38,460 | 55.1 | $ | 5,304 | 13.8 |
Software Licenses. Software
license costs increased slightly to 8% of software license revenues in the six
months ended December 31, 2009 as compared to 6% for the six months ended
December 31, 2008. The increase was due to costs associated with
third-party software that we sell alongside our solutions.
Subscriptions and Transactions.
Subscriptions and transactions remained relatively consistent at 48% of
subscription and transaction revenues in the six months ended December 31, 2009
as compared to 50% in the six months ended December 31, 2008. The
improvement in gross margin was due principally to cost reductions in our UK
invoice receipt solution. The increase in subscription and
transaction costs in dollar terms was due principally to the costs associated
with our Paymode product offering.
Service and Maintenance.
Service and maintenance costs decreased as a percentage of service and
maintenance revenues to 43% in the six months ended December 31, 2009 as
compared to 46% in the six months ended December 31, 2008. The decrease in
service and maintenance costs as a percentage of service and maintenance
revenues was as a result of improved professional services margins in our
Banking Solutions segment and due to the impact of cost reduction measures
implemented in our prior fiscal year.
Equipment and Supplies.
Equipment and supplies costs remained relatively consistent at 75% of equipment
and supplies revenues in the six months ended December 31, 2009 as compared to
74% of equipment and supplies revenues in the six months ended December 31,
2008.
Operating
Expenses
Six Months
Ended December 31,
|
Increase
(Decrease)
Between
Periods 2009
Compared to
2008
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(in thousands)
|
As % of
total
revenues
|
(in thousands)
|
As % of
total
revenues
|
(in thousands)
|
%
|
|||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Sales
and marketing
|
$ | 16,708 | 21.8 | $ | 16,788 | 24.0 | $ | (80 | ) | (0.5 | ) | |||||||||||||
Product
development and engineering
|
8,843 | 11.6 | 10,660 | 15.3 | (1,817 | ) | (17.1 | ) | ||||||||||||||||
General
and administrative
|
8,538 | 11.1 | 9,792 | 14.0 | (1,254 | ) | (12.8 | ) | ||||||||||||||||
Amortization
of intangible assets
|
6,667 | 8.7 | 8,384 | 12.0 | (1,717 | ) | (20.5 | ) | ||||||||||||||||
Total
operating expenses
|
$ | 40,756 | 53.2 | $ | 45,624 | 65.3 | $ | (4,868 | ) | (10.7 | ) | |||||||||||||
22
Sales and Marketing. Sales
and marketing expenses decreased slightly in the six months ended December 31,
2009 as compared to the six months ended December 31, 2008 due to a decrease of
approximately $0.3 million as a result of declining foreign exchange rates
associated with the British Pound Sterling, a reduction in employee
recruiting costs and a reduction in trade show costs. These decreases were
offset in part by an increase in headcount related costs associated with
PayMode.
Product Development and Engineering.
The decrease in product development and engineering expenses was
primarily attributable to a reduction in the use of contract employees and a
reduction in headcount related costs, offset in part by increased costs
associated with our ongoing product enhancements related to
PayMode.
General and Administrative.
The decrease in general and administrative expenses was principally
attributable to a decrease in the use of contract employees and travel costs as
a result of overall cost reduction efforts, a decrease in compensation expense
as a result of the departure of our Chief Operating Officer in our prior fiscal
year and a decrease in bad debt expense.
Amortization of Intangible Assets.
We amortize our intangible assets in proportion to the estimated rate at
which the asset provides economic benefit to us. Accordingly, amortization
expense rates are often higher in the earlier periods of an asset’s estimated
life. The decrease in amortization expense in the six months ended December 31,
2009 as compared to the six months ended December 31, 2008 occurred as expense
from intangible assets arising in prior acquisitions decreased as those assets
aged, offset in part by an increase in amortization expense from intangible
assets arising through our acquisition of PayMode. We expect that total
amortization expense for fiscal 2010 will approximate $13.3
million.
Other
Income, Net
Six Months Ended
December
31,
|
Increase (Decrease)
Between Periods
|
|||||||||||||||
2009
|
2008
|
2009 Compared
to
2008
|
||||||||||||||
(in
thousands)
|
%
|
|||||||||||||||
Interest
income
|
$ | 109 | $ | 454 | $ | (345 | ) | (76.0 | ) | |||||||
Interest
expense
|
(25 | ) | (27 | ) | 2 | 7.4 | ||||||||||
Other
income, net
|
44 | 336 | (292 | ) | (86.9 | ) | ||||||||||
Other
income, net
|
$ | 128 | $ | 763 | $ | (635 | ) | (83.2 | ) | |||||||
Other Income,
Net. For the six months ended December 31, 2009 as compared to
the six months ended December 31, 2008, interest income decreased as a result of
declining marketplace yields associated with our cash and short-term investment
accounts. Other income, net decreased as a result of declining
foreign exchange gains associated with the British Pound Sterling and the
European Euro.
