<PAGE>
424(b)(1)
PROSPECTUS 333-75397
3,500,000 Shares
[LOGO OF ESPS(TM) APPEARS HERE]
Common Stock
This is an initial public offering of common stock by ESPS, Inc. The
3,500,000 shares of common stock being sold in this offering are being sold by
ESPS.
------------
There is no public market for the common stock. The shares of common stock
have been approved for quotation on the Nasdaq National Market under the symbol
ESPS.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................ $ 7.50 $26,250,000
Underwriting discounts and commissions................... $0.525 $ 1,837,500
Proceeds to ESPS, before expenses........................ $6.975 $24,412,500
</TABLE>
Several ESPS stockholders identified on page 52 have granted the
underwriters an option for a period of 30 days to purchase up to 525,000
additional shares of common stock.
------------
Investing in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page 6.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Hambrecht & Quist
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
Charles Schwab & Co., Inc.
June 16, 1999
<PAGE>
[Graphic: The ESPS logo appears on a background depicting a spiral in a
rectangular box. Below the logo is the text "Software Solutions Enabling
e-Compliance." Below that text appear three connected pillars. In the top border
connecting the pillars appears the text "Electronic Compliance (e-Compliance)
Management(TM)" and in the bottom border of the pillars appears the text
"Corporate Intranet and Internet." Within each of the three pillars is the
following text, from left to right: "Advanced Technology," "Industry-Specific
Compliance Expertise," and "Comprehensive Services."]
<PAGE>
[Graphic: A flow chart depicting the compliance process appears in the center of
the Graphic. Six boxes appear in the center of the flow chart, containing the
following text: "Regulatory Affairs," "Research and Development," "Sales and
Marketing," "Human Resources," "Manufacturing," and "Finance." In the center of
the six boxes appears the text "CoreDossier." Around the perimeter of the
boxes appears a line with arrows leading clockwise and six numbered locations
around the boxes. Beside each number appears the following text: "Authoring the
Information," "Collecting and Compiling the information from multiple authors
and in various formats," "Publishing a comprehensive document," "Circulating
the document for review and revision," "Publication of the final compliance
document and delivery" and "Information reuse." Below the flow chart is a box
labeled "Regulatory Agency" with the following text beside it: "Submissions
using paper, CD-Rom and Internet." Below that appears the text "Providing
Software Solutions to Enable Electronic Compliance Management(TM)."
On the left border of the Graphic appears the following text, below the ESPS
logo: "What is e-Compliance? e-Compliance is the application of intranet and
Internet technologies to reduce the compliance burden for companies in highly-
regulated industries." In the right border appears the following text: "The
ESPS Solution: .CoreDossier family of software products, .Industry-Specific
compliance expertise, .Comprehensive Services." Below that text appears the
following text: "Current Markets; Pharmaceutical, Biotechnology, Chemical,
Utilities."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................... 3
Risk Factors......................................................... 6
Forward-Looking Statements........................................... 13
Use of Proceeds...................................................... 14
Dividend Policy...................................................... 14
Capitalization....................................................... 15
Dilution............................................................. 16
Selected Financial Data.............................................. 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 19
Our Business......................................................... 30
Management........................................................... 43
Related Party Transactions........................................... 50
Principal Stockholders............................................... 51
Description of Capital Stock......................................... 53
Shares Eligible for Future Sale...................................... 55
Underwriting......................................................... 56
Legal Matters........................................................ 58
Experts.............................................................. 58
Where You Can Find Additional Information............................ 58
Financial Statements................................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This prospectus summary highlights selected information contained elsewhere
in this prospectus.
ESPS
ESPS is a leading provider of electronic compliance management solutions to
businesses in highly regulated industries. We refer to electronic compliance as
e-compliance. Our electronic compliance management solution, which consists of
the CoreDossier family of software products and related services, enables users
across departments and throughout an enterprise to collaborate in the
authoring, compilation, distribution, publishing and reuse of compliance
information and regulatory submissions. We designed our CoreDossier software
products to utilize advanced technologies, such as corporate intranets and the
Internet, and to meet emerging e-compliance requirements and standards. We also
provide our customers with in-depth industry-specific compliance expertise that
allows us to better serve their compliance needs and requirements. We believe
our solution enables our customers to realize a return on their investment by
reducing the cost and burden of compliance while also reducing the time
required to bring new products and services to market.
Traditionally, businesses have used a manual process to create paper-based
compliance documentation and submissions. In an effort to address the growing
complexity of regulatory compliance and to reduce the costs associated with the
compliance process, businesses are increasingly adopting electronic compliance
processes. We believe the initial systems and approaches used for electronic
compliance have not adequately addressed the need for a flexible, enterprise-
wide solution that can effectively manage the complex compliance process.
The CoreDossier product family includes the CoreDossier platform, industry-
specific modules and the CoreDossier application programming interfaces, or
APIs. The CoreDossier platform provides the foundation for managing compliance
processes throughout an enterprise. For example, CoreDossier enables users to
input information stored throughout the enterprise in different formats,
including paper files, word processing files, spreadsheets, graphics programs
and proprietary software. In addition, CoreDossier enables users to output
information in numerous formats, including the electronic formats most commonly
used in the compliance submission process. The industry-specific modules work
with the CoreDossier platform to perform compliance functions designed to meet
the regulatory requirements of particular industries. The CoreDossier APIs
enable third parties to develop custom applications and extend access to
additional external information sources.
As of April 30, 1999 we have licensed versions of our CoreDossier products
to 46 customers in the pharmaceutical and biotechnology industry, the chemical
industry and the utilities industry. Our customers include Pfizer Inc., Glaxo-
Wellcome Inc., Rhone-Poulenc Rorer Pharmaceuticals Inc., Bayer Corporation, and
Baltimore Gas & Electric.
Our headquarters are located at 1300 Virginia Drive, Suite 125, Fort
Washington, PA 19034. Our telephone number is 215/619-6000. We were
incorporated in Delaware in April 1994 under the name Electronic Submission
Publishing Systems, Inc. We changed our name to ESPS, Inc. on March 30, 1999.
We maintain a world wide web site at www.ESPS.com. Information contained on our
web site does not constitute a part of this prospectus.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by ESPS........ 3,500,000 shares
Common stock to be outstanding after
this offering...................... 15,362,182 shares
Use of proceeds..................... For working capital and general corporate
purposes, including increased domestic and
international sales and marketing
expenditures, product development
expenditures, professional services
organization expenditures and capital
expenditures.
Nasdaq National Market symbol....... ESPS
</TABLE>
------------
Unless otherwise noted, the information in this prospectus takes into
account the conversion of all outstanding shares of series A preferred stock
into shares of common stock upon the consummation of this offering. The
information in this prospectus also takes into account a 1.45 for 1 stock split
which was effected on June 15, 1999. In addition, unless otherwise indicated,
the information included in this prospectus does not take into account the
possible sale of additional shares of common stock to the underwriters under
their over-allotment option. All references to fiscal years refer to the
twelve-month period ended March 31 of that year.
CoreDossier(R) is a registered U.S. trademark of ESPS. ESPS(TM), CADDY
Compiler(TM), CDER Compiler(TM), DAMOS Compiler(TM), CoreDocket(TM), Electronic
Compliance Management(TM) and the ESPS logo are also trademarks of ESPS. This
prospectus also contains trademarks and tradenames of other companies.
4
<PAGE>
Summary Financial Data
(in thousands, except per share data)
This table summarizes our statement of operations data and our balance sheet
data. The pro forma balance sheet data and pro forma as adjusted balance sheet
data below reflect the conversion of all outstanding shares of preferred stock
into common stock at the consummation of the offering. The pro forma as
adjusted balance sheet data also reflect the sale of 3,500,000 shares of common
stock in the offering by ESPS and the receipt and application of the net
proceeds of the offering.
<TABLE>
<CAPTION>
Period from
April 29, 1994 Fiscal Years Ended March 31,
(inception) ---------------------------------
to March 31, 1995 1996 1997 1998 1999
----------------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues........... $ 102 $ 753 $ 1,068 $ 8,646 $17,949
Income (loss) from
operations.............. (440) (772) (2,774) 2,309 2,282
Income tax provision
(benefit)............... -- -- -- (514) 936
Net income (loss)........ (435) (754) (2,813) 2,875 1,476
Earnings (loss) per
share:
Basic.................. $ (0.30) $(0.76) $ (3.51) $ 3.81 $ 0.57
Diluted................ (0.30) (0.76) (3.51) 0.25 0.10
Shares used in
computation of earnings
(loss) per share:
Basic.................. 1,450 989 801 754 2,575
Diluted................ 1,450 989 801 11,326 14,641
Pro forma earnings per
share:
Basic.................. $ 0.13
Diluted................ 0.10
Shares used in
computation of pro forma
earnings per share:
Basic.................. 11,275
Diluted................ 14,641
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 1,812 $ 1,812 $24,585
Working capital................................. 4,366 4,366 27,056
Total assets.................................... 11,896 11,896 33,973
Preferred stock................................. 6 -- --
Stockholders' equity............................ 6,724 6,724 29,497
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could adversely affect our business, financial condition and
results of operations and could result in a complete loss of your investment.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations.
Risks Related to Our Business
Fluctuations in our operating results, particularly compared to the
expectations of market analysts and investors, could cause volatility in our
common stock price
Our operating results have varied greatly in the past, and we expect that
they will continue to vary in the future as a result of a number of factors,
many of which are beyond our control. Therefore, we do not believe that period-
to-period comparisons of our operating results are meaningful. However,
securities analysts and investors may set expectations about our business based
upon past operating results. Consequently, if our operating results do not
follow past trends, our stock price is likely to decline.
We base our decisions regarding operating expenses on anticipated revenue
trends. Because many of our expenses are fixed, a delay in recognizing revenues
from even a limited number of licensing transactions could cause our operating
results to vary significantly from quarter to quarter and could result in
reduced income from operations or operating losses. We anticipate that our
fixed expenses will progressively increase as we expand our operations. Because
we do not know when, or if, our potential customers will place orders and
finalize contracts, we cannot accurately predict our revenue for future
quarters. To the extent these expenses are not followed by increased revenues,
our operating results will suffer. For example, our net income for the quarter
ended December 31, 1998 decreased as a result of increased operating expenses.
Seasonal trends may harm our quarterly operating results. We experience
significant seasonality in software license revenues and expect seasonal trends
to continue in the future. In recent years, our revenues in the fourth quarter
of our fiscal year have generally been higher than our revenues in each of the
prior three quarters and higher than our revenues in the first quarter of the
following fiscal year. We believe that the efforts of our direct sales force to
meet or exceed fiscal year-end sales quotas as well as customer buying patterns
and budgeting cycles are the primary causes of these fluctuations.
As a result of these factors, our annual or quarterly results of operations
may not meet the expectations of securities analysts and investors, which would
likely cause the price of our common stock to decline.
We have a limited operating history and face significant risks often faced by
early stage companies, which could limit our ability to generate revenues
We commenced operations in April 1994 and commercially released the initial
version of CoreDossier in November 1995. As a result of our limited operating
history, we face significant risks and uncertainties related to the early stage
of ESPS. To address these risks and uncertainties, we must:
. Successfully implement our sales and marketing strategy;
. Respond to competitive developments in the marketplace;
. Expand into targeted industries;
. Attract, retain and motivate qualified personnel; and
. Develop and upgrade our products and technologies more rapidly than our
competitors.
6
<PAGE>
If we are unsuccessful in our efforts in any or all of these areas we may be
unable to obtain sufficient revenues.
A small number of our license agreements account for a large portion of our
total revenues and our inability to fulfill our obligations under any
significant license agreements could harm our operating results
We derive a significant portion of our software license revenues from a
small number of license agreements. For example, four customers accounted for
100% of total revenues for the fiscal year ended March 31, 1997, three
customers accounted for 46% of total revenues for the fiscal year ended March
31, 1998 and one customer accounted for 11% of total revenues for the year
ended March 31, 1999. We expect that a significant portion of our revenues will
continue to be derived from a limited number of customers which may vary from
year to year. Our operating results could be harmed if we are unable to
complete one or more substantial license sales in any future period.
Because we rely and will continue to rely on our CoreDossier product family for
substantially all of our revenues, difficulties relating to CoreDossier will
harm our results of operations
Factors that adversely affect the pricing of, or demand for, the CoreDossier
product family will result in a decrease in our revenues. As of March 31, 1999,
substantially all of our revenues were generated from the sale of CoreDossier
products and related maintenance, training and implementation services. We
expect revenues from the sale of CoreDossier products and services to continue
to account for substantially all of our revenues in the future. Our future
growth will depend upon broader market acceptance of the CoreDossier family of
products.
If we are unable to develop and introduce new and improved CoreDossier
products in a timely manner, our business, financial condition and results of
operations would be harmed. Our future financial performance will substantially
depend on our ability to successfully deploy current versions of our
CoreDossier products and to develop, introduce and gain market acceptance of
new and enhanced versions of our CoreDossier products. Competition or
technological change could decrease demand for, or market acceptance of,
CoreDossier. Any decrease in demand or market acceptance or increase in
competition will result in a decrease in revenues.
We may not be able to successfully market and sell our products and services in
our targeted industries and therefore may not generate revenues from these
industries
We have historically sold most of our products and services to businesses in
the pharmaceutical and biotechnology industry. We have recently begun selling
our products and services to businesses in the chemical industry and the
utilities industry. Our business strategy includes targeting industries in
which we do not currently sell products and services, such as the financial
services, insurance, and discrete manufacturing industries. We may not
experience the same level of sales in these industries as in the pharmaceutical
and biotechnology industry.
Our success in these industries will depend upon many factors, including:
. Our ability to obtain expertise in these industries;
. Our ability to develop industry-specific modules for these industries;
and
. Market acceptance of our products and services in these industries.
If we are unable to adequately address these factors we may not successfully
market and sell our products and services in these targeted industries.
Consequently, we may not generate revenues. In addition, as we develop new
industry-specific products, we may begin competing with companies we have not
competed against in the past. These companies may have greater experience and
expertise in these
7
<PAGE>
industries. If we are unable to compete successfully against these new
competitors our business and results of operations would be harmed.
Because our products operate exclusively on the Windows NT platform, our
business would be harmed if the Windows NT platform fails to grow or fails to
meet the technical demands of our products
We designed our products to operate exclusively on the Windows NT platform.
Acceptance of the Windows NT platform may not continue to increase in the
future. If the market for Windows NT fails to grow or grows more slowly than we
currently expect, or if this market is affected by delays in the release of new
or enhanced products, we may not sell as many of our products as we anticipate,
which would harm our business. In addition, we must adapt our product to work
with new or enhanced Windows NT products.
In addition, the performance of our products partly depends on the technical
capabilities of the Windows NT platform. If the Windows NT platform does not
meet the technical demands of our products, the performance of our products may
be limited and, as a result, our business may be harmed.
We may be unable to expand our sales and professional services organizations,
which may hinder our ability to grow and meet customer demands
If we fail to expand our direct sales force or establish other distribution
channels, or if we fail to expand our professional services organization, our
business could be harmed. Our future revenue growth will depend, in large part,
on recruiting and training additional personnel for our sales and professional
services organizations. We have experienced, and may continue to experience,
difficulty in recruiting qualified sales and professional services personnel.
We may be unable to successfully expand our direct sales force or other
distribution channels. Even if we do expand, an increase in our revenues may
not result. If we are unable to hire a number of highly trained professional
services personnel, we may be unable to meet customer demands for services.
This may harm our business and limit our ability to sell our products.
We are growing rapidly and effectively managing our growth may be difficult
We have significantly increased our employee base to meet increasing demand
for our products and services. As we expand into targeted new industries, we
expect to continue increasing our employee base. Our management and operations
have been strained by this growth and will continue to be strained should rapid
growth continue. To compete effectively and to manage future growth, we must
continue to improve our financial and management controls, reporting systems
and procedures on a timely basis. We must also expand, train and manage our
employee base. If we are not successful managing our growth, our business may
be harmed.
We may be unable to attract and retain the personnel we need to market and sell
our products and service our customers' needs
Our future performance will depend largely on the efforts and abilities of
our senior executives, key technical, professional services, sales and
marketing and managerial personnel. Our success will depend on our ability to
attract and retain these key employees in the future. The market for qualified
personnel is extremely competitive. The loss of any of our key personnel may
harm our business and we may not find qualified replacements for key personnel
who leave us.
We rely on our relationships with service vendors, the loss or failure of which
may harm our ability to market and sell our products
We have established relationships with a number of service vendors that are
important to the worldwide implementation, integration, development and
promotion of our products. Our business may be harmed if:
8
<PAGE>
. We are unable to develop and retain effective, long-term relationships
with these service vendors;
. We are unable to adequately train a sufficient number of service vendors;
. Our service vendors do not have or do not devote the resources necessary
to facilitate implementation of our products; or
. Our service vendors endorse a product or technology other than ours.
If we are unable to successfully maintain our existing relationships, or
develop new relationships, our business may be harmed.
We rely on technology licensed from a third party, the loss of which may harm
our ability to sell our products
We incorporate software licensed from Versant Object Technology Corporation
into our products. The pricing provisions of the license agreement expire in
December 1999. Our inability to maintain this license on commercially favorable
terms could impair our ability to sell our products. We will need to replace
the technology if we lose this license, which may take time and may be costly.
In addition, we depend on Versant's ability to deliver and support reliable
products. Versant must enhance their current products, develop new products on
a timely and cost-effective basis, and respond to emerging industry standards
and other technological changes. We may need to replace this software if
Versant fails to update its product, or its product becomes obsolete or
incompatible with future versions of our products. Our sales may decline if we
are unable to replace the functionality provided by Versant's software.
We may be unable to adequately protect our proprietary rights, which could
result in their unauthorized use
Our ability to market and sell our products could be harmed if we do not
protect our proprietary rights. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products and obtain and
use information we regard as proprietary. Other parties may breach
confidentiality agreements and other protective contracts. We may not become
aware of these breaches or have adequate remedies available. We may need to
litigate claims against third parties who infringe our intellectual property
rights, which could be costly.
We have not secured registration of all our marks in the United States and
have not pursued registration in any foreign country. The laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. Effective copyright, trademark and trade secret
protection may not be available in other jurisdictions. If we cannot adequately
protect our proprietary rights, our business may be harmed.
Our products may infringe proprietary rights of others, which may subject us to
costly claims and impair our ability to market and sell our products
In the computer software market, there is frequent and substantial
intellectual property litigation. In addition, many parties are actively
developing collection, publication and distribution technologies, and are
seeking protection for these technologies, including seeking patent protection.
As a result, we believe that disputes over the ownership of these technologies
are likely to arise in the future. Furthermore, former employers of our present
and future employees may assert claims that these employees improperly
disclosed confidential or proprietary information to us. We cannot assure you
that our products do not infringe valid patents, copyrights or other
proprietary rights of third parties. Therefore, we may be subject to legal
proceedings and claims, including claims of alleged infringement of the
proprietary rights of others.
9
<PAGE>
Any claims relating to our infringement of proprietary rights, even if not
meritorious, could result in costly litigation, diversion of management's
attention and resources, product redevelopment, or delays in product shipments.
