<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Bottomline Technologies (de), Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware 02-0433294
- ---------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
155 Fleet Street, Portsmouth, New Hampshire 03801
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(Address of principal executive offices)
Registrant's telephone number, including area code: (603) 436-0700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
The number of shares outstanding of the registrant's common stock as of January
31, 2000 was 10,727,584.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Bottomline Technologies (de), Inc.
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
-----------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $29,293 $39,699
Accounts receivable 10,382 11,631
Other current assets 4,266 1,358
-----------------------------------------------
Total current assets 43,941 52,688
Property and equipment, net 3,232 2,392
Other assets, principally intangible assets 8,446 66
-----------------------------------------------
Total assets $55,619 $55,146
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,171 $ 4,854
Deferred revenue and deposits 5,252 3,467
Other current liabilities 700 657
-----------------------------------------------
Total current liabilities 11,123 8,978
Deferred income taxes payable 253 253
Stockholders' equity
Common stock 11 10
Additional paid-in-capital 41,098 39,429
Retained earnings 3,134 6,476
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Total stockholders' equity 44,243 45,915
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Total liabilities and stockholders' equity $55,619 $55,146
===============================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
1
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Bottomline Technologies (de), Inc.
Condensed Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1999 1998
---------------------------------------------
<S> <C> <C>
Revenues:
Software licenses $ 3,538 $ 3,991
Service and maintenance 5,186 3,073
Equipment and supplies 2,327 2,967
---------------------------------------------
Total revenues 11,051 10,031
Cost of revenues:
Software licenses 44 31
Service and maintenance 2,343 1,350
Equipment and supplies 1,732 2,133
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Total cost of revenues 4,119 3,514
---------------------------------------------
Gross profit 6,932 6,517
Operating expenses:
Sales and marketing 3,253 2,638
Product development and engineering 1,862 977
General and administrative 2,161 1,124
Acquired in-process research and development 2,600
Amortization of intangible assets 482
---------------------------------------------
Total operating expenses 10,358 4,739
---------------------------------------------
Income (loss) from operations (3,426) 1,778
Interest income, net 476 24
---------------------------------------------
Income (loss) before provision (benefit) for income taxes (2,950) 1,802
Provision (benefit) for income taxes (1,180) 721
---------------------------------------------
Net income (loss) $(1,770) $ 1,081
=============================================
Earnings (loss) per share available to common stockholders:
Basic $(0.17) $0.16
=============================================
Diluted $(0.17) $0.14
=============================================
Shares used in computing earnings (loss) per share available
to common stockholders:
Basic 10,700 6,583
=============================================
Diluted 10,700 7,655
=============================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
2
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Bottomline Technologies (de), Inc.
Condensed Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1999 1998
---------------------------------------------
<S> <C> <C>
Revenues:
Software licenses $ 5,342 $ 7,468
Service and maintenance 9,446 5,327
Equipment and supplies 4,810 5,341
---------------------------------------------
Total revenues 19,598 18,136
Cost of revenues:
Software licenses 90 154
Service and maintenance 4,486 2,456
Equipment and supplies 3,595 3,815
---------------------------------------------
Total cost of revenues 8,171 6,425
---------------------------------------------
Gross profit 11,427 11,711
Operating expenses:
Sales and marketing 6,062 4,880
Product development and engineering 3,067 1,905
General and administrative 4,277 2,401
Acquired in-process research and development 3,900
Amortization of intangible assets 607
---------------------------------------------
Total operating expenses 17,913 9,186
---------------------------------------------
Income (loss) from operations (6,486) 2,525
Interest income, net 957 39
---------------------------------------------
Income (loss) before provision (benefit) for income taxes (5,529) 2,564
Provision (benefit) for income taxes (2,212) 1,026
---------------------------------------------
Net income (loss) $(3,317) $ 1,538
=============================================
Earnings (loss) per share available to common stockholders:
Basic $(0.31) $0.23
=============================================
Diluted $(0.31) $0.20
=============================================
Shares used in computing earnings (loss) per share available
to common stockholders:
Basic 10,635 6,472
=============================================
Diluted 10,635 7,555
=============================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
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Bottomline Technologies (de), Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1999 1998
----------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 1,817 $2,243
INVESTING ACTIVITIES
Purchases of property and equipment, net (1,324) (602)
Acquisition of NetTransact (3,813)
Acquisition of ICM, net of cash acquired (8,732)
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Net cash used in investing activities (13,869) (602)
FINANCING ACTIVITIES
Repayments on notes payable (50)
Proceeds from sale of common stock, net 1,646 972
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Net cash provided by financing activities 1,646 922
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Increase (decrease) in cash and cash equivalents (10,406) 2,563
Cash and cash equivalents at beginning of period 39,699 1,362
----------------------------------------------
Cash and cash equivalents at end of period $ 29,293 $3,925
==============================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
4
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Bottomline Technologies (de), Inc.