Provision for Income
Taxes. We recorded income tax expense of $1.3 million and $0.3
million for the six months ended December 31, 2009 and 2008,
respectively. The income tax expense for the six months ended
December 31, 2009 was due to tax expense associated with our UK, Australian and
US operations. The US income tax expense was principally due to
alternative minimum tax arising from the utilization of net operating losses,
state income tax expense, and an increase in deferred tax liabilities for
goodwill that is deductible for tax purposes but not amortized for financial
reporting purposes. The income tax expense for the six months ended
December 31, 2008 was net of approximately $0.4 million of one-time,
non-recurring tax benefits arising from a reduction in our unrecognized tax
benefits upon the expiration of certain statutes of limitations, from the
enactment of legislation during fiscal year 2009 that allowed us to claim a tax
refund for a portion of our
23
unused
research and development credit carryforwards in the US, and from a decrease in
our German tax rate as a result of a restructuring of our German
operations. Our net income tax expense also reflected expense
associated with our German, French, and Australian operations, as well as income
tax expense in the US.
Liquidity
and Capital Resources
One of
our goals is to maintain and improve our capital structure. The key metrics we
focus on in assessing the strength of our liquidity are summarized in the table
below:
Six
Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Cash
provided by operating activities
|
$
|
14,631
|
$
|
10,434
|
December
31,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
(in
thousands)
|
||||||||
Cash,
cash equivalents and marketable securities
|
$
|
55,000
|
$
|
50,303
|
||||
Working
capital
|
39,608
|
30,678
|
We have
financed our operations primarily from cash provided by operating activities and
the sale of our common stock. We have generated positive operating cash flows in
each of our last eight completed fiscal years. We believe that the cash
generated from our operations and the cash, cash equivalents and marketable
securities we have on hand will be sufficient to meet our working capital and
capital expenditure requirements for the foreseeable future. We also may receive
additional investments from, and make investments in, customers or other
companies. However, any such transactions would require the approval of our
board of directors, and in some cases, stockholders and potentially bank or
regulatory approval.
During
the fiscal year, we completed the acquisition of PayMode for $17.0 million in
cash, plus the issuance of warrants for 1,000,000 shares of our common
stock. The warrants have an exercise price of $8.50 per share and a
10 year contractual life. We also may undertake additional business
or asset acquisitions or divestitures.
A portion
of our cash balances are held by our foreign subsidiaries and are denominated in
currencies other than US Dollars. Accordingly, declines in the
foreign currency exchange rates of the British Pound, European Euro, and
Australian Dollar to the US Dollar could have a negative effect on our overall
cash balances upon translation to US dollars. However, we continue to
believe that our existing cash balances, even in light of the foreign currency
volatility we have recently experienced, are adequate to meet our liquidity and
working capital requirements for the foreseeable future.
On
January 27, 2010, we filed a universal shelf registration statement with the
Securities and Exchange Commission that, once effective, will allow us to offer
and sell up to $100,000,000 of common stock, preferred stock, debt securities,
warrants, depository shares, stock purchase contracts and stock purchase
units. These securities may be offered and sold by us in one or more
offerings.
Operating
Activities
Six Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Net
income (loss)
|
$ | 1,876 | $ | (6,718) | ||||
Non-cash
adjustments
|
13,076 | 14,411 | ||||||
Changes
in working capital
|
(321 | ) | 2,741 | |||||
Net
cash provided by operating activities
|
$ | 14,631 | $ | 10,434 | ||||
Net cash
provided by operating activities for the six months ended December 31, 2009 was
primarily due to our net income, adjusted by favorable non-cash adjustments and
an increase in deferred revenue. Non-cash adjustments are principally
transactions that result in the recognition of financial statement expense but
not a corresponding cash disbursement, such as stock compensation expense,
amortization of intangible assets and depreciation of property and
equipment. Net cash provided by operating activities for the six
months ended December 31, 2008 was due to our net loss,
24
affected
by favorable non-cash adjustments and an increase in deferred revenue, offset by
decreases in our accounts payable and accrued expenses and an increase in
accounts receivable.
Investing
Activities
Six
Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Acquisition
of business
|
$ | (17,000 | ) | $ | --- | |||
Purchases
of held-to-maturity securities
|
(50 | ) | (53 | ) | ||||
Proceeds
from sales of held-to-maturity securities
|
50 | 53 | ||||||
Purchases
of property and equipment
|
(2,528 | ) | (2,060 | ) | ||||
Net
cash used in investing activities
|
$ | (19,528 | ) | $ | (2,060 | ) | ||
In the
six months ended December 31, 2009, cash was used to fund the acquisition of
PayMode and, to a lesser extent, to acquire property and
equipment. In the six months ended December 31, 2008, cash was used
to acquire property and equipment.
Financing
Activities
Six Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Proceeds
from employee stock purchase plan and exercise of stock
options
|
$ | 9,560 | $ | 961 | ||||
Repurchase
of common stock
|
(23 | ) | (2,603 | ) | ||||
Excess
tax benefits associated with stock compensation
|
130 | 10 | ||||||
Payment
of bank financing fees
|
(13 | ) | (20 | ) | ||||
Capital
lease payments
|
(56 | ) | (65 | ) | ||||
Net
cash provided by (used in) financing activities
|
$ | 9,598 | $ | (1,717 | ) | |||
Net cash
provided by financing activities for the six months ended December 31, 2009 was
primarily the result of proceeds received from the exercise of stock options and
the purchase of our stock by participants in our employee stock purchase
plan. Net cash used in financing activities for the six months ended
December 31, 2008 was primarily the result of repurchases of our common stock,
offset in part by proceeds received from the exercise of stock options and the
purchase of our stock by participants in our employee stock purchase
plan.
