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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-25259
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BOTTOMLINE TECHNOLOGIES (de), INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 02-0433294
(State or Other Jurisdiction of (I.R.S. Employer
Organization or Incorporation) Identification No.)
155 Fleet Street 03801
Portsmouth, New Hampshire (Zip Code)
(Address of Principal Executive
Offices)
(603) 436-0700
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price of the registrant's common stock at
the close of business on September 20, 2000 was $337,274,423 (reference is made
to Part II, Item 5 herein for a statement of assumptions upon which this
calculation is based). The Company has no non-voting stock.
There were 12,860,408 shares of common stock, $.001 par value per share, of
the registrant outstanding as of September 20, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III (except for information required with
respect to our executive officers, which is set forth under "Part I--Business--
Executive Officers of the Company") have been omitted from this report, as we
expect to file with the Securities and Exchange Commission, not later than 120
days after the close of our fiscal year ended June 30, 2000, a definitive proxy
statement for our annual meeting of stockholders. The information required by
Items 10, 11, 12 and 13 of Part III of this report, which will appear in our
definitive proxy statement, is incorporated by reference into this report.
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TABLE OF CONTENTS
PART I
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Item Page
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1. Business............................................................................... 1
2. Properties............................................................................. 13
3. Legal Proceedings...................................................................... 13
4. Submission of Matters to a Vote of Security Holders.................................... 13
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 14
6. Selected Financial Data................................................................ 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 16
7A. Quantitative and Qualitative Disclosures About Market Risk............................. 29
8. Financial Statements and Supplementary Data............................................ 30
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 30
PART III
10. Directors and Executive Officers of the Registrant..................................... 31
11. Executive Compensation................................................................. 31
12. Security Ownership for Certain Beneficial Owners and Management........................ 31
13. Certain Relationships and Related Transactions......................................... 31
PART IV
14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K................... 32
Signatures............................................................................. 36
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PART I
This annual report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Any statements (including statements to the
effect that we "believe," "expect," "anticipate," "plan" and similar
expressions) that are not statements relating to historical matters should be
considered forward-looking statements. Our actual results may differ materially
from the results discussed in the forward-looking statements as a result of
numerous important factors, including those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors that May Affect Future Results."
Item 1. Business.
The Company
We provide software solutions that create an e-business infrastructure for
use by businesses and financial institutions to present invoices, make payments
and conduct electronic banking. Our products and services enable organizations
to transition from traditional paper-based billing and payment processes to
electronic processes to facilitate e-commerce. We also provide technology for
banks and companies to access banking applications over the Internet. Our
electronic bill presentment and payment software, NetTransact, provides a
secure, interactive system for complex business-to-business transactions that
allows companies to present billing information and accept payments over an
extranet. Our PayBase payments software provides a Web-interface to control,
manage and issue all payments, whether paper-based or electronic, across an
enterprise. BankQuest is our electronic banking product that provides Internet-
based access to banking applications such as cash management, trade finance and
securities processing. SmARt Cash is a software product that improves the
efficiency of accounts receivables transactions by automating the process of
matching payments and remittance information to open invoices.
Our products enable customers to leverage the Internet to automate existing
operations while increasing security and fraud avoidance. They also complement
our customers' existing information systems, accounting applications and
banking functions. To integrate with our customers' existing operations, we
provide multiple options for delivery of complex invoices and detailed payment
or remittance information. We also offer consulting services and related
equipment and supplies to help customers plan, design and implement the
transition from paper to electronic processes.
With our recent acquisition of UK-based Checkpoint Holdings, Ltd., we have
opened a new distribution channel, expanded our international reach and
increased our capacity to support our channel partners and global customers.
The acquisition of Checkpoint Holdings represents a growth opportunity for us
as we seek to provide our products and services to the global eCommerce
marketplace. We have also recently expanded our development capabilities
through the acquisition of Flashpoint, Inc., a web-based software development
organization based in Boston, MA.
NetTransact Product
Our NetTransact product provides a pathway for organizations to move from
paper-based to electronic invoicing and payments. NetTransact offers businesses
and financial institutions the following benefits:
. Open and interactive bill presentment technology. NetTransact enables
businesses and banks to leverage electronic billing and maintain an
open, interactive relationship with customers and corporate account
holders. It permits speedy and efficient access to accounts receivable
and accounts payable departments, and it disseminates complex billing
information wherever required across an organization, regardless of
whether the bill is one page or thousands of pages.
. Facilitation of timely resolution of billing disputes. NetTransact
allows payers to review and, if necessary, make adjustments to a bill
on-line. For example, if an invoice incorrectly states the number of
products delivered, or if a number of items were damaged during
shipment, the payer can generate
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an adjustment that is e-mailed to the biller for resolution and pay the
undisputed amount, without having to wait for a new invoice to be
transmitted.
. Cost effective bill presentment solution. NetTransact accelerates cash
receipts and reduces days sales outstanding (DSO) for billers by
identifying exceptions and providing an efficient means of dispute
resolution. NetTransact also provides operational efficiencies to reduce
staffing, mailing, processing and audit costs, as well as costs
associated with making adjustments and resolving disputes arising in the
billing process. Its cost savings and cash flow benefits to both
corporate billers and payers offer value enhancements to all
participants in the billing process.
. Improved invoice management for payers. NetTransact allows payers to
identify and manage invoices and schedule payments with time sensitive
priorities, enhancing their responsiveness and their vendor
relationships and enabling them to better take advantage of payment term
discounts. NetTransact also streamlines the payables process to provide
payers with improved control over cash outflow.
. Internet based solution. NetTransact leverages the Internet as an
effective means of e-commerce and can be integrated with our other
Internet solutions to provide a complete bill presentment, payment and
banking solution in an Internet environment.
. Savings to billers through reductions in float. By avoiding the delays
associated with preparation of paper bills, their submission by mail and
correspondence relating to disputed matters, NetTransact enables
enterprises to reduce the expense associated with float on outstanding
receivables.
. Seamless integration with accounting systems NetTransact fully
integrates with existing accounting systems to facilitate data transfer
into both the receivables and payables functions for the biller and
payer respectively.
PayBase Products
Our PayBase product suite offers customers the following benefits:
. Internet/intranets remote access capability. Our PayBase product suite
provides users with a secure, convenient means to remotely access and
control payment information. PayBase enables enterprises to manage and
control payments through the Internet and intranets.
. Flexible, dual payment process. Our PayBase product suite has been
designed to provide customers with a single software solution that
permits both paper and electronic payments. PayBase's dual payment
capacity gives enterprises the flexibility to manage the transition to
electronic payments at a pace compatible with the needs of their vendors
and business partners as they evolve in response to market demands and
government mandates.
. Enterprise-wide payment control. Our PayBase product suite offers
enterprises a centralized payment control and management system while
allowing users to make payments where needed within an organization.
PayBase records all payments, transactions and events in a central
database, which improves cash management, control of disbursement and
receipt functions and audit capabilities. In addition, our PayBase
payment control capabilities permit enterprises to readily outsource
payment management functions to banks or other third-party suppliers.
. Cost-effective payment solution. Our PayBase product suite provides
operational efficiencies that reduce staffing, mailing, processing and
auditing costs as well as costs associated with float, risk of error,
fraud and fraud related inquiries. PayBase is designed to be easy to use
and implement, limiting the commitment of an enterprise's resources
required to achieve operational efficiencies.
. Open and scaleable technology. Our PayBase product suite runs on one or
more application servers using Microsoft Windows operating systems and
leading database servers such as Microsoft SQL Server, Oracle and IBM
DB2 Universal Server. PayBase's flexible design provides an enterprise
with a scaleable solution to meet growing needs and to manage the
migration from a department-wide to
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an enterprise-wide system that provides high levels of performance and
supports high volumes of payment activity.
. Enhanced security and fraud protection. Our PayBase product suite
reduces the risk of fraud through a secure, encrypted database and the
control of all payment and operator activity. In addition, PayBase can
automatically send a file of all checks issued instantaneously to the
payer's bank, enabling banks to quickly isolate fraudulent or incorrect
checks and to evaluate questionable payments. For its laser-printing
process, LaserCheck uses blank paper that is non-negotiable until it is
printed and can use specialized magnetic ink character recognition
(MICR) printers for additional security.
BankQuest Product
Our BankQuest product offers customers the following benefits:
. Internet-based access to banking applications. Our BankQuest product
enables banks to provide their corporate and institutional customers
with a Web-based interface to access banking services such as trade
finance, cash management and securities processing.
. Increased speed and accuracy in transactions. By providing an electronic
interface into banking applications, BankQuest helps banks to improve
the processing speed and accuracy of transactions by reducing potential
delays and input errors associated with a manual paper-based process.
. Integration with existing back-office banking systems. Our BankQuest
product also serves as an intermediary software solution that integrates
with legacy banking applications systems. This enables banks to provide
an additional service to their customers without having to incur the
expense of rewriting the existing interface for back-office banking
functions.
. Reduced costs associated with electronic banking. Our BankQuest product
provides Internet access to banking functions that previously required
dedicated resources to implement. By reducing the costs associated with
installation and maintenance of these resources, banks can offer
Internet-based banking services to additional customers.
Strategy
Our objective is to be the leading provider of software solutions that
enable businesses and financial institutions to create an automated e-business
infrastructure to initiate, implement and manage movements of cash resources,
including bill presentment and payment and electronic banking software. Key
elements of our strategy include the following:
. Focus on the Internet as the medium for billing, payments, and
electronic banking. Our PayBase product allows enterprises to use the
Internet or a corporate intranet to make payments from a remote site and
to send and receive remittance advices via e-mail. With NetTransact, we
provide our customers with an integrated, secure bill presentment and
payment solution that can support e-commerce over the Internet. With
BankQuest, we enable financial institutions to provide their customers
with Internet access to electronic banking functions such as cash
management, trade finance and custody services.
. Develop new products and technologies. We intend to develop new products
and technologies which leverage our existing offerings and customer
base. To capitalize on the growth of the Internet and e-commerce, and
changes in payment technologies and practices, we employ professionals
who are skilled in the complex environments of e-commerce, financial
EDI, banking and payment and billing systems. Furthermore, our technical
staff is experienced in the latest database, networking and software
development tools, technologies and methodologies. We intend to leverage
this combination of business expertise and technical knowledge to
enhance our existing offerings and deliver new products and
technologies, including products incorporating XML, an emerging e-
commerce interface standard.
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. Expand and leverage strategic relationships. We intend to expand and
leverage our relationships with business partners who play a key role in
the sales, marketing and distribution of our products. We expect to
expand sales through our existing strategic alliances with companies
such as Citibank, UPS Capital, FleetBoston Financial, The Northern Trust
Company and Princeton eCom, who have selected our software for key
platforms and who are offering NetTransact to their customers. We will
also pursue new channel partnerships and continue to leverage our
relationships with leading technology providers. We also intend to
expand our relationships with enterprise resource planning and
accounting system vendors, such as Oracle, PeopleSoft and SAP, and with
consulting firms that assist companies with the implementation of our
products.
. Pursue strategic acquisitions. We believe that significant opportunities
exist to acquire industry expertise and resources to support our product
suite, to increase our product offerings and distribution and to provide
access to international markets. This will assist us in achieving our
goal of providing a comprehensive business-to-business e-commerce
infrastructure to initiate, implement and manage movements of cash
resources to the worldwide market. We therefore intend to continue to
actively pursue acquisitions of such technologies, as well as
opportunities to broaden our client base and/or expand our geographic
presence.
. Leverage our acquisition of CheckPoint Holdings, Ltd. In acquiring
CheckPoint Holdings, Ltd., we have opened a new distribution channel,
expanded our international reach and increased our capacity to support
our global customers and channel partners. We intend to leverage the
acquisition by introducing our products internationally through
Checkpoint and enhancing our existing products with CheckPoint's
expertise.
. Further penetrate customer base. We intend to further penetrate our
existing customer base, which we believe is only in the early stages of
implementing electronic bill presentment and payment solutions.
Additional sales opportunities to our existing customers include:
. cross-selling our electronic bill presentment software to increase
overall sales of an integrated electronic invoicing and payment
solution to our existing customers;
. selling our electronic banking product to financial institutions
that are existing customers and can benefit from its application;
. expanding department level installations to encompass an
enterprise's entire payment system;
. adding complementary payment capabilities through sales of
additional software modules, such as electronic payment and receipt
creation or check fraud avoidance;
. introducing software upgrades marketing new products; and
. generating additional revenues from our customer base by providing
maintenance and support services and selling supplies.
. Expand customer base. We intend to expand our broad customer base by:
. supporting our existing co-marketing relationships to introduce our
products to their customer base;
. adding additional co-marketing relationships with financial
organizations and hosting partners to re-market our products;
. enhancing our direct sales force to market to large enterprises;
. targeting sales opportunities with financial institutions by
leveraging our experience and industry recognition as the developer
of FedEDI, the Federal Reserve System's financial Electronic Data
Interchange or EDI software solution; and
. pursuing strategic acquisitions.
. Expand international capabilities. We intend to enhance our products
with additional functionality to expand their use in international
markets. We believe that this will enable us to better accommodate
existing and future customer needs. We have begun initiatives to extend
product
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capabilities to accommodate multiple language output, multiple currency
requirements and international standards.
Products and Services
Our software products enable enterprises to electronically present bills to
their customers, control, manage and issue all payments, whether paper-based or
electronic, and access electronic banking functions. We also offer
complementary add-on functionality software for our payment products that
customers can select according to their specific needs, as well as hardware to
complement our software product offerings. Our software products are further
enhanced by an experienced and integrated consulting service and support
system. These consultants help customers to plan, design, implement and manage
an organization's transition from paper-based to electronic invoicing and
payments to enhance operational productivity and customer satisfaction.
NetTransact Product
NetTransact supports corporate billing applications through features that
are designed to meet the specific needs of the business-to-business
environment. NetTransact is a secure interactive system that allows companies
to present billing information and accept payment for transactions. NetTransact
operates on an extranet-based Web site in which both billers and payers have an
electronic interface. The NetTransact system integrates with the billers' and
payers' existing receivables and payables management processes and provides
trading partners with opportunities to communicate online before funds are
transferred. Payers have the ability to review invoices online, modify them if
necessary, approve them for payment and schedule the date of funds transfer to
take advantage of payment discount terms. NetTransact is currently configured
to make payments using the Automated Clearing House (ACH) and represent
authorized debits to the payer's account.
NetTransact provides benefits to both billers and payers, creating business
value for trading partners. Its benefits include:
. Benefits to Billers
. improved cash management by accelerating receipts to reduce total
days sales outstanding;
. reduction in administrative costs in accounts receivable;
. improved billing accuracy;
. real-time access to credit risk management and income forecasting;
. streamlined operations with the ability to resolve billing
differences online before funds are transferred; and
. ability to conduct electronic transactions with customers not
configured for electronic data interchange (EDI).
. Benefits to Payers
. streamlined payables processing with improved cash management and
more control over payment schedules to manage cash flow;
. increased opportunity to take advantage of biller discount terms;
. lower costs through a reduction in data-entry costs and automatic
payment through accounts payable;
. improved communication with business partners through online
resolution of billing differences both on an entire-bill or line-by-
line basis; and
. Internet access to participate in electronic transactions without
incurring additional costs for financial electronic data interchange
(EDI) hardware or software resources.
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PayBase Products
PayBase provides a single software solution to control, manage and issue all
payments across an entire enterprise. PayBase includes the following modules
and offerings, which can be purchased as separate products or together:
PayBase ASP (Application Service Provider) Offering. Our PayBase ASP
offering provides organizations with a license to manage and distribute
Bottomline's payment solutions to their customers across a wide area network
from a centrally managed data center. The PayBase ASP product is designed to
assist application service providers in responding to their customer's demand
for secure third-party management of their payments process. The ASP offering
for PayBase can be either client server or Web-based and it includes the ESP
(electronically sent payments) module, ERADS (electronic remittance advice
delivery system) module and laser check module.
ESP (Electronically Sent Payments) Module. The ESP module allows users to
create electronic payments, facilitating the transition from paper checks to
electronic funds transfer (EFT). This module permits users to create electronic
payment files for their banks that meet the industry requirement of NACHA--The
Electronic Payments Association, and other financial EDI (FEDI) protocols. With
this module, users can process instructions received from a payment system,
such as payroll or accounts receivable. The PayBase ESP module can also create
electronic tax payments in the formats required by federal and state
governments. When the ESP module is installed with our LaserCheck printing
software module, PayBase can create both electronic payments and checks during
the same payment run. The ESP module also can create financial EDI payments
that will allow vendors to automatically post financial EDI remittance
information to their accounts receivable system. This feature eliminates the
need for vendors to manually enter information into accounting ledgers, saving
time and preventing mistakes.