If these claims are successful, we may be unable to market and sell our
products. In addition, we could be required to pay damages or enter into
license agreements. We may be unable to obtain any required licenses on
commercially favorable terms, if at all, or unable to avoid litigation or
settle without substantial expense and damage awards.
Potential year 2000 problems could harm our business
Many computer systems are not capable of distinguishing 21st century dates
from 20th century dates. As a result, beginning on January 1, 2000, computer
systems and software used by many companies and organizations in a wide variety
of industries will produce erroneous results or fail unless they have been
modified or upgraded to process date information correctly. Significant
uncertainty exists in the software industry and other industries concerning the
scope and magnitude of problems associated with the century change. Based on
our assessment to date, we believe the current versions of our software
products are year 2000 compliant, that is, they are capable of adequately
distinguishing 21st century dates from 20th century dates. However, our
products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that may not be year 2000
compliant.
We may face claims based on year 2000 problems in other companies' products,
or issues arising from the integration of multiple products within an overall
system. We also need to ensure year 2000 compliance of our own internal
computer systems. We do not expect the total cost of year 2000 compliance to be
material to our business. However, we and our customers and suppliers may not
identify and remediate all significant year 2000 problems on a timely basis.
Remediation efforts may involve significant time and expense and unremediated
problems could harm our business.
In addition, we may experience reduced sales of our products as potential
customers reduce their budgets for software due to increased expenditures on
their own year 2000 compliance efforts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
Risks Related to the Electronic Compliance Management Market
We may be unable to compete successfully in the rapidly evolving electronic
compliance management market
The market for electronic compliance management solutions is rapidly
changing. As the market changes, new businesses and solutions will enter the
market, creating new competition. We may be unable to compete successfully in
this newly emerging market and, as a result, our business may be harmed. We
expect that competition will increase as emerging companies enter the e-
compliance management market and as new products and technologies are
introduced. Increased competition may result in price reductions, lower gross
margins and loss of our market share, any of which could harm our business.
If the relatively new electronic compliance management market does not develop
and grow as we anticipate, we will be unable to generate expected revenues
The market for electronic compliance management solutions is still emerging,
and continued growth in demand for and acceptance of compliance management
products in general and our products and services in particular remains
uncertain. If the electronic compliance management market does not grow or
grows more slowly than we currently anticipate, sales of our products and
services may suffer. Even if this market grows, businesses may purchase our
competitors' products or develop their own compliance management solutions. We
believe that many of our potential customers are not fully aware of the
availability or benefits of our electronic compliance management solution.
10
<PAGE>
In addition, the anticipated growth of the electronic compliance management
market may depend on the growth of the Internet. Increased use of the Internet
largely depends upon available Internet security, bandwidth and reliability. If
use of the Internet by businesses does not increase, the market for our
products and services may not grow as we expect and our business may be harmed.
If we are unable to respond to changes in the electronic compliance management
market, we may be unable to successfully market and sell our products
Our market is characterized by rapid technological change, frequent new
product introductions, changes in compliance regulation, changes in customer
demands and evolving industry standards. Existing products can become obsolete
and unmarketable as new technologies are introduced, compliance regulations
change and new industry standards emerge. As a result, we cannot estimate the
life cycles of our products. We may need to modify our products when third
parties modify the software that we integrate into our products. To be
successful, we must continue to enhance our current product line and develop
new products that successfully respond to these developments. Our business may
be harmed if we delay release of our products and product enhancements or if
these products and product enhancements fail to achieve market acceptance when
released. In addition, customers may defer or forego purchases of products if
we, our competitors or major hardware, systems or software vendors introduce or
announce new products or product enhancements. These events may interfere with
our ability to market and sell our products, which would harm our results of
operations.
Risks Related to this Offering
Our stock price may be volatile and you may be unable to resell your shares at
or above the initial public offering price
Before this offering, no public market existed for our common stock. The
initial public offering price of our common stock has been determined through
negotiations among us, the selling stockholders and the representatives of the
underwriters. The market price for our shares of common stock is likely to be
volatile and, if you decide to purchase our shares, you may be unable to resell
your shares at or above the initial public offering price due to a number of
factors, including:
. Actual or anticipated variations in quarterly operating results;
. The loss of significant orders;
. Changes in earnings estimates by analysts;
. Announcements of technological innovations or new products by our
competitors;
. Changes in the software and computer industries.
In addition, the stock market has experienced extreme price and volume
fluctuations that affected the market price of many companies in the software
industry and that have been unrelated to these companies' operating
performances. These broad market fluctuations could reduce the market price of
our common stock.
Our officers, directors and affiliates will be able to control matters
requiring stockholder approval and they may approve actions that you voted to
disapprove and disapprove actions that you voted to approve
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately 67% of the
outstanding shares of our common stock, 64% if the underwriters' over-allotment
option is exercised in full. As a result, these stockholders will be able to
control all matters requiring stockholder approval and our management and
affairs. These stockholders may have interests that
11
<PAGE>
differ from yours and they may approve actions that you voted to disapprove and
disapprove actions that you voted to approve. Matters that typically require
stockholder approval include:
. Election of directors;
. Approval of a merger or consolidation; and
. Approval of a sale of all or substantially all of our assets.
In addition, this concentration of ownership may delay, deter or prevent
acts that would result in a change of control, which in turn could reduce the
market price of our common stock.
Future sales of our common stock may depress our stock price
Sales of a substantial number of shares of common stock in the public market
following this offering could reduce the market price of our common stock. All
the shares sold in this offering will be freely tradable. The remaining shares
of common stock outstanding after this offering will be available for sale in
the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Sale
- ---------------- -----------------------------
<S> <C>
0 shares............................. Date of this prospectus
132,708 shares....................... 90 days after the date of this prospectus
11,729,475 shares.................... 180 days after the date of this prospectus
</TABLE>
We have granted options to purchase shares of our common stock under our
1995 stock incentive plan, and intend to register the shares of common stock
issuable or reserved for issuance under the plan upon the completion of this
offering.
New investors in our common stock will experience immediate and substantial
dilution
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing our common stock in
this offering will, therefore, incur immediate dilution of $5.58 in net
tangible book value per share of our common stock. This dilution figure deducts
the estimated underwriting discounts and commissions and estimated offering
expenses payable by ESPS from the initial public offering price. Investors will
incur additional dilution upon the exercise of outstanding stock options. See
"Dilution."
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address market
acceptance of our products and services, expansion into new targeted
industries, product development, sales and marketing strategies, development
and maintenance of strategic alliances, technological advancement, global
expansion, use of proceeds, the costs and timing of our year 2000 compliance
program, projected capital expenditures, liquidity, and availability of
additional funding sources. These statements may be found in the sections of
this prospectus entitled "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Our Business" and in this prospectus generally. Our
actual results could differ materially from those anticipated in these forward-
looking statements as a result of the factors discussed in "Risk Factors" and
elsewhere in this prospectus. We are not obligated to publicly update any
forward-looking statements for any reason, even if new information becomes
available or events occur in the future.
13
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $22.8 million in net proceeds from the
sale of the 3,500,000 shares of common stock in this offering at the initial
public offering price of $7.50 per share, after deducting the underwriters'
discount of $1.8 million and our offering expenses of $1.6 million. We will not
receive any proceeds from the sale of common stock as a result of the exercise
of the over-allotment option by the underwriters.
We intend to use the net proceeds of this offering for working capital and
general corporate purposes, including increased domestic and international
sales and marketing expenditures, product development expenditures,
expenditures related to the expansion of our professional services organization
and capital expenditures made in the ordinary course of business. We may also
use a portion of the net proceeds to acquire additional businesses, products
and technologies or to establish joint ventures that we believe will complement
our business. However, we have no specific plans, agreements or commitments,
oral or written, to do so. We are not engaged in any negotiations for any
acquisition or joint venture. The amounts that we actually expend for working
capital purposes will vary depending on a number of factors, including future
revenue growth, if any, the amount of cash we generate from operations and the
progress of our product development efforts. As a result, we will retain broad
discretion in the allocation of the net proceeds of this offering. Pending the
uses described above, we will invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We intend to retain
any future earnings to fund the development and growth of our business.
Therefore, we do not anticipate paying any cash dividends in the future.
14
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 31, 1999. We
present capitalization:
. On an actual basis;
. On a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into common stock upon the
consummation of the offering; and
. On a pro forma as adjusted basis to give effect to the automatic
conversion of all outstanding shares of preferred stock into common stock
upon the consummation of the offering and to reflect the sale of the
shares in the offering and our receipt of the estimated net proceeds from
the sale of 3,500,000 shares of common stock offered in the offering at
the initial public offering price of $7.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, 6,000,000 shares
authorized; 6,000,000 shares issued and
outstanding actual; no shares issued and
outstanding pro forma and pro forma as
adjusted................................... $ 6 $ -- $ --
Common stock, 50,000,000 shares authorized,
3,154,221 shares issued and outstanding
actual; 11,854,221 shares issued and
outstanding pro forma; and 15,354,221
issued and outstanding pro forma as
adjusted................................... 3 12 15
Additional paid-in capital.................. 6,570 6,567 29,337
Retained earnings........................... 349 349 349
Deferred stock compensation................. (204) (204) (204)
------ ------ -------
Total stockholders' equity................ 6,724 6,724 29,497
------ ------ -------
Total capitalization...................... $6,724 $6,724 $29,497
====== ====== =======
</TABLE>
This table is based on the number of outstanding shares as of March 31, 1999
and does not include the following:
. 221,464 shares available for issuance under our 1995 stock incentive plan;
. 3,874,317 shares of common stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $1.77 per share, of which
options to purchase 767,572 shares of common stock were exercisable at a
weighted average exercise price of $0.07 per share; and
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included in this prospectus.
15
<PAGE>
DILUTION
As of March 31, 1999, our net tangible book value on a pro forma basis
giving effect to the conversion of our preferred stock into common stock upon
consummation of this offering was approximately $6.7 million or $0.57 per share
of common stock. Net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total liabilities, divided
by the number of shares of common stock outstanding. As of March 31, 1999, our
net tangible book value, on a pro forma basis as adjusted for the sale of
3,500,000 shares of common stock by ESPS, based on the initial public offering
price of $7.50 per share and after deducting the underwriting discounts and
commissions and other estimated offering expenses, would have been
approximately $1.92 per share. This represents an immediate increase of $1.35
per share to existing stockholders and an immediate dilution of $5.58 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $7.50
Pro forma net tangible book value per share at March 31, 1999. $0.57
Pro forma increase per share attributable to new investors.... 1.35
Pro forma net tangible book value per share after the
offering..................................................... 1.92
-----
Dilution per share to new investors............................. $5.58
=====
</TABLE>
The following summarizes on a pro forma basis as of March 31, 1999, the
differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us based on the initial
public offering price of $7.50 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 11,854,221 77% $ 6,189,000 19% $ 0.52
New investors.................. 3,500,000 23 26,250,000 81 7.50
---------- --- ----------- ---
Total........................ 15,354,221 100% $32,439,000 100%
========== === =========== ===
</TABLE>
16
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The tables that follow present portions of our financial statements and are
not complete. You should read the following selected financial data in
conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. We derived the statement of operations
data for the fiscal years ended March 31, 1997, 1998 and 1999, and the balance
sheet data as of March 31, 1998 and 1999 from our financial statements that
have been audited by Ernst & Young LLP, independent auditors, which are
included elsewhere in this prospectus. We derived the statement of operations
data for the period from inception, April 24, 1994, to March 31, 1995 and the
fiscal year ended March 31, 1996 and the balance sheet data as of March 31,
1995, 1996 and 1997 from audited financial statements, that are not included in
this prospectus. Pro forma balance sheet data reflects the automatic conversion
of all outstanding shares of preferred stock into common stock upon
consummation of this offering. You should not rely on our historical results as
an indicator of our future results. See note 11 of the notes to financial
statements for an explanation of the method used to calculate pro forma basic
and diluted earnings per share.
<TABLE>
<CAPTION>
Period from
April 24, 1994 Fiscal Years Ended March 31,
(inception) --------------------------------
to March 31, 1995 1996 1997 1998 1999
----------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software licenses....... $ 100 $ 721 $ 648 $6,814 $13,454
Services and
maintenance............ 2 32 420 1,832 4,495
----- ------ ------- ------ -------
Total revenues........ 102 753 1,068 8,646 17,949
Cost of revenues:
Software licenses....... -- -- 68 258 298
Services and
maintenance............ -- 72 506 1,589 3,193
----- ------ ------- ------ -------
Total cost of
revenues............. -- 72 574 1,847 3,491
----- ------ ------- ------ -------
Gross profit.............. 102 681 494 6,799 14,458
Operating expenses:
Research and
development............ 208 725 1,407 1,978 3,829
Sales and marketing..... 32 95 714 1,283 5,185
General and
administrative......... 302 633 1,147 1,229 3,162
----- ------ ------- ------ -------
Total operating
expenses............. 542 1,453 3,268 4,490 12,176
----- ------ ------- ------ -------
Income (loss) from
operations............... (440) (772) (2,774) 2,309 2,282
Interest, net............. 5 18 (39) 52 130
----- ------ ------- ------ -------
Income (loss) before
income taxes............. (435) (754) (2,813) 2,361 2,412
Income tax provision
(benefit)................ -- -- -- (514) 936
----- ------ ------- ------ -------
Net income (loss)......... $(435) $ (754) $(2,813) $2,875 $ 1,476
===== ====== ======= ====== =======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Period from
April 24, 1994 Fiscal Years Ended March 31,
(inception) ---------------------------------
to March 31, 1995 1996 1997 1998 1999
----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings (loss) per share:
Basic................... $ (0.30) $(0.76) $(3.51) $ 3.81 $ 0.57
Diluted................. (0.30) (0.76) (3.51) 0.25 0.10
Shares used in computation
of earnings (loss) per
share:
Basic................... 1,450 989 801 754 2,575
Diluted................. 1,450 989 801 11,326 14,641
Pro forma earnings per
share:
Basic................... $ 0.13
Diluted................. 0.10
Shares used in computation
of pro forma earnings per
share:
Basic................... 11,275
Diluted................. 14,641
</TABLE>
<TABLE>
<CAPTION>
March 31, March 31, 1999
-------------------------- -----------------
1995 1996 1997 1998 Actual Pro Forma
---- ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........ $435 $ 871 $2,311 $ 4,558 $ 1,812 $ 1,812
Working capital.................. 409 429 1,608 4,119 4,366 4,366
Total assets..................... 602 1,262 3,211 10,017 11,896 11,896
Preferred stock.................. 1 2 6 6 6 --
Stockholders' equity............. 547 786 1,962 4,896 6,724 6,724
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our History of Operations
ESPS provides software solutions that enable businesses in highly regulated
industries to reduce the costs and overall burden associated with traditional
compliance processes. Our electronic compliance management solution utilizes
advanced technologies, such as corporate intranets and the Internet, and has
the ability to scale throughout an enterprise. The CoreDossier family of
software products and related services enables users to collaborate in the
authoring, compilation, distribution, publishing and reuse of compliance
information and regulatory submissions. In addition to advanced technology, we
provide our customers with in-depth industry-specific compliance expertise that
allows us to better understand their compliance needs and requirements.
ESPS was founded in April 1994. In our first fiscal year of operation, ended
March 31, 1995, we focused primarily on research and development activities.
From early in the fiscal year ended March 31, 1996 through the fiscal year
ended March 31, 1997, we began to recruit personnel, purchase operating assets,
market our products, build a direct sales force and expand our services
business. We commercially released CoreDossier in November 1995. Our revenues
totaled $753,000 in the fiscal year ended March 31, 1996 and $1.1 million in
the fiscal year ended March 31, 1997. We generated net losses of $754,000 in
the fiscal year ended March 31, 1996 and $2.8 million in the fiscal year ended
March 31, 1997.
In the fiscal year ended March 31, 1997, we substantially expanded our
operations to capitalize on our opportunity within the rapidly emerging
compliance management market. We decided to accelerate our investments in
marketing, sales, professional services, product development and our general
and administrative infrastructure. As a result, from March 31, 1996 to March
31, 1999, we have:
. Opened two domestic field sales offices;
. Entered the European market by opening a direct sales office in the
United Kingdom; and
. Released three major upgrades to CoreDossier and two industry-specific
modules.
We believe these investments have been critical to our growth to date. Our
revenues were $8.6 million for the fiscal year ended March 31, 1998,
representing an increase of 710% from the fiscal year ended March 31, 1997.
These revenues grew to $17.9 million for the fiscal year ended March 31, 1999
representing an increase of 108% over the prior fiscal year. These investments
increased our operating expenses by $1.2 million, or 37%, for the fiscal year
ended March 31, 1998 over fiscal year 1997 and $7.7 million, or 171% for the
fiscal year ended March 31, 1999 over fiscal year 1998. However, we remained
profitable with income from operations of $2.3 million for the fiscal year
ended March 31, 1999, which is the same amount that was reported for the prior
fiscal year ended March 31, 1998. We have been profitable for the last six
consecutive quarters and, as of March 31, 1999, had retained earnings of
$349,000. We anticipate that our operating expenses will increase substantially
in the future as we continue to expand our product development, sales and
marketing, professional services and administrative staffs.
Source of Revenues and Revenue Recognition Policy
We generate revenues through software licenses and services and maintenance.
Software licenses revenues are generated from licensing the rights to use our
products. Services and maintenance revenues are generated from sales of
customer support services contracts and consulting and training services
performed for customers that license our products.
19
<PAGE>
Revenues from the sale of software licenses are recognized upon shipment of
software when persuasive evidence of an agreement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Vendor-specific objective evidence is typically based on the price charged when
an element is sold separately, or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established by authorized management, will not change
before market introduction. Elements included in multiple element arrangements
could consist of software products, upgrades, enhancements, customer support
services, or consulting services. If an acceptance period is required, revenues
are recognized upon the earlier of customer acceptance or the expiration of the
acceptance period.
Revenues from maintenance are recognized ratably over the term of the
customer support contract, typically one year. Consulting revenues are
primarily related to implementation services performed on a time-and-materials
basis under separate service arrangements related to the installation of our
software products. Revenues from consulting and training services are
recognized as services are performed. If a transaction includes both license
and service elements, license fee revenues are recognized on shipment of the
software, provided services do not include significant customization or
modification of the base product, and the software is not subject to acceptance
criteria.
Our revenue recognition policy is in accordance with American Institute of
Certified Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition."
Our Results of Operations
We believe that period-to-period comparisons of our operating results are
not meaningful. You should not rely on them to predict our future performance.
You should consider our prospects in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. In addition, although we have experienced significant revenue growth
recently, this revenue growth may not continue, and we may not maintain
profitability in the future. Our future operating results will depend on many
factors, including:
. Demand for our products and services;
. Product and price competition;
. Variability in the mix of our software licenses revenues and services and
maintenance revenues;
. Variability in the mix of services that we perform and those performed by
third-party service providers;
. Success in expanding our direct sales force and professional services
organization and implementing indirect distribution channels;
. Our ability to develop and market new and enhanced products on a timely
basis;
. Timing of our new product introductions and product enhancements or those
of our competitors;
. Continued purchases by our existing customers, including additional
software licenses and services and maintenance contracts;
. International sales;
. The loss of any key employees and timing of our new hires;
. Significant downturns in the software industry, particularly when general
economic conditions decline and spending on management information
systems decreases;
. The fiscal or quarterly budget cycles of our customers;
. The efforts of our direct sales force to meet or exceed quarterly or
fiscal year-end sales quotas; and
. The effects of year 2000 issues on customers' purchasing decisions.