Off-Balance
Sheet Arrangements
During
the six months ended December 31, 2009, we did not engage in material
off-balance sheet activities, including the use of structured finance, special
purpose or variable interest entities, material trading activities in
non-exchange traded commodity contracts or transactions with persons or entities
that benefit from their non-independent relationship with us.
Contractual
Obligations
Following
is a summary of future payments that we are required to make under existing
contractual obligations as of December 31, 2009:
Payments Due
by Period *
|
||||||||||||||||||||
Total
|
Less Than 1
Year
|
1-3 Years
|
4-5 Years
|
More Than 5
Years
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Operating
lease obligations
|
$ | 14,528 | $ | 1,940 | $ | 8,926 | $ | 2,576 | $ | 1,086 | ||||||||||
Capital
lease obligations
|
190 | 59 | 131 | ---- | ---- | |||||||||||||||
Other
contractual obligations
|
1,056 | 256 | 800 | ---- | ---- | |||||||||||||||
Total
|
$ | 15,774 | $ | 2,255 | $ | 9,857 | $ | 2,576 | $ | 1,086 | ||||||||||
*Payment due dates are calculated from
our most recent fiscal year end of June 30, 2009.
25
Purchase
orders are not included in the table above. Our purchase orders represent
authorizations to purchase rather than binding agreements. The contractual
obligation amounts in the table above are associated with agreements that are
enforceable and legally binding and that specify all significant terms,
including: fixed or minimum services to be used; fixed, minimum or variable
price provisions; and the approximate timing of the transaction. Obligations
under contract that we can cancel without a significant penalty are not included
in the table above. Also excluded from the table is our
estimate of unrecognized tax benefits as of December 31, 2009 in the amount of
$1.0 million. These amounts have been excluded because as of December
31, 2009 we are unable to estimate the timing of future cash outflows, if any,
associated with these liabilities as we do not currently anticipate settling any
of these tax positions with cash payment in the foreseeable future.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
We are
exposed to a variety of risks, including foreign currency exchange rate
fluctuations and changes in the market value of our investments in marketable
securities primarily due to changes in interest rates. We have not entered into
any foreign currency hedging transactions or other instruments to minimize our
exposure to foreign currency exchange rate fluctuations nor do we presently plan
to in the future. Also, we have not entered into any interest rate swap
agreements, or other instruments to minimize our exposure to interest rate
fluctuations. There has been no material change to our exposure to market risk
from that which was disclosed in our Annual Report on Form 10-K as filed with
the SEC on September 11, 2009.
Item 4.
Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2009. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2009, our chief executive officer and
chief financial officer concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1.
|
Legal
Proceedings
|
On August
25, 2009, the plaintiffs in the initial public offering securities class action
litigation against Bottomline and our subsidiary Optio Software, which is
described in our Annual Report on Form 10-K for the fiscal year ended June 30,
2009, or our Annual Report, filed a motion for final approval of the proposed
settlement, approval of the plan of distribution of the settlement fund, and
certification of the settlement classes. A settlement fairness hearing was held
on September 10, 2009. On October 5, 2009, the Court issued an opinion granting
plaintiffs’ motion for final approval of the settlement, approval of the plan of
distribution of the settlement fund, and certification of the settlement
classes. An order and final judgment was entered on November 25,
2009. Various notices of appeal of the Court’s order have been
filed. For additional information regarding this litigation, please
refer to our Annual Report.
26
Item 1A.
|
Risk
Factors
|
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties described below before making an investment
decision involving our common stock. The risks and uncertainties described below
are not the only ones facing our company. Additional risks and uncertainties may
also impair our business operations.
If
any of the following risks actually occur, our business, financial condition or
results of operations would likely suffer. In that case, the trading price of
our common stock could fall, and you may lose all or part of the money you paid
to buy our common stock.
The
risk factors below related to catastrophic events, security breaches and the
concentration of revenue from subscription and transaction based arrangements
represent material additions to our risk factors, and should be considered in
addition to the other risk factors that follow, which do not reflect material
changes from the risk factors disclosed in Part I, Item 1A. “Risk
Factors” in our Annual Report on Form 10-K for the year ended June 30,
2009.
Ongoing
financial market volatility and adverse changes in the domestic and global
economic environment could have a significant adverse impact on our business,
financial condition and operating results
Our
business and operating results could be significantly impacted by general
economic conditions. Since Fall 2008, the US and global economies have
experienced an unprecedented series of events due to the effects of the credit
market crisis, slowing global economic activity, a decrease in consumer and
business confidence and severe liquidity concerns. A prolonged economic downturn
could result in a variety of risks to our business, including:
|
•
|
increased
volatility in our stock price;
|
|
•
|
increased
volatility in foreign currency exchange
rates;
|
|
•
|
delays
in, or curtailment of, purchasing decisions by our customers or potential
customers either as a result of continuing economic uncertainty or anxiety
or as a result of their inability to access the liquidity necessary to
engage in purchasing initiatives;
|
|
•
|
increased
credit risk associated with our customers or potential customers,
particularly those that may operate in industries most affected by the
economic downturn, such as financial services;
and
|
|
•
|
impairment
of our goodwill or other assets.
|
During
the six months ended December 31, 2009, as compared to the six months ended
December 31, 2008, we experienced a decline in the foreign currency exchange
rates associated with the British Pound Sterling which negatively impacted
our overall revenue growth. Additionally, during fiscal 2009 we experienced a
higher than anticipated level of volatility in our common stock price which we
believe was a result of the general financial market turmoil rather than the
result of anything specific to our business. We have observed that, in some
cases, closing new business is taking somewhat longer and, in some cases,
customer buying decisions are being postponed. To the extent that the current
economic downturn worsens or persists, or any of the above risks occur, our
business and operating results could be significantly and adversely
affected.