Notes to Unaudited Condensed Financial Statements
(in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary for a fair
presentation of the interim financial information have been included. Operating
results for the three and six months ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended June 30, 2000.
For further information, refer to the financial statements and footnotes thereto
included in the company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
NOTE 2 - ACQUISITIONS
In July 1999, the company acquired certain software and related proprietary
intellectual property from the Northern Trust Company for $3,700,000 in cash.
This software product, called NetTransact, allows for the electronic presentment
of bills and related dispute resolution in a business-to-business environment.
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 which is being amortized over a five year period.
In October 1999, the company acquired substantially all of the assets and
assumed certain liabilities of Integrated Cash Management Services, Inc. (ICM)
for $8,500,000 in cash. ICM is a leading software development company
specializing in web access to complex back-office applications for financial
institutions and their customers. In connection with this acquisition, the
Company recorded a $2,600,000 charge for acquired in-process research and
development and various intangible assets of $6,400,000 that are being amortized
over periods ranging from one to five years.
5
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NOTE 3 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(1,770) $1,081 $(3,317) $1,538
Accretion to redemption value on redeemable
common stock (28) (56)
-------------------------------------------------------------
Numerator for basic and diluted earnings (loss)
per share available to common stockholders $(1,770) $1,053 $(3,317) $1,482
=============================================================
Denominator:
Denominator for basic earnings (loss) per share
available to common stockholders -
weighted-average shares outstanding 10,700 6,583 10,635 6,472
Effect of employee stock options, warrants and
redeemable common stock 1,072 1,083
-------------------------------------------------------------
Denominator for diluted earnings (loss) per share
available to common stockholders 10,700 7,655 10,635 7,555
=============================================================
Earnings (loss) per share available to common
stockholders:
Basic $ (0.17) $ 0.16 $ (0.31) $ 0.23
=============================================================
Diluted $ (0.17) $ 0.14 $ (0.31) $ 0.20
=============================================================
</TABLE>
The effect of stock options is excluded from the calculation of diluted
earnings per share for the three and six months ended December 31, 1999 as their
effect would be anti-dilutive.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve risks
and uncertainties, including those relating to the company's ability to develop
new and enhanced payment management software and services and on the market
acceptance of the company's payment management software and services. Actual
results may differ materially from the results predicted and reported results
should not be considered as an indication of future performance. See "Certain
Factors That May Affect Future Results" for additional information about
potential factors that could affect the company's business and financial
results.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER
31,1998
REVENUES
Total revenues increased by $1.1 million to $11.1 million in the three months
ended December 31, 1999 from $10.0 million in the three months ended
December 31, 1998, an increase of 11%.
Software Licenses. Software license fees decreased by $453,000 to $3.5 million
in the three months ended December 31, 1999 from $4.0 million in the three
months ended December 31, 1998, a decrease of 11%. Software license fees
represented 32% of total revenues in the three months ended December 31, 1999
compared to 40% of total revenues for the three months ended December 31, 1998.
We believe the decrease in software license fees was due primarily to a slow
down in customer decisions to install new software prior to Year 2000.