20
<PAGE>
The following table presents statement of operations data as a percentage
of total revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
---------------------------
Fiscal Years
Ended March 31,
---------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses.............................. 60.7% 78.8% 75.0%
Services and maintenance....................... 39.3 21.2 25.0
-------- ------- -------
Total revenues............................... 100.0 100.0 100.0
Cost of revenues:
Software licenses.............................. 6.4 3.0 1.7
Services and maintenance....................... 47.4 18.4 17.8
-------- ------- -------
Total cost of revenues....................... 53.8 21.4 19.5
-------- ------- -------
Gross profit..................................... 46.2 78.6 80.5
Operating expenses:
Research and development....................... 131.7 22.9 21.3
Sales and marketing............................ 66.9 14.8 28.9
General and administrative..................... 107.4 14.2 17.6
-------- ------- -------
Total operating expenses..................... 306.0 51.9 67.8
-------- ------- -------
Income (loss) from operations.................... (259.8) 26.7 12.7
Interest, net.................................... (3.7) 0.6 0.7
-------- ------- -------
Income (loss) before income taxes................ (263.5) 27.3 13.4
Income tax provision (benefit)................... -- (6.0) 5.2
-------- ------- -------
Net income (loss)................................ (263.5)% 33.3% 8.2%
======== ======= =======
</TABLE>
Comparison of Fiscal Year Ended March 31, 1999 and Fiscal Year Ended March 31,
1998
Revenues
Total revenues consist of software licenses revenues and services and
maintenance revenues. Services and maintenance revenues include professional
consulting, training and customer support services. Total revenues increased
108% from $8.6 million for the fiscal year ended March 31, 1998 to $17.9
million for the fiscal year ended March 31, 1999. For fiscal 1999, one
customer accounted for 11% of revenues and for fiscal 1998, three customers
accounted for 46% of revenues.
Software licenses revenues increased 97% from $6.8 million for the fiscal
year ended March 31, 1998 to $13.5 million for the fiscal year ended March 31,
1999. We attribute this increase to both increased market acceptance of
CoreDossier and $1.8 million of license fees from Adobe Systems, Incorporated.
In November 1997, we first delivered release 3.0 of CoreDossier. In June 1998,
we first delivered release 3.1 of CoreDossier and the CDER compiler module
specific to the pharmaceutical industry. In October 1998, we first delivered
the CADDY compiler module specific to the chemical industry.
Services and maintenance revenues increased 145% from $1.8 million for the
fiscal year ended March 31, 1998 to $4.5 million for the fiscal year ended
March 31, 1999. This increase resulted primarily from an increase in customer
support revenues of $1.4 million and an increase in consulting and training
services revenues of $1.3 million, as our customer base grew from 20 at March
31, 1998 to 43 at March 31, 1999. We expect the proportion of services and
maintenance revenues to total revenues to fluctuate in the future, depending
in part on our customers' direct use of third-party consulting and
implementation service providers and the ongoing renewals of customer support
contracts.
Revenues outside of the United States were $1.2 million for the fiscal year
ended March 31, 1998, and
increased to $3.3 million for the fiscal year ended March 31, 1999. This
increase resulted primarily from the sale of our products and services to
existing customers with operations outside the United States.
21
<PAGE>
We do not believe that we can sustain the historical percentage growth rates
of software licenses and services and maintenance revenues.
Cost of Revenues
Cost of software licenses revenues. Cost of software licenses revenues
consists primarily of royalties we pay to third parties for the use of their
technology incorporated into our CoreDossier products. Cost of software
licenses revenues increased from $258,000 for the fiscal year ended March 31,
1998 to $298,000 for the fiscal year ended March 31, 1999. This increase
resulted primarily from an increase in the sale of our CoreDossier products.
Cost of software licenses revenues as a percentage of software licenses
revenues was 4% for fiscal 1998 and 2% for fiscal 1999. This decrease was
caused primarily by the license fees from Adobe Systems, Incorporated, which
did not require the third-party technology.
Cost of services and maintenance revenues. Cost of services and maintenance
revenues consists primarily of personnel costs related to professional services
and customer support.
Cost of services and maintenance revenues increased 101% from $1.6 million
for the fiscal year ended March 31, 1998 to $3.2 million for the fiscal year
ended March 31, 1999. This increase resulted primarily from the hiring and
training of 23 professional services and customer support personnel to support
our increased customer base. The number of our professional services and
customer support personnel increased from 15 at March 31, 1998 to 38 at March
31, 1999. Cost of services and maintenance revenues as a percentage of services
and maintenance revenues was 87% for fiscal 1998 and 71% for fiscal 1999. The
cost of services and maintenance revenues as a percentage of services and
maintenance revenues may vary among periods because of the mix of services we
provide which have different cost structures. The decrease in cost of services
and maintenance revenues as a percentage of services and maintenance revenues
resulted primarily from increased customer support revenues, which have higher
margins than the other services.
Operating Expenses
Research and development. Research and development expenses consist
primarily of salaries, benefits and depreciation for equipment for:
. Software developers;
. Quality assurance personnel; and
. Program managers and technical writers.
Research and development expenses increased 94% from $2.0 million for the
fiscal year ended March 31, 1998 to $3.8 million for the fiscal year ended
March 31, 1999. This increase resulted from an increase in the number of
software developers and quality assurance personnel, from 26 to 49 employees,
to support our product development and testing activities. Research and
development expenses represented 23% of our total revenues for fiscal 1998 and
21% for the fiscal year ended March 31, 1999. The decrease in research and
development expenses as a percentage of total revenues primarily reflects the
more rapid growth of our revenues compared to the investment in our research
and development activities during this period. We believe that we need to
significantly increase our research and development investment to expand our
market position and continue to expand our product line and penetrate other
targeted industries. Accordingly, we anticipate that research and development
expenses will increase in future periods.
Sales and marketing. Sales and marketing expenses consist primarily of:
. Salaries, commissions and bonuses earned by sales and marketing
personnel;
. Travel and promotional expenses; and
. Communication costs related to direct sales efforts.
Sales and marketing expenses increased 304% from $1.3 million for the fiscal
year ended March 31, 1998 to $5.2 million for the fiscal year ended March 31,
1999. This increase resulted primarily from our increased investment in sales
and marketing infrastructure, both domestically and internationally. The
investments included increases in personnel-related expenses of $2.2 million,
recruiting fees of
22
<PAGE>
$219,000, travel and entertainment expenses of $516,000, and related facility
and equipment costs of $391,000. In addition, we increased marketing
activities, including trade shows, public relations, direct mail campaigns and
other promotional activities by $591,000. Sales and marketing expenses
represented 15% of our total revenues for fiscal 1998 and 29% for fiscal 1999.
We believe that we will need to significantly increase our sales and marketing
expenses to expand our market position, and further increase our penetration
and acceptance of our products in other targeted industries. Accordingly, we
anticipate that sales and marketing expenses will increase in future periods.
General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative, and information services personnel. These expenses also include
fees for legal, accounting, and consulting services.
General and administrative expenses increased 157% from $1.2 million for the
fiscal year ended March 31, 1998 to $3.2 million for the fiscal year ended
March 31, 1999. This increase resulted from an increase of $948,000 in hiring,
training and payroll related costs associated with the addition of 13
executive, finance and administrative personnel to support the growth of our
business and the amortization of deferred stock compensation expense as
described below. In addition, rent and uitilities expense increased $489,000
due to the additional office space and travel and entertainment costs increased
$149,000 due to the increased personnel. The number of our executive, finance
and administrative personnel grew from five at March 31, 1998 to 18 at March
31, 1999. General and administrative expenses represented 14% of our total
revenues for fiscal 1998 and 18% for fiscal 1999. We believe our general and
administrative expenses will continue to increase as we expand our
administrative staff, domestically and internationally, and incur expenses
associated with becoming a public company. We expect these expenses to include
annual and other public reporting costs, directors' and officers' liability
insurance, investor relations programs and legal, accounting and consulting
fees.
Deferred stock compensation expense increased from $0 for the fiscal year
ended March 31, 1998 to approximately $218,000 for the fiscal year ended March
31, 1999. Total deferred stock compensation at March 31, 1999 of $204,000 will
be amortized over the vesting periods of the options.
Interest, net. Interest, net is derived from interest income earned on our
cash and cash equivalents. Interest income increased 150% from $52,000 for the
fiscal year ended March 31, 1998 to $130,000 for the fiscal year ended March
31, 1999. This increase resulted from an increase in average cash held during
fiscal 1999.
Income taxes. Income taxes increased from a benefit of $514,000 for the
fiscal year ended March 31, 1998 to a provision of $936,000 for the fiscal year
ended March 31, 1999. This increase resulted primarily from the reversal of a
valuation allowance for fiscal 1998 for income tax benefits related to our net
operating losses in prior periods. The income tax provision for fiscal 1999
yielded an effective rate of 39%.
Comparison of Fiscal Year Ended March 31, 1998 and March 31, 1997
Revenues
Total revenues increased 710% from $1.1 million for the fiscal year ended
March 31, 1997 to $8.6 million for the fiscal year ended March 31, 1998. During
fiscal 1997, four customers accounted for 100% of total revenues. During fiscal
1998, three customers accounted for 46% of total revenues.
Software licenses revenues increased 952% from $648,000 for the fiscal year
ended March 31, 1997 to $6.8 million for the fiscal year ended March 31, 1998.
The increase in software licenses revenues from fiscal 1997 to fiscal 1998
primarily resulted from increased market acceptance of CoreDossier and
increased sales activities.
Services and maintenance revenues increased from $420,000 for the fiscal
year ended March 31, 1997, to $1.8 million for the fiscal year ended March 31,
1998 an increase of 336%. The increase in services and
23
<PAGE>
maintenance revenues from fiscal 1997 to fiscal 1998 resulted primarily from
the increase in consulting and training services of $1.1 million and customer
support revenues of $266,000 associated with the increased sales of our
software applications and the overall growth of our installed base of customers
from four at March 31, 1997 to 20 at March 31, 1998.
Revenues outside of the United States were insignificant for fiscal 1997.
Revenues outside of the United States were $1.2 million for fiscal 1998.
Cost of Revenues
Cost of software licenses revenues. Cost of software licenses revenues
increased from $68,000 for the fiscal year ended March 31, 1997 to $258,000 for
the fiscal year ended March 31, 1998, an increase of 279%. Cost of software
licenses revenues as a percentage of software licenses revenues was 10% for
fiscal 1997 and 4% for fiscal 1998.
Cost of services and maintenance revenues. Cost of services and maintenance
revenues were $506,000 for the fiscal year ended March 31, 1997. Cost of
services and maintenance revenues increased 214% to $1.6 million for the fiscal
year ended March 31, 1998. The increase from fiscal 1997 to fiscal 1998
resulted primarily from an increase of $649,000 in payroll and related expenses
due to the hiring and training of 11 professional services and customer support
personnel to support our growing customer base. The number of our professional
services and customer support personnel increased from 6 at March 31, 1997 to
15 at March 31, 1998. In addition, travel and entertainment expenses increased
$256,000 due to the increase in personnel. Cost of services and maintenance
revenues as a percentage of services and maintenance revenues was 120% for
fiscal 1997 and 87% for fiscal 1998. The decrease in cost of services and
maintenance revenues as a percentage of services and maintenance revenues from
fiscal 1997 to fiscal 1998 primarily reflected increased revenues both in
maintenance and consulting services.
Operating Expenses
Research and development. Research and development expenses increased 41%
from $1.4 million for the fiscal year ended March 31, 1997 to $2.0 million for
the fiscal year ended March 31, 1998. The increases in research and development
expenses from fiscal 1997 to fiscal 1998 related primarily to the increase in
the number of software developers and quality assurance personnel needed to
support our product development and testing activities. Research and
development costs represented 132% of our total revenues for fiscal 1997 and
23% for fiscal 1998. The decrease in research and development expenses as a
percentage of total revenues from fiscal 1997 to fiscal 1998 primarily reflects
the growth of our revenues in this period, which increased from $1.1 million
for fiscal 1997 to $8.6 million for fiscal 1998.
Sales and marketing. Sales and marketing expenses increased 80% from
$714,000 for the fiscal year ended March 31, 1997 to $1.3 million for the
fiscal year ended March 31, 1998. The increases in sales and marketing expenses
from fiscal 1997 to fiscal 1998 resulted primarily from our investment in sales
and marketing infrastructure, which included increases in personnel-related
expenses of $263,000, recruiting fees of $95,000, travel and entertainment
expenses of $66,000, and related facility and equipment costs of $41,000, as
well as increased marketing activities, including trade shows, public
relations, direct mail campaigns and other promotional expenses, which
increased by $103,000. Sales and marketing expenses represented 67% of our
total revenues for fiscal 1997, and 15% for fiscal 1998. The decrease in sales
and marketing expenses as a percentage of total revenues from fiscal 1997 to
fiscal 1998, reflects the growth of our revenues in this period from $1.1
million for fiscal 1997 to $8.6 million for fiscal 1998.
General and administrative. General and administrative expenses increased 7%
from $1.1 million for the fiscal year ended March 31, 1997 to $1.2 million for
the fiscal year ended March 31, 1998. The $100,000 increase in general and
administrative expenses from fiscal 1997 to fiscal 1998 resulted primarily from
increased compensation and consulting expenses. General and administrative
costs represented 107% of our
24
<PAGE>
total revenues for fiscal 1997, and 14% for fiscal 1998. The decrease in
general and administrative expenses as a percentage of total revenues was due
to the growth of our revenues in this period from $1.1 million for fiscal 1997
to $8.6 million for fiscal 1998.
Interest, net. Interest, net, increased from $39,000 of interest expense for
the fiscal year ended March 31, 1997 incurred in connection with bridge loans
to $52,000 of interest income for the fiscal year ended March 31, 1998. The
increase in fiscal 1998 resulted primarily from increases in interest income
resulting from higher average cash and cash equivalents.
Income taxes. We had no provision for income taxes for the fiscal year ended
March 31, 1997. As a result of the reversal of a valuation allowance for income
tax benefits related to the use of our net operating losses in prior years, we
realized a tax benefit of $514,000 in the fiscal year ended March 31, 1998.
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for the last eight fiscal quarters ended March 31, 1999. You should read the
following table in conjunction with our financial statements and the related
notes included in this prospectus. We have prepared this unaudited information
on the same basis as the audited financial statements. This table includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software licenses...... $ 900 $ 909 $2,205 $2,800 $2,040 $3,684 $3,737 $3,993
Services and
maintenance........... 286 296 499 751 915 865 1,098 1,617
------- ------ ------ ------ ------ ------ ------ ------
Total revenues........ 1,186 1,205 2,704 3,551 2,955 4,549 4,835 5,610
Cost of revenues:
Software licenses...... 28 44 70 116 70 92 110 26
Services and
maintenance........... 211 303 507 568 587 553 881 1,172
------- ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues............. 239 347 577 684 657 645 991 1,198
------- ------ ------ ------ ------ ------ ------ ------
Gross profit........... 947 858 2,127 2,867 2,298 3,904 3,844 4,412
Operating expenses:
Research and
development........... 393 446 555 584 701 894 1,183 1,051
Sales and marketing.... 187 203 384 509 587 963 1,476 2,159
General and
administrative........ 220 275 299 435 549 686 979 948
------- ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 800 924 1,238 1,528 1,837 2,543 3,638 4,158
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............ 147 (66) 889 1,339 461 1,361 206 254
Interest, net.......... 4 24 11 14 50 37 40 3
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 151 (42) 900 1,353 511 1,398 246 257
Income tax provision
(benefit)............. (1,349) (16) 340 511 198 543 95 100
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 1,500 $ (26) $ 560 $ 842 $ 313 $ 855 $ 151 $ 157
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE>
The following table presents our unaudited quarterly results of operations
as a percentage of revenues:
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software licenses...... 75.9% 75.4% 81.5% 78.9% 69.0% 81.0% 77.3% 71.2%
Services and
maintenance........... 24.1 24.6 18.5 21.1 31.0 19.0 22.7 28.8
------ ----- ----- ----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses...... 2.4 3.7 2.6 3.3 2.4 2.0 2.3 0.5
Services and
maintenance........... 17.8 25.1 18.8 16.0 19.9 12.2 18.2 20.9
------ ----- ----- ----- ----- ----- ----- -----
Total cost of revenue.. 20.2 28.8 21.4 19.3 22.3 14.2 20.5 21.4
------ ----- ----- ----- ----- ----- ----- -----
Gross profit............ 79.8 71.2 78.6 80.7 77.7 85.8 79.5 78.6
Operating expenses:
Research and
development........... 33.1 37.0 20.5 16.4 23.7 19.7 24.5 18.7
Sales and marketing.... 15.8 16.8 14.2 14.3 19.9 21.2 30.5 38.5
General and
administrative........ 18.5 22.8 11.1 12.3 18.6 15.1 20.2 16.9
------ ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 67.4 76.6 45.8 43.0 62.2 56.0 75.2 74.1
------ ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 12.4 (5.4) 32.8 37.7 15.5 29.8 4.3 4.5
Interest, net........... 0.3 2.0 0.4 0.4 1.7 0.8 0.8 0.1
------ ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 12.7 (3.4) 33.2 38.1 17.2 30.6 5.1 4.6
Income tax provision
(benefit).............. (113.7) (1.3) 12.6 14.4 6.7 11.9 2.0 1.8
------ ----- ----- ----- ----- ----- ----- -----
Net (loss) income....... 126.4% (2.1)% 20.6% 23.7% 10.5% 18.7% 3.1% 2.8%
====== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The discussions relating to the fiscal year comparisons of the results of
operations generally apply to the comparison of results of operations for the
eight quarters ended March 31, 1999.
In recent years, there have been greater sales of our products in our
fourth fiscal quarter than in each of the first three quarters of our fiscal
year. For example, in the fiscal year ended March 31, 1998, 41% of total
revenues were recognized in the fourth quarter, compared to 31% in the third
quarter, 14% in the second quarter, and 14% in the first quarter. In the
fiscal year ended March 31, 1999, 31% of total revenues were recognized in the
fourth quarter, compared to 27% in the third quarter, 25% in the second
quarter, and 17% in the first quarter. In addition, we experienced lower total
revenues in the first quarter of fiscal 1999 as compared to the last quarter
of fiscal 1998. We expect that seasonal trends will continue.
The gross margin on services and maintenance fluctuates from quarter to
quarter based on the mix of services provided in any given quarter.
Sales and marketing expenses increased steadily throughout the fiscal year
ended March 31, 1999 due primarily to the expansion of the sales and marketing
departments in the United States and the United Kingdom.
Sales and marketing expenses increased to $1.5 million in the third quarter
of fiscal 1999 from $963,000 in the second quarter, an increase of $513,000,
or 53%. This increase is due primarily to the increase in sales and marketing
personnel from 22 persons at the end of the second quarter of fiscal 1999 to
28 persons at the end of the third quarter of fiscal 1999 and the related
payroll increase of $424,000.