Our
common stock has experienced and may continue to undergo extreme market price
and volume fluctuations
The
NASDAQ Global Market often experiences extreme price and volume fluctuations.
Broad market fluctuations of this type may adversely affect the market price of
our common stock. The stock prices for many companies in the technology sector
have experienced wide fluctuations that often have been unrelated to their
operating performance. The market price of our common stock has experienced and
may continue to undergo extreme fluctuations due to a variety of factors,
including:
|
•
|
general
and industry-specific business, economic and market
conditions;
|
|
•
|
changes
in or our failure to meet analysts’ or investors’ estimates or
expectations;
|
|
•
|
actual
or anticipated fluctuations in operating results, including those arising
as a result of any impairment of goodwill or other intangible assets
related to past or future
acquisitions;
|
|
•
|
public
announcements concerning us, including announcements of litigation, our
competitors or our industry;
|
|
•
|
introductions
of new products or services or announcements of significant contracts by
us or our competitors;
|
|
•
|
acquisitions,
divestitures, strategic partnerships, joint ventures, or capital
commitments by us or our
competitors;
|
|
•
|
adverse
developments in patent or other proprietary rights;
and
|
|
•
|
announcements
of technological innovations by our
competitors.
|
27
Our
business and operating results are subject to fluctuations in foreign currency
exchange rates
We
conduct a substantial portion of our operations outside of the US, principally
in Europe and Australia. In the six months ended December 31, 2009,
approximately 46% of our revenues and 33% of our operating expenses,
respectively, were attributable to customers or operations located outside of
North America. During fiscal 2009, the foreign currency exchange rates of the
British Pound, European Euro and Australian Dollar to the US Dollar declined
significantly, and we anticipate that foreign currency exchange rates may
continue to fluctuate in the near term. As we experienced in fiscal 2009,
continued appreciation of the US Dollar against these foreign currencies will
have the impact of reducing both our revenues and operating
expenses.
Our
future financial results will be impacted by our success in selling new products
in a subscription and transaction based revenue model
A
substantial portion of our revenues and profitability were historically
generated from perpetual software license revenues. We are offering a growing
number of our products under a subscription and transaction based revenue model,
which we believe has certain advantages over a perpetual license model,
including better predictability of revenue. PayMode, which we
acquired in September 2009, will be offered for sale on a subscription and
transaction basis.
A
subscription and transaction based revenue model typically results in no
up-front revenue. Additionally, there can be no assurance that our customers, or
the markets in which we compete, will respond favorably to the approach we have
taken with our newer offerings. To the extent that our subscription and
transaction based offerings do not receive general marketplace acceptance, our
financial results could be materially and adversely affected.
An
increasing number of large and more complex customer contracts, or contracts
that involve the delivery of services over contractually committed periods,
generally delay the timing of our revenue recognition and, in the short-term,
may adversely affect our operating results, financial condition and the market
price of our stock
Due to an
increasing number of large and more complex customer contracts, particularly in
our Banking Solutions segment, we have experienced, and will likely continue to
experience, delays in the timing of our revenue recognition. These arrangements
generally require significant implementation work, product customization and
modification and user acceptance and systems integration testing, resulting in
the recognition of revenue over the period of project completion which normally
spans several quarters. Delays in revenue recognition on these contracts,
including delays that result from customer decisions to halt or otherwise slow
down a long-term project due to their own staffing or other challenges, could
affect our operating results, financial condition and the market price of our
common stock. Similarly, if we are unable to continue to generate new large
orders on a regular basis, our business operating results and financial
condition could be adversely affected.
We
make significant investments in existing products and new product offerings that
can adversely affect our operating results and these investments may not be
successful
We
operate in a highly competitive and rapidly evolving technology environment and
believe that it is important to enhance existing product offerings and develop
new product offerings to meet strategic opportunities as they evolve. Our
operating results have recently been affected by increases in product
development expenses as we continued to make investments in our hosted, banking
and accounts payable automation products. We may at any time, based
on product needs or marketplace demands, decide to significantly increase our
product development expenditures. Over the next several quarters, we
expect to make significant investments in PayMode, which we acquired in
September 2009. Investments in existing products and new product
offerings can have a negative impact on our operating results, and any existing
product enhancements or new product offerings may not be accepted in the
marketplace or generate material revenues.
Integration
of acquisitions could interrupt our business and our financial condition could
be harmed
Part of
our operating strategy is to identify and pursue strategic acquisitions that can
expand our geographical footprint or complement our existing product
functionality. We acquired PayMode in September 2009. We may in the future
continue to acquire, or make investments in, other businesses, products or
technologies. Any acquisition or strategic investment we have made in the past
or may make in the future may entail numerous risks, including the
following:
|
•
|
difficulties
integrating acquired operations, personnel, technologies or
products;
|
|
•
|
inadequacy
of existing operating, financial and management information systems to
support the combined organization or new
operations;
|
|
•
|
write-offs
related to impairment of goodwill and other intangible
assets;
|
|
•
|
entrance
into markets in which we have no or limited prior experience or
knowledge;
|
28
|
•
|
diversion
of management’s focus from our core business
concerns;
|
|
•
|
dilution
to existing stockholders and earnings per
share;
|
|
•
|
incurrence
of substantial debt; and
|
|
•
|
exposure
to litigation from third parties, including claims related to intellectual
property or other assets acquired or liabilities
assumed.
|
Any such
difficulties encountered as a result of any merger, acquisition or strategic
investment could have a material adverse effect on our business, operating
results and financial condition.