ERADS (Electronic Remittance Advice Delivery System) Module. The ERADS
module allows an enterprise to convert to electronic payments immediately and
to deliver the remittance detail by fax, e-mail, communications networks or the
Internet, depending on the technology available to its payees. This module can
be used for payments to individuals (e.g., travel reimbursements) and to
enterprises (e.g., vendor payments). Whenever payments are sent electronically
through the secure Automated Clearing House network, the ERADS module
automatically channels the remittance details to each payee by the appropriate
media and the payee receives an electronic payment directly deposited into its
bank account. Enterprises can realize cost efficiencies through reduced check
printing or processing and the lower cost of transmitting remittance
information electronically.
PayBase Web Series (Internet/Intranet Access) Modules. The Web Series
Internet/intranet access modules extend the functionality of PayBase to the
Internet. PayBase Web Series allows enterprises to use the Internet or a
corporate intranet to request, approve and initiate payments from remote sites,
including locations that are not linked by a corporate network. Web Series can
also provide automatic e-mail delivery of remittance advice both internally and
to third parties such as vendors, customers and employees. Web Series
incorporates administration software that maintains central payment information
that can be accessed on the Internet or over an intranet by authorized users to
approve payments, review payment status and correct data as appropriate.
PayView Module. The PayView module allows users to store and retrieve
electronic images of printed documents from financial applications such as
payroll, vendor payments, purchase order creation, claims payment and travel
and expense reimbursement. These images can be automatically e-mailed or faxed
to a recipient at the time of creation, reducing costs and delays associated
with the printing and handling of paper documents.
LaserCheck Module. The LaserCheck module allows users to print checks,
including all variable data, such as magnetic ink character recognition lines,
logos and signatures, on blank paper using a laser printer. This module can be
deployed over the user's network or the Internet wherever it is needed, whether
in a
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centralized printing facility, the issuing department or in a remote location.
With the module's CheckSort feature, users can sort checks to lower postage
rates and can produce copies in a specified order to simplify filing.
LaserCheck also provides password protection, as well as hardware and software
security features, and initiates printing of all checks, confirmation notices
and reports.
Check Fraud Avoidance Module. The Check Fraud Avoidance module allows users
to automatically send a digital file of all checks issued to their bank. Most
commercial banks employ a "Positive Pay" system that determines when the check
is presented to the bank and whether a bank customer has in fact issued it. A
number of banks will only reimburse customers for check fraud losses if the
customer uses Positive Pay. This module protects the user from having altered
or unissued checks paid from their account and protects banks from fraudulent
checks received from other institutions. The Check Fraud Avoidance software
receives its data input from PayBase, but can also receive input from a non-
PayBase system that uses printed checks.
BankQuest Product
Our BankQuest product allows banks to provide their corporate and
institutional customers with electronic banking functions such as cash
management, trade finance and custody services over a browser-based platform.
This improves the processing speed and accuracy of banking functions by
reducing potential delays and input errors associated with a paper-based
process.
BankQuest acts as an intermediary software solution that integrates with a
bank's legacy systems to enable electronic banking services to their customers
without the bank having to incur the expense of rewriting the existing code and
applications for their back-office functions. Additionally, banks reduce costs
and resources associated with implementing and supporting hardware/software
interfaces for their corporate and institutional customers. In reducing these
costs, banks also have the potential to extend their electronic banking
services to additional customers that were previously restricted by the costs
associated with installation and maintenance.
SmARt Cash
SmARt Cash is a software product that improves the efficiency of accounts
receivables transactions by automating the process of matching payments and
remittance information to open invoices. SmARt Cash interfaces with the lockbox
services of banks and receives a variety of source data which is processed to
match more accurately with the open invoices of the customer. In this manner,
the SmARt Cash software helps to automate the cash application process for
accounts receivables and reduces the clerical function of data entry and the
errors associated with a manual process. Our SmARt Cash product is available to
both banks and corporate customers.
Professional Services
Our team of service professionals draws on extensive experience in e-
commerce to provide consulting services, project implementation and training
services to our clients. Consulting service professionals are available to
review clients' current bill presentment and payment methods and processes,
report findings and recommend changes and solutions. Project implementation
professionals are available to coordinate system installation, including
billing and payment design, reporting format and delivery, bank data and
communication requirements, signature and authority set up and security, audit
and control procedures. We offer training services to all customer personnel
involved in the billing and payment cycle, including management, users and
information technology personnel involved in the transition from paper-based
methods to electronic methods.
Equipment and Supplies
We offer consumable products needed for payment disbursements and check
printing, including magnetic ink character recognition toner and blank-paper
check stock. We also provide printers and printer-related equipment, primarily
through drop-ship arrangements with our hardware vendors, to enhance our
software
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product offerings. We have reseller agreements with the two leading secure
magnetic ink character recognition printer manufacturers in the country, Troy
Systems, which primarily uses Hewlett Packard printers, and Source Technology,
which primarily uses Lexmark printers.
Technology
Our technology focus is on the industry standards for Internet and client
server platforms. NetTransact, our web-based invoice presentment and payment
system, converts an organization's existing billing file through proprietary
mapping tools into a file that is accessible over the Internet. This file is
transferred using file transfer protocol (FTP) to a secure hosting facility
where the payer can access the invoice using standard Web-browser technology.
Once the payer has reviewed the invoice and made any adjustments, either on the
total invoice or on a line-by-line basis, the payer approves the amount to be
paid and selects a payment date. On the payment date, NetTransact generates a
payment file that contains the bank routing information and account numbers for
both the payer and biller along with the remittance information. Upon receipt
of the file, the biller's bank initiates a secure debit through the Automated
Clearing House that transfers the funds from the payer's designated account to
the biller's designated account.
The server platform for NetTransact is based on Sun Enterprise architecture.
For cross platform capabilities, it is written using the Internet-standard Java
programming language in conjunction with iPlanet Application Server. The data
for NetTransact is stored using database servers such as Sybase Adaptive Server
and Oracle 8i. Database connectivity within the system is accomplished through
the use of JDBC (java database connectivity). The security architecture for
NetTransact is based on sophisticated security protocols that support
firewalls, Secure Socket Layer, HTTPS (hyper text transfer protocol secure) and
digital certificates.
PayBase/32/, our advanced 32-bit payment processing software, has been
designed using a client/server architecture. The server platform supports open
database connectivity (ODBC) compliant Unix and Windows NT databases. The
server platform is the warehouse for information relating to the customer's
payment solution, including security tables, application form parameters and
audit tables. The client workstation houses the PayBase executable programs.
This design enables PayBase to be highly scaleable for both distributed and
high volume centralized check printing, as well as electronic payment
origination. The client workstation interacts with the database to ascertain
authority, to retrieve information to create the form and to update the audit
tables with transaction information and payment result information. Print
output can be sent to any addressable network printer. The ESP and Check Fraud
Avoidance modules are bundled with communication software that allows scripting
of the data transmission. Transmission can be executed from any client
workstation.
PayBase is designed to be network independent and can be implemented in
leading network architectures, including Novell, Windows NT and TCP/IP. The
product design creates predictable low volume network traffic in order to
minimize the implementation concerns for corporate information technology.
Installation of the product is highly automated using InstallShield.
PayBase development methods conform to the latest Microsoft development
specifications, including extensive use of MFC (Microsoft Foundation Classes)
and the DCOM/COM ((Distributed) Component Object Model) standards. Components
are designed as OLE (Object Linking and Embedding) Automation Servers for ease
of future development and enhancement as well as interoperability. Web enabled
components of PayBase are written as ActiveX controls. The primary development
tool is Visual C++.
The PayBase suite also includes PayBase DesignerPlus, a sophisticated
proprietary data mapping and design tool. This tool is used to create
sophisticated payment applications using multiple form designs and multiple
payment methods, including all forms of electronic payments. It provides a
proprietary mapping tool to transform any type of host data file into the
format needed for efficient payment creation. The forms design function allows
easy creation of paper output formats from checks to W-2 forms and includes
design wizards to
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further automate the process. The data mapping and design are securely linked
to the desired business payment process.
Our electronic banking product, BankQuest, provides web-enabled information
reporting and transaction initiation, supporting a bank's cash management,
trade finance and custody business. The information reporting modules can
receive information from multiple back-office processing systems and
consolidate the information to be reported with up to eight levels of sub
reporting. The transaction initiation module allows the bank to present
customized instruction screens that replicate functions and features normally
reserved for a workstation environment.
The BankQuest platform is made up of three main components, web servers,
database servers and hub servers. The web servers are independently scalable
and can be expanded for a high volume of simultaneous users. The database
servers are based on industry standards such as Microsoft and Oracle servers
and they are also independently scalable to service the required transaction
traffic and volume. The hub servers support data reformatting and interface
functions and are also scalable in order to be configured to meet the service
level requirements that are committed to clients in terms of data availability
and processing rates.
For security, BankQuest provides Secure Socket Layer 3 and 128-bit
encryption. To meet our customer's security requirements, BankQuest also
provides supplemental security infrastructures such as digital signatures and
smart cards through our security partner, Ubizen. BankQuest also provides
application level security through an administrative tool that allocates access
levels for users along with types of information available to users.
Product Development and Engineering
Our product development and engineering organization included 92 persons as
of June 30, 2000. There are three primary development groups: software
engineering, quality assurance and technical support. We spent $3.2 million in
fiscal year 1998, $4.0 million in fiscal year 1999 and $8.6 million in fiscal
year 2000 on product development and engineering costs.
The software engineers have substantial experience in advanced software
development techniques as well as extensive knowledge of the complex processes
involved in business payment systems. Our engineers actively participate in the
Microsoft Developer Network programs and maintain extensive knowledge of
software development trends.
Our quality assurance engineers have both extensive knowledge of our
products and expertise in software quality assurance techniques. Members of the
quality assurance group make extensive use of automated software testing tools
to facilitate comprehensive and timely testing of products. The quality
assurance group members participate in all beta releases, including all tests
of new products or enhancements, and provide initial training materials for
customer support and service.
The technical support group provides all product documentation as well as
technical support for released products. Members of the technical group include
experienced technical writers, business analysts and network analysts. The
technical writers are versed in current document technology and work closely
with the software engineers to ensure documentation is clear, current and
complete. The technical support engineers are responsible for the analysis of
reported software problems and work closely with customers and customer support
staff. The group's broad knowledge of our products, operating systems,
communications, and printers allows them to rapidly respond to software
configuration needs.
Customers
Our customer base includes over 2,500 companies in industries such as
financial services, health care, communications, education, media,
manufacturing and government.
9
<PAGE>
Sales and Marketing
Sales
As of June 30, 2000, we employed 57 sales executives trained on Bottomline's
systems. Among these sales executives, 51 were divided among six geographical
markets and focused on sales to large and medium sized enterprises and six of
were focused exclusively on sales to large banks and financial institutions.
Eight systems engineers support our sales executives. We also have a dedicated
telephone-sales team that markets new applications, software upgrades and
additional services to our existing customers. In addition to our direct
selling efforts, we promote our products and services through strategic
relationships with our channel partners.
In support of our NetTransact product, Bottomline has relationships with
leading organizations including Citibank, UPS Capital, FleetBoston Financial,
The Northern Trust Company and Princeton eCom. We expect these companies to
broaden our distribution channel and support our position in the market. We
also promote our products and services through relationships with enterprise
resource planning and accounting system vendors, such as Oracle, PeopleSoft and
SAP.
Marketing
We promote products and services through conferences, seminars, direct
marketing and trade publications. Our marketing partners sponsor joint mailings
and seminars and issue joint press releases with us, as well as advertising our
on their web sites. We also maintain membership in key industry organizations
such as Financial Services Technology Consortium, Microsoft Value Chain
Initiative, American Bankers Association and various operating committees of
NACHA--The Electronic Payments Association. In addition, we participate in
industry conferences such as the Association for Financial Professionals,
NACHA--The Electronic Payments Association, Payments, American Payroll Congress
and National User Conferences of Software Partners. We also promote brand
awareness through our public relations program and by advertising in respected
buying guides.
Competition
We encounter competition from various sources for each of our products. For
NetTransact, most companies that are marketing electronic bill presentment
solutions have been primarily focused on business-to-consumer applications,
such as electronic presentment of utility bills, telephone bills and cable
service bills. If these companies expand their focus to include business-to-
business applications, we may encounter increased competition from companies in
this industry such as CheckFree, eDocs, Just-In-Time, Spectrum, Derivion and
Metavante.
We also expect to encounter competition for NetTransact from companies
entering the business-to-business electronic bill presentment and payment
market along with some financial institutions, including large banks, that are
developing internal capabilities such as PNC Bank in conjunction with Perot
Systems.
For PayBase, we currently compete primarily with companies that offer a
broad suite of electronic data interchange products, companies that provide a
broad spectrum of electronic payments solutions, such as CheckFree, and
companies that offer laser check printing software and services. To a lesser
extent, we compete with providers of enterprise resource planning solutions,
such as SAP and PeopleSoft, and providers of traditional payment products,
including check stock and check printing software and services, such as
Standard Register. In addition, some financial institutions operate as
outsourced providers of check printing and electronic payment services for
their customers. We also experience competition from our customers and
potential customers who develop, implement and maintain their own payment
solutions.
For BankQuest, we primarily compete with companies, such as S1, that offer a
wide range of financial services including electronic banking applications. We
also encounter competition from companies that provide
10
<PAGE>
traditional treasury workstation solutions. These companies include Brokat
Financial Services, Magnet Communications and Politzer and Haney. In addition,
we compete with a bank's internal technical development teams that develop and
implement their own proprietary solution.
For all of our products, we believe we compete on a number of factors,
including:
. scope, quality and cost-effectiveness of our solutions;
. industry knowledge and expertise;
. interoperability of solutions with existing information technology and
payments infrastructure;
. product performance and technical features;
. patented and proprietary technologies; and
. customer service and support.
Although a number of our competitors may be better positioned to compete in
certain aspects of the payments industry, we believe that our market position
is enhanced by:
. our ability to provide a comprehensive e-business infrastructure for use
by businesses and financial institutions to present invoices, make
payments and conduct electronic banking;
. our relationships with our strategic partners;
. our large customer base; and
. the level of industry expertise of our development, sales and customer
service and support professionals.
Although we believe that we compete favorably in our industry, the markets
for payment management, electronic bill presentment and electronic banking
software are intensely competitive and characterized by rapid technological
change and a number of factors could adversely affect our ability to compete in
the future.
Backlog
At the end of fiscal year 2000, backlog, including deferred revenue, was $31
million compared with backlog of $8.3 million at the end of fiscal year 1999.
We do not believe that backlog is a meaningful indicator of sales that can be
expected for any period, and there can be no assurance that the backlog at any
point in time will translate into revenue in any subsequent period.
Proprietary Rights
We rely upon a combination of patents, copyrights, trademarks and trade-
secret laws to establish and maintain proprietary rights in our technology and
products. We have filed patent applications relating to our products. However,
there can be no assurance that our patent applications, or any others that may
be filed in the future will issue or will be of sufficient scope and strength
to provide meaningful protection of our technology or any commercial advantage
to us, or that the issued patents will not be challenged, invalidated or
circumvented. In addition, we rely upon a combination of copyright and
trademark laws and non-disclosure and other intellectual property contractual
arrangements to protect our proprietary rights. Given the rapidly changing
nature of the industry's technology, the competence and creative ability of our
development, engineering, programming, marketing and service personnel may be
as or more important to its competitive position as the legal protections and
rights afforded by patents. We also enter into agreements with our employees
and clients that seek to limit and protect the distribution of proprietary
information. There can be no assurance that the steps we have taken to protect
our property rights, however, will be adequate to deter misappropriation of
proprietary information, and we may not be able to detect unauthorized use and
take appropriate steps to enforce our intellectual proprietary rights.
Government Regulation
Although our operations have not been subject to any material industry-
specific governmental regulation, some of our existing and potential customers
are subject to extensive federal and state governmental
11
<PAGE>
regulations. In addition, governmental regulation in the financial services
industry is evolving, particularly with respect to payment technology, and our
customers may become subject to increased regulation in the future.