Service and Maintenance. Service and maintenance fees increased by $2.1
million to $5.2 million in the three months ended December 31, 1999 from $3.1
million in the three months ended December 31, 1998, an increase of 69%. Service
and maintenance fees represented 47% of total revenues in the three months ended
December 31, 1999 compared to 31% of total revenues in the three months ended
December 31, 1998. The increase in service and maintenance fees was due
primarily to several large service contracts during the quarter.
Equipment and Supplies. Equipment and supplies sales decreased by $640,000 to
$2.3 million in the three months ended December 31, 1999 from $3.0 million in
the three months ended December 31, 1998, a decrease of 22%. Equipment and
supplies sales represented 21% of total revenues in the three months ended
December 31, 1999 compared to 30% of total revenues in the three months ended
December 31, 1998. We believe the decrease in equipment and supplies sales was
due primarily to a slow down in customer decisions to purchase new systems prior
to Year 2000.
COST OF REVENUES
Software Licenses. Software license costs increased by $13,000 to $44,000 in
the three months ended December 31, 1999 from $31,000 in the three months ended
December 31, 1998, an increase of 42%. Software license costs represented 1% of
software license fees in the three months ended December 31, 1999 and 1998.
7
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Service and Maintenance. Service and maintenance costs increased by $993,000 to
$2.3 million in the three months ended December 31, 1999 from $1.4 million in
the three months ended December 31, 1998, an increase of 74%. Service and
maintenance costs were 45% of service and maintenance revenues in the three
months ended December 31, 1999 compared to 44% of service and maintenance
revenues in the three months ended December 31, 1998.
Equipment and Supplies. Equipment and supplies costs decreased by $401,000 to
$1.7 million in the three months ended December 31, 1999 from $2.1 million in
the three months ended December 31, 1998, a decrease of 19%. Equipment and
supplies costs were 74% of equipment and supplies sales in the three months
ended December 31, 1999 compared to 72% of equipment and supplies sales in the
three months ended December 31, 1998.
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 $615,000 to $3.3 million in the three
months ended December 31, 1999 from $2.6 million in the three months ended
December 31, 1998, an increase of 23%. Sales and marketing expenses were 29% of
total revenues in the three months ended December 31, 1999 compared to 26% of
total revenues in the three months ended December 31, 1998. The increase was due
primarily to additional sales and marketing expenses associated with our ICM
acquisition and 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 $885,000 to $1.9
million in the three months ended December 31, 1999 from $977,000 in the three
months ended December 31, 1998, an increase of 91%. Product development and
engineering expenses were 17% of total revenues in the three months ended
December 31, 1999 compared to 10% of total revenues in the three months ended
December 31, 1998. The increase was due primarily to additional product
development and engineering expenses associated with our investment in the
NetTransact product and our acquisition of ICM, and 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 and legal and accounting services. General and administrative expenses
increased by $1.1 million to $2.2 million in the three months ended December 31,
1999 from $1.1 million in the three months ended December 31, 1998, an increase
of 92%. General and administrative expenses were 20% of total revenues in the
three months ended December 31, 1999 compared to 11% of total revenues in the
three months ended December 31, 1998. The dollar increase was due primarily to
additional general and administrative expenses related to our acquisition of ICM
and increases in staffing and personnel related costs.
8
<PAGE>
Acquired in-process research and development and amortization of intangible
assets. In-process research and development of $2,600,000 represents a one-time
charge related to the ICM acquisition for acquired in-process research and
development. In connection with the acquisition, intangible assets of
$6,400,000 were recorded and are being amortized over periods ranging from 1 to
5 years. Amortization expense on our NetTransact and ICM acquisitions was
$482,000 for the three months ended December 31, 1999.
Interest Income, Net. Interest income, net consists of interest income and
interest expense. Interest income, net increased by $452,000 to $476,000 in the
three months ended December 31, 1999 from $24,000 in the three months ended
December 31, 1998. The increase was due to interest earned on the proceeds of
our initial public offering.