As
a result of our acquisitions, we could be subject to significant future
write-offs with respect to intangible assets, which may adversely affect our
future operating results
We review
our intangible assets periodically for impairment. At December 31, 2009, the
carrying value of our goodwill and our other intangible assets was approximately
$67.0 million and $37.0 million, respectively. While we reviewed our goodwill
and our other intangible assets during the fourth quarter of fiscal year 2009
and concluded that there was no impairment, we could be subject to future
impairment charges with respect to these intangible assets, or intangible assets
arising as a result of acquisitions in future periods. Any such charges, to the
extent occurring, would likely have a material adverse effect on our operating
results.
Our
fixed costs may lead to operating results below analyst or investor expectations
if our revenues are below anticipated levels, which could adversely affect the
market price of our common stock
A
significant percentage of our expenses, particularly personnel and facilities
costs, are relatively fixed and based in part on anticipated revenue levels. In
recent years, we experienced slowing growth rates with certain of our licensed
software products. In the six months ended December 31, 2009 as compared to the
six months ended December 31, 2008, we experienced a decline in the foreign
currency exchange rates applicable to our European based revenues which
negatively impacted our overall revenue growth. A decline in revenues without a
corresponding and timely slowdown in expense growth could negatively affect our
business. Significant revenue shortfalls in any quarter may cause significant
declines in operating results since we may be unable to reduce spending in a
timely manner.
Quarterly
or annual operating results that are below the expectations of public market
analysts could adversely affect the market price of our common stock. Factors
that could cause fluctuations in our operating results include the
following:
|
•
|
economic
conditions, which may affect our customers’ and potential customers’
budgets for information technology
expenditures;
|
|
•
|
the
timing of orders and longer sales
cycles;
|
|
•
|
the
timing of product implementations, which are highly dependent on
customers’ resources and
discretion;
|
|
•
|
the
incurrence of costs relating to the integration of software products and
operations in connection with acquisitions of technologies or businesses;
and
|
|
•
|
the
timing and market acceptance of new products or product enhancements by
either us or our competitors.
|
Because
of these factors, we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful.
Our
mix of products and services could have a significant effect on our financial
condition, results of operations and the market price of our common
stock
The gross
margins for our products and services vary considerably. Our software revenues
generally yield significantly higher gross margins than do our subscription and
transaction, service and maintenance and equipment and supplies revenue streams.
In the six months ended December 31, 2009, we experienced a decrease in our
overall software license revenues. If software license revenues were to
significantly decline in any future period, or if the mix of our products and
services in any given period did not match our expectations, our results of
operations and the market price of our common stock could be significantly
adversely affected.
We
face risks associated with our international operations that could harm our
financial condition and results of operations
A
significant percentage of our revenues have been generated by our international
operations, and our future growth rates and success are in part dependent on our
continued growth and success in international markets. We have operations in the
US, UK, Australia, France and Germany. As is the case with most international
operations, the success and profitability
29
of these
operations are subject to numerous risks and uncertainties that include, in
addition to the risks our business as a whole faces, the
following:
|
•
|
currency
exchange rate fluctuations;
|
|
•
|
difficulties
and costs of staffing and managing foreign
operations;
|
|
•
|
differing
regulatory and industry standards and certification
requirements;
|
|
•
|
the
complexities of foreign tax
jurisdictions;
|
|
•
|
reduced
protection for intellectual property rights in some countries;
and
|
|
•
|
import
or export licensing requirements.
|
A
significant percentage of our revenues to date have come from our payment and
document management offerings and our future performance will depend on
continued market acceptance of these solutions
A
significant percentage of our revenues to date have come from the license and
maintenance of our payment and document management offerings and sales of
associated products and services. Any significant reduction in demand for our
payment and document management offerings could have a material adverse effect
on our business, operating results and financial condition. Our future
performance could depend on the following factors:
|
•
|
continued
market acceptance of our payment and document management
offerings;
|
|
•
|
our
ability to introduce enhancements to meet the market’s evolving needs for
secure payments and cash management solutions;
and
|
|
•
|
acceptance
of software solutions offered on a hosted
basis.
|
A
growing number of our customer arrangements involve selling our products and
services on a hosted basis, which may have the effect of delaying revenue
recognition and increasing development or start-up expenses
An
increasing number of our customer arrangements involve offering certain of our
products and services on a hosted basis. As an example, PayMode,
which we acquired in September 2009, is a hosted offering. Hosted
arrangements typically include a contractually defined service period as well as
performance criteria that our products or services are required to meet over the
duration of the service period. Arrangements entered into on a hosted basis
generally delay the timing of revenue recognition and often require the
incurrence of up-front costs, which can be significant. We are continuing to
make investments in our hosted offerings, such as PayMode and our related
accounts payable automation products, and there can be no assurance that these
products will ultimately gain broad market acceptance. Additionally,
there is a risk that we might be unable to consistently maintain the performance
requirements or service levels called for under any such arrangements. Such
events, to the extent occurring, could have a material and adverse effect on our
operating results.