Accordingly, our products and services must be designed to work within the
regulatory constraints under which our customers operate.
Federal regulations require that all federal payments, other than payments
under the Internal Revenue Code of 1986, must be made electronically. These
regulations required that the conversion from checks to electronic payments be
made in two phases. During the first phase, recipients who became eligible to
receive federal payments on or after July 26, 1996 were required to receive
payments electronically unless they certified in writing that they did not have
an account with a financial institution or an authorized payment agent. The
second phase began on January 2, 1999. Beginning on that date, all federal
payments, except payments made under the Internal Revenue Code, are required to
be made electronically.
The National Automated Clearing House Association now requires that, upon
the request of the receiver of an electronic payment, its bank must provide to
each receiver all payment-related information contained within the transmitted
remittance information. Banks must provide this information to their receivers
by the opening of business on the second banking day following the settlement
date of the entry.
Current treasury regulations require that a business that paid more than
$50,000 in annual employment or other depository taxes in 1995, 1996 or 1997
now make such payments electronically. This requirement is effective for return
periods beginning before January 1, 2000. The date upon which a business first
becomes subject to the electronic payments requirement depends on the year in
which the business first paid more than $50,000 in depository taxes. Businesses
that made in excess of $200,000 of aggregate federal tax deposits in 1998 must
make such deposits electronically for all return periods beginning on or after
January 1, 2000. If a business first exceeds the $200,000 threshold in 1999 or
in any subsequent year, the electronic deposit obligation will be imposed for
the return period beginning after December 31 of the year ending after the year
the threshold was surpassed and will continue for all succeeding years. Non-
complying taxpayers may be subject to a 10% penalty if they fail to comply with
such requirements. In addition, state and local taxing authorities have been
implementing electronic solutions for collecting tax payments. The electronic
payment of certain taxes is required by law in states such as New York,
California, Connecticut and Arkansas.
Executive Officers of the Registrant
Our executive officers and their respective ages as of September 25, 2000,
are as follows:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Daniel M. McGurl........ 64 Chairman of the Board and Chief Executive Officer
Joseph L. Mullen........ 47 President, Chief Operating Officer and Director
Robert A. Eberle........ 39 Executive Vice President, Chief Financial Officer, Treasurer and Director
Paul Bergeron........... 56 Executive Vice President and Group Executive, Global Sales
Leonard J. DiIuro, Jr... 53 Executive Vice President and Group Executive, National Sales
Peter Fortune........... 41 President of Checkpoint
</TABLE>
Daniel M. McGurl, one of our founders, has served as Chairman of the Board
of Directors and Chief Executive Officer since May 1989. From May 1989 to
September 2000, Mr. McGurl served as President. From 1987 to 1989, Mr. McGurl
served as Senior Vice President of State Street Bank and Trust Company. Prior
to 1987, Mr. McGurl held a variety of positions at IBM Corporation, including
Director of Marketing Planning and Director of Far East Operations.
Joseph L. Mullen has served as a director since July 1996 and President and
Chief Operating Officer since September 2000. He served as Executive Vice
President of Operations from July 1996 to September 2000, and served as Vice
President of Sales and Marketing from July 1991 to July 1996. From 1977 to
1989, Mr. Mullen held a variety of positions at IBM Corporation, including
Marketing Manager and Northeast Area Market Planning Manager.
12
<PAGE>
Robert A. Eberle has served as a director since September 2000 and Executive
Vice President, Chief Financial Officer and Treasurer since September 1998.
From December 1996 to September 1998, Mr. Eberle served as Executive Vice
President of Telxon Corporation, a mobile computing and wireless data company,
with primary responsibility for its Technical Subsidiaries Group. From August
1994 to December 1996, Mr. Eberle served as Executive Vice President and Chief
Operating Officer of Itronix Corporation, a designer and manufacturer of
notebook and hand-held computers and then a subsidiary of Telxon Corporation,
with primary responsibility for the financial and operational performance for
the company. From August 1993 to August 1994, Mr. Eberle served as Vice
President of Corporate Development of Telxon Corporation, with primary
responsibility for acquisitions, strategic relationships and its investment
portfolio.
Paul Bergeron has served as Executive Vice President and Group Executive,
Global Sales since August 2000. From December 1997 to August 2000, Mr. Bergeron
served as an independent consultant. From June 1995 to November 1997, Mr.
Bergeron served as President of Charter Systems, an Internet services company
that offered consulting, design, implementation and support of computer
networks. From March 1991 to December 1994, Mr. Bergeron served as Vice
President, European Operations for Borland International, Inc. From December
1990 to March 1991, Mr. Bergeron served as President of Interbase, an
independently operated relational database company and then a subsidiary of
Ashton-Tate. From August 1986 to November 1990, Mr. Bergeron served as Director
of International Sales for Stratus Computer , a manufacturer of computer
platforms and applications. Prior to 1986, Mr. Bergeron held a variety of
executive and sales positions at IBM, Wang, Interbase, Stratus Computer and
Banyan Systems.
Leonard J. DiIuro, Jr. has served as Executive Vice President and Group
Executive, National Sales since August 2000. He served as Executive Vice
President, Sales from July 1998 to August 2000, and served as Vice President of
Business Development from July 1996 to July 1998. From July 1994 to July 1996,
Mr. DiIuro served as Vice President of Strategic Alliances and Area Manager,
and from May 1993 to July 1994 as Vice President of Strategic Alliances. Prior
to 1993, Mr. DiIuro held a variety of positions at IBM Corporation, including
Business Unit Executive, Branch Manager and Area Marketing Planning Manager.
Peter Fortune has served as President of Checkpoint since August 2000. From
May 1993 to August 2000, Mr. Fortune served as Executive Director of Checkpoint
Security Services Limited and from March 1999 to August 2000, he served as
Chief Executive Officer of Checkpoint Holdings. From January 1990 to March
1999, Mr. Fortune held a variety of positions at Checkpoint, including Managing
Director for Security Print and Outsourced Services, General Manager of
Security Print Operations and Head of Product Management. Prior to January
1990, Mr. Fortune held various positions at Unisys Corporation, including
Director of Customer Services for UK Printing Operations.
Employees
As of June 30, 2000, we had a total of 365 employees. None of our employees
is represented by a labor union. We have not experienced any work stoppages and
we consider relations with our employees to be good.
Item 2. Properties.
We currently lease approximately 54,000 square feet of office space at our
headquarters in Portsmouth, New Hampshire under 4 leases that expire from 2001
to 2002. We also lease offices in San Francisco, California; Lakewood,
Colorado; Great Neck, New York; and New York, New York. In August 2000, we
entered into a lease for approximately 83,000 square feet of space for a new
headquarters facility in Portsmouth, New Hampshire. This new construction is
scheduled to be completed in June 2001 with occupancy to occur in July 2001.
Item 3. Legal Proceedings.
From time to time we may be named in claims arising in the ordinary course
of business. Currently, no significant legal proceedings or claims are pending.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2000.
13
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Our common stock began trading on the Nasdaq National Market under the
symbol "EPAY" on February 12, 1999. Prior to that date, there was no
established public trading market for our common stock. The following table
sets forth the high and low sale prices of our common stock for the periods
indicated, as quoted on the Nasdaq National Market.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
Fiscal 1999
Third quarter (commencing February 12, 1999).......... $98 $14
Fourth quarter........................................ $73 3/4 $32
Fiscal 2000
First quarter......................................... $56 1/4 $12 5/8
Second quarter........................................ $52 11/16 $13 3/4
Third quarter......................................... $50 1/2 $31
Fourth quarter........................................ $54 7/8 $23 3/4
Fiscal 2001
First quarter (through September 20, 2000)............ $36 3/4 $19 7/16
</TABLE>
As of September 20, 2000, there were approximately 197 holders of record of
our common stock.
The closing price for our common stock on September 20, 2000 was $36 1/4.
For purposes of calculating the aggregate market value of the shares of our
common stock held by non-affiliates, as shown on the cover page of this report,
it has been assumed that all the outstanding shares were held by non-affiliates
except for the shares held by our directors and executive officers. However,
this should not be deemed to constitute an admission that all these persons
are, in fact, affiliates of ours, or that there are not other persons who may
be deemed to be affiliates of ours.
We have never paid dividends on our common stock. We intend to retain our
earnings for use in our business and, therefore, do not anticipate paying any
cash dividends on our common stock for at least the next fiscal year.
Sales of Unregistered Securities and Use of Proceeds
In June 2000, United Technologies Corporation purchased 307,882 shares of
common stock for an aggregate consideration of $9,951,000, net of expenses. In
connection with the equity investment, we issued warrants for the purchase of
307,882 shares of common stock to United Technologies Corporation at an
exercise price of $38.00. The warrants were fully vested and exercisable upon
date of issuance. The proceeds will be used for working capital purposes.
In April 2000, we issued warrants to Citibank for the right to purchase
324,000 shares of common stock at an exercise price of $55.00. The warrants
were fully vested and exercisable upon date of issuance.
These securities were not registered under the Securities Act of 1933, as
amended ("the Act") pursuant to the exemption from the registration
requirements of the Act provided by Section 4(2) of the Act.
Use of Proceeds of Initial Public Offering
On February 12, 1999 we made an initial public offering of 3,910,000 shares
of common stock registered under a Registration Statement on Form S-1
(Registration No. 333-67309), which was declared effective by the Securities
and Exchange Commission on February 11, 1999. Proceeds of our initial public
offering were used during the period between July 1, 1999 and June 30, 2000 in
the amount of $14.6 million to acquire software and related proprietary
intellectual property, assets and certain liabilities from The Northern Trust
Company, Integrated Cash Management Services, Inc., and OLC Software, Inc.
14
<PAGE>
Item 6. Selected Financial Data.
You should read the following financial data in conjunction with the
Financial Statements, including the related notes, and "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Prior to our initial public offering of common stock in February 1999, there
were 801,000 shares of redeemable common stock outstanding which were
redeemable at the option of the holders at a redemption price that increased
over time. The redemption rights terminated upon the occurrence of our initial
public offering. The earnings (loss) per share available to common stockholders
shown below for periods prior and up to the initial public offering have been
adjusted to reflect the increase in the redemption price for each such period.
The shares used in computing diluted earnings per share available to common
stockholders for periods prior and up to the initial public offering include
the redeemable common stock. For periods occurring after our initial public
offering, such shares are included in the basic earnings per share available to
common stockholders.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Software licenses.............. $ 4,689 $ 6,392 $ 9,887 $15,885 $ 19,483
Service and maintenance........ 4,580 6,729 9,701 12,422 19,870
Equipment and supplies......... 8,798 9,005 9,449 10,996 9,781
------- ------- ------- ------- --------
Total revenues............... 18,067 22,126 29,037 39,303 49,134
Cost of revenues:
Software licenses.............. 27 160 215 261 561
Service and maintenance........ 2,655 4,206 4,261 5,323 9,733
Equipment and supplies......... 5,361 6,410 6,526 7,999 7,252
------- ------- ------- ------- --------
Total cost of revenues....... 8,043 10,776 11,002 13,583 17,546
------- ------- ------- ------- --------
Gross profit..................... 10,024 11,350 18,035 25,720 31,588
Operating expenses:
Sales and marketing
Sales and marketing.......... 4,190 6,631 7,675 10,969 13,784
Expense associated with
warrants issued............. -- -- -- -- 11,902
Product development and
engineering
Product development and
engineering................. 1,237 2,185 3,158 3,971 8,580
In-process research and
development................. -- -- -- -- 3,900
General and administrative
General and administrative... 3,044 4,266 4,372 4,755 8,606
Amortization of intangible
assets...................... -- -- -- -- 2,311
------- ------- ------- ------- --------
Total operating expenses....... 8,471 13,082 15,205 19,695 49,083
------- ------- ------- ------- --------
Income (loss) from operations.... 1,553 (1,732) 2,830 6,025 (17,495)
Interest income (expense), net... (6) (56) (50) 726 1,830
------- ------- ------- ------- --------
Income (loss) before provision
(benefit) for income taxes...... 1,547 (1,788) 2,780 6,751 (15,665)
Provision (benefit) for income
taxes........................... 664 (536) 1,177 2,700 (1,400)
------- ------- ------- ------- --------
Net income (loss)................ $ 883 $(1,252) $ 1,603 $ 4,051 $(14,265)
======= ======= ======= ======= ========
Earnings (loss) per share
available to common
stockholders:
Basic.......................... $ 0.14 $ (0.23) $ 0.24 $ 0.50 $ (1.33)
======= ======= ======= ======= ========
Diluted........................ $ 0.11 $ (0.23) $ 0.20 $ 0.43 $ (1.33)
======= ======= ======= ======= ========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------
1996 1997 1998 1999 2000
----- ------- ------ ------ ------
(In thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Shares used in computing earnings (loss)
per share available to common
stockholders:
Basic................................... 5,693 5,986 6,314 7,988 10,744
===== ======= ====== ====== ======
Diluted................................. 7,001 5,986 7,316 9,170 10,744
===== ======= ====== ====== ======
Other Data:
Excluding non-cash charges for expense
associated with warrants issued and
acquisition-related charges:
Income (loss) after tax................. $ 883 $(1,252) $1,603 $4,051 $1,469
===== ======= ====== ====== ======
</TABLE>
The other data above consists of income (loss) after tax excluding non-cash
charges for expense associated with warrants issued, in-process research and
development and amortization of intangible assets and goodwill associated with
acquisitions. We have provided this other data as we consider it relevant to
allow for comparability with other companies in similar businesses who present
such information. Other companies, however, may calculate it differently than
we do. The other data is not a measurement of financial performance under
accounting principles generally accepted in the United States.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------------------
1996 1997 1998 1999 2000
------ ------ ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $1,080 $ 827 $ 1,362 $39,699 $27,292
Marketable securities................... -- -- -- -- 11,222
Working capital......................... 3,123 2,476 3,884 43,710 40,976
Total assets............................ 9,144 10,481 11,301 55,146 71,280
Short-term and long-term debt........... 597 1,384 75 -- --
Redeemable common stock, at redemption
value.................................. 1,148 1,246 1,353 -- --
Stockholders' equity.................... 3,708 2,680 4,368 45,915 57,128
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
the financial statements and notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
Overview
We provide a complete suite of applications to help our customers leverage
the Internet to reduce costs, streamline operations and improve existing
processes for payments. In 1989, we released our first product, LaserCheck for
DOS, to offer companies a cost-effective means to issue checks using
specialized laser printers and toners, eliminating the need for pre-printed,
negotiable check stock. In 1992, we entered into an arrangement with Xerox
Corporation to sell an advanced laser printer and newly developed magnetic ink
character recognition toners. Over the next few years we became one of the
largest re-sellers of Xerox Corporation magnetic ink character recognition
products. We then adapted our LaserCheck products to run on Windows 3.X and
Windows 95 operating platforms and developed new check fraud avoidance software
applications. Our PayBase payments software now provides a Web-interface to
control, manage, and issue all payments, whether paper-based or electronic,
across an enterprise.
During fiscal year 2000, in order to expand our suite of applications, we
acquired NetTransact, an electronic bill presentment and payment software
product from The Northern Trust Company. NetTransact allows companies to
present billing information and accept payments over a secure, interactive
system for complex business-to-business transactions. We also acquired certain
assets and assumed certain liabilities from Integrated Cash Management, Inc.
(ICM), whose BankQuest software offers powerful cash management tools
16
<PAGE>
and Internet access to advanced banking applications. BankQuest provides
Internet-based access to back-office banking applications such as cash
management, trade finance and securities processing. We also acquired all the
outstanding shares of OLC Software, Inc., whose SmARtCash product improves the
efficiency of accounts receivable transactions by automating the process of
matching payments and remittance information to open invoices.
On August 28, 2000 we acquired two companies, U.K.-based Checkpoint
Holdings, Ltd. (Checkpoint) and Flashpoint, Inc. (Flashpoint) a professional
software development company. In acquiring Checkpoint, we have opened a new
distribution channel, expanded our international reach and increased our
capacity to support our global customers and channel partners. We intend to
leverage the acquisition by introducing our products internationally through
Checkpoint and enhancing our existing products with CheckPoint's expertise.