Provision (benefit) for Income Taxes. The benefit for income taxes was
$1.2 million in the three months ended December 31, 1999 compared with a
provision of $721,000 in the three months ended December 31, 1998. The effective
tax rate in the three months ended December 31, 1999 and 1998 was 40%. The
effective tax rate in each of the three month periods ended December 31, 1999
and 1998 differed from the federal statutory rate due principally to the effect
of state income taxes.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,1998
REVENUES
Total revenues increased by $1.5 million to $19.6 million in the six months
ended December 31, 1999 from $18.1 million in the six months ended December 31,
1998, an increase of 8%.
Software Licenses. Software license fees decreased by $2.2 million to
$5.3 million in the six months ended December 31, 1999 from $7.5 million in the
six months ended December 31, 1998, a decrease of 29%. Software license fees
represented 27% of total revenues in the six months ended December 31, 1999
compared to 41% of total revenues for the six months ended December 31, 1998.
We believe the decrease in software license fees was due primarily to a slow
down in customer decisions to install new software prior to Year 2000.
Service and Maintenance. Service and maintenance fees increased by
$4.1 million to $9.4 million in the six months ended December 31, 1999 from
$5.3 million in the six months ended December 31, 1998, an increase of 77%.
Service and maintenance fees represented 48% of total revenues in the six months
ended December 31, 1999 compared to 29% of total revenues in the six months
ended December 31, 1998. The increase in service and maintenance fees was due
primarily to several large service contracts during the quarter.
Equipment and Supplies. Equipment and supplies sales decreased by $526,000 to
$4.8 million in the six months ended December 31, 1999 from $5.3 million in the
six months ended December 31, 1998, a decrease of 10%. Equipment and supplies
sales represented 25% of total revenues in the six months ended December 31,
1999 compared to 29% of total revenues in the six months ended December 31,
1998. We believe the decrease in equipment and supplies sales was due primarily
to a slow down in customer decisions to purchase new systems prior to the Year
2000.
9
<PAGE>
COST OF REVENUES
Software Licenses. Software license costs decreased by $50,000 to $90,000 in
the six months ended December 31, 1999 from $140,000 in the six months ended
December 31, 1998, a decrease of 36%. Software license costs represented 2% of
software license fees in the six months ended December 31, 1999 and 1998.
Service and Maintenance. Service and maintenance costs increased by
$2.0 million to $4.5 million in the six months ended December 31, 1999 from
$2.5 million in the six months ended December 31, 1998, an increase of 83%.
Service and maintenance costs were 47% of service and maintenance revenues in
the six months ended December 31, 1999 compared to 46% of service and
maintenance revenues in the six months ended December 31, 1998.
Equipment and Supplies. Equipment and supplies costs decreased by $235,000 to
$3.6 million in the six months ended December 31, 1999 from $3.8 million in the
six months ended December 31, 1998, a decrease of 6%. Equipment and supplies
costs were 74% of equipment and supplies sales in the six months ended
December 31, 1999 compared to 72% of equipment and supplies sales in the
six months ended December 31, 1998.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $1.2 million to
$6.1 million in the six months ended December 31, 1999 from $4.9 million in the
six months ended December 31, 1998, an increase of 24%. Sales and marketing
expenses were 31% of total revenues in the six months ended December 31, 1999
compared to 27% of total revenues in the six months ended December 31, 1998.
The increase was due primarily to additional sales and marketing expenses
associated with our ICM acquisition and increases in staffing and personnel
related costs.
Product Development and Engineering. Product development and engineering
expenses increased by $1.2 million to $3.1 million in the six months ended
December 31, 1999 from $1.9 million in the six months ended December 31, 1998,
an increase of 61%. Product development and engineering expenses were 16% of
total revenues in the six months ended December 31, 1999 compared to 11% of
total revenues in the six months ended December 31, 1998. The increase was due
primarily to additional product development and engineering expenses associated
with our investment in the NetTransact product and our acquisition of ICM, and
increases in staffing and personnel related costs.
General and Administrative. General and administrative expenses increased by
$1.9 million to $4.3 million in the six months ended December 31, 1999 from
$2.4 million in the six months ended December 31, 1998, an increase of 78%.
General and administrative expenses were 22% of total revenues in the six months
ended December 31, 1999 compared to 13% of total revenues in the six months
ended December 31, 1998. The dollar increase was due primarily to additional
general and administrative expenses related to our acquisition of ICM and
increases in staffing and personnel related costs.