26
<PAGE>
Sales and marketing expenses increased to $2.2 million in the fourth quarter
of fiscal 1999 from $1.5 million in the third quarter, an increase of $683,000,
or 46%. We formed focused sales and marketing teams to specifically address the
chemicals and utilities markets, which was a major contributor to the overall
increase in sales and marketing personnel from 28 persons at the end of the
third quarter to 43 persons at the end of the fourth quarter of fiscal 1999.
This contributed to the increases in payroll of $316,000, sales commissions of
$77,000, travel and entertainment of $204,000 and professional fees, trade
shows and training of $86,000.
We determined that it was more likely than not that we would earn enough
taxable income in future periods to realize our deferred tax asset. Therefore,
in the quarter ended June 30, 1997, we reversed a $1.3 million valuation
allowance for tax benefits relating to our operating losses in prior periods.
Liquidity and Capital Resources
We have primarily financed our operations through private placements of our
preferred stock and cash from operations. Through March 31, 1999, proceeds from
private placements of preferred stock totaled $6.0 million.
As of March 31, 1999, we had cash and cash equivalents of $1.8 million, a
decrease of $2.7 million from cash and cash equivalents held at March 31, 1998.
Our working capital at March 31, 1999 was $4.4 million, compared to $4.1
million at March 31, 1998.
Our operating activities resulted in net cash outflow of $2.3 million for
the fiscal year ended March 31, 1997 and $796,000 for the fiscal year ended
March 31, 1999. We had $2.7 million of net cash inflows for the fiscal year
ended March 31, 1998. The sources of cash in that fiscal year were primarily
income from operations, increases in accounts payable and accrued liabilities
and increases in deferred revenues, partially offset by increases in accounts
receivable, and other current assets. The operating cash outflows for fiscal
1997 resulted from significant investments in sales, marketing and product
development, which led to an operating loss. The cash outflows from the
operating loss, increases in accounts receivable, and other current assets were
partially offset by increases in accounts payable and accrued liabilities and
deferred revenues. The operating cash outflows for the fiscal year ended March
31, 1999 resulted primarily from increases in accounts receivable and other
current assets and decreases in deferred revenues partially offset by increases
in accounts payable and accrued expenses offset by net income.
Investing activities used cash of $224,000 for the fiscal year ended March
31, 1997, $547,000 for the fiscal year ended March 31, 1998 and $2.0 million
for the fiscal year ended March 31, 1999, for the purchase of property and
equipment.
Financing activities provided cash of $4.0 million for the fiscal year ended
March 31, 1997. The source of cash from financing activities for the fiscal
year ended March 31, 1997 was through the issuance of preferred stock and
financing from bridge loans. Financing activities provided cash of $59,000 for
the fiscal year ended March 31, 1998 and $51,000 for the fiscal year ended
March 31, 1999, which represents proceeds from the exercise of stock options
offset by offering costs paid in fiscal 1999.
We anticipate that we will continue to experience significant growth in our
operating expenses. Operating expenses will consume a material amount of our
cash resources, including a portion of the net proceeds of this offering. We
believe that the net proceeds of this offering, together with our existing cash
and cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital and capital
27
<PAGE>
expenditures for at least the next twelve months. After these twelve months, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise such additional funds through public or
private equity financing, bank debt financing or from other sources.
Year 2000 Compliance
Year 2000 Issue
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries including technology, transportation,
utilities, finance and telecommunications will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. There is significant uncertainty concerning the scope and magnitude
of problems associated with the century change. We recognize the need to ensure
that our operations will not be harmed by year 2000 software failures. We are
assessing the potential overall impact of the impending century change on our
business, financial condition and operating results.
State of Readiness
Software Products. Based on our assessment to date, we believe the current
versions of our software products are year 2000 compliant--that is, they are
capable of adequately distinguishing 21st century dates from 20th century
dates. We have substantially completed the testing of the current version of
our software. We are currently assessing the need to test the older versions of
our software which may still be used on a limited basis. This assessment is
expected to be complete by late 1999.
Internal Information Systems. We have preliminarily assessed our internal
management information and non-information technology systems to identify any
products, services or systems that are not year 2000 compliant and to plan for
corrective action. We have not encountered any material year 2000 problems with
our computer systems or any other equipment that might be subject to year 2000
problems. We believe that with modifications to existing software and
conversions to new software, the year 2000 problem will not pose a significant
operational problem for our computer systems. We expect to complete our testing
of the internal information systems by late 1999.
External Vendors. We plan to verify compliance by external vendors that
supply us with software and information systems and to communicate with
significant suppliers to determine the readiness of third parties' remediation
of their own year 2000 issues. As part of our assessment, we are evaluating the
level of validation we will require of third parties to ensure their year 2000
readiness. Our verification should be complete by late 1999.
Risk and Cost. Our products are generally integrated into enterprise systems
involving sophisticated hardware and complex software products that may not be
year 2000 compliant. We may face claims based on year 2000 problems in other
companies' products, or issues arising from the integration of multiple
products within an overall system. Although we have not been a party to any
litigation or arbitration proceeding to date involving our products or services
related to year 2000 compliance issues, we may be required to defend our
products or services, or to negotiate resolutions of claims based on year 2000
issues. The costs of defending and resolving year 2000-related disputes,
regardless of the merits, and any liability we may have for year 2000-related
damages, including consequential damages, could harm our business, financial
condition and results of operations. In addition, we believe that the
purchasing patterns of customers and potential customers may be affected by
year 2000 issues as companies expend significant resources to correct or
upgrade their current software systems for year 2000 compliance. These
expenditures may result in reduced funds available to purchase software
products such as those we offer. To the extent year 2000 issues cause a
significant delay in, or cancellation of, decisions to purchase our products or
services, our business, financial condition and results of operations would be
harmed.
28
<PAGE>
All costs to date relating to year 2000 compliance have been incurred in the
normal course of business. To date we have not incurred any material costs
directly associated with our year 2000 compliance efforts as they relate to
both our software products and our internal information systems. We do not
expect the total cost of these year 2000 compliance activities to be material
to our business, financial condition and results of operations. All future
costs are currently considered in our fiscal 2000 information technology
budget. These costs and the timing with which we plan to complete our year 2000
modifications and testing processes are based on our estimates.
Contingency Plan
We have not implemented a year 2000 contingency plan to date. It is our
intention to devote whatever resources are necessary to assure year 2000
compliance issues are resolved. However, we intend to develop and implement a
contingency plan by late 1999 if our year 2000 compliance initiatives fall
behind schedule.
29
<PAGE>
OUR BUSINESS
ESPS provides electronic compliance management solutions to businesses in
highly regulated industries. Our solution allows our customers to reduce the
costs and burden associated with the compliance process by enabling e-
compliance and also decreases the time required to bring new products and
services to market. Our CoreDossier family of software products enables users
throughout an enterprise to collaborate in the authoring, compilation,
distribution, publishing and reuse of complex compliance information and
submissions to regulatory agencies. In addition, we provide in-depth compliance
expertise that enables us to better serve the industry-specific compliance
needs and requirements of our customers. We also provide comprehensive
consulting, implementation and maintenance services. As of April 30, 1999, we
had licensed versions of our CoreDossier products to 46 customers in the
pharmaceutical and biotechnology industry, the chemical industry and the
utilities industry.
Industry Overview
Overview of Regulation and Compliance
Virtually every business in the world is subject to rules, regulations and
standards imposed by various regulatory agencies. As part of their oversight,
regulatory agencies typically require businesses to compile information to
document their compliance with specific regulations and to maintain compliance
records. In addition, regulatory agencies often require businesses to make
periodic or event-driven submissions. Periodic submissions demonstrate a
business's compliance with regulations relating to its ongoing operations.
Event-driven submissions are required in connection with a specific business
event, such as the introduction of a new product or service or a change in
customer rates.
In the United States, federal and state regulatory agencies are responsible
for ensuring that businesses comply with various regulations. The following
table provides examples of major federal regulatory agencies and each agency's
estimate of the number of hours required for mandated record keeping and
compliance reporting, or burden hours, as reported to the Office of Management
and Budget for 1997 under the Paperwork Reduction Act of 1995.
<TABLE>
<CAPTION>
Compliance
Agency Burden Hours
- ------ -------------
<S> <C>
Environmental Protection Agency, or EPA........................... 115.6 million
Federal Energy Regulatory Commission, or FERC..................... 5.2 million
Nuclear Regulatory Commission, or NRC............................. 10.3 million
Securities and Exchange Commission, or SEC........................ 148.9 million
</TABLE>
Significant state regulatory agencies in the United States include public
utility commissions and insurance commissions. Similar regulatory environments
exist throughout the world, requiring many businesses with international
operations to comply with regulations in most nations in which they operate.
Three examples of highly-regulated industries include the pharmaceutical and
biotechnology industry, the chemical industry and the utilities industry.
. Pharmaceutical and biotechnology industry. The pharmaceutical and
biotechnology industry includes over 4,000 companies worldwide, many of
which market their products in a number of different countries. Because
of the potential risks associated with newly-developed drugs and medical
devices, regulatory agencies typically require pharmaceutical and
biotechnology companies to extensively document their research,
development and manufacturing processes. In addition, pharmaceutical and
biotechnology companies generally must demonstrate the safety and
efficacy of a drug or medical device to a regulatory agency before its
commercialization. This process often requires the collection of data
that takes years to compile and the preparation of submissions that
consist of hundreds of thousands of pages.
. Chemical industry. The chemical industry includes over 4,000 companies
worldwide, many of which sell products around the world. Similar to
companies in the pharmaceutical and
30
<PAGE>
biotechnology industry, chemical companies are, in many cases, required
to receive regulatory approval before introducing new products. In
addition, the chemical industry faces more significant regulation than
most other industries relating to environmental protection and the
transportation of hazardous materials.
. Utilities industry. The utilities industry includes over 3,000 companies
worldwide, including electric utilities, gas transmission and
distribution companies and telecommunications companies. Utilities face
significant regulation with regard to expanding their infrastructure and
setting and changing customer rates. Additionally, the global trend
toward deregulation in the utilities industry is increasing the volume of
regulatory filings, since an increasing number of companies are entering
the market and existing utility companies are entering territories in
which they were previously not permitted to compete.
The Compliance Process
Companies must undertake a complex process to comply with regulations
imposed by the regulatory agencies that oversee their operations. The
compliance process requires significant time and effort from personnel in
various departments within a company. The major aspects of the compliance
process include:
. Authoring the information. Various persons within and outside a business
organization, including scientists, researchers, technical personnel,
consultants, financial analysts and regulatory affairs personnel, who are
often in different geographic locations, conduct studies and capture and
analyze data over a period of time. Individuals then author information
detailing their studies, analyses and conclusions.
. Collecting and compiling the information from multiple authors and in
various formats. Regulatory affairs personnel collect from various
authors information, which often exists in a variety of formats,
including paper files, faxes, phone messages, e-mails, word processing
files, spreadsheets, graphics programs, and the company's own proprietary
software. This information is then compiled by teams of regulatory
affairs and clerical personnel who are dedicated to the compliance
process.
. Publishing a comprehensive document. The compliance teams publish the
information in a form or document that complies with the specifications
of a regulatory agency. This often involves scanning and copying a large
number of voluminous files. The document must be formatted for
publication, which includes conforming the different numbering schemes,
footnotes and technical terms used in the various narratives.
. Circulating the document for review and revision. The initial document is
distributed to numerous scientists, researchers, technical personnel,
consultants, financial analysts, management and outside advisors for
their review and comments. The comments are integrated by the regulatory
affairs group into a revised compliance document. The revised document is
then distributed again for review. This process is repeated, often
multiple times, until all parties are satisfied with the document.
. Publication of the final compliance document. Once the compliance process
is complete, final versions of the document are published and archived
and, if required, submitted to a regulatory agency. These submissions can
be made in various ways, such as in paper format, on CD-ROM or over the
Internet.
. Reuse of information for additional submissions and ongoing compliance
purposes. Once archived, the information can be accessed and used
throughout the organization to prepare additional regulatory submissions
and for ongoing compliance purposes.
Many companies incur significant costs relating to compliance activities.
Direct costs include the cost of personnel, such as scientists, technical
personnel, accountants, lawyers and management, and other administrative costs
related to the compliance process. Indirect costs include lost revenues and
market share resulting from delays in introducing new products, fees and
expenses resulting from penalties imposed by
31
<PAGE>
regulatory agencies for non-compliance and monetary damages and legal fees
resulting from legal actions brought by agencies or other third parties. In
addition to delays relating to the company's compliance process, regulatory
agencies may experience difficulty in working with various electronic filing
formats and voluminous paper filings, resulting in lengthy review time for
compliance filings. As regulatory environments become more complex and the
number of companies subject to regulation increases, we expect compliance costs
to grow and the need for access to information to increase.
The Emergence of E-compliance
Historically, businesses have used a manual process to create paper-based
documentation and submissions that demonstrate compliance with regulatory
requirements. In recent years, the emergence of new technologies and the
increase in the complexity of regulatory compliance have caused businesses to
reevaluate how they assemble, compile, share, review and revise compliance
information.
At the same time, regulatory agencies around the world are analyzing the
benefits of electronic compliance and submissions and are moving toward
implementing e-compliance standards. In the United States, the federal
government has encouraged regulatory agencies to adopt e-compliance standards
and to use technology to improve productivity, efficiency and effectiveness by
reducing the burden of collecting, disseminating and reviewing information.
Recently, regulatory agencies have begun to implement electronic compliance and
reporting standards. Examples of the increasing adoption of e-compliance in the
United States and abroad include:
. The FDA has announced its intention to support all electronic filings by
2002;
. The EPA has announced its intention to support all electronic filings by
2000;
. FERC has announced an electronic filing initiative to improve processing
and distribution of filings;
. BfArM, the Bundesinstitut fur Arzneimittel und Medizinprodukte, a German
regulatory agency, has announced its intention to support electronic
submissions; and
. The European Union has adopted an electronic filing standard for
pesticide registrations, known as CADDY.
The Impact of Intranet and Internet Technology
Intranets and the Internet are quickly emerging as the medium of choice for
collecting, publishing and distributing information. These networks provide a
relatively low cost and widely dispersed communication, collaboration and data
transmission platform. We believe that businesses are seeking to use corporate
intranets and the Internet to manage complex business processes, such as
compliance management. As businesses attempt to reengineer their complex
business processes to utilize these networks, they are faced with the challenge
of accessing and integrating large amounts of data that are often in various
formats and stored in different locations throughout the enterprise.
The Need for Enterprise-wide Electronic Compliance Management Solutions
As businesses move toward implementing e-compliance processes, a variety of
approaches have emerged that attempt to address the requirements and to realize
the benefits of e-compliance. These approaches include:
. Internally-developed systems. Systems developed by internal information
technology departments tend to be highly customized and are designed to
meet the specific regulatory requirements at the time of development. As
regulations change and technology advances, these systems are
increasingly costly and difficult to maintain due to their lack of
flexibility. Furthermore, many of these systems were not specifically
designed to take advantage of intranet and Internet technologies.
. Document management systems. Document management systems are designed to
scan, store, secure and archive documents. These systems are not designed
to support the compliance management function and generally lack the
capability to support complex document publication, automatic cross-
referencing and different pre-defined forms and formats.
32
<PAGE>
. Point solutions. Point solutions are software tools designed to address a
very specific compliance requirement. These tools generally do not have
the breadth to address all of the compliance management needs of
businesses that are required to comply with the complex regulations of
multiple agencies.
. Desktop publishing tools. Desktop publishing tools are typically word
processing tools that are used to create individual pieces of a
compliance-related document. These tools often lack the features and
functions required to enable a business to create much larger and more
complex compliance documents.
. Outsourcing. Businesses sometimes hire third parties to prepare
regulatory submissions. This approach can be costly and time-consuming
and may limit the ability of businesses to reuse the information that has
been prepared.
We believe that businesses, in an effort to significantly improve their
compliance processes, are seeking an enterprise-wide electronic compliance
management solution that has the following characteristics:
. Enterprise scalability. The ability to access information and collaborate
on publications by an increasing number of users in multiple departments
throughout an enterprise.
. Industry-specific compliance expertise. Expertise in the complex and
rapidly changing compliance requirements of particular industries.
. Multiple-industry applicability. Ability to meet the compliance
requirements of customers operating in various industries.
. Leading technology foundation. Support for the most advanced technology
platforms, such as intranets and the Internet, as well as an architecture
that allows for changes in technology.
. Support multiple information formats. Ability to collect information
stored in various formats, including spreadsheets, desktop publishing and
database applications, as well as the ability to output to the various
formats supported by regulatory agencies in each industry.
. Rapid implementation. Ability to be rapidly implemented throughout the
enterprise.
We believe that an enterprise-wide application which exhibits these
characteristics will enable businesses to deploy effective compliance
management systems to reduce compliance costs and the time required to bring
new products and services to market.
Our Solution
Our solution, which consists of the CoreDossier family of software products
and related services, enables users throughout an enterprise to collaborate in
the authoring, compilation, distribution, publishing and reuse of compliance
information and regulatory submissions. We designed our CoreDossier software
products to utilize advanced technologies, such as corporate intranets and the
Internet, and to meet emerging electronic compliance requirements and
standards. We believe our solution reduces the risks associated with the
deployment of in-house and other customized compliance management solutions and
enables companies in highly regulated industries to realize a return on their
investment through direct cost savings. Furthermore, we believe our solution
enables companies to reduce the time required to bring new products and
services to market. We also offer our solution to regulatory agencies to
provide them with more effective and efficient access to compliance filings,
decreasing the time required for regulatory review and response.
Our solution provides our customers with the following key advantages:
Scalable enterprise-wide solution. Our solution extends throughout an
enterprise, providing multiple departments in various locations throughout the
world with the ability to collaborate electronically in the
33
<PAGE>
authoring, assembling, distributing and publishing of compliance information.
We also designed our solution to support the growth of our customers as they
add new users and process an increasing amount of compliance information.
Domain expertise. We designed our solution around our expertise in meeting
the specific compliance needs of each industry in which our customers compete.
Our professionals possess industry expertise and in-depth knowledge of specific
compliance requirements. This domain expertise enables us to provide an
electronic compliance management solution that effectively addresses the
requirements, changes and subtleties of regulations that are unique to each
specific industry.
Modular product architecture. Our solution addresses the compliance
requirements of customers in various industries through the use of industry-
specific modules to enhance the functionality of the CoreDossier platform.
Furthermore, our solution enables large diversified businesses that operate in
numerous industries to address various regulatory requirements with a single
compliance solution.
Intranet and Internet capabilities. We designed our systems architecture to
be adaptable to advancing intranet and Internet technologies. We believe that
corporate intranets and the Internet will become increasingly important in the
electronic compliance management process as companies continue to rapidly adopt
these communication platforms.
Multiple input and output capabilities. We designed our solution to enable
users to input information in different formats, including paper files, faxes,
phone messages, e-mails, word processing files, spreadsheets, graphics
programs, and the company's own proprietary software. In addition, CoreDossier
supports older formats such as WordStar and Wang Office. CoreDossier also
enables users to output information in numerous formats, including those most
commonly used in the electronic compliance submission process, such as
hypertext markup language, or HTML, portable document format, or PDF, and
tagged image file format, or TIFF, on CD-ROM and paper.