Our goal is to be the leading provider of software solutions that enable
businesses and financial institutions to create an automated e-business
infrastructure to initiate, implement and manage the movements of cash
resources. Our customer base, now at over 2,500 companies, are in industries
such as financial services, health care, communications, education, media,
manufacturing and government. We provide our products and services to the
leading organizations in virtually every industry and currently include over
half of the Fortune 100 companies as our customers.
Our revenues are primarily derived from the following three sources:
. Software License Fees. We derive software license revenues from our
suite of software applications, which are generally based on the number
of software applications and user licenses purchased, including PayBase,
NetTransact and BankQuest. Fees from the sale of these software licenses
are generally recognized upon delivery of the software to the customer.
Certain software arrangements are recognized on a percentage of
completion basis due to the fact that they require significant
customization and modification.
. Service and Maintenance Fees. We derive service and maintenance revenues
from (a) consulting, design, project management and training fees which
are fixed on a project-to-project basis, (b) customer support and
maintenance fees and (c) customer-specific customization of our
BankQuest product. Revenues relating to custom consulting, design and
service fees are recognized at the time services are rendered. Customer
support and training fees are established as a percentage, typically 18%
of the list price for the software license, and are prepaid annually.
Support and maintenance agreements generally have a term of 12 months
and are renewable annually. We recognize revenues related to customer
support and maintenance fees ratably over the life of the agreement.
Certain service contracts are recognized on a percentage of completion
basis due to extensive customization and lengthy implementation.
. Equipment and Supplies Sales. We derive equipment and supplies revenues
from the sales of printers, check paper and magnetic ink character
recognition toners that are recognized at the time of delivery.
We expect to continue making significant investments in product development
and engineering in order to enhance our current products, develop new products
and further advance our Internet and payment technologies. Future investments
in product development and engineering will generally be related to the hiring
of additional software engineering personnel.
We record software development costs in accordance with Financial Accounting
Standards Board Statement No. 86. We have not had any software development
costs that were capitalized during the last fiscal year and do not currently
have any software development costs that are being capitalized.
17
<PAGE>
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Due to a variety of
implementation questions that have arisen, the Securities and Exchange
Commission (SEC) has deferred the implementation of SAB 101 until no later than
the fourth quarter for fiscal years beginning after December 15, 1999. The SEC
is expected to issue further interpretive guidance in the fall of 2000. We will
adopt SAB 101 no later than the fourth quarter of the fiscal year ending June
30, 2001. We are still assessing the impact of adopting SAB 101 and do not
expect to make a definitive assessment until the further guidance is issued.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees". Interpretation 44 clarifies guidance for
certain issues that arose in the application of APB 25. Areas of focus within
Interpretation 44 include repricings, modifications to extend the option term,
change of grantee status, modifications to accelerate vesting and options
exchanged in a purchase business combination. Interpretation 44 will be applied
prospectively to new awards, modifications to outstanding awards, and changes
in employee status on or after July 1, 2000. Effective July 1, 2000, should
these types of transactions occur, we will account for them under APB 25 as
clarified by Interpretation 44.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet effective July 1, 2000 at their fair value. We will adopt SFAS
133, as amended by SFAS 137 effective July 1, 2000. We do not expect the
adoption of SFAS 133 to have a material impact on our results of operations or
financial position.
Recent Developments
On August 28, 2000 we acquired Checkpoint Holdings, Ltd. and Flashpoint,
Inc.
Checkpoint, based in Reading, England, is an eCommerce and electronic
payments software provider. By acquiring Checkpoint's technology, expertise and
customer base, we opened a new distribution channel that will significantly
enhance our international growth opportunities. The transaction is valued at
approximately $82 million, including $15 million in cash consideration, $20
million in the form of a promissory note, 1,350,000 newly issued shares of
common stock, a warrant to purchase 100,000 shares of common stock at a price
of $50 per share and acquisition related costs. We will account for the
transaction as a purchase and will report Checkpoint's financial results under
our current revenue classifications.
Flashpoint is a professional software development company based in Boston,
MA. Flashpoint has core expertise in Windows-based software development,
leading browser applications and programming languages including C++, Java and
XML. The purchase price is approximately $14.5 million, consisting of $4.5
million in cash, 242,200 newly issued shares of common stock, the assumption of
all outstanding stock options of Flashpoint and acquisition related costs. We
will exchange all outstanding stock options of Flashpoint for our options based
on the transaction conversion ratio. We will account for the transaction as a
purchase.
The Company is evaluating and making preliminary assessments of the purchase
price allocation. The Company's early assessment is that a significant amount
of the purchase price will result in identifiable intangibles and goodwill and
will result in significant amounts of amortization in future years, including
fiscal year 2001. The Company's analysis is not yet complete but the Company
estimates the expected useful life to be in the three to five year range.
In August 2000, we made a $900,000 equity investment in Princeton eCom, an
electronic bill presentment and payment services provider, and a $500,000
equity investment in Magnet Corporation, a business-to-business e-finance
infrastructure and services provider. Both of these investments will be
accounted for on the cost basis.
18
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Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
-------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software licenses..................................... 34.0% 40.4% 39.7%
Service and maintenance............................... 33.4 31.6 40.4
Equipment and supplies................................ 32.6 28.0 19.9
----- ----- -----
Total revenues...................................... 100.0 100.0 100.0
Cost of revenues:
Software licenses..................................... 0.7 0.7 1.1
Service and maintenance............................... 14.7 13.5 19.8
Equipment and supplies................................ 22.5 20.4 14.8
----- ----- -----
Total cost of revenues.............................. 37.9 34.6 35.7
----- ----- -----
Gross profit............................................ 62.1 65.4 64.3
Operating expenses:
Sales and marketing
Sales and marketing................................. 26.4 27.9 28.1
Expense associated with warrants issued............. -- -- 24.2
Product development and engineering
Product development and engineering................. 10.9 10.1 17.5
In-process research and development................. -- -- 7.9
General and administrative
General and administrative.......................... 15.1 12.1 17.5
Amortization of intangible assets................... -- -- 4.7
----- ----- -----
Total operating expenses.............................. 52.4 50.1 99.9
----- ----- -----
Income (loss) from operations........................... 9.7 15.3 (35.6)
Interest income (expense), net.......................... (0.1) 1.9 3.7
----- ----- -----
Income (loss) before provision (benefit) for income
taxes.................................................. 9.6 17.2 (31.9)
Provision (benefit) for income taxes.................... 4.1 6.9 (2.9)
----- ----- -----
Net income (loss)....................................... 5.5% 10.3% (29.0)%
===== ===== =====
</TABLE>
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Revenues
Total revenues increased by $9.8 million to $49.1 million in the fiscal
year ended June 30, 2000 from $39.3 million in the fiscal year ended June 30,
1999, an increase of 25%.
Software Licenses. Software license fees increased by $3.6 million to $19.5
million in the fiscal year ended June 30, 2000 from $15.9 million in the
fiscal year ended June 30, 1999, an increase of 23%. Software license fees
remained constant at approximately 40% of total revenues in the fiscal years
ended June 30, 2000 and June 30, 1999. The increase in software license fees
was due primarily to growing market acceptance of our NetTransact software
product, which was introduced in fiscal 2000.
Service and Maintenance. Service and maintenance fees increased by $7.5
million to $19.9 million in the fiscal year ended June 30, 2000 from $12.4
million in the fiscal year ended June 30, 1999, an increase of 60%. Service
and maintenance fees represented 40% of total revenues in the fiscal year
ended June 30, 2000 compared to 32% of total revenues in the fiscal year ended
June 30, 1999. The increase was due primarily to an
19
<PAGE>
increase in the number of sales of software licenses, which resulted in
increased orders for services and sales of software maintenance and technical
support. In addition, there were several large contracts during the fiscal year
ended June 30, 2000 accounted for on a percentage of completion basis due to
the required customization and modifications.
Equipment and Supplies. Equipment and supplies sales decreased by $1.2
million to $9.8 million in the fiscal year ended June 30, 2000 from $11.0
million in the fiscal year ended June 30, 1999, a decrease of 11%. Equipment
and supplies sales represented 20% of total revenues in the fiscal year ended
June 30, 2000 compared to 28% of total revenues in the fiscal year ended June
30, 1999. The decrease in equipment and supplies sales was due primarily to our
de-emphasis of this lower margin source of revenues. We anticipate this source
of revenue to continue to decline as a percentage of total revenues due to
Northern Trust.
Cost of Revenues
Software Licenses. Software license costs consist of expenses incurred by us
to manufacture, package and distribute our software products and related
documentation, costs of licensing third-party software incorporated into our
products, and royalties to Northern Trust on revenues from our NetTransact
product. Software license costs increased by $300,000 to $561,000 in the fiscal
year ended June 30, 2000 from $261,000 in the fiscal year ended June 30, 1999,
an increase of 115%. Software license costs increased to 3% of software license
fees in the fiscal year ended June 30, 2000 compared to 2% at June 30, 1999.
The increase in software license costs was due primarily to the NetTransact
royalties due to The Northern Trust Company.
Service and Maintenance. Service and maintenance costs include salary
expense and other related costs for our customer service, maintenance and
telephone support staffs, as well as third-party contractor expenses. Service
and maintenance costs increased by $4.4 million to $9.7 million in the fiscal
year ended June 30, 2000 from $5.3 million in the fiscal year ended June 30,
1999, an increase of 83%. Service and maintenance costs were 49% of service and
maintenance revenues in the fiscal year ended June 30, 2000 compared to 43% of
service and maintenance revenues in the fiscal year ended June 30, 1999. The
increase in service and maintenance costs was due primarily to increased
staffing and personnel related costs to support the BankQuest product.
Equipment and Supplies. Equipment and supplies costs decreased by $700,000
to $7.3 million in the fiscal year ended June 30, 2000 from $8.0 million in the
fiscal year ended June 30, 1999, a decrease of 9%. Equipment and supplies costs
were 74% of equipment and supplies sales in the fiscal year ended June 30,
2000, which is consistent with costs totaling 73% of equipment and supplies
sales in the fiscal year ended June 30, 1999.
Operating Expenses
Sales and Marketing:
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and trade shows.
Sales and marketing expenses increased by $2.8 million to $13.8 million in the
fiscal year ended June 30, 2000 from $11.0 million in the fiscal year ended
June 30, 1999, an increase of 26%. Sales and marketing expenses, excluding the
warrant discussed below, remained constant at 28% of total revenues in the
fiscal years ended June 30, 2000 and 1999. The dollar increase was due
primarily to increases in staffing and personnel related costs.
Expense Associated with Warrants Issued. Expense associated with warrants
issued of $11.9 million represent non-cash charges related to the issuance of
warrants, that vested immediately, to two companies. The Company valued the
warrants issued using the Black-Scholes method assuming an expected life of
three years and a volatility of 91%. There was no comparable amount for the
year ended June 30, 1999 since no such warrants were issued in 1999. In the
future we may incur such costs in connection with transactions involving other
companies.
20
<PAGE>
Product Development and Engineering:
Product Development and Engineering. Product development and engineering
expenses consist primarily of personnel costs to support product development.
Product development and engineering expenses increased by $4.6 million to $8.6
million in the fiscal year ended June 30, 2000 from $4.0 million in the fiscal
year ended June 30, 1999, an increase of 116%. Product development and
engineering expenses before the in-process research and development charge
described below were 18% of total revenues in the fiscal year ended June 30,
2000 compared to 10% of total revenues in the fiscal year ended June 30, 1999.
The dollar increase was due primarily to increases in staffing and personnel
related costs to support our expanding suite of software products.
In-process Research and Development. In-process research and development of
$3.9 million represents non-cash charges related to the NetTransact and ICM
acquisitions for in-process research and development during the year ended June
30, 2000. The in-process research and development projects were valued using an
Income Approach, which included the application of a discounted future earnings
methodology. Using this methodology, the value of the in-process technology is
comprised of the total present value of the future earnings stream attributable
to the technology throughout its anticipated life. No alternative future uses
were identified prior to reaching technological feasibility. In connection with
these acquisitions, identifiable intangible assets and goodwill amounts were
recorded and are being amortized over a period ranging from one to five years.
There was no comparable amount for the year ended June 30, 1999 since all the
acquisitions occurred in fiscal 2000.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and certain facilities-related
expenses. General and administrative expenses increased by $3.8 million to $8.6
million in the fiscal year ended June 30, 2000 from $4.8 million in the fiscal
year ended June 30, 1999, an increase of 81%. General and administrative
expenses were 18% of total revenues in the fiscal year ended June 30, 2000
compared to 12% of total revenues in the fiscal year ended June 30, 1999. The
dollar increase was due primarily to staffing and personnel related costs,
additional facility and information system requirements resulting from
acquisitions and growth, and other expenses necessary to support our expanding
operations.
Amortization of Intangible Assets. Amortization of intangible assets was
$2.3 million for the year ended June 30, 2000. There was no comparable amount
for the year ended June 30, 1999 since all the acquisitions occurred in fiscal
2000. As a result of our acquisitions, total identifiable tangible and
intangible assets and goodwill approximating $10.7 million or 15% of total
assets and 18.8% of stockholders equity was recorded.
The carrying value of intangible assets is periodically reviewed by the
Company based on the expected future undiscounted operating cash flows of the
related asset. If an impairment is indicated, the Company will adjust the
carrying value of the intangible assets. No event has occurred that would
impair the value of long-lived assets recorded in the accompanying consolidated
financial statements.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income and interest expense. Interest income (expense), net increased
by $1.1 million to $1.8 million of interest income in the fiscal year ended
June 30, 2000 from $726,000 of interest income in the fiscal year ended June
30, 1999. The increase in interest income was due to higher available cash,
cash equivalents and short-term investment balances, as a result of our initial
public offering in February 1999, on hand for the entire fiscal year 2000.
Provision (Benefit) for Income Taxes. Benefit for income taxes was $1.4
million for the fiscal year ended June 30, 2000 which represents a change of
$4.1 million from a $2.7 million provision in the fiscal year ended June 30,
1999. The effective tax rate in the fiscal year ended June 30, 2000 was 9%
compared to 40% in the fiscal year ended June 30, 1999. The effective tax rate
of 9% in the fiscal year ended June 30, 2000 differed from the federal
statutory rate due principally to the effect of expenses related to the
issuance of warrants during fiscal year 2000 that are not deductible for tax
purposes and acquisition related amounts which are not deductible for tax
purposes. The effective tax rate of 40% in the fiscal year June 30, 1999
differed from the
21
<PAGE>
federal statutory rate due principally to the effect of state income taxes. As
of June 30, 2000 and 1999 we had net deferred tax assets of $2.8 million and
$412,000 respectively. The realizability of the net deferred tax assets at June
30, 2000 is more likely than not as such net deferred tax assets are
principally able to be carried back to taxes paid in prior years. The valuation
allowance increased by $2.3 million from June 30, 1999. This increase was
required to reduce the net deferred tax assets to the amount that is considered
more likely than not to be realized.
Net Income (Loss). Net income decreased by $18.4 million to a $14.3 million
loss in the fiscal year ended June 30, 2000 from $4.1 million of income in the
fiscal year ended June 30, 1999. The decrease in net income was due primarily
to the expense associated with warrants issued, acquisition related charges and
the increased operating costs associated with the Company's growth.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenues
Total revenues increased by $10.3 million to $39.3 million in the fiscal
year ended June 30, 1999 from $29.0 million in the fiscal year ended June 30,
1998, an increase of 35%.
Software Licenses. Software license fees increased by $6.0 million to $15.9
million in the fiscal year ended June 30, 1999 from $9.9 million in the fiscal
year ended June 30, 1998, an increase of 61%. Software license fees represented
40% of total revenues in the fiscal year ended June 30, 1999 compared to 34% of
total revenues for the fiscal year ended June 30, 1998. The increase in
software license fees was due primarily to growing market acceptance of our
PayBase product suite, and the delivery of software to The Federal Reserve
System, which resulted in recognition of one-time software license fees of
approximately $1.1 million in the fiscal year ended June 30, 1999.
Service and Maintenance. Service and maintenance fees increased by $2.7
million to $12.4 million in the fiscal year ended June 30, 1999 from $9.7
million in the fiscal year ended June 30, 1998, an increase of 28%. Service and
maintenance fees represented 32% of total revenues in the fiscal year ended
June 30, 1999 compared to 33% of total revenues in the fiscal year ended June
30, 1998. The dollar increase was due primarily to an increase in the number of
sales of software licenses, which resulted in increased orders for services and
sales of software maintenance and technical support.