A
growing portion of our revenue is derived from subscription and transaction
based revenue arrangements
A growing
portion of our revenue is being derived from subscription and transaction based
arrangements. We believe that these arrangements have several advantages over
perpetual license arrangements, including better predictability of revenue.
However, there are also certain risks inherent with these transactions. For
example, there is a risk that customers may elect not to renew these
arrangements upon expiry or that they may aggressively attempt to renegotiate
pricing or other significant contractual terms, either at or prior to the point
of renewal, based on economic conditions that exist at that time. Further, in
respect of our hosted product offerings, customers often negotiate contractual
termination rights in the event of a contractual breach by us which, to the
extent occurring, might permit the customer to exit the contract prior to the
end of its term, generally without additional compensation to us. Our future
revenue and overall growth rates depend significantly upon ongoing customer
retention. To the extent we were unable to achieve desired customer retention
rates, or in the event we were unable to retain customers on favorable economic
terms, our business, operating results and financial condition could be
adversely affected.
Our
future financial results will depend on our ability to manage growth
effectively
Our
ability to manage growth effectively will depend in part on our ability to
continue to enhance our operating, financial and management information systems.
If we are unable to manage growth effectively, the quality of our services, our
ability to retain key personnel and our business, operating results and
financial condition could be materially adversely affected.
30
We
face significant competition in our targeted markets, including competition from
companies with significantly greater resources
In recent
years, we have encountered increasing competition in our targeted markets. We
compete with a wide range of companies, ranging from small start-up enterprises
with limited resources, which compete principally on the basis of technology
features or specific customer relationships, to large companies, which can
leverage significant customer bases and financial resources. Given the size and
nature of the markets we target, the implementation of our growth strategy and
our success in competing for market share is dependent on our ability to grow
our sales and marketing capabilities and maintain an appropriate level of
financial resources.
We
depend on key employees who are skilled in e-commerce, payment, cash and
document management and invoice presentment methodology and Internet and other
technologies
Our
success depends upon the efforts and abilities of our executive officers and key
technical and sales employees who are skilled in e-commerce, payment methodology
and regulation, and Internet, database and network technologies. Our key
employees are in high demand within the marketplace and many competitors,
customers and industry organizations are able to offer considerably higher
compensation packages than we currently provide. The loss of one or more of
these individuals could have a material adverse effect on our business. In
addition, we currently do not maintain “key man” life insurance policies on any
of our employees. While some of our executive officers have employment or
retention agreements with us, the loss of the services of any of our executive
officers or other key employees could have a material adverse effect on our
business, operating results and financial condition.
Increased
competition may result in price reductions and decreased demand for our product
solutions
The
markets in which we compete are intensely competitive and characterized by rapid
technological change. Some competitors in our targeted markets have longer
operating histories, significantly greater financial, technical, and marketing
resources, greater brand recognition and a larger installed customer base than
we do. We expect to face additional competition as other established and
emerging companies enter the markets we address. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships to expand their product offerings and to offer more comprehensive
solutions. This growing competition may result in price reductions of our
products and services, reduced revenues and gross margins and loss of market
share, any one of which could have a material adverse effect on our business,
operating results and financial condition.
Our
success depends on our ability to develop new and enhanced products, services
and strategic partner relationships
The
markets in which we compete are subject to rapid technological change and our
success is dependent on our ability to develop new and enhanced products,
services and strategic partner relationships that meet evolving market needs.
Trends that could have a critical impact on us include:
|
•
|
evolving
industry standards, mandates and laws, such as those mandated by the
National Automated Clearing House Association and the Association for
Payment Clearing Services;
|
|
•
|
rapidly
changing technology, which could cause our software to become suddenly
outdated or could require us to make our products compatible with new
database or network systems;
|
|
•
|
developments
and changes relating to the Internet that we must address as we maintain
existing products and introduce any new products;
and
|
|
•
|
the
loss of any of our key strategic partners who serve as a valuable network
from which we can leverage industry expertise and respond to changing
marketplace demands.
|
There can
be no assurance that technological advances will not cause our products to
become obsolete or uneconomical. If we are unable to develop and introduce new
products or enhancements to existing products in a timely and successful manner,
our business, operating results and financial condition could be materially
adversely affected. Similarly, if our new products do not receive general
marketplace acceptance, or if the sales cycle of any of our new products
significantly delays the timing of revenue recognition, our results could be
negatively affected.
Our
products could be subject to future legal or regulatory actions, which could
have a material adverse effect on our operating results
Our
software products and hosted services offerings facilitate the transmission of
business documents and information including, in some cases, confidential
financial data related to payments, invoices and cash management. Our web-based
31
software
products, and certain of our hosted services offerings, transmit this data
electronically. While we believe that all of our product and service offerings
comply with current regulatory and security requirements, there can be no
assurance that future legal or regulatory actions will not impact our product
and service offerings. To the extent that regulatory or legal developments
mandate a change in any of our products or services, or alter the demand for or
the competitive environment of our products and services, we might not be able
to respond to such requirements in a timely or successful manner. If this were
to occur, our business, operating results and financial condition could be
materially adversely affected.