Rapid deployment. We designed our solution to be quickly implemented
throughout a customer's enterprise. Since our solution is tailored to meet the
specific compliance requirements of our targeted industries, it requires
minimal customization.
Our Strategy
Our goal is to be the leading provider of electronic compliance management
solutions that enable businesses to author, compile, distribute and publish
complex compliance documents. To achieve this objective we intend to:
Enhance our Technology Leadership and Product Functionality. We believe that
our products provide the most advanced solution to meet e-compliance
requirements in our targeted markets. Our solution incorporates leading
technologies, such as intranet and Internet technologies. We intend to maintain
and enhance our position as a technology leader by continuing to invest in
product development to:
. Expand the base functionality of the CoreDossier platform;
. Support emerging publishing standards and formats;
. Enhance existing industry-specific modules; and
. Develop industry-specific modules to target new industries.
In addition, we encourage third parties to develop industry-specific modules
that will enhance the functionality of CoreDossier through the use of
application programming interfaces.
34
<PAGE>
Target Other Industries. We have focused our product development,
consulting, sales and marketing efforts on specific industries, particularly
the pharmaceutical and biotechnology industry and, more recently, the chemical
and utilities industries. We believe that companies in other industries could
benefit from our solution and we intend to utilize our experience in compliance
management to rapidly penetrate these industries. We intend to:
. Leverage the comprehensive compliance technology contained in the
CoreDossier platform to quickly develop new modules that provide
industry-specific compliance functionality; and
. Utilize and expand our cross-functional sales and marketing teams, which
combine industry specific compliance expertise with knowledge of product
development, to quickly penetrate targeted industries.
The additional industries we are currently targeting include the financial
services, insurance and discrete manufacturing industries.
Enhance our Domain Expertise. We believe our industry expertise and
knowledge of specific compliance requirements enables us to effectively tailor
our solutions to the specific needs of businesses in the industries we target.
Furthermore, our domain expertise enables us to provide our customers with
access to critical and constantly changing compliance-related information. We
intend to continue to enhance our industry-specific domain expertise to
accelerate our entrance into other industries and to quickly establish a
leadership position in these industries.
Extend Use of Intranet and Internet Technologies for Compliance
Management. We intend to continue to actively promote the use of corporate
intranet and Internet technologies for compliance management by developing new
products to take advantage of these advanced technologies and demonstrating the
capabilities of our CoreDossier products. We have installed CoreDossier at
several regulatory agencies to promote the benefits of electronic compliance.
We have also participated in several of the first web-based regulatory
submissions. We are currently developing a new family of products that will
enable compliance information and submissions to be accessed through a standard
web browser.
Expand our Professional Services Organization. We have recently established
a professional services organization to enhance our customers' ability to
realize maximum return on their investment in CoreDossier. In addition to
helping customers realize this return, our professional services organization
is designed to assist them in addressing other requirements and functions
within their business such as record keeping and internal compliance.
Expand and Capitalize on our Strategic Alliances. We believe that our
strategic alliances with leading systems integration firms, information
technology consulting firms and technology companies enable us to promote
awareness of our products and services, expand territorial coverage and provide
implementation services to end-users. We intend to maintain and strengthen
these relationships, as well as establish new relationships with leaders in the
information technology industry.
Enhance our International Presence. We intend to increase our international
presence and enhance our solution to address the needs of companies operating
in various countries throughout the world. We believe that significant
opportunities exist for electronic compliance management software that is
designed for businesses subject to compliance requirements in various worldwide
regulatory environments. We currently maintain an office in London, England and
intend to add sales personnel, develop domain expertise and establish
additional offices to further address international markets.
We believe that because we intend to continue to implement each of the
components of our strategy as our business grows over time, we cannot estimate
a definitive schedule for the implementation of our strategy at this time.
Products
The CoreDossier product family includes the CoreDossier platform, industry-
specific modules and the CoreDossier application program interfaces, or APIs.
Our software products comprise a modular system
35
<PAGE>
that may be configured in a variety of ways to meet customers' industry-
specific requirements. The CoreDossier platform provides the foundation for
enabling our customers to collaborate in the authoring, compiling,
distributing, publishing and reuse of compliance information. Our industry-
specific modules are easy-to-install software products that perform compliance
functions designed to meet the regulatory requirements of a particular
industry. The CoreDossier APIs enable third parties to develop custom
applications and extend access to additional external information sources.
The CoreDossier family of products is priced on a per-server basis.
Depending upon the functionality and industry-specific modules chosen by a
customer, the license fee for the CoreDossier solution generally ranges from
$200,000 to $400,000 per-server, with multiple site licenses costing in excess
of $1.0 million. Customers can purchase additional industry-specific modules,
which range from $40,000 to $75,000 per module and are sold on a per-server
basis. The license fees for CoreDossier do not include fees for implementation,
technical support and training.
The CoreDossier Platform
The CoreDossier platform is the base product used by our customers. The
CoreDossier platform addresses the following aspects of compliance management:
Support for multiple file format inputs. Many documents and other
information required for a regulatory submission exist in both paper and
electronic formats. CoreDossier supports over 100 file formats, enabling
businesses to utilize information in its existing formats without the
complications generally associated with file conversion. Electronic formats
include:
. Current word processing formats, such as Microsoft Word, WordPerfect and
Interleaf, and older word processing formats such as Wang Office and
WordStar;
. Spreadsheet formats, such as Excel, Lotus 1-2-3 and SAS;
. Graphic formats, such as TIFF, Bitmap, and Illustrator;
. Desktop publishing tools, such as QuarkXPress, Photoshop and Pagemaker;
and
. Communication formats, such as e-mail and facsimile.
In addition, CoreDossier supports a variety of file and document management
systems, including Documentum, PC DOCS and FileNet. In our next product
release, we intend to support extensible markup language, or XML, which will
enable CoreDossier to better support other external information sources.
Publication design. CoreDossier allows customers to define, create and reuse
publication templates. These templates provide a standardized structure for
resulting publications, which contains documents, document templates, standards
for headers and footers, tables of contents and finishing options. As a result,
customers can quickly create new publications that meet predefined internal or
external compliance requirements using an old template. This also allows
companies to utilize information contained in previous publications to create
new publications.
Support for multiple file format outputs. CoreDossier supports output in
standardized formats and languages such as HTML, PDF and TIFF and on CD-ROM and
paper. In our next product release, we intend to support XML and additional
output formats to better address our customers' needs. The ability to support
multiple outputs is essential for many of our customers, as many regulatory
agencies require that companies publish both in electronic formats and in paper
format. In addition, the ability to publish in multiple output formats provides
companies with the ability to reuse compliance information for other purposes,
including quality assurance, record-keeping and internal compliance.
Server-to-server communications. CoreDossier servers installed in different
departments of a business can share compliance and publication information. As
a result, a CoreDossier user in one department, such
36
<PAGE>
as product development, can share information and collaborate with a user in
another department, such as regulatory affairs.
The CoreDossier platform is comprised of the:
. CoreDossier server, which manages publication information and maintains
data integrity in response to requests from the CoreDossier assemblers.
. CoreDossier generator, which is responsible for converting source
documents into PDF renditions and document data. The PDF renditions are
stored within the original source documents. The document data, such as
cross-references and table of contents information, are stored in the
CoreDossier server. The CoreDossier generator is also responsible for
servicing publishing requests from the CoreDossier assemblers.
. CoreDossier assembler, which is the main interface for the publication
manager. The CoreDossier assembler enables multiple users to create and
modify a publication simultaneously, allowing for a collaborative
publication creation process.
. CoreDossier web server, which enables access to publications on corporate
intranets and the Internet.
. CoreDossier document management interface, which enables CoreDossier to
communicate with a user's document management system. Through this
interface, CoreDossier can access documents in Documentum, FileNet, PC
DOCS and shared file systems. Interfaces are planned for Open Text and
Lotus Notes in the future.
CoreDossier is written in C++ and supports Windows 95, Windows 98 and
Windows NT operating systems. The CoreDossier server and the CoreDossier
generator run on Windows NT. The CoreDossier web server runs on Windows NT and
was created using HTML, XML, PDF and Java programming languages. We anticipate
that future versions of the CoreDossier web server will run on a variety of
UNIX platforms.
Industry-Specific Modules
We have developed customized modules for the CoreDossier platform to meet
the specific needs of our targeted industries. Because of the modular
architecture of the CoreDossier solution, we have been able to develop and
introduce these industry-specific modules quickly and efficiently. These
industry-specific modules extend the core capabilities of the CoreDossier
platform by providing additional user interfaces, processes and output formats
that are designed specifically for a particular industry's compliance
requirements.
Existing modules and modules currently under development include:
. CDER compiler module. This module enables our customers in the
pharmaceutical and biotechnology industry to produce electronic
submissions for new drug applications that comply with the FDA's
specifications. These electronic submissions enable our customers to
reduce time required for the assembly and review process for a new drug
application. Currently, we offer a CDER compiler module and a collection
of pharmaceutical templates.
. CADDY compiler module. This module enables our customers to produce
electronic submissions for global agrochemical product registrations. The
CADDY compiler module was used to prepare the first submission that
complied with the current specifications for agrochemical electronic
filings with the Canadian Pest Management Regulatory Agency. Currently,
we offer a CADDY compiler module and one agrochemical template.
. DAMOS compiler module. This module enables our customers to produce
electronic submissions for pharmaceutical product registrations. The
DAMOS compiler module has been used to prepare
37
<PAGE>
submissions to BfArM, a regulatory agency that oversees the
pharmaceutical industry in Germany. Currently, we offer a DAMOS compiler
module and three pharmaceutical templates.
. CoreDocket module. The first release of the CoreDocket module is targeted
for mid-1999. This module is designed to enable utilities companies to
collect and organize information from multiple sources quickly for
regulatory filings. One distinct feature of the CoreDocket module is that
utilities can use their existing e-mail and authoring systems in
automating the process of responding to compliance-related requests from
the regulatory agencies.
CoreDossier Application Programming Interfaces
The CoreDossier APIs are used to extend the functionality of the
CoreDossier platform. Using software development kits, customers can utilize
the APIs to link our solution to other business information systems, such as
imaging systems, authoring systems and other legacy systems. Customers can
also use the CoreDossier APIs to customize their CoreDossier software to meet
their specific needs and support additional input and output formats.
Professional Services
Our professional services organization provides customers with on-site
product implementation and consulting, technical support and training
services. Our services include:
Implementation and Consulting. Our service professionals implement the
CoreDossier software for our customers at a single site or multiple sites. As
part of our implementation services offering, we work with clients to
customize our solution to effectively meet their specific business needs. We
provide ongoing consulting services to assist our customers in optimizing the
use of our solution to realize a return on their investment as quickly as
possible. We price our implementation services on a time and materials basis.
Technical Support. We have implemented a comprehensive technical support
program to assist customers in using our products and to identify, analyze and
solve problems that may arise. The support program includes worldwide e-mail
support, which is available 24 hours a day, seven days a week, and telephone
support, which is globally available during the normal business hours of the
countries in which our products are used. We provide technical support to our
customers as part of our maintenance program, which is typically priced based
on a percentage of the then-current software license list price.
Training. We offer a number of educational classes in conjunction with our
products, including end-user training and in-depth technical training covering
the implementation and management of our solution. Training services are
priced on a per class basis, as well as incremental time and materials charges
for customized on-site training.
Strategic Alliances
We have established a number of relationships with service vendors for the
implementation of our software to our customers. We frequently participate in
joint sales and marketing efforts with our strategic partners. Our strategic
alliances are classified in three categories:
CorePartner Solution Integrators. Solution integrators provide services
ranging from project management to installation, systems integration and
application development. These solution integrators include Computer Sciences
Corporation, First Consulting Group-ISCG, PricewaterhouseCoopers LLP and
Science Applications International Corp.
CorePartner Technology Alliances. Through technology alliances, we work
with independent software vendors and service providers to create new products
and integrate product lines to be compatible with CoreDossier. These
technology alliance partners include Documentum, FileNet and Versant Object
Technology Corporation.
38
<PAGE>
CorePartner Strategic Alliances. Through strategic alliances, we seek to
promote awareness of our electronic compliance management solution and gain
strategic support for our overall marketing, sales and development programs. We
currently have a strategic alliance partnership with Adobe Systems
Incorporated.
Customers and Markets
Our targeted customers are mid- to large-sized businesses and divisions of
large companies that operate in highly regulated industries. We believe that
these enterprises have the greatest compliance burden and are likely to
implement new technology as a means of gaining a competitive advantage. We
initially focused on the pharmaceutical and biotechnology industry.
Consequently, the majority of our existing customers are pharmaceutical and
biotechnology companies. We recently introduced the CADDY compiler module for
the chemical industry and we intend to release the CoreDocket module for the
utilities industry in mid-1999.
As of April 30, 1999, we licensed versions of our CoreDossier products to 46
customers. For the fiscal year ended March 31, 1999, Adobe Systems,
Incorporated accounted for approximately $2.0 million of our total revenues.
For the fiscal year ended March 31, 1998, three of our customers accounted for
approximately $4.0 million of our total revenues. Our agreement with Glaxo-
Wellcome Inc. accounted for approximately $1.5 million of total revenues for
fiscal year 1998. Our agreement with Hoechst Marion Roussel accounted for
approximately $1.3 million of total revenues for fiscal year 1998 and our
agreement with Rhone-Poulenc Rorer Pharmaceuticals Inc. accounted for
approximately $1.2 million of total revenues for fiscal year 1998. For the
fiscal year ended March 31, 1997, four of our customers accounted for
$1.1 million of total revenues. Our agreement with Astra Merck, Inc. accounted
for approximately $473,000 of total revenues for fiscal year 1997. Our
agreement with Agouron Pharmaceuticals, Inc. accounted for approximately
$249,000 of total revenues for fiscal year 1997. Our agreement with Ligand
Pharmaceuticals Incorporated accounted for $200,000 of total revenues for
fiscal 1997, and our agreement with Janssen Pharmaceutica, Inc. accounted for
$146,000 of total revenues for fiscal year 1997.
Below is a representative list of customers who have licensed our software
as of April 30, 1999:
<TABLE>
<S> <C>
Pharmaceutical and Biotechnology Industry
Abbott Laboratories Ligand Pharmaceuticals Incorporated
Alcon Laboratories, Inc. Molecular Biosystems, Inc.
Allergan, Inc. NPS Pharmaceuticals, Inc.
Athena Neurosciences, Inc. Organon Laboratories, Ltd., a
Baxter Healthcare Corp., a subsidiary of subsidiary of Akzo Noble Pharma
Baxter International Inc. N.V.
Biogen, Inc. Otsuka America Pharmaceutical, Inc.
Coulter Pharmaceutical, Inc. Pfizer Inc.
DuPont Pharmaceuticals Company PharmaNet, Inc.
Dura Pharmaceuticals Inc. Quintiles, Inc.
G.D. Searle & Co. Rhone-Poulenc Rorer Pharmaceuticals
Glaxo-Wellcome Inc., a subsidiary of Inc., a subsidiary of Rhone-Poulenc
Glaxo Rorer Inc.
Wellcome PLC Schering AG
Health Decisions, Inc. Sequus Pharmaceuticals, Inc.
Immunex Corp. TAP Holdings, Inc.
Warner Lambert Company
Zeneca, Inc.
Chemical Industry Utilities Industry
Bayer Corporation, Agriculture Division Baltimore Gas & Electric
E.I. du Pont de Nemours and Company
Novartis Animal Health, Inc.
</TABLE>
39
<PAGE>
In addition, we intend to market our electronic compliance management
solution to regulatory agencies and industry groups. We currently have
installed test versions of our solution at several federal regulatory agencies
for use and review by these agencies. We believe that this increased exposure
will encourage the adoption of e-compliance standards and the use of our
solution.
Sales and Marketing
We market our products and services primarily through our direct sales
organization. We deploy teams comprised of sales, marketing, regulatory
compliance, professional services and software development professionals that
are focused on specific industries. These cross-functional sales and marketing
teams, referred to as tiger teams, are responsible for identifying and
quantifying new markets, identifying new applications for CoreDossier within
industries already served by our solution, generating new opportunities and
capitalizing on those opportunities. Sales efforts are typically targeted at
senior regulatory compliance officers. For larger projects, purchase approval
is often required from more senior company executives. While the sales cycle
varies substantially from customer to customer, the initial sales cycle
typically ranges from three to six months.
We have initiated a branding and marketing strategy designed to broaden
market awareness of the ESPS name and to solidify our position as a leading
provider of electronic compliance management solutions in the pharmaceutical
and biotechnology, chemical and utilities industries. We have also initiated
marketing strategies targeted at the financial services, insurance and discrete
manufacturing industries. We are also leveraging our expertise to sell our
products to additional departments of our current customers.
As of March 31, 1999, we employed 35 people in sales and marketing in the
United States, and eight people in sales and marketing in Europe.
Product Development
We have substantially invested in the development of our CoreDossier
platform and our industry-specific modules. Our product development department
is responsible for the design, development, testing and release of our software
products and is organized in four areas:
. Software development;
. Quality assurance;
. Product documentation; and
. Program management.
Along with a product manager from our marketing department, members from
each of these areas form product teams that work closely with other
organizations, customers and prospective customers to better understand their
compliance management needs.
The software development and quality assurance groups are further divided
into platform development and industry-specific module development groups. The
platform group extends and develops the CoreDossier platform by creating
additional functions and features that can be used by customers in various
industries. Each industry group works closely with the marketing managers from
each of the marketing teams to design and deliver industry-specific modules and
applications. As a result of this structure the industry-specific module
development groups are able to develop new modules independent of the
development cycles of the CoreDossier platform.
We released the next version of our CoreDossier platform, version 4.0, in
May 1999. CoreDossier 4.0 provides new features, including support for XML, the
ability to create publications using paragraphs of information in addition to
full documents, support for publishing documents based on forms and enhanced
tables of contents and cross references. In addition, we believe that
CoreDossier 4.0 will allow us to develop new industry-specific modules more
effectively. After the release of CoreDossier 4.0, we intend to introduce the
CoreDocket module, an industry-specific module designed to enable utilities
companies to more efficiently collect and organize information for their
regulatory filings.
40
<PAGE>
We are also currently developing CorePortal, a web-based product which will
enable compliance publications and information produced with CoreDossier to be
reviewed and shared on the web using a standard browser. CorePortal is based on
the advanced technology of CoreDossier. CorePortal will have applications for
CoreDossier corporate customers as well as regulatory authorities looking to
provide web-based access to compliance publications within the organizations
and to outside constituencies, such as the general public.
In addition to developing our own software, we incorporate technology owned
by third parties into our products. We believe this approach significantly
shortens our product development time without compromising our competitive
position or the quality of our products.
As of March 31, 1999, we employed 46 people in our product development
department. Our research and development expenses were $1.4 million in the
fiscal year ended March 31, 1997, $2.0 million in the fiscal year ended March
31, 1998 and $3.8 million in the fiscal year ended March 31, 1999.