10
<PAGE>
Acquired in-process research and development and amortization of intangible
assets. In-process research and development of $3,900,000 represents one-time
charges related to the NetTransact and ICM acquisitions for acquired in-process
research and development. In connection with these acquisitions, intangible
assets of $8,900,000 were recorded and are being amortized over periods ranging
from 1 to 5 years, yielding amortization expense of $607,000 for the six months
ended December 31, 1999.
Interest Income, Net. Interest income, net consists of interest income and
interest expense. Interest income, net increased by $917,000 to $957,000 in the
six months ended December 31, 1999 from $40,000 in the six months ended December
31, 1998. The increase was due to interest earned on the proceeds of our initial
public offering.
Provision (benefit) for Income Taxes. The benefit for income taxes was
$2.2 million in the six months ended December 31, 1999 compared with a provision
of $1.0 million in the six months ended December 31, 1998. The effective tax
rate in the six months ended December 31, 1999 and 1998 was 40%. The effective
tax rate in each of the six month periods ended December 31, 1999 and 1998
differed from the federal statutory rate due principally to the effect of state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from cash provided by operating
activities and the sale of common stock. We had net working capital of
$32.8 million at December 31, 1999, including cash and cash equivalents totaling
$29.3 million.
Net cash provided by operating activities was $1.8 million in the six months
ended December 31, 1999. Net cash provided by operating activities during the
six months ended December 31, 1999 was primarily the result of the decrease in
accounts receivable, net of the receivables acquired in the ICM acquisition.
Net cash used in investing activities was $13.9 million in the six months
ended December 31, 1999. Cash was primarily used during this period for the
NetTransact and ICM acquisitions. Additionally, cash was used during the period
to acquire computer equipment and software for internal use. 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 $1.6 million in the six months
ended December 31, 1999. Net cash provided by financing activities was the
result of the net proceeds from the exercise of employee stock options.
In December 1999, our revolving credit agreement with the bank expired.
There were no outstanding balances under this revolving credit agreement.
We anticipate renewing this revolving credit agreement during the next quarter.
We believe that the cash and cash equivalents on hand will be sufficient to
meet our working capital requirements for the foreseeable future.
11
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YEAR 2000 CONSIDERATIONS AND RESULTS
Computer systems and software must accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many software and computer
systems have needed to be upgraded in order to be year 2000 compliant.
Since crossing into the 21st century, we have experienced no year 2000
compliance issues with our internal software or hardware systems. Our products
installed after February 1997 had been extensively tested to validate the year
2000 compliance. There have been no reported issues related to the year 2000
compliance reported by our customers or other users of our products installed
after February 1997.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
SUBSTANTIALLY ALL OF OUR REVENUES TO DATE HAVE COME FROM OUR PAYMENT MANAGEMENT
OFFERINGS AND OUR PERFORMANCE WILL DEPEND ON CONTINUED MARKET ACCEPTANCE OF
THESE OFFERINGS
Substantially all of our revenues to date have come from the license and
maintenance of our payment management offerings and sales of related products
and services. Any reduction in demand for our payment management solutions, or
lack of meaningful growth in the market for electronic and payment management
solutions could have a material adverse effect on our business, operating
results and financial condition. Our PayBase software products are designed to
provide a single platform to control, manage and issue all payments, whether
paper-based or electronic, across an enterprise. Our future performance will
depend to a large degree upon the market acceptance of PayBase as a payment
management solution. Our prospects will also depend upon enterprises seeking to
enhance their payment functions to integrate electronic payment capabilities. In
addition, our future results will depend on the continued market acceptance of
desktop software for use in a departmental setting, including our LaserCheck
solution, as well as our ability to introduce enhancements to meet the market's
evolving needs for secure, payment management solutions.