Any
unanticipated performance problems or bugs in our product offerings could have a
material adverse effect on our future financial results
If the
products that we offer and continue to introduce do not sustain marketplace
acceptance, our future financial results could be adversely affected. Since
certain of our offerings are still in early stages of adoption and since most of
our products are continually being enhanced or further developed in response to
general marketplace demands, any unanticipated performance problems or bugs that
we have not been able to detect could result in additional development costs,
diversion of technical and other resources from our other development efforts,
negative publicity regarding us and our products, harm to our customer
relationships and exposure to potential liability claims. In addition, if our
products do not enjoy wide commercial success, our long-term business strategy
will be adversely affected, which could have a material adverse effect on our
business, operating results and financial condition.
Catastrophic
events may disrupt our business
We are a
highly automated business and we rely on our network infrastructure, various
software applications and many internal technology systems and data networks for
our customer support, development, sales and marketing and accounting and
finance functions. Further, our hosted offerings rely on certain of these
systems from the perspective of the ongoing provision of services to our
customers and potential customers. A disruption or failure of these
systems in the event of a natural disaster, telecommunications failure,
cyber-attack, war, terrorist attack, or other catastrophic event could cause
system interruptions, reputational harm, delays in product development, breaches
of data security and loss of critical data. Such an event could also
prevent us from fulfilling our customer orders or maintaining certain service
level requirements, particularly in respect of our hosted
offerings. While we have developed certain disaster recovery plans
and backup systems to reduce the potentially adverse effect of such events, a
catastrophic event that resulted in the destruction or disruption of any of our
data centers or our critical business or information technology systems could
severely affect our ability to conduct normal business operations and, as a
result, our business, operating results and financial condition could be
adversely affected.
Security
breaches or computer viruses could harm our business by disrupting the delivery
of services, damaging our reputation, or resulting in material liability to
us
Our
products, particularly our hosted offerings, may be vulnerable to unauthorized
access, computer viruses and other disruptive problems. In the course of
providing services to our customers, we may collect, store, process or transmit
sensitive and confidential information. A security breach affecting us could
damage our reputation and result in the loss of customers and potential
customers. Such an event could also result in material financial
liability to us.
Privacy,
security, and compliance concerns have continued to increase as technology has
evolved to facilitate e-commerce. We may need to spend significant capital or
other resources to ensure ongoing protection against the threat of security
breaches or to alleviate problems caused by security concerns. Additionally,
computer viruses could infiltrate our systems and disrupt our business and our
provision of services, particularly our hosted offerings. Any such event could
have an adverse effect on our business, operating results, and financial
condition.
We
could incur substantial costs resulting from warranty claims or product
liability claims
Our
product agreements typically contain provisions that afford customers a degree
of warranty protection in the event that our products fail to conform to written
specifications. These agreements typically contain provisions intended to limit
the nature and extent of our risk of warranty and product liability claims. A
court, however, might interpret these terms in a limited way or conclude that
part or all of these terms were unenforceable. Furthermore, some of our
agreements are governed by non-US law, and there is a risk that foreign law
might provide us less or different protection. While we maintain general
liability insurance, including coverage for errors and omissions, we cannot be
sure that our existing coverage will continue to be available on reasonable
terms or will be available in amounts sufficient to cover one or more large
claims.
Our
products facilitate the transmission of sensitive business documents and other
confidential data related to payments, cash management and
invoices. Further, some of our products facilitate the transfer of
cash or transmit instructions that initiate cash transfer. Although
we have not experienced any material warranty or product liability claims to
date, a warranty or product liability claim, whether or not meritorious, could
result in substantial costs and a diversion of
32
management’s
attention and our resources, which could have an adverse effect on our business,
operating results and financial condition.
We
could be adversely affected if we are unable to protect our proprietary
technology and could be subject to litigation regarding our intellectual
property rights, causing serious harm to our business
We rely
upon a combination of patent, copyright and trademark laws and non-disclosure
and other intellectual property contractual arrangements to protect our
proprietary rights. However, we cannot assure you that our patents, pending
applications for patents that may issue in the future, or other intellectual
property will be of sufficient scope and strength to provide meaningful
protection to our technology or any commercial advantage to us, or that the
patents will not be challenged, invalidated or circumvented. We enter into
agreements with our employees and customers that seek to limit and protect the
distribution of proprietary information. Despite our efforts to safeguard and
maintain our proprietary rights, there can be no assurance that such rights will
remain protected or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights.
In recent
years, there has been significant litigation in the United States involving
patents and other intellectual property rights. We may be a party to litigation
in the future to protect our intellectual property rights or as a result of an
alleged infringement of the intellectual property rights of others. Any such
claims, whether or not meritorious, could require us to spend significant sums
in litigation, pay damages, delay product implementations, develop
non-infringing intellectual property or acquire licenses to intellectual
property that is the subject of the infringement claim. These claims could have
a material adverse effect on our business, operating results and financial
condition.
We
engage off-shore development resources which may not be successful and which may
put our intellectual property at risk
In order
to optimize our research and development capabilities and to meet development
timeframes, we contract with off-shore third party vendors in India and
elsewhere for certain development activities. While our experience to date with
these resources has been positive, there are a number of risks associated with
off-shore development activities that include, but are not limited to, the
following:
|
•
|
less
efficient and less accurate communication and information flow as a
consequence of time, distance and language barriers between our primary
development organization and the off-shore resources, resulting in delays
or deficiencies in development
efforts;
|
|
•
|
disruption
due to political or military conflicts around the
world;
|
|
•
|
misappropriation
of intellectual property from departing personnel, which we may not
readily detect; and
|
|
•
|
currency
exchange rate fluctuations that could adversely impact the cost advantages
intended from these agreements.
|
To the
extent that these or unforeseen risks occur, our operating results and financial
condition could be adversely impacted.