Competition
The market for electronic compliance management solutions is new and rapidly
evolving. As the market develops, we expect competition to increase. We
primarily compete against the internal information technology departments of
our customers and potential customers. These information technology departments
may develop their own compliance management software. We also compete against
desktop publishing tools and service providers who compile submissions to
regulatory agencies manually, without the use of compliance software. In each
industry, we also face competition from software vendors who provide compliance
assistance to specific divisions of our current and potential customers and
point solutions, such as the Document Solutions Group of Xerox and Interleaf,
Inc. We believe that the principal competitive factors in the electronic
compliance management market are product flexibility, domain expertise,
customer support, scalability and price. We believe that our solution is
superior to the products and services offered by our competitors in product
flexibility, domain expertise, customer service and scalability. However, the
price of our solution may discourage smaller businesses from purchasing our
products and services.
Intellectual Property and Other Proprietary Rights
We rely on a combination of copyright, trade secret and trademark laws,
confidentiality agreements with employees and third parties, and protective
contractual provisions contained in license agreements with consultants,
vendors and customers to protect our proprietary rights.
We have registered the trademark CoreDossier in the United States. In
addition, we use a number of common law trademarks and service marks,
including:
. ESPS and the ESPS logo;
. CDER compiler;
. CADDY compiler;
. DAMOS compiler;
. CoreDocket; and
. Electronic compliance management.
We believe the strength of our trademarks and service marks benefits our
business and we intend to continue to protect our registered and common law
trademarks and service marks in the United States and abroad. We have not
secured registration of all of our marks in the United States and have not
pursued registration in any foreign country.
We also protect our proprietary rights by requiring employees to agree not
to reveal any sensitive information to our competitors and to sign a
confidentiality agreement. Employees are required to execute a
41
<PAGE>
non-competition agreement which may restrict them from working for a competitor
for one year after employment terminates. However, we may not obtain these
agreements in every case.
We incorporate technology from third parties into our software. We currently
have a material license agreement with Versant Object Technology Corporation
for the use of technology which is embedded in CoreDossier. Under the terms of
the license agreement, we have the right to use and copy Versant's software to
develop and combine Versant's technology with our software products to create
applications. Our license is non-exclusive, non-transferable and non-
assignable. We currently pay Versant royalty fees based on sales of our
products. The pricing provisions of the agreement expire on December 31, 1999.
Unless we negotiate otherwise, the royalty fees could substantially increase.
Employees
As of March 31, 1999, we had a total of 125 employees in the United States,
including 46 people engaged in product development, 35 people in sales and
marketing, 28 people in professional services and 16 people in general and
administrative services. We also employed a total of 20 people in Europe,
including eight people in sales and marketing, 10 people in professional
services and two people in general and administrative services. Our employees
are not represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
Facilities
Our principal administrative, sales, marketing, technical support and
product development facilities are located at our headquarters in Fort
Washington, Pennsylvania. We currently lease approximately 30,300 square feet
of office space in the Fort Washington facility under a lease which terminates
October 31, 2003.
We also lease office space for sales and marketing in La Jolla and San Jose,
California, Research Triangle Park, North Carolina and in the United Kingdom
and Germany.
Legal Proceedings
ESPS is not currently a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
The following table contains information about our executive officers and
directors as of April 30, 1999. Our audit committee consists of Charles O.
Heller, Christopher B. Hollenbeck and Michael J. Egan. Our compensation
committee consists of Charles O. Heller and Christopher B. Hollenbeck.
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Terrence P. Brennan..... 48 President, Chief Executive Officer and Director
Leonard W. von Vital.... 48 Chief Financial Officer
Bradley R. Burget....... 37 Vice President, Professional Services
Michael T. Hoey......... 32 Vice President, Research and Development
Kevin E. Leininger...... 34 Vice President, Marketing
George B. Pearcy........ 53 Vice President, Finance and Administration
Jeffrey C. Sager........ 32 Vice President, Sales
Michael J. Egan......... 46 Director
Charles O. Heller ...... 63 Director
Christopher B.
Hollenbeck ............ 31 Director
</TABLE>
Terrence P. Brennan has served as the president, chief executive officer and
as a member of the board of directors of ESPS since October 1995. From February
1995 until October 1995, Mr. Brennan was an independent consultant to the
pharmaceutical industry. From January 1994 until February 1995, Mr. Brennan was
president and chief executive officer of Bio-Imaging Technologies, Inc., a
service organization providing image processing and management services to
pharmaceutical and biotechnology companies. From September 1986 until January
1994, Mr. Brennan served as president of Research Data Corporation, a
pharmaceutical information management company developing electronic submissions
to the FDA. From October 1982 until September 1986, Mr. Brennan held the
position of senior product manager with Carter-Wallace Pharmaceuticals. From
April 1976 until October 1982, Mr. Brennan was a product manager with Zeneca
Pharmaceuticals. Mr. Brennan holds a B.S. in business administration and an
M.B.A. from the University of Dayton.
Leonard W. von Vital has served as chief financial officer of ESPS since
October 1998. From May 1998 until October 1998, Mr. von Vital was vice
president of finance, vending operations for Real Time Data, Inc., a
consolidator of vending businesses and a provider of technology to the vending
industry. From May 1997 until May 1998, Mr. von Vital was senior vice president
of product management for Astea International Inc., a developer and vendor of
enterprise customer relationship management software, and from November 1993 to
May 1997, he was chief financial officer of that company. Mr. von Vital is a
certified public accountant and holds a B.S. in accounting from St. Francis
College.
Bradley R. Burget has served as vice president of professional services of
ESPS since October 1998. From November 1996 until October 1998, Mr. Burget was
regional manager of consulting for Baan Supply Chain Solutions, a software
company, developing enterprise resource planning software. From December 1995
until November 1996, Mr. Burget served as client project manager at SSI, Inc.,
a contract consulting and resources company. From December 1993 until December
1995, Mr. Burget was client service manager for Information Network Systems, a
developer of software used to process compliance of warranty claims in consumer
electronics manufacturing. Mr. Burget holds a B.S. in physics from Iowa State
University.
Michael T. Hoey has served as vice president of research and development of
ESPS since March 1996. From June 1990 until March 1996, Mr. Hoey was a
technology manager with Andersen Consulting, where he focused on the document
management and publishing industries. Mr. Hoey holds a B.S. and an M.S. in
electrical engineering from Syracuse University.
43
<PAGE>
Kevin E. Leininger has served as vice president of marketing of ESPS since
June 1998. From March 1997 until June 1998, Mr. Leininger was vice president of
business development and marketing for NeoMedia Technologies, Inc, formerly
DevTech Associates, Inc., a developer of document systems and intelligent
document software and products. From June 1994 to March 1997, Mr. Leininger was
managing director and head of marketing of DevTech, and was director of Open
Systems for DevTech from September 1991 to June 1994. Mr. Leininger holds a
B.S. in physics and mathematics from Iowa State University and an M.B.A. in
international business and finance from the University of Chicago.
George B. Pearcy joined ESPS in November 1995 and currently holds the
position of vice president of finance and administration. From October 1992
until November 1995, Mr. Pearcy was the vice president of finance for
Northeastern Analytical Corporation and TTI Environmental Services, an
environmental analytical laboratory and an underground storage tank company.
From September 1985 to October 1992, Mr. Pearcy was director of financial and
commercial operations for International Computaprint Corporation, a division of
Reed Elsevier which provides database management and pre-press services to the
publishing industry. Mr. Pearcy holds a B.S./B.A. in accounting and an M.B.A.
from the University of Missouri.
Jeffrey C. Sager has served as vice president of sales of ESPS since January
1996. From April 1994 to December 1995, Mr. Sager was Director of market
development for Etak Inc., a developer of computerized mapping software systems
and products. From January 1992 until April 1994, Mr. Sager was manager of
marketing and corporate development and western regional sales representative
for Geographic Data Technology, Inc., a developer of digital mapping databases.
Mr. Sager holds a B.S. in business from the University of Delaware.
Michael J. Egan was elected to the board of directors of ESPS in April 1999.
Since October 1997, Mr. Egan has served as senior vice president and chief
financial officer of PECO Energy Company. From April 1995 to October 1997, Mr.
Egan served as senior vice president and chief financial officer of Aristech
Chemical Company. From 1993 to 1995, Mr. Egan served as vice president,
planning and control, of ARCO Chemical Company, Americas, where he also served
as controller from 1991 to 1993. Since June 1998, Mr. Egan has also served as
the chairman of AmerGen, a joint venture between PECO Energy Company and
British Energy PLC involved in acquiring nuclear power plants.
Charles O. Heller has served as a member of the board of directors of ESPS
since May 1995. Since February 1990, Dr. Heller has served as director of the
Dingman Center for Entrepreneurship at the University of Maryland. Since
February 1994, he has served as chairman and president of the Baltimore-
Washington Venture Group, a private investor network. Since June 1986, he has
served as president of the Annapolis Consulting Group, a management consulting
firm. Since January 1998, Dr. Heller has served as president of the Bahamas
Venture Capital Fund. From 1983 until 1986, Dr. Heller was the chief executive
officer of InterCAD Corporation, an electronic publishing software company, and
from 1969 until 1979, Dr. Heller was the chief executive officer of CADCOM,
Inc., a computer-aided design software company. Dr. Heller currently is a
member of the board of directors of several privately held companies, including
Klein Technologies, Inc., Avatech Solutions, Inc., SYSCOM, Inc., the Baltimore-
Washington Venture Group, Annapolis Consulting Group, and the Bahamas Venture
Capital Fund. Dr. Heller holds a B.S. and an M.S. in civil engineering from
Oklahoma State University and a Ph.D. in engineering from The Catholic
University of America.
Christopher B. Hollenbeck has served as a member of the board of directors
of ESPS since July 1997. Mr. Hollenbeck is a principal of H&Q Venture
Associates LLC, a venture capital firm, where he has been an Investment Manager
for the Adobe Ventures Funds since July 1998. From June 1996 until June 1998,
Mr. Hollenbeck served as a vice president in the venture capital department of
Hambrecht & Quist LLC From April 1991 until September 1995, Mr. Hollenbeck held
various positions in the investment banking department of Hambrecht & Quist
LLC. Mr. Hollenbeck is a member of the board of directors of several privately
held companies, including AvantGo, Inc., Glyphica Corporation and HAHT
Software, Inc. Mr. Hollenbeck holds a B.A. in American Studies from Stanford
University.
44
<PAGE>
Board Committees
We have established an audit committee and a compensation committee. The
compensation committee:
. Reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and
. Makes recommendations to the board of directors regarding compensation
and benefits for our executive officers and stock option grants.
The audit committee:
. Reviews the results and scope of the audit and other services provided by
our independent auditors; and
. Reviews and evaluates our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The compensation committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of ESPS and administering the incentive compensation and benefit
plans. The compensation committee consists of Charles O. Heller and
Christopher B. Hollenbeck. Terrence P. Brennan, president, chief executive
officer and a director of ESPS, participates in all discussions and decisions
regarding salaries and incentive compensation for all employees and
consultants of ESPS, except that he is excluded from discussions regarding his
own salary, incentive compensation and option grants to officers and
directors. No interlocking relationship exists between any member of ESPS's
compensation committee and any member of any other company's board of
directors or compensation committee.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We intend to
pay each member of our board who is not an employee a director fee for
attending meetings of the board of directors and committee meetings.
In May 1995, we granted Dr. Heller an option to purchase 58,000 shares of
our common stock at an exercise price of $0.07 per share. In April 1996, we
granted Dr. Heller an option to purchase 29,000 shares of our common stock at
an exercise price of $0.07 per share. In December 1996, we granted Dr. Heller
an option to purchase 130,500 shares of common stock at an exercise price of
$0.07 per share. In November 1998, we granted Dr. Heller an option to purchase
29,000 shares of common stock at an exercise price of $4.14 per share. In
January 1999, we granted Dr. Heller an option to purchase 21,138 shares of
common stock at an exercise price of $8.28 per share. Under the terms of the
option agreements, 25% of the options are exercisable on the first anniversary
of the grant date and 6.25% become exercisable on the last day of each quarter
after the first anniversary of the grant date. We anticipate that we will
grant Mr. Egan an option to purchase 36,250 shares of our common stock at an
exercise price equal to the initial public offering price. Mr. Hollenbeck is
not currently compensated as a member of our board of directors.
Executive Compensation
The table below summarizes information concerning the compensation awarded
to, earned by, or paid for services rendered to ESPS in all capacities during
the fiscal year ended March 31, 1999 by:
. Our chief executive officer;
. Our four most highly compensated executive officers as of March 31, 1999
whose total salary and bonus for the fiscal year ended March 31, 1999
exceeded $100,000.
We did not pay any executive officer named in the summary compensation
table any fringe benefits, perquisites or other compensation in excess of 10%
of his salary and bonus during the fiscal year ended March 31, 1999.
45
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term Compensation
Compensation Awards
------------------ ----------------------
Securities
Name and Principal Position Year Salary($) Bonus($) Underlying Options (#)
- --------------------------- ---- --------- -------- ----------------------
<S> <C> <C> <C> <C>
Terrence P. Brennan............. 1999 $175,000 $65,625 --
President and Chief Executive
Officer 1998 150,000 38,000 --
Michael T. Hoey................. 1999 150,000 15,000 --
Vice President, Research and
Development 1998 119,166 30,000 217,500
Kevin Leininger................. 1999 113,950 18,250 145,000
Vice President, Marketing
Jeffrey C. Sager................ 1999 130,000 36,750 58,000
Vice President, Sales 1998 102,244 30,000 29,000
George B. Pearcy................ 1999 120,000 31,500 --
Vice President, Finance and
Administration 1998 117,499 30,000 72,500
</TABLE>
The amounts in the earned bonus column represent bonuses which were earned
in the fiscal year, but not paid until the subsequent fiscal year. Mr.
Leininger joined ESPS on June 8, 1998. Mr. Leininger's annual salary is
$140,000.
The following table contains information regarding options granted in the
fiscal year ended March 31, 1999 to the executive officers named in the summary
compensation table above. The potential realizable value over the terms of the
options is based on assumed rates of stock appreciation in compliance with the
rules of the SEC and do not represent our estimate of future stock price.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of ESPS common stock. For the fiscal year ended March 31, 1999, we
granted options to acquire up to an aggregate of 1,394,005 shares to employees
and directors, all under the 1995 stock incentive plan and all at an exercise
price equal to not less than the fair market value of our common stock on the
date of grant as determined in good faith by the board of directors. We also
granted options to acquire 426,300 shares to employees at a price that was
lower than the estimated fair value of the common stock. Optionees may pay the
exercise price by cash, check, promissory note, delivery of already-owned
shares of our common stock or by a cashless exercise procedure. Options under
the 1995 stock incentive plan generally vest over four years with 25% of the
shares vesting on the first anniversary of the grant date, and the remaining
option shares vesting 6.25% in every calendar quarter after the first
anniversary of the grant date. We may modify the standard vesting schedule.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realized
Individual Grants Value at Assumed
------------------------------------- Annual Rates of
Number of % of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Expiration -------------------
Name Granted(#) Fiscal Year Price ($/Sh) Date 5%($) 10%($)
- ---- ---------- ------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Terrence P. Brennan..... -- -- -- -- -- --
Michael T. Hoey......... -- -- -- -- -- --
Kevin Leininger......... 145,000 8.1% $0.07 6/8/03 1,325,082 1,598,131
Jeffrey C. Sager........ 58,000 3.2 10.34 3/25/04 -- 100,572
George B. Pearcy........ -- -- -- -- -- --
</TABLE>
46
<PAGE>
The following table presents information regarding the value realized upon
exercise of options during the fiscal year ended March 31, 1999 and the number
and value of unexercised options held by the executive officers named in the
summary compensation table above. As of March 31, 1999, there was no public
market for the common stock. The value of unexercised in-the-money options at
fiscal year end is based upon a value of $7.50 per share, the initial public
offering price, minus the per share exercise price, multiplied by the number of
shares underlying the option.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at Fiscal Year End(#) at Fiscal Year End($)
On Exercise Realized -------------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Terrence P. Brennan..... 398,752 $31,900 99,688 398,750 $ 739,681 $2,958,725
Michael T. Hoey......... 203,145 14,010 193,793 255,563 1,439,878 1,898,829
Kevin Leininger......... 18,125 1,250 -- 126,875 -- 942,682
Jeffrey C. Sager........ 59,813 4,125 43,500 114,188 323,205 848,413
George B. Pearcy........ 58,000 4,000 151,797 123,703 1,127,851 919,114
</TABLE>
Employee Benefit Plans
1995 Stock Incentive Plan. Our board of directors and stockholders adopted
and approved the 1995 stock incentive plan in April 1995. Since its adoption
the plan has been periodically amended. The 1995 plan provides for grants of
incentive stock options, non-qualified stock options and stock awards to
employees, directors, consultants and advisors. Members of the non-employee
director administrative committee are not eligible to receive options and
awards. We may issue options to purchase a maximum of 7,880,170 shares of
common stock under the 1995 plan, which includes 1,160,000 shares that were
authorized for issuance under the plan by our board of directors in May 1999,
subject to approval by our stockholders. The board of directors may not
increase the maximum number of shares without obtaining the approval of the
stockholders. No options or awards may be granted under the 1995 plan after
April 2005.
The 1995 plan may be administered by the board of directors or a committee
of non-employee directors. The plan administrator has the power to determine
the persons to whom, the times at which, and the price at which the options and
awards shall be granted, and to determine the type of option or award to be
granted and the number of shares subject to options and awards.
The plan administrator determines the price for options. For a non-qualified
stock option, the price shall be at least equal to 85% of the fair market value
of the shares on the date the option is granted. For an incentive stock option,
the price shall be at least 100% of the fair market value on the date the
option is granted. If a recipient of an incentive stock option owns shares
possessing more than 10% of the total voting power of all classes of stock, the
option price shall be at least 110% of the fair market value on the grant date.
Options expire no later than five years after the date of the grant. Options
expire thirty days from the date the recipient's employment or service with
ESPS terminates or twelve months after termination which is due to disability
or death, unless the grant agreement or plan administrator includes different
termination dates. Options are not transferable during the lifetime of the
recipient, except that a non-qualified stock option may be transferred under a
domestic relations order, or if the grant agreement permits a transfer of the
option.
The 1995 plan specifies that if there is a change of control of ESPS, the
plan administrator may take action with respect to options, including
terminating options with 15 days' notice, or causing options to become
immediately exercisable in full. If we merge into another company or sell all
or substantially all of
47
<PAGE>
our assets, options shall become immediately exercisable unless the successor
company agrees to assume the options or provide equivalent options.
Awards of stock granted under the 1995 plan are in the form of written award
agreements approved by the plan administrator. The plan administrator may
impose restrictions and forfeiture conditions on stock awards.
If the outstanding shares are modified by reason of a reorganization,
merger, consolidation, recapitalization, reclassification, stock split,
combination or exchange of shares, the plan administrator shall make
adjustments to the aggregate number of shares available under the 1995 plan and
the number of shares and price per share of outstanding options.
Employee Stock Purchase Plan. Our board of directors adopted and approved an
employee stock purchase plan in May 1999 to provide our employees with the
opportunity to purchase our common stock, subject to approval by our
stockholders. The plan is intended to qualify as an employee stock purchase
plan under section 423 of the Internal Revenue Code.
We have reserved 350,000 shares of our common stock which may be issued
under the plan. Employees are eligible if they are full or part-time employees
who work for us for over 20 hours per week and for more than five months per
year, and do not own stock possessing 5% or more of the voting power or value
of our stock.