THE YEAR 2000 ISSUE MAY CAUSE OUR CURRENT AND POTENTIAL CUSTOMERS TO DELAY
IMPLEMENTING OUR PRODUCTS AND SERVICES
We believe that the adoption of our products and services by existing and
potential customers and subscribers has been, and may continue to be, adversely
affected by the year 2000 issue. Companies may delay or cancel decisions to
adopt our products and services in the beginning of the year 2000 as they assess
any issues caused by the year 2000 and respond thereto. If this occurs, it could
have a material adverse effect on our business, financial condition and results
of operations.
12
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OUR FUTURE RESULTS WILL DEPEND UPON MARKET ACCEPTANCE OF OUR NEW BILL
PRESENTMENT AND CASH MANAGEMENT PRODUCTS
Our objective is to be the leading provider of software solutions that enable
businesses and financial institutions to create an automated e-business
infrastructure to enable, implement and manage movements of cash resources. Part
of that strategy is the successful implementation of our NetTransact bill
presentment software. We acquired NetTransact from The Northern Trust Company, a
financial institution, in July 1999. NetTransact is currently in pilot and we
anticipate commercial introduction of NetTransact during the current fiscal
year. Another part of that strategy is the successful implementation of our web-
based BankQuest cash management software. We acquired the BankQuest software in
our acquisition of Integrated Cash Management Services, Inc. in October 1999. We
anticipate commercial introduction of BankQuest during our current fiscal year.
If these products have any unanticipated performance problems or bugs, their
introductions could be delayed. If either product is delayed, or does not enjoy
wide commercial success when it is introduced to the general marketplace, our
long-term business strategy would be adversely affected.
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OPERATING RESULTS IF OUR REVENUES
ARE BELOW EXPECTATIONS
A significant percentage of our expenses, particularly personnel costs and
rent, are relatively fixed, and based in part on expectations of future
revenues. We may be unable to reduce spending in a timely manner to compensate
for any significant fluctuations in revenues. Accordingly, shortfalls in
revenues may cause significant variations in operating results in any quarter.
Factors that could cause these fluctuations include the following:
. The potential delay in sales of our products and services in the
beginning of the Year 2000 as companies assess any issues caused by the
year 2000 and respond thereto;
. the timing of orders and longer sales cycles, particularly due to
increased average selling prices of our payment 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.
13
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Because of these factors, we believe that period to period comparisons of our
results of operations are not necessarily meaningful. In addition, it is
possible that in some future quarters our results of operations will be below
the expectations of public market analysts and investors, and in that case the
price of our common stock could be materially adversely affected.
OUR FIRST AND THIRD QUARTER REVENUES CAN BE LESS THAN THE PRECEDING QUARTER'S
REVENUES
During our third fiscal quarter ended March 31, revenues have typically
declined as customers focus internal resources on statutory and regulatory
reporting requirements. Our fourth fiscal quarter ended June 30, generally has
the highest revenues as customers complete projects before summer, when activity
in many corporate financial departments tends to slow. As a result, we have
historically experienced first quarter revenues that are lower than those of the
immediately preceding quarter.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED SOFTWARE,
SERVICES AND RELATED PRODUCTS
The bill presentment, payment and cash management software markets are subject
to rapid technological change and our success is dependent on our ability to
develop new and enhanced software, services and related products. Trends which
could have a critical impact on us include:
. rapidly changing technology that could require us to make our products
compatible with new database or network systems;
. evolving industry standards and mandates, such as those mandated by the
National Automated Clearing House Association and by the Debt Collection
Improvement Act of 1996; and
. developments and changes relating to the Internet that we must address as
we introduce Internet-capable products.
If we are unable to develop and introduce new products, or enhancements to
existing products, in a timely and successful manner, our business, operating
results and financial condition could be materially adversely affected.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE INTERNET
Our future success will in large part depend upon the willingness of
businesses and financial institutions to adopt the Internet as a medium of e-
commerce. There are critical issues involved in the commercial use of the
Internet which are not yet fully resolved, including concerns regarding the
Internet's:
. security;
. reliability;
. ease of access; and
. quality of services.