Equipment and Supplies. Equipment and supplies sales increased by $1.5
million to $11.0 million in the fiscal year ended June 30, 1999 from $9.5
million in the fiscal year ended June 30, 1998, an increase of 16%. Equipment
and supplies sales represented 28% of total revenues in the fiscal year ended
June 30, 1999 compared to 33% of total revenues in the fiscal year ended June
30, 1998. The increase in equipment and supplies sales was due primarily to an
increase in printer sales.
Cost of Revenues
Software Licenses. Software license costs consist of expenses incurred by us
to manufacture, package and distribute our software products and related
documentation and costs of licensing third-party software incorporated into our
products. Software license costs increased by $46,000 to $261,000 in the fiscal
year ended June 30, 1999 from $215,000 in the fiscal year ended June 30, 1998,
an increase of 21%. Software license costs remained constant at 2% of software
license fees in each of the fiscal years ended June 30, 1999 and June 30, 1998.
The increase in software license costs was due primarily to third-party royalty
payments of approximately $100,000 made in connection with the software
delivered to The Federal Reserve System, which was offset by other small
reductions.
Service and Maintenance. Service and maintenance costs include salary
expense and other related costs for our customer service, maintenance and
telephone support staffs, as well as third-party contractor expenses. Service
and maintenance costs increased by $1.1 million to $5.3 million in the fiscal
year ended June 30, 1999 from $4.3 million in the fiscal year ended June 30,
1998, an increase of 25%. Service and maintenance costs
22
<PAGE>
were 43% of service and maintenance revenues in the fiscal year ended June 30,
1999 compared to 44% of service and maintenance revenues in the fiscal year
ended June 30, 1998. The increase in service and maintenance costs was due
primarily to increased staffing and personnel related costs.
Equipment and Supplies. Equipment and supplies costs increased by $1.5
million to $8.0 million in the fiscal year ended June 30, 1999 from $6.5
million in the fiscal year ended June 30, 1998, an increase of 23%. Equipment
and supplies costs were 73% of equipment and supplies sales in the fiscal year
ended June 30, 1999 compared to 69% of equipment and supplies sales in the
fiscal year ended June 30, 1998. The increase in equipment and supplies costs
as a percentage of equipment and supplies sales was due primarily to
competitive pressure on the pricing of both hardware and supplies.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and trade shows.
Sales and marketing expenses increased by $3.3 million to $11.0 million in the
fiscal year ended June 30, 1999 from $7.7 million in the fiscal year ended June
30, 1998, an increase of 43%. Sales and marketing expenses were 28% of total
revenues in the fiscal year ended June 30, 1999 compared to 26% of total
revenues in the fiscal year ended June 30, 1998. The increase was due primarily
to increases in staffing and personnel related costs.
Product Development and Engineering. Product development and engineering
expenses consist primarily of personnel costs to support product development.
Product development and engineering expenses increased by $813,000 to $4.0
million in the fiscal year ended June 30, 1999 from $3.2 million in the fiscal
year ended June 30, 1998, an increase of 26%. Product development and
engineering expenses were 10% of total revenues in the fiscal year ended June
30, 1999 compared to 11% of total revenues in the fiscal year ended June 30,
1998. The dollar increase was due primarily to increases in staffing and
personnel related costs.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and certain facilities-related
expenses. General and administrative expenses increased by $383,000 to $4.8
million in the fiscal year ended June 30, 1999 from $4.4 million in the fiscal
year ended June 30, 1998, an increase of 9%. General and administrative
expenses were 12% of total revenues in the fiscal year ended June 30, 1999
compared to 15% of total revenues in the fiscal year ended June 30, 1998. The
dollar increase was due primarily to staffing and personnel related costs and,
to a lesser extent, facility, information system and other expenses necessary
to support our expanding operations.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income and interest expense. Interest income (expense), net increased
by $776,000 to $726,000 of interest income in the fiscal year ended June 30,
1999 from $50,000 of interest expense in the fiscal year ended June 30, 1998.
The increase in interest income was due to higher available cash and cash
equivalent balances on hand as a result of our initial public offering in
February 1999 and lower average balances outstanding under our revolving credit
agreement.
Provision for Income Taxes. The provision for income taxes increased by $1.5
million to $2.7 million in the fiscal year ended June 30, 1999 from $1.2
million in the fiscal year ended June 30, 1998. The effective tax rate in the
fiscal year ended June 30, 1999 was 40% compared to 42% in the fiscal year
ended June 30, 1998.
Net Income. Net income increased by $2.5 to $4.1 million in the fiscal year
ended June 30, 1999 from $1.6 in the fiscal year ended June 30, 1998.
Liquidity and Capital Resources
We have financed our operations primarily from cash provided by operating
activities and the sale of our common stock. We had net working capital of
$41.0 million at June 30, 2000, including cash and cash equivalents and
marketable securities totaling $38.5 million.
23
<PAGE>
Net cash provided by operating activities was $3.4 million in the fiscal
year ended June 30, 2000, $3.7 million in the fiscal year ended June 30, 1999,
and $2.6 million in the fiscal year ended June 30, 1998. Net cash provided by
operating activities for each of the three fiscal years ended June 30, 2000 was
primarily the result of net income and increases in deferred revenues, accounts
payable and accrued expenses, partially offset by increases in accounts
receivable and prepaid expenses.
Net cash used in investing activities was $29.4 million in the fiscal year
ended June 30, 2000, $1.4 million in the fiscal year ended June 30, 1999, and
$993,000 in the fiscal year ended June 30, 1998. Cash was used in the fiscal
year ended June 30, 2000 for the acquisition of businesses and assets and
marketable securities and to acquire property and equipment.
On August 28, 2000 we acquired two companies Checkpoint Holdings, Ltd.
(Checkpoint) and Flashpoint, Inc. (Flashpoint) for an aggregate of
approximately $20 million in cash, $20 million in the form of a promissory
note, approximately $50 million in stock, and a warrant to purchase 100,000
shares of common stock at a price of $50 per share. We currently have no
significant capital spending or purchase commitments, but expect to continue to
engage in capital spending in the ordinary course of business.
Net cash provided by financing activities was $13.6 million in the fiscal
year ended June 30, 2000, and $36.1 million in the fiscal year ended June 30,
1999. Net cash used in financing activities was $1.1 million in the fiscal year
ended June 30, 1998. The net decrease was primarily the result of our initial
public offering of common stock in February 1999, as compared with issuance of
common stock to a subsidiary of United Technologies Corporation and proceeds
from the exercise of stock options in the year ended June 30, 2000. Net cash
used in financing activities during the fiscal year ended June 30, 1998
primarily represented repayment of indebtedness.
We believe that the cash generated from operations and cash and cash
equivalents and marketable securities on hand will be sufficient to meet our
working capital requirements for the foreseeable future. We also may receive
additional investments from, and make investments in, customers or other
companies.
24
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before
purchasing 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.
A significant percentage of our revenues to date have come from our payment
management offerings and our performance will depend on continued market
acceptance of these offerings
A significant percentage of our revenues to date have come from the license
and maintenance of our payment management offerings and sales of related
products and services. Any reduction in demand for our PayBase product could
have a material adverse effect on our business, operating results and financial
condition. Our future performance will depend to a large degree upon the market
acceptance of PayBase as a payment management solution. Our prospects will also
depend upon enterprises seeking to enhance their payment functions to integrate
electronic payment capabilities. In addition, our future results will depend on
the continued market acceptance of desktop software for use in a departmental
setting, including our LaserCheck solution, as well as our ability to introduce
enhancements to meet the market's evolving needs for secure, payment management
solutions.
Our future financial results will depend upon market acceptance of our
NetTransact and BankQuest products
If the NetTransact and BankQuest products that we acquired in recent
acquisitions do not achieve market acceptance, our future financial results
will be adversely affected. We acquired NetTransact bill presentment software
from The Northern Trust Company, a financial institution, in July 1999. General
availability of the NetTransact product was announced in February 2000. We
acquired the web-based BankQuest cash management software in our acquisition of
Integrated Cash Management Services, Inc. in October 1999. BankQuest was
commercially introduced in April 2000 and is now generally available. If either
of these products has any unanticipated performance problems or bugs, or does
not enjoy wide commercial success, our long-term business strategy would be
adversely affected.
Integration of new acquisitions.
We have been actively pursuing acquisitions of other companies, including
our recent acquisitions of Checkpoint and Flashpoint, and plan to continue to
make such acquisitions in the future. If we are unable to integrate the
operations of the companies we acquire on a timely basis, we may lose the
benefit of these acquisitions. Such acquisitions may also create management
dislocation or result in unexpected costs. We have limited experience with
mergers and acquisitions and any such difficulties encountered as a result of
any mergers or acquisition could materially affect our business, operating
results and financial condition.
We must attract and retain highly skilled personnel with knowledge of
electronic payments and bill presentment and the banking industry
We are dependent upon the ability to attract, hire, train and retain highly
skilled technical, sales and marketing, and support personnel, particularly
with expertise in electronic payment and bill presentment technology and
knowledge of the banking industry. Competition for qualified personnel is
intense. In addition, our corporate headquarters location in Portsmouth, New
Hampshire may limit our access to skilled personnel. Any failure to attract,
hire or retain qualified personnel could have a material adverse effect on our
business, operating results and financial condition. In addition, we plan to
expand our sales and marketing and customer support organizations. Based on our
experience, it takes an average of nine months for a salesperson to become
25
<PAGE>
fully productive. We cannot assure you that we will be successful in increasing
the productivity of our sales personnel, and the failure to do so could have a
material adverse effect on our business, operating results and financial
condition.
Our fixed costs may lead to fluctuations in operating results if our revenues
are below expectations, and if our operating results are below external
expectations, the market price of our stock may fall.
A significant percentage of our expenses, particularly personnel costs and
rent, are relatively fixed, and based in part on expectations of future
revenues. We may be unable to reduce spending in a timely manner to compensate
for any significant fluctuations in revenues. Accordingly, shortfalls in
revenues may cause significant fluctuations in operating results in any
quarter. Quarterly operating results that are below the expectations of public
market analysts could adversely affect the market price for our common stock.
Factors that could cause these fluctuations include the following:
. The timing of orders and longer sales cycles, particularly due to any
increase in average selling prices of our software solutions;
. the timing and market acceptance of new products or product enhancements
by either us or our competitors;
. the timing of product implementations, which are highly dependent on
customers' resources and discretion;
. the incurrence of costs relating to the integration of software products
and operations in connection with acquisitions of technologies or
businesses;
. delivery interruptions relating to equipment and supplies purchased from
third-party vendors, which could delay system sales; and
. economic conditions which may affect our customers' and potential
customers' budgets for technological expenditures.
Because of these factors, we believe that period to period comparisons of
our results of operations are not necessarily meaningful.
The market price of our common stock has experienced, and may continue to be
subject to, extreme price and volume fluctuations
Stock markets in general, and The Nasdaq Stock Market in particular, have
experienced extreme price and volume fluctuations. Broad market fluctuations of
this type may adversely affect the market price of our common stock.
The market price of our common stock has experienced, and may continue to be
subject to extreme fluctuations due to a variety of factors, including:
. public announcements concerning us, our competitors or our industry;
. fluctuations in operating results;
. introductions of new products or services by us or our competitors;
. adverse developments in patent or other proprietary rights;
. changes in analysts' earnings estimates;
. announcements of technological innovations by our competitors; and
. general and industry-specific business, economic and market conditions
We may experience accounting charges in connection with the issuance of
warrants
During the quarter ended June 30, 2000, we incurred non-cash charges in
connection with the issuance of warrants to Citibank and a subsidiary of United
Technologies Corporation. In the future, we may experience similar accounting
charges to the extent we issue warrants to channel partners or others.
26
<PAGE>
Our success depends on our ability to develop new and enhanced software,
services and related products
The bill presentment, payment and cash management software markets in which
we compete are subject to rapid technological change and our success is
dependent on our ability to develop new and enhanced software, services and
related products that meet our evolving market needs. Trends which could have a
critical impact on us include:
. rapidly changing technology that could require us to make our products
compatible with new database or network systems;
. evolving industry standards and mandates, such as those mandated by the
National Automated Clearing House Association and by the Debt Collection
Improvement Act of 1996; and
. developments and changes relating to the Internet that we must address
as we introduce new products.
If we are unable to develop and introduce new products, or enhancements to
existing products, in a timely and successful manner, our business, operating
results and financial condition could be materially adversely affected.
Our success depends on the wide-spread adoption of the internet and growth of
electronic business
Our future success will in large part depend upon the willingness of
businesses and financial institutions to adopt the Internet as a medium of e-
commerce. These entities will probably accept this new medium only if the
Internet provides substantially greater efficiency and enhances their
competitiveness. There are critical issues involved in the commercial use of
the Internet which are not yet fully resolved, including concerns regarding the
Internet's:
. security;
. reliability;
. ease of access; and
. quality of services.
To the extent that any of these issues inhibit or limit the adoption of the
Internet as a medium of e-commerce, our business prospects could be adversely
affected. If electronic business does not continue to grow or grows more slowly
than expected, demand for our products and services may be reduced.
If the internet infrastructure is not adequately maintained, the demand for our
products and services may decrease
Our future success will depend, in part, on the maintenance of the Internet
infrastructure. To the extent that the Internet continues to experience
increased numbers of users, frequency of use or increased bandwidth
requirements of users, the Internet infrastructure may not continue to support
the demands placed on it and, as a result, the performance or reliability of
the Internet may be adversely affected. In addition, the Internet could lose
its viability as a form of media due to delays in the development or adoption
of new standards and protocols that can handle increased levels of activity.
The infrastructure and complementary products and services necessary to
maintain the Internet as a viable commercial medium may not be developed or
maintained. Any failure in performance or reliability of the Internet could
adversely affect the demand for our products and services and, consequently,
hurt our operating results.
Increased government regulation and legal uncertainties may impair the growth
of the internet and decrease demand for our products and services
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws, including those governing intellectual property,
privacy, libel and taxation, apply to the Internet generally and to the e-
commerce in
27
<PAGE>
particular. Legislation could dampen the growth in the use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium, which may decrease demand for our products and services and
thus have a material and adverse effect on our business, results of operations
and financial condition.
Our business can be adversely affected by problems with third-party hardware
that we resell
Any problems with third-party hardware that we resell could harm our
customer relationships, industry credibility and financial condition. In a
prior fiscal year, we experienced a significant problem with a third-party
printer that we were then reselling which had a material adverse effect on our
operating results. Any repetition of these or similar problems with third party
hardware could have a material adverse effect on our business, operating
results and financial condition.
Increased competition may result in price reductions and decreased demand for
our products and services
The market for bill presentment, payment and cash management software is
intensely competitive and characterized by rapid technological change. Growing
competition may result in price reductions of our products and services,
reduced revenues and gross margins and loss of market share, any one of which
could have a material adverse effect on our business, operating results and
financial condition. Some competitors in our market have longer operating
histories, significantly greater financial, technical, marketing and other
resources, greater brand recognition and a larger installed customer base than
we do. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships to expand their product
offerings and to offer more comprehensive solutions. We also expect to face
additional competition as other established and emerging companies enter the
market for payment management solutions.
Rapid growth could strain our personnel, systems and controls
In the past, rapid growth has strained our managerial and other resources.
Our ability to manage any future growth will depend in part on our ability to
continue to enhance our operating, financial and management information
systems. We cannot assure you that our personnel, systems and controls will be
adequate to support any future growth. If we are not able to manage growth
effectively, should it occur, the quality of our services, our ability to
retain key personnel and our business, operating results and financial
condition could be materially adversely affected.
We depend on a few key employees who are skilled in e-commerce, payment
methodology and internet and other technologies
Our success depends upon the efforts and ability of our executive officers
and key technical employees who are skilled in e-commerce, payment methodology
and regulation, and Internet, database and network technologies. We currently
do not maintain "key man" life insurance policies on any of our employees.
While some of our executive officers have employment agreements with us, the
loss of the services of any of our executive officers or other key employees
could have a material adverse effect on our business, operating results and
financial condition.
Undetected bugs in our software could adversely affect the performance of our
software and demand for our products
Our software products could contain errors or "bugs" that we have not been
able to detect which could adversely affect their performance and reduce demand
for our products. Any defects or errors in new products, such as NetTransact or
BankQuest, or enhancements could harm our customer relationships and result in
negative publicity regarding us and our products, which could have a material
adverse effect on our business, operating results and financial condition.