The plan permits employees to purchase shares of common stock through
payroll deductions of up to 15% of their base compensation. The purchase
periods are six month periods, except for the first purchase period, which
begins with the completion of the public offering and ends on December 31,
1999. The maximum number of shares that an employee may purchase during a
purchase period is 2,000 shares. The plan administrator may also limit the
total number of shares that may be purchased by all employees in a purchase
period.
The price of the stock will be 85% of the fair market value of the common
stock on either the first day of the purchase period or on the day the stock is
purchased, whichever is lower. An employee may not purchase stock valued at
over $25,000 in any calendar year.
The plan will terminate in ten years; however, our board of directors has
the right to terminate the plan at any time.
401(k) Profit Sharing Plan. We have adopted a tax-qualified employee savings
and retirement plan, the 401(k) profit sharing plan, for eligible U.S.
employees. Eligible employees may elect to defer a portion of their eligible
compensation, subject to the statutorily prescribed annual limit. We may make
matching contributions on behalf of all participants who have elected to make
deferrals to the 401(k) profit sharing plan in an amount determined annually by
ESPS. Any contributions to the plan by us or the participants are paid to a
trustee. The contributions made by ESPS, if any, are subject to a vesting
schedule; all other contributions are fully vested at all times. The 401(k)
profit sharing plan, and the accompanying trust, is intended to qualify under
sections 401(k) and 501 of the Internal Revenue Code, so that contributions by
us or by employees and income earned if any on plan contributions are not
taxable to employees until withdrawn and contributions by us, if any, will be
deductible by us when made. At the direction of each participant, the trustee
invests the contributions made to the 401(k) profit sharing plan in any number
of investment options.
Limitations on Liability of Directors and Officers and Indemnification
Limitation of Liability
Our certificate of incorporation specifies that our directors will not be
personally liable to us or our stockholders for monetary damages resulting from
a breach of fiduciary duty, to the maximum extent
48
<PAGE>
permitted by Delaware law. Under Delaware law, directors of a corporation will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for:
. Any breach of the duty of loyalty to the corporation or its stockholders;
. Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. Unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. Any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to non-monetary remedies that
may be available, such as injunctive relief or rescission, nor does it relieve
our officers and directors from complying with federal or state securities
laws.
Indemnification
Our certificate of incorporation specifies that we will indemnify our
directors officers and employees, and may indemnify our other corporate agents,
to the fullest extent permitted by law. An officer or director shall not be
entitled to indemnification if:
. The officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests; or
. The officer or director is subject to criminal action or proceedings and
had reasonable cause to believe the conduct was unlawful.
49
<PAGE>
RELATED PARTY TRANSACTIONS
Agreement with Adobe Systems Incorporated
In November 1997, we signed a license and marketing agreement with Adobe
Systems Incorporated. Adobe Systems Incorporated is a majority partner of a
limited partnership which is a limited partner in Adobe Ventures L.P., a
significant stockholder of ESPS. H&Q Adobe Ventures Management L.P., a
stockholder of ESPS, is a general partner in Adobe Ventures L.P. Under this
agreement, we customized software for Adobe Systems Incorporated and granted
Adobe an exclusive, non-transferable, world-wide license to use the customized
software.
We received license fees of $1.8 million for the use of the customized
software. We are also entitled to receive royalty fees based on sales of the
Adobe software product which incorporates our technology. As of the fiscal year
ended March 31, 1999 we have received royalties of approximately $158,000.
Issuance of Preferred Stock to Significant Stockholders
In March 1997, we issued additional shares of preferred stock to H&Q ESPS
Investors L.P., and to Adobe Ventures, L.P., two of our significant
stockholders. Under the terms of the stock purchase agreement, Adobe Ventures
L.P. purchased 2,500,000 shares of preferred stock, and H&Q ESPS Investors L.P.
purchased 1,500,000 shares of preferred stock, at a price of $1.00 per share.
These shares of preferred stock will convert into shares of common stock upon
consummation of the offering. Partial payment for the shares sold to Adobe
Ventures L.P. was in the form of cancellation of promissory notes. We have also
entered into a rights agreement with these two stockholders, which grants them
rights to require registration of their shares of preferred stock or the common
stock into which their preferred shares are convertible. See "Description of
Capital Stock--Registration Rights."
Promissory Notes Payable to Adobe Ventures L.P.
In July 1996, we issued a promissory note payable to Adobe Ventures L.P. in
the amount of $500,000 with interest at a rate of 6.04% per year. In September
1996, we issued a promissory note payable to Adobe Ventures L.P. in the amount
of $500,000 with interest at a rate of 6.02% per year. In November 1996, we
issued a promissory note payable to Adobe Ventures L.P. in the amount of
$500,000 with interest at a rate of 5.96%. The amount due was convertible into
shares of preferred stock, and the loans were fully paid by the issuance of
preferred stock to Adobe Ventures L.P. in March 1997.
Relationship Between a Director and Significant Stockholder
Christopher B. Hollenbeck, a member of our board of directors, is a limited
partner of H&Q Adobe Ventures Management LP, the general partner of Adobe
Ventures, L.P., a significant stockholder of ESPS. Mr. Hollenbeck was elected
to our board of directors by the holders of series A preferred stock exercising
their right to elect a director under our certificate of incorporation. The
right to elect a member of the board of directors terminates when the shares of
series A preferred stock convert into common stock.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table contains information regarding the beneficial ownership
of the common stock of ESPS as of April 30, 1999 by:
. Each person or entity who is known by us to own beneficially more than 5%
of our outstanding common stock;
. The executive officers named in the summary compensation table;
. Each director of ESPS; and
. All directors and executive officers as a group.
The persons named in the table have sole voting and investment power over
all shares of common stock held by them subject to any state community property
laws. The percentage ownership in the following table is based on 11,862,182
shares of common stock outstanding as of April 30, 1999 and 15,362,182 shares
outstanding immediately following the completion of this offering. The number
of options represents stock options that are exercisable within 60 days of
April 30, 1999. When shares are issued upon exercise of options, warrants or
other rights to acquire our capital stock, there will be further dilution to
new public investors.
<TABLE>
<CAPTION>
Before Offering After Offering
----------------------------------- -----------------------------------
Name Shares Options Total Percent Shares Options Total Percent
---- ------ ------- ----- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5% Stockholders
Adobe Incentive
Partners L.P........... 4,930,000 -- 4,930,000 41.6% 4,930,000 -- 4,930,000 32.1%
345 Park Avenue
San Jose, CA 95110
H&Q ESPS
Investors LP........... 2,900,000 -- 2,900,000 24.4% 2,900,000 -- 2,900,000 18.9%
One Bush Street
San Francisco, CA 94104
Adobe Ventures L.P...... 820,201 -- 820,201 6.9% 820,201 -- 820,201 5.3%
One Bush Street
San Francisco, CA 94104
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Before Offering After Offering
------------------------------------- -------------------------------------
Name Shares Options Total Percent Shares Options Total Percent
---- ------ ------- ----- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and
Directors
Terrence P. Brennan..... 1,096,563 99,688 1,196,251 10.0% 1,096,563 99,688 1,196,251 7.7%
Michael T. Hoey......... 203,145 193,793 396,938 3.3% 203,145 193,793 396,938 2.6%
Kevin Leininger......... 18,125 18,125 36,250 0.3% 18,125 18,125 36,250 0.2%
Jeffrey C. Sager........ 59,813 43,500 103,313 0.9% 59,813 43,500 103,313 0.7%
George B. Pearcy........ 58,000 151,798 209,798 1.7% 58,000 151,798 209,798 1.4%
Michael J. Egan......... -- -- -- -- -- -- -- --
Charles O. Heller....... 147,719 13,594 161,313 1.4% 147,719 13,594 161,313 1.0%
Christopher B.
Hollenbeck............. 8,700,000 -- 8,700,000 73.3% 8,700,000 -- 8,700,000 56.6%
All directors and
executive officers as a
group (10 persons)..... 10,283,365 520,498 10,803,863 90.9% 10,283,365 520,498 10,803,863 70.2%
</TABLE>
The shares listed for Mr. Hollenbeck include 4,930,000 shares of common
stock issuable upon conversion of shares of series A preferred stock owned and
held by Adobe Incentive Partners L.P., Adobe Ventures L.P. and H&Q Adobe
Ventures Management, L.P. and 2,900,000 shares of common stock issuable upon
conversion of shares of series A preferred stock owned and held by H&Q ESPS
Investors LP. Mr. Hollenbeck is a limited partner of H&Q Adobe Ventures
Management L.P., a general partner of Adobe Ventures L.P., and may be deemed to
share voting and investment power with respect to the shares held by Adobe
Ventures L.P. Mr. Hollenbeck has a financial interest in H&Q ESPS Investment
Management Co. LLC, a general partner of H&Q ESPS Investors LP. Mr. Hollenbeck
disclaims beneficial ownership of the shares held by Adobe Ventures L.P. and
the shares held by H&Q ESPS Investors, LP., except for his financial interest.
If the underwriters exercise their over-allotment option to purchase up to
525,000 shares of common stock, then the following stockholders will sell up to
the following number of shares: Terrence P. Brennan, 198,319 shares, Michael T.
Hoey, 59,045 shares, George B. Pearcy, 34,784 shares, Jeffrey C. Sager, 17,127
shares, Charles O. Heller, 33,157 shares, Mark Gavin, 12,115 shares, Ronald M.
Swartz, 85,452 shares, and Larry D. Tindell, 85,001 shares.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
At the closing of the offering our authorized capital stock will consist of
50,000,000 shares of common stock and 6,000,000 shares of preferred stock.
Before the offering, there will be 6,000,000 shares of series A preferred stock
issued and outstanding. These shares of series A preferred stock will
automatically convert into an aggregate of 8,700,000 shares of common stock
upon consummation of this offering. After the offering there will be no
preferred stock issued and outstanding.
The following is a description of our capital stock. Our certificate of
incorporation, bylaws and Delaware law contain additional provisions which also
apply to our capital stock.
Common Stock
As of April 30, 1999 there were 3,162,182 shares of common stock outstanding
which were held of record by 54 stockholders.
Holders of common stock are entitled to one vote per share on all matters to
be voted upon. Holders of common stock do not have cumulative voting rights.
Holders of common stock are entitled to receive dividends declared by the board
of directors out of funds legally available for the payment of dividends,
limited by the preferences that apply to any outstanding preferred stock. See
"Dividend Policy." Upon a liquidation, dissolution or winding up of ESPS, the
holders of common stock are entitled to share proportionately in all assets
remaining after payment of liabilities, after we fulfill the distribution
rights of then outstanding preferred stock. The common stock has no preemptive
or conversion rights and no additional subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The shares
issued in this offering will be fully paid and nonassessable.
Preferred Stock
Our certificate of incorporation authorizes the board of directors, without
stockholder action, to designate and issue preferred stock. The board may
designate the voting powers, preferences and rights of the preferred shares,
which may be greater than the rights of the common stock. It is not possible to
state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of common stock until the board determines the specific
rights of the preferred stock. However, possible effects of issuing preferred
stock with voting and conversion rights include:
. Restricting dividends on common stock;
. Diluting the voting power of common stock;
. Impairing the liquidation rights of the common stock;
. Delaying or preventing a change of control of ESPS without stockholder
action; and
. Harming the market price of common stock.
We have no plans to issue any shares of preferred stock.
Registration Rights
Shares of our series A preferred stock convert into shares of our common
stock. The common stock which these preferred shares convert into is
unregistered. In July 1994, we granted registration rights to holders of our
series A preferred stock. In addition, we granted registration rights to Larry
D. Tindell, Ronald M. Swartz and Mark Gavin, who hold unregistered shares of
our common stock. These registration rights are provided under the terms of an
agreement between us and the holders of the registrable securities. The
agreement grants three types of registration rights:
53
<PAGE>
. Requested Registration. The holders of the registrable securities may
require us to use our best efforts to prepare a registration statement
and other related documents which would permit the sale of the
registrable securities. We only need to prepare the registration
statement and related documents if at least 25% of the registrable
securities are to be registered, or if the aggregate offering price will
be least $5,000,000. We shall pay the expenses incurred in a requested
registration.
. ESPS Registration. If we elect to register any of our shares of common
stock in a public offering, the holders of the registrable securities are
entitled to include their shares in the registration. We have the right
to reduce the number of shares to be registered in view of market
conditions. We shall pay the expenses incurred in an ESPS registration.
. Registration on Form S-3. Holders of the registrable securities may
require that we register their shares for public resale on Form S-3, if
we are eligible to use Form S-3 and the value of the securities to be
registered is at least $500,000. We are only required to make one
requested S-3 registration in any six month period. The requesting
holders shall pay the expenses incurred in a registration on Form S-3.
Delaware Anti-Takeover Law and Provisions in Our Charter and Bylaws
Provisions of Delaware law, our certificate of incorporation and bylaws
could make the acquisition of ESPS and the removal of incumbent officers and
directors more difficult. These provisions are intended to discourage coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to control ESPS to first negotiate with us. We believe that the
benefits provided to ESPS by allowing us to negotiate with an unfriendly or
unsolicited acquiror outweigh the disadvantages of discouraging takeover
proposals since we will have the opportunity to negotiate improved terms. These
provisions deter transactions not approved by our board, and could have the
effect of discouraging offers to purchase your stock at a premium over market
price for shares of common stock. Consequently, the provisions may also inhibit
fluctuations in the market price of our shares resulting from actual or rumored
takeover attempts.
Delaware Law. We are subject to Section 203 of the Delaware General
Corporation Law, or the anti-takeover law, which regulates corporate
acquisitions. The anti-takeover law prohibits a publicly-held Delaware
corporation from engaging in a business combination with any interested
stockholder for three years following the date the person became an interested
stockholder, unless the transaction is approved in a prescribed manner.
. A business combination includes a merger, consolidation, asset or stock
sale, or any transaction resulting in a financial benefit to the
interested stockholder.
. An interested stockholder is a person or entity who, together with
affiliates and associates, owns, or within three years before the
determination of interested stockholder status, did own, 15% or more of
the corporation's voting stock.
Our Charter Documents. Our certificate of incorporation eliminates the right
of stockholders to act by written consent without an annual or special meeting.
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. The authorization of undesignated
preferred stock makes it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of ESPS. These provisions are intended to
enhance continuity and stability in the composition of the board of directors
and to reduce the vulnerability to unsolicited or hostile takeovers, and could
delay changes in the control or management of ESPS.
Transfer Agent
The transfer agent and registrar for the common stock is StockTrans, Inc.,
Ardmore, Pennsylvania.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 15,362,182 shares to be outstanding after the offering, 3,500,000
shares of common stock will be freely tradeable. After the offering, 10,283,365
shares will be held by affiliates, as that term is defined in Rule 144(a) under
the Securities Act of 1933. For purposes of Rule 144, an affiliate of ESPS is a
person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, ESPS. The shares
held by affiliates are restricted securities under the Securities Act of 1933,
which may only be sold in the public market upon the expiration of the holding
periods prescribed by Rule 144, and are subject to the volume and manner of
sale limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least two years, including an affiliate, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
. one percent of the then outstanding shares of our common stock,
approximately 154,000 shares immediately following the offering, or
. the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale.
Sales under Rule 144 also must satisfy the manner of sale provisions, notice
requirements and the availability of current public information about us. A
shareholder who is deemed not to have been an affiliate of ours at any time
during the 90 days preceding a sale, and who has beneficially owned restricted
shares for at least two years, would be entitled to sell those shares under
Rule 144(k) without volume limitations, manner of sale provisions or public
information requirements.
Beginning 90 days after the offering, any employee, officer, director or
consultant of ESPS who purchased shares under a written benefit plan or
contract may rely on the resale provisions of Rule 701 to sell shares of our
stock, unless a lock-up agreement has been signed which applies to these
shares. Rule 701 permits affiliates to sell their shares without complying with
the holding period requirements of Rule 144. Rule 701 also permits non-
affiliates to sell shares without complying with the holding period, public
information, volume limitation or notice provisions of Rule 144.
All of our affiliates have agreed to further restrict their shares by
entering into lock-up arrangements discussed below.
We have granted options to purchase shares of our common stock under our
1995 stock incentive plan. As of April 30, 1999, options to purchase 791,860
shares of our common stock were fully vested and exercisable. An additional
221,464 shares were reserved for issuance under the 1995 stock incentive plan.
We intend to register the shares of common stock issuable or reserved for
issuance under the plan upon the completion of this offering.
Lock-up Arrangements
We have entered into lock-up arrangements with our officers and directors,
some employees and some stockholders, except for stockholders owning an
aggregate of 46,045 shares. Our officers and directors and some of our
stockholders have agreed not to sell their shares of our common stock for 180
days after the date of this prospectus without the written consent of Hambrecht
& Quist LLC. Our employees and former employees have agreed not to sell more
than five percent of the sum of the number of shares owned plus the number of
shares which could be issued under any options held for 180 days after the date
of this prospectus. When these lock-up agreements expire, 11,729,475 additional
shares will be available for sale in the public market, subject to the
limitations of Rule 144.
55
<PAGE>
UNDERWRITING
The underwriters named below, through their representatives, Hambrecht &
Quist LLC, BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc.
and Charles Schwab & Co., Inc. have agreed to purchase the following number of
shares of common stock from ESPS:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................ 1,141,875
BancBoston Robertson Stephens Inc. .............................. 761,250
U.S. Bancorp Piper Jaffray, Inc.................................. 634,375
Charles Schwab & Co., Inc........................................ 175,000
CIBC World Markets Corp. ........................................ 87,500
Deutsche Alex. Brown & Co. ...................................... 87,500
Donaldson, Lufkin & Jenrette Securities Corporation.............. 87,500
SBC Warburg Dillon Read LLC...................................... 87,500
S.G. Cowen Securities Corporation................................ 87,500
Chatsworth Securities LLC........................................ 43,750
First Albany Corporation......................................... 43,750
First Union Capital Markets Corp. ............................... 43,750
Janney Montgomery Scott Inc. .................................... 43,750
Parker/Hunter Incorporated....................................... 43,750
Pennsylvania Merchant Group Ltd. ................................ 43,750
Sanders Morris Mundy Inc. ....................................... 43,750
SoundView Technology Group, Inc. ................................ 43,750
---------
Total.......................................................... 3,500,000
=========
</TABLE>
The underwriters are obligated to purchase shares of common stock offered in
this prospectus if any of the shares are purchased. However, we must satisfy
conditions specified in the underwriting agreement, including demonstrating
that there has not been a material adverse change in our business and providing
certificates, opinions and letters from us, counsel and the independent
auditors.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price printed on the cover page of this
prospectus and to dealers at the initial public offering price less a maximum
concession of $0.30 per share. The underwriters may allow and the dealers may
reallow a maximum concession of $0.10 per share to brokers and dealers. After
the initial public offering of the shares, the underwriters may change the
offering price and other selling terms.
The following table shows the per share and total underwriting discounts and
commissions to be paid by us and the selling stockholders to the underwriters
in connection with this offering. These amounts assume both no exercise and
full exercise of the underwriters' option to purchase additional shares of
common stock.