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The adoption of the use of the Internet by enterprises which have historically
relied on traditional means of commerce and communication will require them to
accept a new medium for conducting business and exchanging information. These
entities will probably accept this new medium only if the Internet provides
substantially greater efficiency and enhances their competitiveness. To the
extent that any of these issues inhibit or limit the continued adoption of the
Internet for e-commerce, our business prospects could be adversely affected.
OUR BUSINESS CAN BE ADVERSELY AFFECTED BY PROBLEMS WITH THIRD-PARTY HARDWARE
In fiscal 1997, we experienced a significant problem with a third-party
printer that we were then reselling which had a material adverse effect on our
operating results. We revised and enhanced our quality assurance control
programs and now utilize multiple printers and printer vendors. However, any
repetition of these or similar problems with third party hardware could have a
material adverse effect on our business, operating results and financial
condition.
INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
OUR PRODUCTS AND SERVICES
The market for payment management, electronic bill presentment 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.
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WE DEPEND ON A FEW KEY EMPLOYEES WHO ARE SKILLED IN E-COMMERCE, PAYMENT
METHODOLOGY AND INTERNET AND OTHER TECHNOLOGIES
Our success depends upon the efforts and ability of our executive officers
and key technical employees who are skilled in e-commerce, payment methodology
and regulation, and Internet, database and network technologies. We currently do
not maintain "key man" life insurance policies on any of our employees. While
some of our executive officers have employment agreements with us, the loss of
the services of any of our executive officers or other key employees could have
a material adverse effect on our business, operating results and financial
condition.
WE MUST ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL WITH KNOWLEDGE OF ELECTRONIC
PAYMENTS AND BILL PRESENTMENT AND THE BANKING INDUSTRY
We are dependent upon the ability to attract, hire, train and retain highly
skilled technical, sales and marketing, and support personnel, particularly with
expertise in electronic payment and bill presentment technology and knowledge of
the banking industry. Competition for qualified personnel is intense. In
addition, our 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 six months for a salesperson to become fully productive.
We cannot assure you that we will be successful in increasing the productivity
of our sales personnel, and the failure to do so could have a material adverse
effect on our business, operating results and financial condition.
UNDETECTED YEAR 2000 PROBLEMS AND CLAIMS REGARDING NON-COMPLIANT DISCONTINUED
PRODUCTS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. We have assessed the impact of year
2000 compliance on our products and systems. We cannot, however, be certain that
we have identified all of the potential risks to our business that could result
from matters related to the year 2000. We have identified the following risks
that you should be aware of:
. Year 2000 problems that affect our internal systems. We have not
experienced any significant Year 2000 problems with our internal systems.
It is possible, however, that these systems could contain undetected
problems that could cause serious and costly disruptions at a future
date, which would have a material adverse effect on our business,
operating results and financial condition.
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. Year 2000 problems that affect our discontinued products. We have
notified customers that had purchased DOS based products that their
products were not year 2000 compliant and that we would no longer be
supporting those products. Based on the notification we provided and the
contractual provisions limiting liability contained in our standard terms
and conditions which governed the sale of our DOS based products, we do
not believe there are significant risks to our business relating to year
2000 compliance of these products. However, we cannot assure you that
customers who purchased these products will not assert claims against us,
which could result in costly litigation which diverts management's
attention and could have a material adverse effect on our business,
operating results and financial condition.
. Undetected year 2000 problems that could affect our currently supported
products. We believe that all of our products that have been installed
after February 1997 were year 2000 compliant at the time of installation.
However, although we have tested such products for year 2000 compliance,
we cannot be certain that these tests have detected all potential year
2000 problems. The failure of our currently supported products to be
fully year 2000 compliant could result in claims by or liability to our
customers, which could have a material adverse effect on our business,
operating results and financial condition.
UNDETECTED BUGS IN OUR SOFTWARE COULD ADVERSELY AFFECT THE PERFORMANCE OF OUR
SOFTWARE AND DEMAND FOR OUR PRODUCTS
Our software products could contain errors or ``bugs'' that we have not
been able to detect which could adversely affect their performance and reduce
demand for our products. Additionally, we regularly introduce new releases and
periodically introduce new versions of our software products. Any defects or
errors in new products, such as NetTransact, or enhancements could result in
adverse customer reactions and negative publicity regarding us and our products
and could have a material adverse effect on our business, operating results and
financial condition.