28
<PAGE>
Our business could be subject to product liability claims
Because our software and hardware products are designed to provide critical
payment management and invoicing functions, we may be subject to significant
product liability claims. Our insurance may not be sufficient to cover us
against these claims or may not be available at all. A product liability claim
brought against us, even if not successful, could require us to spend
significant time and money in litigation. As a result, any such claim, whether
successful or not, could seriously damage our reputation and harm our business,
operating results and financial condition.
Our business could be adversely affected if we are unable to protect our
proprietary technology
We rely upon a combination of patent, copyright and trademark laws and non-
disclosure and other intellectual property contractual arrangements to protect
our proprietary rights. However, we cannot assure you that our patents, pending
applications that may be issued in the future, or other intellectual property
will be of sufficient scope and strength to provide meaningful protection of
our technology or any commercial advantage to us, or that the patents will not
be challenged, invalidated or circumvented. We enter into agreements with our
employees and clients that seek to limit and protect the distribution of
proprietary information. We cannot assure you that the steps we have taken to
protect our intellectual property rights will be adequate to deter
misappropriation of proprietary information, and we may not be able to detect
unauthorized use and take appropriate steps to enforce our intellectual
property rights.
We could become subject to litigation regarding intellectual property rights,
which could seriously harm our business
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of the intellectual property of others. These claims
could require us to spend significant sums in litigation, pay damages, delay
product installments, develop non-infringing intellectual property or acquire
licenses to intellectual property that is the subject of the infringement
claim. These claims could have a material adverse effect on our business,
operating results and financial condition.
We may incur significant costs from class action litigation due to the expected
volatility of our common stock
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If
we were the object of securities class action litigation, we could incur
substantial costs and experience a diversion of our management's attention and
resources and such securities class action litigation could have a material
adverse effect on our business, financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to financial risk, including changes in interest rates, relates
primarily to cash and cash equivalents and marketable securities. These
investments bear interest at a variable interest rate, which is subject to
market changes. We have not entered into any interest rate swap agreements, or
other instruments to minimize our exposure to interest rate increases. We have
not had any derivative instruments in the past and do no presently plan to in
the future.
For purposes of specific risk analysis we use sensitivity analysis to
determine the impacts that market risk exposure may have on the fair value of
our cash and cash equivalents and marketable securities. To perform sensitivity
analysis, we assess the risk of loss in fair values from the impact of
hypothetical changes in interest rates on market sensitive instruments. We
compare the market values for interest risk based on the present value of
future cash flows as impacted by the changes in the rates. We selected discount
rates for the present value computations based on market interest rates in
effect at June 30, 2000. We compared the market values resulting from these
computations with the market values of these financial instruments at June 30,
2000. The differences in the comparison are the hypothetical gains or losses
associated with each type of risk.
29
<PAGE>
Our investment portfolio consists of demand deposit accounts, a money market
mutual fund and investment accounts. Due to the short-term average maturity of
the investment portfolio, a sudden sharp change in interest rates would not
have a material adverse effect on the value of the portfolio. Based on our
investment portfolio and interest rates, a 100 basis point increase or decrease
in interest rates would result in an increase or decrease of approximately
$400,000 and $385,000 for the years ended 1999 and 2000, respectively, in our
results from operations and cash flows.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements, Financial Statements and Supplementary Data
appear on pages 37 to 56 of this Annual Report on Form 10-K.
Item 9. Changes In and Disagreements with Accountants in Accounting and
Financial Disclosure.
None.
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
See "Executive Officers of the Registrant" in Part I of this Annual Report
on Form 10-K. We will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days
after the close of the fiscal year ended June 30, 2000. The information
required by this item is incorporated herein by reference to the information
contained under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to
the information contained under the captions "Executive Compensation,"
"Director Compensation," "Compensation Committee Interlocks and Insider
Participation." "Stock Performance Graph," "Employment Agreements" and "Reports
of the Compensation Committee on Executive Compensation" of the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to
the information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference to
the information contained under the caption "Certain Relationships and Related
Transactions" of the Proxy Statement.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedule and Exhibits
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Financial Statements--see "Index to Financial Statements"..... 37
(2) Financial Statement Schedule for the Years Ended June 30,
1998, 1999 and 2000: Schedule II--Valuation and Qualifying
Accounts........................................................ 33
Financial statement schedules not included have been omitted
because of the absence of conditions under which they are
required or because the required information, where material,
is shown in the financial statements or notes
(3) Exhibits:
Exhibits submitted with the Annual Report on Form 10-K as
filed with the Securities and Exchange Commission and those
incorporated by reference to other filings are listed on the
Exhibit Index................................................ 34
</TABLE>
(b) Reports on Form 8-K
None.
32
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS
Years Ended June 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Additions
--------------------
(Charged
Balance at to Costs
Beginning and Balance at
Year ended of Year Expenses) Recoveries Deductions(1) End of Year
---------- ---------- --------- ---------- ------------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
June 30, 1998........ $ 644 326 -- -- $ 970
June 30, 1999........ $ 970 302 176 125 $1,323
June 30, 2000........ $1,323 413 15 654 $1,097
</TABLE>
--------
(1) Deductions are principally write-offs.
33
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.1* Specimen certificate for shares of common stock.
10.1* 1989 Stock Option Plan, as amended, including form of stock option
agreement for incentive and non-statutory stock options.
10.2* Amended and Restated 1997 Stock Incentive Plan, including form of
stock option agreement for incentive and non-statutory stock
options.
10.3* 1998 Director Stock Option Plan, including form of non-statutory
stock option agreement.
10.4* 1998 Employee Stock Purchase Plan.
10.5* First Amendment and Restatement of Stock Rights and Voting
Agreement, as amended.
10.6* Second Stock Rights Agreement, as amended.
10.7* Lease dated November 28, 1994, between the Registrant and Wenberry
Associates L.L.C.
10.8* Employment Agreement between the Registrant and Mr. McGurl.
10.9* Employment Agreement between the Registrant and Mr. Mullen.
10.10* Employment Agreement between the Registrant and Mr. Eberle.
10.11* Revolving Credit Agreement between the Registrant and Shawmut Bank
N.A., dated January 13, 1995.
10.12* Secured Revolving Time Note between the Registrant and Shawmut Bank
N.A., dated
January 13, 1995.
10.13* First Amendment of the Loan Agreement between the Registrant and
Fleet National Bank of Massachusetts, dated December 29, 1995.
10.14* Secured Revolving Time Note between the Registrant and Fleet
National Bank of Massachusetts, dated December 29, 1995.
10.15* Second Amendment of the Loan Agreement between the Registrant and
Fleet National Bank, dated December 20, 1996.
10.16* Secured Revolving Time Note between the Registrant and Fleet
National Bank, dated
December 20, 1996.
10.17* Third Amendment of the Loan Agreement between the Registrant and
Fleet National Bank, dated December 29, 1997.
10.18* Secured Revolving Time Note between the Registrant and Fleet
National Bank, dated
December 29, 1997.
10.19* Fourth Amendment of the Loan Agreement between the Registrant and
Fleet National Bank, dated December 29, 1998.
10.20* Secured Revolving Time Note between the Registrant and Fleet
National Bank, dated
December 29, 1998.
10.21* Line of Credit Agreement for the Acquisition of Equipment between
the Registrant and Shawmut Bank N.A., dated January 13, 1995.
10.22* Secured Term Note between the Registrant and Shawmut Bank N.A.,
dated June 28, 1995.
10.23* Security Agreement between the Registrant and Shawmut Bank N.A.,
dated January 13, 1995.
10.24** Asset Purchase Agreement between the Registrant and The Northern
Trust Company, dated
June 30, 1999.
10.25*** Asset Purchase Agreement between the Registrant and Integrated Cash
Management Services, Inc., dated October 25, 1999.
10.26**** Stock Purchase Agreement by and among the Registrant and Nevada
Bond Investment Corp. II, dated June 9, 2000.
10.27**** Investor Rights Agreement by and among the Registrant and Nevada
Bond Investment Corp. II, dated June 9, 2000.
10.28***** Share Purchase Agreement between the Persons named in column (A) of
Schedule 1 thereto and the Registrant dated August 28, 2000.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.29***** Form of Loan Note issued to the Persons named in column (A) of
Schedule 1 of Share Purchase Agreement between the Persons named in
column (A) of Schedule 1 thereto and the Registrant dated August
28, 2000.
10.30***** Stock Purchase Agreement by and among the Registrant, Flashpoint,
Inc. and Eric Levine dated August 28, 2000.
10.31 Common Stock Purchase Warrant for 307,882 shares of common stock,
$.001 par value of Bottomline Technologies (de), Inc, issued to
Nevada Bond Investment Corp. II on June 9, 2000 (filed herewith).
10.32 Common Stock Purchase Warrant for 324,000 shares of common stock,
$.001 par value of Bottomline Technologies (de), Inc., issued to
Citibank, N.A. on April 4, 2000 (filed herewith).
10.33 Lease dated July 20, 1999, between the Registrant and 60 Cutter
Mill Road Property Corp. (filed herewith).
10.34 Lease dated May 22, 2000, between the Registrant and 55 Broad
Street L.P. (filed herewith).
10.35 Lease dated August 31, 2000, between the Registrant and 325
Corporate Drive II, LLC (filed herewith).
23 Consent of Ernst & Young LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
--------
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File No. 333-67309).
** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended June 30, 1999 (File No. 000-25259).
*** Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated October 25, 1999 (File No. 000-25259).
**** Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 (File No. 333-43842).
***** Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated September 12, 2000 (File No. 000-25259).
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Bottomline Technologies (de) Inc.
By: /s/ Robert A. Eberle ____________
Robert A. Eberle
Executive Vice President,
Chief Financial Officer,
Treasurer and Director
(Principal Financial and
Accounting Officer)
Date: September 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 26, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Daniel M. McGurl Chairman of the Board, and
______________________________________ Chief Executive
Daniel M. McGurl Officer(Principal
Executive Officer)
/s/ Joseph L. Mullen President, Chief Operating
______________________________________ Officer and Director
Joseph L. Mullen
/s/ Robert A. Eberle Executive Vice President,
______________________________________ Chief Financial Officer,
Robert A. Eberle Treasurer, and Director
(Principal Financial and
Accounting Officer)
/s/ James L. Loomis Senior Executive Advisor
______________________________________ and Director
James L. Loomis
/s/ Joseph L. Barry Jr. Director
______________________________________
Joseph L. Barry Jr.
/s/ Dianne Gregg Director
______________________________________
Dianne Gregg
/s/ James W. Zilinski Director
______________________________________
James W. Zilinski
</TABLE>
36
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors........................................... 38
Consolidated Balance Sheets as of June 30, 1999 and 2000................. 39
Consolidated Statements of Operations for the years ended June 30, 1998,
1999 and 2000........................................................... 40
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ended June 30, 1998, 1999 and 2000........................ 41
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1999 and 2000........................................................... 42
Notes to Consolidated Financial Statements............................... 43
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Bottomline Technologies (de), Inc.
We have audited the accompanying consolidated balance sheets of Bottomline
Technologies (de), Inc. as of June 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the three years in the period ended June 30,
2000. Our audits also included the consolidated financial statement schedule
listed in the index at Item 14 (a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bottomline
Technologies (de), Inc. at June 30, 1999 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 2, 2000, except for Note 12 as
to which the date is August 28, 2000.
38
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------
1999 2000
------- -------
(in thousands,
except per
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $39,699 $27,292
Marketable securities....................................... -- 11,222
Accounts receivable, net of allowances for doubtful accounts
and returns of $1,323 at June 30, 1999 and $1,097 at June
30, 2000................................................... 11,631 14,571
Inventory, net.............................................. 322 168
Deferred income taxes....................................... 665 1,046
Prepaid expenses and other current assets................... 371 546
------- -------
Total current assets.......................................... 52,688 54,845
Property and equipment, net................................... 2,392 5,172
Intangibles, net of accumulated amortization of $2,311........ -- 8,416
Deferred income taxes......................................... -- 2,084
Other assets.................................................. 66 763
------- -------
Total assets............................................ $55,146 $71,280
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,376 $ 2,004
Accrued expenses............................................ 3,478 4,930
Deferred revenue and deposits............................... 3,467 6,034
Income taxes payable........................................ 657 901
------- -------
Total current liabilities..................................... 8,978 13,869
Deferred income taxes......................................... 253 283
Commitments and contingent liabilities........................ -- --
Stockholders' equity:
Preferred Stock, $.001 par value:
Authorized shares--4,000; issued and outstanding shares--
none..................................................... -- --
Common Stock, $.001 par value:
Authorized shares--50,000; issued and outstanding shares--
10,476 at June 30, 1999, and 11,226 at June 30, 2000..... 10 11
Additional paid-in-capital.................................. 39,429 64,914
Accumulated comprehensive loss--unrealized loss on
available-for-sale securities.............................. -- (8)
Retained earnings (deficit)................................. 6,476 (7,789)
------- -------
Total stockholders' equity.................................... 45,915 57,128
------- -------
Total liabilities and stockholders' equity.............. $55,146 $71,280
======= =======
</TABLE>
See accompanying notes.
39
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1998 1999 2000
------- ------- --------
(in thousands, except
per share data)
<S> <C> <C> <C>
Revenues:
Software licenses............................... $ 9,887 $15,885 $ 19,483
Service and maintenance......................... 9,701 12,422 19,870
Equipment and supplies.......................... 9,449 10,996 9,781
------- ------- --------
Total revenues.............................. 29,037 39,303 49,134
Cost of revenues:
Software licenses............................... 215 261 561
Service and maintenance......................... 4,261 5,323 9,733
Equipment and supplies.......................... 6,526 7,999 7,252
------- ------- --------
Total cost of revenues...................... 11,002 13,583 17,546
------- ------- --------
Gross profit...................................... 18,035 25,720 31,588
Operating expenses:
Sales and Marketing:
Sales and marketing........................... 7,675 10,969 13,784
Expense associated with warrants issued....... -- -- 11,902
Product development and engineering:
Product development and engineering........... 3,158 3,971 8,580
In-process research and development........... -- -- 3,900
General and administrative:
General and administrative.................... 4,372 4,755 8,606
Amortization of intangible assets............. -- -- 2,311
------- ------- --------
Total operating expenses.................... 15,205 19,695 49,083
------- ------- --------
Income (loss) from operations..................... 2,830 6,025 (17,495)
Interest income................................... 35 730 1,830
Interest expense.................................. (85) (4) --
------- ------- --------
(50) 726 1,830
------- ------- --------
Income (loss) before provision (benefit) for
income taxes..................................... 2,780 6,751 (15,665)
Provision (benefit) for income taxes.............. 1,177 2,700 (1,400)
------- ------- --------
Net income (loss)................................. $ 1,603 $ 4,051 $(14,265)
======= ======= ========
Earnings (loss) per share available to common
stockholders:
Basic........................................... $ 0.24 $ 0.50 $ (1.33)
======= ======= ========
Diluted......................................... $ 0.20 $ 0.43 $ (1.33)
======= ======= ========
Shares used in computing earnings (loss) per share
available to common stockholders:
Basic........................................... 6,314 7,988 10,744
======= ======= ========
Diluted......................................... 7,316 9,170 10,744
======= ======= ========
</TABLE>
See accompanying notes.
40
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
Years ended June 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Retained Total
------------- Paid-in Comprehensive Earnings Stockholders'
Shares Amount Capital Loss (Deficit) Equity
------ ------ ---------- ------------- --------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30,
1997................... 6,306 $ 6 $ 1,675 -- $ 999 $ 2,680
Issuance of common
stock upon exercise
of stock options..... 54 -- 192 -- -- 192
Accretion to
redemption value on
redeemable common
stock................ -- -- -- -- (107) (107)
Net income............ -- -- -- -- 1,603 1,603
------ --- ------- --- -------- --------
Balances at June 30,
1998................... 6,360 6 1,867 -- 2,495 4,368
Issuance of common
stock upon exercise
of stock options and
warrants............. 179 -- 297 -- -- 297
Accretion to
redemption value on
redeemable common
stock................ -- -- -- -- (70) (70)
Termination of
redemption rights
upon initial public
offering............. 801 1 1,422 -- -- 1,423
Proceeds from sale of
common stock, net of
offering expenses.... 3,136 3 35,843 -- -- 35,846
Net income............ -- -- -- -- 4,051 4,051
------ --- ------- --- -------- --------
Balances at June 30,
1999................... 10,476 10 39,429 -- 6,476 45,915
Issuance of common
stock for employee
stock purchase plan
and upon exercise of
stock options........ 442 1 3,637 -- -- 3,638
Proceeds from sale of
common stock and
issuance of warrants,
net of expenses...... 308 -- 21,848 -- -- 21,848
Net loss.............. -- -- -- -- (14,265) (14,265)
Unrealized loss on
available-for-sale
securities........... -- -- -- $(8) -- (8)
--------
Comprehensive loss.... -- -- -- -- -- (14,273)
------ --- ------- --- -------- --------
Balances at June 30,
2000................... 11,226 $11 $64,914 $(8) $ (7,789) $ 57,128
====== === ======= === ======== ========
</TABLE>
See accompanying notes.