Some
anti-takeover provisions contained in our charter and under Delaware law could
hinder a takeover attempt
We are
subject to the provisions of Section 203 of the General Corporation Law of
the State of Delaware prohibiting, under some circumstances, publicly-held
Delaware corporations from engaging in business combinations with some
stockholders for a specified period of time without the approval of the holders
of substantially all of our outstanding voting stock. Such provisions could
delay or impede the removal of incumbent directors and could make more difficult
a merger, tender offer or proxy contest involving us, even if such events could
be beneficial, in the short-term, to the interests of our stockholders. In
addition, such provisions could limit the price that some investors might be
willing to pay in the future for shares of our common stock. Our certificate of
incorporation and bylaws contain provisions relating to the limitations of
liability and indemnification of our directors and officers, dividing our board
of directors into three classes of directors serving three-year terms and
providing that our stockholders can take action only at a duly called annual or
special meeting of stockholders.
We
may incur significant costs from class action litigation as a result of expected
volatility in our common stock
In the
past, companies that have experienced market price volatility of their stock
have been the targets of securities class action litigation. In August 2001, we
were named as a party in one of the so-called “laddering” securities class
action suits relating to the underwriting of our initial public offering. In
April 2008, we acquired Optio Software, which is also a party in a “laddering”
securities class action suit. We could incur substantial costs and experience a
diversion of our
33
management’s
attention and resources in connection with any such litigation, which could have
a material adverse effect on our business, financial condition and results of
operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The
following table provides information about purchases by us of our common stock
during the three months ended December 31, 2009:
Period
|
Total Number of
Shares Purchased
|
Average Price Paid
Per
Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans
or
Programs
|
Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under
The Plans
or Programs
(1)
|
||||||||||||
October 1,
2009 — October 31, 2009
|
---- | ---- | ---- | $ | 4,401,000 | |||||||||||
November 1,
2009 — November 30, 2009
|
---- | ---- | ---- | $ | 4,401,000 | |||||||||||
December 1,
2009 — December 31, 2009
|
---- | ---- | ---- | $ | 4,401,000 | |||||||||||
Total
|
---- | ---- | ---- | $ | 4,401,000 | |||||||||||
(1)
|
In
April 2008, our board of directors authorized a repurchase program for the
repurchase of up to $10.0 million of our common
stock.
|
Item 4.
Submission of Matters to a Vote of Security Holders
We held
our 2009 Annual Meeting of Stockholders on November 19, 2009. The
following matters were voted upon at the Annual Meeting.
1.
|
Election of
Directors. Holders of 18,274,344 shares of our common
stock voted to elect Michael J. Curran to serve for a term of three years
as a Class II Director. Holders of 5,712,847 shares of our
common stock withheld votes from such director. Holders of
23,520,679 shares of our common stock voted to elect Joseph L. Mullen to
serve for a term of three years as a Class II Director. Holders
of 466,512 shares of our common stock withheld votes from such
director. Holders of 17,730,815 shares of our common stock
voted to elect James W. Zilinski to serve for a term of three years as a
Class II Director. Holders of 6,256,376 shares of our common
stock withheld votes from such
director.
|
2.
|
Approval of the
Company’s 2009 Stock Incentive Plan. Holders of
16,184,583 shares of our common stock voted to approve the 2009 Stock
Incentive Plan. Holders of 5,678,718 shares of our common stock
voted against approving the plan, holders of 47,823 shares abstained from
voting, and 2,076,067 shares were broker
non-votes.
|
3.
|
Ratification of
Independent Registered Public Accounting Firm. Holders
of 23,908,263 shares of our common stock voted to ratify the appointment
of Ernst & Young LLP as our independent registered public accounting
firm for the current fiscal year. Holders of 64,568 shares of
our common stock voted against ratifying such appointment, holders of
14,360 shares abstained from voting, and no shares were broker
non-votes.
|
Item 6.
Exhibits
See the
Exhibit Index for a list of exhibits filed as part of this Quarterly Report on
Form 10-Q, which Exhibit Index is incorporated herein by reference.
34
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Bottomline Technologies (de), Inc. | |||
Date:
February 8, 2010
|
By:
|
/s/ KEVIN M. DONOVAN | |
Kevin
M. Donovan
|
|||
Chief
Financial Officer and Treasurer
|
|||
(Principal Financial and Accounting Officer) |
35
EXHIBIT
INDEX
Exhibit
Number
|
Description
|
||
10.1 |
Form
of Executive Officer Bonus Plan for 2010 with respect to Robert A.
Eberle
|
||
10.2 |
2009
Stock Incentive Plan (incorporated herein by reference to the Registrant’s
Current Report on Form 8-K filed on November 25, 2009 (File No.
000-25259)).
|
||
31.1 |
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
|
||
31.2 |
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial
Officer
|
||
32.1 |
Section
1350 Certification of Principal Executive Officer
|
||
32.2 |
Section
1350 Certification of Principal Financial
Officer
|
36