OUR BUSINESS COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS
Our software and hardware products are designed to provide critical payment
management functions and to limit the risk of fraud or loss in effecting such
transactions. As a result, our products are critical to our customers and there
is the potential for significant product liability claims. Our license
agreements with customers typically place the responsibility for use of the
system on the customer and contain provisions intended to limit our exposure to
product liability claims. However, these limitation provisions may not preclude
all potential claims. We have not experienced any product liability claims to
date. However, a product liability claim brought against us, even if not
successful, would likely be time consuming and costly. A successful liability
claim could have a material adverse effect on our business, operating results
and financial condition.
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WE INTEND TO PURSUE STRATEGIC ACQUISITIONS AND OUR BUSINESS COULD BE MATERIALLY
ADVERSELY AFFECTED IF WE FAIL TO ADEQUATELY INTEGRATE ACQUIRED BUSINESSES
As part of our overall business strategy, we pursue strategic acquisitions
that would provide us with additional product or service offerings, additional
industry expertise, a broader client base or an expanded geographic presence.
Any acquisition could result in the use of significant amounts of cash,
potentially dilutive issuances of equity securities, or the incurrence of debt
or amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect our business, operating results and
financial condition. In addition, acquisitions involve numerous risks,
including:
. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experience; and
. the potential loss of key employees of the acquired company.
From time to time, we engage in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY TECHNOLOGY
We rely upon a combination of patent, copyright and trademark laws and non-
disclosure and other intellectual property contractual arrangements to protect
our proprietary rights. We have one allowed United States patent application
relating to certain security aspects of our dual payment process. However, we
cannot assure you that our allowed patent, or any other patents that may be
issued in the future, will be of sufficient scope and strength to provide
meaningful protection of our technology or any commercial advantage to us, or
that the patents will not be challenged, invalidated or circumvented. We enter
into agreements with our employees and clients that seek to limit and protect
the distribution of proprietary information. We cannot assure you that the steps
we have taken to protect our property rights, however, will be adequate to deter
misappropriation of proprietary information, and we may not be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights.
18
<PAGE>
OTHERS COULD CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY
Although we believe that our products and services do not infringe upon the
intellectual property rights of others and that we have all rights necessary to
utilize the intellectual property employed in our business, we are subject to
the risk of claims alleging infringement of third-party intellectual property
rights. These claims could require us to spend significant sums in litigation,
pay damages, delay product installments, develop non-infringing intellectual
property or acquire licenses to intellectual property that is the subject of the
infringement claim. Therefore, these claims could have a material adverse effect
on our business, operating results and financial condition.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we may be named in claims arising in the ordinary course
of business. Currently, no legal proceedings or claims are pending.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes in Rights and Classes of Stock
None.
Sales of Unregistered Securities and Use of Proceeds
None.
Use of Proceeds of Initial Public Offering
Proceeds of our initial public offering in the amount of $8.5 million were
used during the period between September 30, 1999 and December 31, 1999 to
complete the acquisition of Integrated Cash Management Services, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 1999 Annual Meeting of Shareholders on November 11, 1999. The
following matters were voted upon at the Annual Meeting.
1. Holders of 9,614,411 shares of our common stock voted to elect Joseph L.
Barry, Jr. to serve for a term of three years as a Class I Director.
Holders of 47,235 shares of our common stock withheld vote from such
director.
2. Holders of 9,640,276 shares of our common stock voted to ratify the
selection of Ernst & Young LLP as our independent auditors for the
current fiscal year. Holders of 18,123 shares of our common stock voted
against ratifying such selection and 3,247 shares abstained from voting.
19
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
On November 9, 1999, a Current Report on Form 8-K was filed pertaining to
our acquisition of substantially all of the assets and business of ICM and
assumption of certain liabilities of ICM for an aggregate of $8.5 million in
cash.
20
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bottomline Technologies (de), Inc.
Date: February 8, 2000 By:
Robert A. Eberle
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
21
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