41
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Jume 30,
--------------------------
1998 1999 2000
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss)................................. $ 1,603 $ 4,051 $(14,265)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Expense associated with warrants issued......... -- -- 11,902
In-process research and development............. -- -- 3,900
Amortization of intangible assets............... -- -- 2,311
Depreciation and amortization of property and
equipment...................................... 827 873 1,553
Provision for allowances on accounts
receivable..................................... 326 302 413
Provision for allowances for obsolescence of
inventory...................................... -- 132 --
Deferred income tax (benefit) expense........... (270) 194 (2,435)
Changes in operating assets and liabilities:
Accounts receivable........................... (1,727) (4,936) (1,986)
Inventory, prepaid expenses and other current
assets and other assets...................... 530 (538) (718)
Refundable income taxes....................... 905 -- --
Accounts payable, accrued expenses and
deferred revenue and deposits................ 392 2,993 2,449
Income taxes payable.......................... 59 598 244
------- ------- --------
Net cash provided by operating activities......... 2,645 3,669 3,368
Investing activities
Purchases of marketable securities................ -- -- (30,441)
Proceeds from sales and maturities of marketable
securities....................................... -- -- 19,211
Purchases of property and equipment, net.......... (993) (1,400) (4,148)
Acquisition of businesses and assets, net of cash
acquired......................................... -- -- (13,981)
------- ------- --------
Net cash used in investing activities............. (993) (1,400) (29,359)
Financing activities
Repayments on revolving credit arrangement........ (1,045) -- --
Repayments on note payable........................ (264) (75) --
Proceeds from exercise of stock options and
employee stock purchase plan..................... 192 297 3,638
Proceeds from sale of common stock, net........... -- 35,846 9,946
------- ------- --------
Net cash provided by (used in) financing
activities....................................... (1,117) 36,068 13,584
------- ------- --------
Increase (decrease) in cash and cash equivalents.. 535 38,337 (12,407)
Cash and cash equivalents at beginning of year.... 827 1,362 39,699
------- ------- --------
Cash and cash equivalents at end of year.......... $ 1,362 $39,699 $ 27,292
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................... $ 85 $ 4 $ --
Income taxes.................................. $ 464 $ 2,096 $ 1,112
</TABLE>
See accompanying notes.
42
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30, 1998, 1999 and 2000
1. Organization and Nature of Business
Bottomline Technologies (de), Inc. was originally incorporated as a New
Hampshire corporation in 1989 and was reincorporated as a Delaware corporation
in August 1997. The Company is a software company that creates an automated e-
business infrastructure for use by businesses and financial institutions to
make payments and present bills. The Company's products and services are sold
to customers operating in many different industries throughout the world.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts, a money market
mutual fund and an overnight investment account at a financial institution. The
Company considers all highly liquid instruments with an original maturity of
ninety days or less to be cash equivalents. The carrying value of these
instruments approximates their fair value.
Marketable Securities
The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115). SFAS 115 establishes the accounting
and reporting requirements for all debt securities and for investments in
equity securities that have readily determinable fair values. All marketable
securities must be classified as one of the following: held-to-maturity,
available-for-sale, or trading. The Company classifies its marketable
securities as available-for-sale and, as such, carries the investments at fair
value, with unrealized holding gains and losses reported as a separate
component of stockholders' equity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, marketable
securities, and accounts receivable. Cash and cash equivalents subject us to
concentrations of credit risk as the Company had approximately $27,300,000
invested with a single financial institution at June 30, 2000. The Company
invests its excess cash and cash equivalents in high quality marketable
securities. Concentration of credit risk with respect to marketable securities
is limited as marketable securities are primarily investment-grade corporate
bonds with high-credit, quality financial institutions.
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of companies and diverse industries comprising the
Company's customer base. At June 30, 2000, a subsidiary of United Technologies
Corporation, a related party, accounted for 14.4% of total accounts receivable.
On-going credit evaluations of customer' financial condition are performed and
collateral is generally not required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
43
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Instruments
The fair value of the Company's financial instruments, which include cash
and cash equivalents, marketable securities, accounts receivable, and accounts
payable are based on assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates reflecting varying degrees of
perceived risk. The carrying value of these financial instruments approximated
their fair value at June 30, 1999 and 2000, respectively, due to the short-term
nature of these instruments.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (three to five years).
Leasehold improvements are amortized on a straight-line basis over the lesser
of the estimated useful life of the asset or the lease term.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets represent core technology, contract
backlog, assembled workforce and goodwill in connection with acquisitions made
during the fiscal year. In connection with the acquisitions accounted for as
business combinations and the acquisition of assets, the Company recorded
intangible assets based on the excess of the purchase price over the
identifiable tangible assets acquired on the date of purchase. Intangible
assets are reported at cost, net of accumulated amortization, and are being
amortized over their estimated useful lives ranging from one to five years.
Goodwill and other intangible assets, net of accumulated amortization, was
$8,416,000 at June 30, 2000. Amortization expense was $2,311,000 for the year
ended June 30, 2000.
The carrying value of intangible assets is periodically reviewed by the
Company based on the expected future undiscounted operating cash flows of the
related asset. If an impairment is indicated, the Company will adjust the
carrying value of the intangible assets. No event has occurred that would
impair the value of long-lived assets recorded in the accompanying consolidated
financial statements.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$129,000, $136,000 and $358,000 for the years ended June 30, 1998, 1999 and
2000, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Estimates include, but are not limited to,
the allowances for doubtful accounts and returns and accrued liabilities.
Actual results could differ from those estimates.
Income Taxes
Deferred income taxes are provided for differences in bases of assets and
liabilities for financial reporting and income tax purposes. Temporary
differences relate primarily to acquisition-related intangibles, depreciation,
44
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
various accruals, and allowances for doubtful accounts, returns and inventory.
The principal non-deductible expenses relate to the issuance of a warrant
during fiscal year 2000 and certain non-deductible acquisition-related
intangibles.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123) encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for stock based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
Prior to the Company's initial public offering on February 12, 1999, the
Board of Directors determined the fair value of the Company's common stock in
its good faith judgement at each option grant date for grants under the equity
plans. In determining the fair value, the Board of Directors considered a
number of factors including the financial and operating performance, recent
transactions in the Company's common stock, if any, the values of similarly
situated companies and the lack of marketability of the Company's common stock.
Capitalized and Acquired Software Costs
Capitalization of software development costs under SFAS No. 86 begins upon
the establishment of technological feasibility. Technological feasibility is
established upon the completion of a working model. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies. Capitalized
and acquired software costs charged to operations were $253,000 for the year
ending June 30, 1998. For the years ended June 30, 1999 and 2000, there were no
costs capitalized since none met the definition of technological feasibility.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the
American Institute (AcSEC) of Certified Public Accountants issued Statement of
Position (SOP) 97-2 "Software Revenue Recognition", which was adopted effective
July 1, 1998. SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" deferred the effective date of certain
aspects of SOP 97-2. Effective December 15, 1998, SOP 98-9 was issued which
amended SOP 98-4 and extended the deferral of the application of certain
passages of SOP 97-2 to transactions entered into in fiscal years beginning
after March 15, 1999. These statements superseded SOP 91-1, "Software Revenue
Recognition," and provide guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions entered into in
fiscal years beginning after December 15, 1997. The adoption of SOP 97-2, as
amended by SOP 98-4 and SOP 98-9, did not have a material impact on the
Company's revenues and results of operations.
Revenue recognition from software license fees is recognized when persuasive
evidence of an arrangement exists, delivery of the product has occurred, the
fee is fixed or determinable and collectibility is probable. The Company's
software arrangements may contain multiple elements, such as software products,
services, hardware and post-contract customer support (PCS). Revenue earned on
software arrangements involving multiple elements which qualify for separate
element treatment is allocated to each element based on the relative fair
values of those elements based on vendor specific objective evidence. For the
year ended June 30, 2000, vendor specific objective evidence is limited to the
price charged when the element is sold separately or,
45
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for an element not yet being sold separately, the price established by
management having the relevant authority. Accordingly, revenue for software
licenses is recognized when the product is shipped. Revenue for services is
recognized as the services are provided to the customer. Revenue for PCS under
software maintenance agreements is recognized ratably over the term of the
agreement, generally one year. Revenue for hardware is recognized when the
product is shipped.
Certain arrangements requiring significant customization and modifications
and extended implementation periods are accounted for using percentage of
completion contract accounting as defined by Statement of Position No. 81-1
("SOP 81-1"), "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts". Under SOP 81-1, revenue is recognized based on the
costs incurred during the reporting period as a percentage of the estimated
total contract costs.
For the year ended June 30, 1998, revenue was recognized in accordance with
SOP 91-1 and, accordingly, revenue for software was recognized when the product
was shipped and there were no significant remaining company obligations.
Customer Returns
Customer returns are estimated and accrued for when known based on return
authorizations and past history.
Earnings per Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS
128 requires calculation and presentation of basic and diluted earnings per
share. Basic earnings per share is calculated based on the weighted average
number of common shares outstanding and excludes any dilutive effects of
warrants, stock options or other type securities. Diluted earnings per share is
calculated based on the weighted average number of common shares outstanding
and the dilutive effect of stock options, warrants and related securities
calculated using the treasury stock method. Dilutive securities are excluded
from the diluted earnings per share calculation if their effect is
antidilutive.
401(k) Plan
The Company has a 401(k) Profit Sharing Plan (the Plan), whereby eligible
employees may contribute up to 15% of their compensation, subject to
limitations established by the Internal Revenue Code. The Company may
contribute a discretionary matching contribution annually equal to 50% (30% in
1999 and 25% in 1998) of each such participant's deferred compensation up to 5%
of their annual compensation. The Company charged $98,000, $129,000 and
$294,000 to expense in the years ended 1998, 1999 and 2000, respectively, under
the Plan.
Comprehensive Income (Loss)
The Company computes comprehensive income (loss) in accordance with
Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting
Comprehensive Income". SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in the financial statements.
Comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources, such as foreign currency translation adjustments
and unrealized gains and losses on available-for-sale securities. Comprehensive
income was equal to net income for the years ended June 30, 1998 and 1999 since
there were no elements of comprehensive income. Comprehensive loss for the year
ended June 30, 2000 was
46
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$14,273,000. The difference between net loss and comprehensive loss for the
year ended June 30, 2000 was $8,000 of net unrealized losses on the Company's
investments.
Segment Reporting
Effective July 1, 1998, the Company adopted SFAS No.131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
superseded FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 established standards for the way that public
business enterprises report information about operating segments in financial
reports. SFAS 131 also established standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 131 did not affect results of operations, financial position, or the
footnote disclosure as the Company operates in a single industry segment.
Accounting Pronouncements
In December 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Due to a variety of
implementation questions that have arisen, the Securities and Exchange
Commission (SEC) has deferred the implementation of SAB 101 until no later than
the fourth quarter for fiscal years beginning after December 15, 1999. The SEC
is expected to issue further interpretive guidance in the fall of 2000. We will
adopt SAB 101 no later than the fourth quarter of the fiscal year ending June
30, 2001. We are still assessing the impact of adopting SAB 101 and do not
expect to make a definitive assessment until the further guidance is issued.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees". Interpretation 44 clarifies guidance for
certain issues that arose in the application of APB 25. Areas of focus within
Interpretation 44 include repricings, modifications to extend the option term,
change of grantee status, modifications to accelerate vesting and options
exchanged in a purchase business combination. Interpretation 44 will be applied
prospectively to new awards, modifications to outstanding awards, and changes
in employee status on or after July 1, 2000. Effective July 1, 2000, should
these types of transactions occur, we will account for them under APB 25 as
clarified by Interpretation 44.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet effective July 1, 2000 at their fair value. We will adopt SFAS
133, as amended by SFAS 137 effective July 1, 2000. We do not expect the
adoption of SFAS 133 to have a material impact on our results of operations or
financial position.
3. Product and Business Acquisitions
NetTransact
In July 1999, the Company acquired certain software and related proprietary
intellectual property, NetTransact, from The Northern Trust Company for
$3,800,000 in cash and acquisition costs. NetTransact allows for the electronic
presentment and payment of invoices and related dispute resolution in a
business-to-business environment. In connection with this product acquisition,
the Company recorded a $1,300,000 charge for acquired in-process research and
development and a $2,500,000 intangible asset that is being amortized on a
straight line basis over a five-year period. Accumulated amortization on
intangible assets was $503,000 at June 30, 2000. In
47
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
connection with the acquisition, the Company is obligated to pay The Northern
Trust Company a 10% royalty on all NetTransact revenue related to the software
and certain other property acquired from The Northern Trust Company excluding
the initial $3,500,000 in revenues.
Integrated Cash Management Services, Inc.
In October 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of Integrated Cash Management Services, Inc.
("ICM") for an aggregate of $9,300,000 in cash and acquisition costs.
In connection with this asset acquisition, the Company recorded a $2,600,000
charge for acquired in-process research and development. The Company recorded
$6,700,000 of intangible assets consisting of core technology, contract
backlog, assembled workforce and goodwill. The intangible assets are reported
at cost, net of accumulated amortization, and are being amortized on a straight
line basis over their estimated useful lives ranging from one to five years.
Accumulated amortization on intangible assets was $1,637,000 at June 30, 2000.
The acquisition was accounted for as a purchase with results of operations
included with those of the Company for periods subsequent to the date of
acquisition.
OLC Software, Inc.
In February 2000, the Company acquired all outstanding shares of stock of
OLC Software, Inc. ("OLC") for an aggregate of $1,500,000 in cash and
acquisition costs. OLC was an early stage development company with limited
operations prior to the acquisition. In connection with this acquisition, the
Company recorded an intangible asset that is being amortized over its useful
life of three years. Accumulated amortization on intangible assets was $171,000
at June 30, 2000.
The acquisition was accounted for as a purchase with results of operations
included with those of the Company for periods subsequent to the date of
acquisition.
In-Process Research and Development
In connection with the acquisitions of the NetTransact product and the ICM
net assets, the Company recorded in-process research and development charges of
$3,900,000 representing purchased in-process research and development that has
not yet reached technological feasibility. The Company's management made
certain assessments with respect to the determination of all identifiable
assets resulting from, or to be used in, research and development activities as
of the respective acquisition dates.
In the NetTransact product and ICM net asset acquisitions, the in-process
research and development projects were valued using an Income Approach, which
included the application of a discounted future earnings methodology. Using
this methodology, the value of the in-process technology is comprised of the
total present value of the future earnings stream attributable to the
technology throughout its anticipated life. As a basis for the valuation
process, the Company made estimates of the revenue stream to be generated in
each future period and the corresponding operating expenses and other charges
to apply to this revenue stream. In order to determine the value of the
earnings stream that was specifically attributable to the in-process
technology, the earnings attributable to the projects were calculated by
deducting the earnings streams attributable to all other assets, including
working capital and tangible assets. Based upon these assumptions, the future
after-tax income streams relating to the in-process technologies were
discounted to present value using a risk adjusted discount rate that reflected
the uncertainty involved in successfully completing and commercializing the in-
process technologies.
48
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the amounts allocated to the assets acquired for all the above
is as follows:
(in thousands)
<TABLE>
<S> <C>
In-process research and development............................... $ 3,900
Core technology................................................... 5,600
Assembled workforce............................................... 1,100
Net identifiable tangible assets.................................. 627
Goodwill.......................................................... 2,800
Other............................................................. 600
--------
14,627
--------
Less:
In-process research and development charges..................... (3,900)
--------
10,727
Less:
Accumulated amortization........................................ (2,311)
--------
$ 8,416
========
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the Company and ICM as if the acquisition had
occurred as of the beginning of fiscal 1999 and 2000, after giving effect to
certain adjustments, including amortization of goodwill and other intangible
assets. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and ICM been a
single entity during such period. Since NetTransact was a product acquistion
and OLC had very limited operations prior to the acquisition, no amounts are
included in the pro forma information below.
<TABLE>
<CAPTION>
Pro forma year
ended June 30,
----------------
1999 2000
------- --------
(unaudited)
(in thousands)
<S> <C> <C>
Revenues.................................................. $45,207 $ 50,833
Net income (loss)......................................... $ 826 $(15,713)
Net income (loss) per share............................... $ 0.08 $ (1.46)
</TABLE>
4. Marketable Securities
Marketable securities are classified as available-for-sale and are reported
at fair value based on quoted market prices with net unrealized gains or losses
excluded from earnings and reported as a separate component of shareholders'
equity. Interest income and realized gains and losses are recognized when
earned. The carrying amount of the Company's investments at June 30, 2000 is
shown in the table below:
<TABLE>
<CAPTION>
June 30, 2000
---------------
Market
Cost Value
------- -------
(in thousands)
<S> <C> <C>
Marketable Securities:
Corporate Bonds........................................... $10,219 $10,210
Certificates of Deposit................................... 1,011 1,012
------- -------
Total....................................................... $11,230 $11,222
======= =======
</TABLE>
At June 30, 2000, marketable securities with scheduled maturities within one
year were $10,221,000 and maturities between one to three years were
$1,001,000. Gross unrealized losses were $9,000 and gross unrealized gains were
$1,000 for the year ended June 30, 2000. Realized gains and losses were $-0-
for the year ended June 30, 2000.
49
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------
1999 2000
------ ------
(in
thousands)
<S> <C> <C>
Furniture and fixtures........................................ $ 465 $ 792
Technical equipment........................................... 3,551 5,335
Software...................................................... 803 1,952
Leasehold improvements........................................ 277 458
------ ------
5,096 8,537
Less: Accumulated depreciation and amortization............... 2,704 3,365
------ ------
$2,392 $5,172
====== ======
</TABLE>
6. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------
1999 2000
------ ------
(in
thousands)
<S> <C> <C>
Employee compensation and benefits............................ $2,598 $2,915
Sales taxes................................................... 220 610
Royalties..................................................... -- 296
Other......................................................... 660 1,109
------ ------
$3,478 $4,930
====== ======
</TABLE>
7. Borrowing Arrangements
The Company had a revolving credit agreement (the revolving agreement) with
a bank which provided for available borrowings of up to $5,000,000. The
revolving agreement expired on December 30, 1999 and the Company chose not to
renew it. There were no borrowings outstanding under the revolving agreement at
June 30, 1999.
8. Commitments and Contingent Liabilities
The Company leases its principal office facility under a noncancellable
operating lease expiring in 2002. In addition to the base term, the Company has
two five-year options to extend the term of the lease. Rent payments are fixed
for the initial two years of the lease and may be increased after that during
the initial term of the lease by the Consumer Price Index. In addition, the
Company is obligated to pay certain incremental operating costs over the base
amount.
The Company also leases office space in other cities. All such leases expire
by fiscal year 2010.
Future minimum annual rental commitments under these leases at June 30, 2000
are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2001........................................................... $1,300
2002........................................................... 1,043
2003........................................................... 657
2004........................................................... 507
2005 and thereafter............................................ 2,871
------
$6,378
======
</TABLE>
50
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense charged to operations for the years ended June 30, 1998, 1999
and 2000 was $342,000, $454,000, and $944,000 respectively.
9. Capital Transactions
Preferred Stock
On November 12, 1998, the Company's Board of Directors authorized a class of
preferred stock, $.001 par value with 4,000,000 shares available for issuance.
Common Stock
In connection with the sale of its common stock in 1992, the Company agreed
with certain stockholders to redeem, at the stockholders' option, 801,000
shares of common stock anytime after June 29, 1995. The initial redemption
value was $1.00 per share and increased each year in accordance with the
agreement. These redemption rights terminated in February 1999 upon the
effectiveness of the Company's initial public offering. The redemption value at
termination was $1,423,000.
In February 1999, the Company completed the sale of 3,029,466 shares of its
common stock in its initial public offering for proceeds of approximately
$34,874,000, net of expenses of the offering.
In June 2000, a subsidiary of United Technologies Corporation (UTC)
purchased 307,882 shares of common stock for aggregate consideration of
$9,951,000, net of expenses. In connection with the equity investment, the
Company also issued warrants to UTC for the purchase of 307,882 shares of
common stock at an exercise price of $38.00. The Company valued the warrants
issued using the Black-Scholes method using assumptions of an expected life of
three years and a volatility of 91%. The proceeds of the sale of the common
stock and warrants were allocated to each based on the relative fair value
resulting in a charge to operations of $6,041,000. The warrants were fully
vested and exercisable upon issuance.
Shares reserved for future issuance were 3,468,811 at June 30, 2000.
Equity Plans
1989 Stock Option Plan
The Company adopted the Bottomline Technologies, Inc. Stock Option Plan, as
amended, (the Plan) on August 1, 1989, which provides for the issuance of
incentive stock options and nonstatutory stock options. The Plan is
administered by the Board of Directors, which has the authority to determine to
whom options may be granted, the period of exercise and what other
restrictions, if any, should apply. Vesting for options granted under the Plan
is principally over three years from the date of the grant. The Company has
reserved up to 1,440,000 shares of its common stock for issuance under the
Plan. Incentive stock options may be granted to employees at a price of no less
than 100% of the fair market value of the common stock at the date of grant.
Options expire a maximum of ten years from the date of grant.
1997 Stock Incentive Plan
On August 21, 1997, the Company adopted the 1997 Stock Incentive Plan (the
1997 Plan), which provides for the issuance of stock options and nonstatutory
stock options. The 1997 Plan is administered by the Board of Directors which
has the authority to determine to whom options may be granted, the period of
exercise and what other restrictions, if any, should apply. Vesting for options
granted under the 1997 Plan is principally over four years from the date of the
grant. The Company has reserved up to 2,700,000 shares of its common stock for
issuance under the 1997 Plan to employees at a price of no less than 100% of
the fair market value of the common stock at the date of grant. Options expire
a maximum of ten years from the date of grant.
51
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Non-Employee Director Stock Option Plan
On November 12, 1998, the Company adopted the 1998 Non-Employee Director
Stock Option Plan (the Director Plan), which provides for the issuance of non-
statutory stock options. The Company has reserved up to 300,000 shares of its
common stock for issuance under the Director Plan. Under the terms of the
Director Plan, each non-employee director is granted an option to purchase
15,000 shares of common stock upon his or her initial election to the Board of
Directors. Such options vest ratably over four years from the date of the
grant. Additionally, each non-employee director is granted an option to
purchase 7,500 shares of common stock at each annual meeting of stockholders
following the annual meeting of the initial year of the election. Such options
principally vest over one year from the date of the grant.
1998 Employee Stock Purchase Plan
On November 12, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the Stock Purchase Plan), which provides for the issuance of up to a
total of 750,000 shares of common stock to participating employees. Eligible
employees may contribute between 1% and 10% of their base pay to the Stock
Purchase Plan. At the end of a designated offering period, employees purchase
shares of the Company's common stock with their contributions at an amount
equal to 85% of the closing market price per share of the common stock on
either the first day or the last day of the offering period, whichever is
lower.
Stock-Based Compensation
The Company has elected to follow APB 25, and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, as the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Option valuation models have been developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. Such models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The following
assumptions were made for grants in 1998, 1999 and 2000, respectively:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Dividend yield........................... 0% 0% 0%
Expected lives of options (years)........ 4 4 4
Risk-free interest rate.................. 5.65--6.20% 4.37--5.75% 5.97--6.66%
Volatility............................... -- 45.0% 91.0%
</TABLE>
For purposes of the required pro forma disclosures, the estimated fair value
of the options is amortized over the options' vesting period. Had compensation
cost for the Company's stock option plan been determined based on the fair
value at the grant dates for awards under those plans consistent with the
Black-Scholes method subsequent to the Company's initial public offering in
February 1999 and the minimum value method prior to February 1999, the
Company's pro forma net income (loss) and pro forma earnings (loss) per share
available to common stockholders would have been as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1998 1999 2000
------- ------- ---------
(in thousands, except per
share data)
<S> <C> <C> <C>
Pro forma net income (loss)..................... $ 1,488 $ 3,433 $ (17,759)
Pro forma earnings (loss) per share available to
common stockholders:
Basic......................................... $ 0.22 $ 0.42 $ (1.65)
Diluted....................................... $ 0.19 $ 0.37 $ (1.65)
</TABLE>
52
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As the provisions of SFAS 123 are effective only for fiscal years beginning
after December 15, 1994, the effects of applying SFAS 123 for pro forma
disclosures are not necessarily representative of the effects on net income
(loss) for future years.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 339 $5.10 885 $6.69 1,561 $10.51
Options granted......... 600 7.91 756 14.05 918 28.45
Options exercised....... (54) 3.67 (54) 5.55 (393) 7.77
Options canceled........ -- -- (26) 7.44 (120) 12.85
--- ----- ----- ----- ----- ------
Outstanding, end of
year................... 885 6.69 1,561 10.51 1,966 19.30
Exercisable at end of
year................... 102 $5.20 364 $6.63 313 $ 9.81
Weighted average fair
value of options
granted during the
year................... $1.53 $5.00 $21.78
</TABLE>
As of June 30, 1999 and 2000, options to purchase 1,709,000 and 871,000
shares, respectively, were available for grant under the Company's three stock
option plans. The following table presents weighted-average price and life
information about significant option groups outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Range of Weighted Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
-------- ----------- ---------------- -------- ----------- --------
(in thousands, except per share and life data)
<S> <C> <C> <C> <C> <C>
$5.67-$8.00 415 7.41 years $ 7.67 207 $ 7.44
$8.80-$10.00 203 6.63 years 9.65 38 9.05
$13.00-$13.00 415 8.62 years 13.00 59 13.00
$13.88-$28.88 396 9.34 years 16.60 0 0.00
$30.56-$59.00 537 9.42 years 38.78 9 47.71
----- ---
1,966 313
===== ===
</TABLE>
Warrants
In connection with the sale of its common stock in March 1992, the Company
issued warrants for the purchase of an aggregate 644,000 shares of common stock
at exercise prices ranging from $1.00 to $2.00 per share. During 1999, the
remaining warrants outstanding of 143,000 shares were exercised at a weighted
average price of $1.19.
In April 2000, the Company issued warrants to a company for the right to
purchase up to 324,000 shares of common stock at an exercise price of $55.00.
The warrants were fully vested and exercisable upon issuance. At June 30, 2000,
none of these warrants had been exercised. The Company valued the warrants
issued using the Black-Scholes method using assumptions of an expected life of
three years and a volatility of 91%. The value of the warrants, $5,861,000, was
charged to the results of operations.
53
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1998 1999 2000
------ ------ --------
<S> <C> <C> <C>
Numerator:
Net income (loss)............................... $1,603 $4,051 $(14,265)
Accretion to redemption value on redeemable
common stock................................... (107) (70) --
------ ------ --------
Numerator for basic and diluted earnings (loss)
per share available to common stockholders....... $1,496 $3,981 $(14,265)
====== ====== ========
Denominator:
Denominator for basic earnings (loss) per share
available to common stockholders--weighted-
average shares outstanding..................... 6,314 7,988 10,744
Effect of employee stock options, warrants and
redeemable common stock........................ 1,002 1,182 --
------ ------ --------
Denominator for diluted earnings (loss) per share
available to common stockholders................. 7,316 9,170 10,744
====== ====== ========
Earnings (loss) per share available to common
stockholders:
Basic........................................... $ 0.24 $ 0.50 $ (1.33)
====== ====== ========
Diluted......................................... $ 0.20 $ 0.43 $ (1.33)
====== ====== ========
</TABLE>
Options for 18,000 and 1,966,000 shares for the years ended June 30, 1999
and 2000, respectively, were excluded from the calculation of diluted earnings
per share as the effect would have been anti-dilutive. Warrants for 631,882
shares for the year ended June 30, 2000 were excluded from the calculation of
diluted earnings per share as the effect would have been anti-dilutive.
11. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS
No. 109 requires the use of the liability method in which income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
54
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
June 30,
--------------
1999 2000
----- -------
(in
thousands)
<S> <C> <C>
Deferred tax assets:
Allowances................................................. $ 516 $ 438
Various accrued expenses................................... 60 411
Inventory.................................................. 89 27
Deferred revenue........................................... -- 106
Goodwill amortization...................................... -- 2,148
Warrants................................................... -- 2,328
----- -------
665 5,458
Less: valuation allowance.................................. -- (2,328)
----- -------
Total deferred tax assets................................ 665 3,130
----- -------
Deferred tax liabilities:
Property, plant and equipment.............................. (253) (283)
----- -------
Total deferred tax liabilities........................... (253) (283)
----- -------
Net deferred tax assets.................................. $ 412 $ 2,847
===== =======
</TABLE>
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1998 1999 2000
------ ------ -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal............................................ $1,238 $2,021 $ 789
State.............................................. 209 485 246
------ ------ -------
1,447 2,506 1,035
------ ------ -------
Deferred:
Federal............................................ (241) 156 (1,587)
State.............................................. (29) 38 (848)
------ ------ -------
(270) 194 (2,435)
------ ------ -------
$1,177 $2,700 $(1,400)
====== ====== =======
</TABLE>
A reconciliation of the federal statutory rate to the effective income tax
is as follows:
<TABLE>
<CAPTION>
Year Ended June
30,
-----------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate.................. 34.0% 34.0% (34.0)%
State taxes, net of federal benefit...................... 6.5 4.7 (5.9)
Warrant expense.......................................... -- -- 15.5
Goodwill amortization.................................... -- -- 0.4
Non-deductible expenses.................................. 0.6 0.3 0.3
Research and development tax credits..................... (3.6) -- --
Other.................................................... 4.8 1.0 --
Valuation allowance...................................... -- -- 14.8
---- ---- -----
42.3% 40.0% (8.9)%
==== ==== =====
</TABLE>
55
<PAGE>
BOTTOMLINE TECHNOLOGIES (de), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The principal non-deductible expense for income tax purposes is a warrant
that is not deductible for income tax purposes and goodwill amortization on a
stock acquisition.
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not,
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $2,328,000 valuation allowance at June 30, 2000 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$2,328,000.
In addition to the above deferred tax assets, the company also has available
$1,308,000 of tax benefit attributable to the exercise of non-qualified stock
options. When realized, the associated benefit will be recognized as an
increase to additional paid-in capital.
12. Subsequent Events
On August 28, 2000, the Company acquired the stock of two companies,
Checkpoint Holdings, Ltd. (Checkpoint) and Flashpoint, Inc. (Flashpoint).
Checkpoint is an eCommerce and electronic payments software provider. The
purchase price for Checkpoint was approximately $82 million, with $15 million
paid in cash, $20 million in the form of a promissory note, 1,350,000 newly
issued shares of common stock, a warrant to purchase 100,000 shares of common
stock at a price of $50 per share and acquisition related costs. The
transaction will be accounted for as a purchase and Checkpoint's financial
results will be included with the Company's results from the acquisition date.
Flashpoint is a professional software development company. The purchase
price was approximately $14.5 million, consisting of $4.5 million in cash,
242,200 newly issued shares of common stock, the assumption of all outstanding
stock options of Flashpoint and acquisition related costs. The transaction will
be accounted for as a purchase and Flashpoint's results will be included in the
Company's results from the acquisition date.
The Company is evaluating and making preliminary assessments of the purchase
price allocation. The Company's early assessment is that a significant amount
of the purchase price will result in identifiable intangibles and goodwill and
will result in significant amounts of amortization in future years, including
fiscal year 2001. The Company's analysis is not yet complete but the Company
estimates the expected useful life to be in the three to five year range.
In August 2000, we entered into a ten-year lease for approximately 83,000
square feet of space for a new headquarters facility in Portsmouth, New
Hampshire. Total lease payments for this new facility will be approximately $15
million.
In August 2000, we made a $900,000 equity investment in Princeton eCom, an
electronic bill presentment and payment services provider, and a $500,000
equity investment in Magnet Corporation, a business-to-business e-finance
infrastructure and services provider. Both of these investments will be
accounted for on the cost basis.
56