<TABLE>
<CAPTION>
Total
--------------------
Without With
Per Over- Over-
Share allotment allotment
------ ---------- ---------
<S> <C> <C> <C>
underwriting discounts and commissions paid by us.. $0.525 $1,837,500 $ --
underwriting discounts and commissions paid by
selling stockholders.............................. 0.525 -- 275,625
</TABLE>
We will pay the offering expenses, estimated to be $1.6 million.
Eight ESPS stockholders have granted the underwriters an option exercisable
no later than 30 days after the date of this prospectus to purchase up to
525,000 additional shares of common stock at the initial
56
<PAGE>
public offering price, less the underwriting discount printed on the cover page
of this prospectus. If the underwriters exercise this option, each of the
underwriters will be obligated to purchase a number of shares that
approximately reflects the same percentage of total shares the underwriter
purchased in the above table. The eight ESPS stockholders will be obligated to
sell the shares to the underwriters. The underwriters may exercise the option
only to cover over-allotments made in connection with the sale of shares of
common stock offered in this prospectus.
The offering of the shares is made for delivery when as and if accepted by
the underwriters. An offer for sale may be withdrawn, cancelled or modified
without notice. The underwriters reserve the right to reject all or part of an
order for the purchase of shares.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in connection
with liabilities.
The selling stockholders and other stockholders, including executive
officers and directors, who will own in the aggregate 11,729,475 shares of our
common stock after the offering, have agreed that they will not, without the
written consent of Hambrecht & Quist LLC, offer or sell any shares of our
common stock, options or warrants to acquire shares of our common stock, or
securities exchangeable or convertible into shares of our common stock during
the 180-day period following the date of this prospectus. We have agreed that
we will not, without the written consent of Hambrecht & Quist LLC, offer or
sell any shares of our common stock, options or warrants to acquire shares of
our common stock or securities exchangeable for or convertible into shares of
our common stock during the 180-day period following the date of this
prospectus. We may issue shares upon the exercise of options granted before the
date of this prospectus, and may grant additional options under our stock
option plans, provided that, without the written consent of Hambrecht & Quist
LLC, the additional options shall not be exercisable during the 180-day period.
Persons participating in this offering may over-allot or effect transactions
which stabilize or maintain the market price of our common stock at levels
above those which might prevail in the open market, including by entering
stabilizing bids, effecting syndicate covering transactions or imposing penalty
bids. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of our
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. A penalty bid means
an arrangement that permits the underwriters to reclaim a selling concession
from a syndicate member in connection with the offering when shares of common
stock sold by the syndicate member are purchased in syndicate covering
transactions. These transactions may be effected on the Nasdaq National Market
or in the over-the-counter market. Stabilizing, if commenced, may be
discontinued at any time.
Before this offering, there has been no market for our common stock. The
initial public offering price for our common stock has been determined by
negotiation among us, the selling stockholders and the representatives. Among
the factors considered in determining the initial public offering price were
prevailing market and economic conditions, our revenues and earnings, market
valuations of other companies engaged in activities similar to ours, estimates
of our business potential and prospects, the present state of our business
operations and our management. The initial public offering price on the cover
of this preliminary prospectus is subject to change as a result of market
conditions.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol ESPS.
Under the conduct rules of the National Association of Securities Dealers or
the NASD, due to the ownership interest in ESPS by affiliates of Hambrecht &
Quist LLC, ESPS may be deemed to be an affiliate of Hambrecht & Quist LLC and
because of that this offering is being made under Rule 2720 (d)(2).
57
<PAGE>
Accordingly, the public offering price can be no higher than that recommended
by a qualified independent underwriter. BancBoston Robertson Stephens Inc. has
agreed to serve in this role and to recommend a price to fulfill the
requirements of the NASD conduct rules. BancBoston Robertson Stephens Inc., in
its role as a qualified independent underwriter, has performed a due diligence
investigation and has reviewed and participated in the preparation of this
prospectus and the registration statement which includes this prospectus. The
NASD conduct rules specify that no NASD member participating in the
distribution may confirm sales to those accounts over which it has
discretionary authority without prior specific written consent.
H&Q ESPS Investors, L.P. holds 2,000,000 shares of series A preferred stock,
which will automatically convert into 2,900,000 shares of common stock upon
consummation of this offering. H&Q ESPS Investors, L.P. is a Delaware limited
partnership with two general partners. One of the general partners is a wholly-
owned subsidiary of Hambrecht & Quist California and the other is a limited
liability company whose members are unaffiliated with the Hambrecht & Quist
LLC. In addition, the limited partners of H&Q ESPS Investors, L.P. include
employees of Hambrecht & Quist LLC or directors of Hambrecht & Quist Group, the
parent corporation of Hambrecht & Quist California. Hambrecht & Quist LLC, one
of the underwriters in this offering, is wholly owned by Hambrecht & Quist
California.
Adobe Ventures L.P. holds 565,656 shares of series A preferred stock which
will automatically convert into 820,201 shares of common stock upon
consummation of this offering. H&Q Adobe Ventures Management L.P. is a general
partner of Adobe Ventures L.P. and holds 34,344 shares of series A preferred
stock which will convert into 49,799 shares of common stock upon consummation
of this offering. Adobe Ventures Management Inc., a limited partner of H&Q
Adobe Ventures Management L.P., is a wholly-owned subsidiary of Hambrecht &
Quist California. Hambrecht & Quist LLC, one of the underwriters in this
offering, is wholly owned by Hambrecht & Quist California.
Under the terms of the series A preferred stock, the holders of the series A
preferred stock have had the power to elect one member of our board of
directors which right terminates upon completion of the offering.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania will provide ESPS an
opinion relating to the validity of the common stock issued in this offering.
Brobeck, Phleger & Harrison LLP, New York, New York will provide the
underwriters an opinion related to other matters in this offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at March 31, 1999 and 1998, and for each of the three years in the
period ended March 31, 1999, as described in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information described in
the registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to ESPS and the
common stock, refer to the registration statement and the related exhibits and
schedules. You may read and copy any document we file
58
<PAGE>
at the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. Our SEC filings are also
available to the public from the SEC's web site at http://www.sec.gov. Upon
completion of this offering, we must comply with the information and periodic
reporting requirements of the Securities Exchange Act and will file periodic
reports, proxy statements and other information with the SEC. These periodic
reports, proxy statements and other information will be available for
inspection and copying at the SEC's public reference rooms and the web site of
the SEC.
59
<PAGE>
ESPS, INC.
INDEX TO FINANCIAL STATEMENTS
For the years ended March 31, 1997, 1998 and 1999
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Audited Financial Statements
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
ESPS, Inc.
We have audited the accompanying balance sheets of ESPS, Inc. as of March
31, 1999 and 1998, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended March
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ESPS, Inc. at March 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 28, 1999, except as
to Note 13, as to which the
date is June 15, 1999
F-2
<PAGE>
ESPS, INC.
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Proforma
Stockholders'
March 31, Equity at
---------------- March 31,
1998 1999 1999
------- ------- -------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 4,558 $ 1,812
Accounts receivable, net of allowance of $50
and $127, respectively...................... 3,616 6,210
Accounts receivable--related party........... 323 158
Deferred income taxes........................ 650 322
Deferred offering costs...................... -- 696
Other current assets......................... 49 340
------- -------
Total current assets....................... 9,196 9,538
Property and equipment, net.................... 763 2,330
Other assets................................... 58 28
------- -------
Total assets............................... $10,017 $11,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 30 $ 956
Accrued expenses............................. 1,045 2,311
Deferred revenues--current................... 2,802 1,905
Deferred revenues--related party............. 1,200 --
------- -------
Total current liabilities.................. 5,077 5,172
Deferred revenues, less current portion........ 44 --
Stockholders' equity:
Series A preferred stock, $0.001 par value:
Authorized shares--6,000
Issued and outstanding shares--6,000 at
March 31, 1998 and 1999 and 0 proforma
basis as of March 31, 1999 (liquidation
preference of $6,000) .................... 6 6 $ --
Common stock, $0.001 par value;
Authorized shares--50,000
Issued and outstanding shares--1,318 and
3,154 at March 31, 1998 and 1999,
respectively and 11,854 proforma basis as
of March 31, 1999......................... 1 3 12
Additional paid-in capital................... 6,186 6,570 6,567
Retained earnings (accumulated deficit)...... (1,127) 349 349
Deferred stock compensation.................. (170) (204) (204)
------- ------- ------
Total stockholders' equity................. 4,896 6,724 $6,724
------- ------- ======
Total liabilities and stockholders' equity. $10,017 $11,896
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
ESPS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
------------------------
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Revenues:
Software licenses.................................. $ 648 $6,814 $11,676
Software licenses--related party................... -- -- 1,778
Services and maintenance........................... 420 1,832 4,315
Services and maintenance--related party............ -- -- 180
------- ------ -------
Total revenues................................... 1,068 8,646 17,949
Cost of revenues:
Software licenses.................................. 68 258 298
Services and maintenance........................... 506 1,589 3,193
------- ------ -------
Total cost of revenues........................... 574 1,847 3,491
------- ------ -------
Gross profit......................................... 494 6,799 14,458
Operating expenses:
Research and development........................... 1,407 1,978 3,829
Sales and marketing................................ 714 1,283 5,185
General and administrative......................... 1,147 1,229 3,162
------- ------ -------
Total operating expenses......................... 3,268 4,490 12,176
------- ------ -------
Income (loss) from operations........................ (2,774) 2,309 2,282
Interest, net........................................ (39) 52 130
------- ------ -------
Income (loss) before income taxes.................... (2,813) 2,361 2,412
Income tax provision (benefit)....................... -- (514) 936
------- ------ -------
Net income (loss).................................... $(2,813) $2,875 $ 1,476
======= ====== =======
Earnings (loss) per share:
Basic.............................................. $ (3.51) $ 3.81 $ 0.57
Diluted............................................ (3.51) 0.25 0.10
Shares used in computation of earnings (loss) per
share:
Basic.............................................. 801 754 2,575
Diluted............................................ 801 11,326 14,641
Pro forma earnings per share:
Basic.............................................. $ 0.13
Diluted............................................ 0.10
Shares used in computation of pro forma earnings per
share:
Basic.............................................. 11,275
Diluted............................................ 14,641
</TABLE>
See accompanying notes.
F-4
<PAGE>
ESPS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series A Retained
Preferred Stock Common Stock Additional Earnings Deferred Total
----------------- -------------- Paid-In (Accumulated Stock Stockholders'
Shares Amount Shares Amount Capital Deficit) Compensation Equity
-------- ------- ------ ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
March 31, 1996......... 2,000 $ 2 854 $-- $1,972 $(1,189) $ -- $ 785
Issuance of series A
preferred stock...... 4,000 4 -- -- 3,996 -- -- 4,000
Stock issuance costs.. -- -- -- -- (10) -- -- (10)
Repurchase of common
stock................ -- -- (323) -- -- -- -- --
Net loss.............. -- -- -- -- -- (2,813) -- (2,813)
-------- ------- ----- ---- ------ ------- ----- ------
Balance at
March 31, 1997......... 6,000 6 531 -- 5,958 (4,002) -- 1,962
Exercise of stock
options.............. -- -- 787 1 58 -- -- 59
Deferred stock
compensation......... -- -- -- -- 170 -- (170) --
Net income............ -- -- -- -- -- 2,875 -- 2,875
-------- ------- ----- ---- ------ ------- ----- ------
Balance at
March 31, 1998......... 6,000 6 1,318 1 6,186 (1,127) (170) 4,896
Exercise of stock
options.............. -- -- 1,836 2 132 -- -- 134
Deferred stock
compensation......... -- -- -- -- 252 -- (252) --
Amortization of
deferred stock
compensation......... -- -- -- -- -- -- 218 218
Net income............ -- -- -- -- -- 1,476 -- 1,476
-------- ------- ----- ---- ------ ------- ----- ------
Balance at
March 31, 1999......... 6,000 $ 6 3,154 $ 3 $6,570 $ 349 $(204) $6,724
======== ======= ===== ==== ====== ======= ===== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ESPS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income (loss).................................. $(2,813) $ 2,875 $ 1,476
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization.................... 170 223 464
Deferred income taxes............................ -- (650) 328
Provision for losses on accounts receivables..... -- 50 77
Amortization of deferred stock compensation...... -- -- 218
Changes in assets and liabilities:
Accounts receivable............................ (370) (3,619) (2,506)
Other current assets........................... (85) (16) (291)
Accounts payable and accrued expenses.......... 93 757 1,579
Deferred revenue............................... 679 3,115 (2,141)
------- ------- -------
Net cash (used in) provided by operating
activities.................................. (2,326) 2,735 (796)
Investing activities:
Purchase of property and equipment................. (224) (547) (2,001)
Financing activities:
Proceeds from issuance of bridge loan.............. 1,500 -- --
Proceeds from the issuance of preferred stock...... 2,500 -- --
Stock issuance and deferred offering costs......... (10) -- (83)
Proceeds from exercise of stock options............ -- 59 134
------- ------- -------
Net cash provided by financing activities.... 3,990 59 51
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 1,440 2,247 (2,746)
Cash and cash equivalents, beginning of year....... 871 2,311 4,558
------- ------- -------
Cash and cash equivalents, end of year............. $ 2,311 $ 4,558 $ 1,812
======= ======= =======
Supplemental disclosures of cash flow information:
Conversion of bridge loan to preferred stock....... $ 1,500 $ -- $ --
Liability incurred for offering costs.............. $ -- $ -- $ 613
Cash paid for income taxes......................... $ -- $ 6 $ 236
</TABLE>
See accompanying notes.
F-6
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
1. Business
ESPS, Inc. (formerly Electronic Submission Publishing Systems, Inc.), a
Delaware corporation, is a leading provider of electronic compliance management
solutions to businesses in highly regulated industries. The Company's solution,
which consists of the CoreDossier family of software products and related
services, enables users across departments and throughout an enterprise to
collaborate in the authoring, compilation, distribution, publishing and reuse
of compliance information and regulatory submissions. The Company designed its
CoreDossier software products to utilize advanced technologies, such as
corporate intranets and the Internet, and to meet emerging electronic
compliance requirements and standards. The Company's solution enables its
customers to realize a return on their investment by reducing the cost and
burden of compliance while also reducing the time required to bring new
products and services to market. The Company's initial concentration has been
directed to the pharmaceutical industry.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Pronouncements
The Financial Accounting Standards Board recently issued Statements of
Financial Accounting Standards Nos. 130 and 131, which establish standards for
the reporting of comprehensive income and disclosure concerning segment
information, respectively. The adoption of the requirements of these standards
has not resulted in a material effect on the Company's financial position or
results of operations.
Revenue Recognition
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public
Accountants (AICPA) and was amended by Statement of Position 98-4 (SOP 98-4).
The Company adopted SOP 97-2 for fiscal year ending March 31, 1998. Based upon
their interpretation of SOP 97-2 and SOP 98-4, the Company believes its current
revenue recognition policies and practices are consistent with SOP 97-2 and SOP
98-4. However, full implementation guidelines for this standard have not yet
been issued.
Additionally, the AICPA recently issued SOP 98-9, which provides certain
amendments to SOP 97-2 and is effective for transactions entered into after
April 1, 1999. This pronouncement has not and is not expected to materially
impact the Company's revenue recognition practices.
The Company generates revenues through the sale of software licenses and
services and maintenance to end users. Software licenses revenues are generated
from licensing the rights to use the Company's products. Services and
maintenance revenues are generated from sales of customer support services
contracts and consulting and training services performed for customers that
license the Company's products.
Revenues from the sale of software licenses are recognized upon shipment of
software when persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Vendor-specific
F-7
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Accounting Policies (continued)
Revenue Recognition (continued)
objective evidence is typically based on the price charged when an element is
sold separately, or, in the case of an element not yet sold separately, the
price established by authorized management, if it is probable that the price,
once established, will not change before market introduction. Elements included
in multiple element arrangements could consist of software products, upgrades,
enhancements, customer support services, or consulting services. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.
Revenues from maintenance are recognized ratably over the term of the
customer support contract, typically one year. Consulting revenues are
primarily related to implementation services performed on a time-and-materials
basis under separate service arrangements related to the installation of the
Company's software products. Revenues from consulting and training services are
recognized as services are performed. If a transaction includes both license
and service elements, license fee revenues are recognized on shipment of the
software, provided services do not include significant customization or
modification of the base product, and the software is not subject to acceptance
criteria.
Revenues from one customer exceeded 10% of total revenues and accounted for
approximately $1,958,000, of revenues during the year ended March 31, 1999
(Note 8). Revenues from three customers each exceeding 10% of total revenues
accounted for approximately $1,495,000, $1,297,000, and $1,185,000, of total
revenues during the year ended March 31, 1998. Amounts due from these customers
amounted to approximately $193,000 at March 31, 1998. Revenues from four
customers each exceeding 10% of total revenues accounted for approximately
$473,000, $249,000, $200,000 and $146,000 of total revenues during the year
ended March 31, 1997.
Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid investments with
an original maturity of three months or less.
Fair Value of Financial Instruments
At March 31, 1999, the Company had the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximates their fair
value based on the liquidity of these financial instruments or based on their
short-term nature.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is mainly in North America and Europe and consists of
companies in the pharmaceutical, chemical and utility industries. The Company
does not require collateral or other security to support credit sales, but
provides an allowance for bad debts based on historical experience and
specifically identified risks.
Deferred Offering Costs
As of March 31, 1999, specific incremental costs directly attributable to
the Company's planned initial public offering process have been deferred. These
costs will be charged against additional paid-in capital in connection with the
consummation of this offering.
F-8
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Accounting Policies (continued)
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the related assets which
range from five to seven years.
Research and Development
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Financial accounting standards
provide for the capitalization of certain software development costs after
technological feasibility of the software is established. Under the Company's
current practice of developing new products and enhancements, the technological
feasibility of the underlying software is not established until substantially
all product development is complete, including the development of a working
model. No such costs have been capitalized because the impact of capitalizing
such costs would not be material.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS No. 123), provides companies with a choice to follow
the provisions of SFAS No. 123 in determination of stock-based compensation
expenses or to continue with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). The
Company continues to follow APB No. 25 and has provided pro forma disclosures
as required by SFAS No. 123.
Earnings (Loss) Per Share and Pro Forma Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities by
including other common stock equivalents, including stock options and
convertible preferred stock, in the weighted average number of common shares
outstanding for a period, if dilutive.
Pro forma earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding and the weighted average
convertible preferred stock outstanding as if such shares were converted into
common stock at the time of issuance.
Derivatives
In June 1998, SFAS No. 133, Accounting for Derivatives and Hedging
Activities, was issued which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because the Company has never used nor currently intends to use
derivatives, management does not anticipate that the adoption of this new
standard will have a significant effect on earnings or the financial position
of the Company. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999.
F-9
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Property and Equipment
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31,
-------------
1998 1999
----- ------
<S> <C> <C>
Computer equipment......................................... $ 760 $1,832
Computer software.......................................... 173 237
Furniture, fixtures, and office equipment.................. 271 903
Leasehold improvements..................................... 40 273
----- ------
1,244 3,245
Accumulated depreciation................................... (481) (915)
----- ------
Total property and equipment............................... $ 763 $2,330
===== ======
</TABLE>
4. Accrued Expenses
Accrued expenses consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Income taxes................................................ $ 136 $ 328
Sales taxes................................................. 241 405
Payroll and related......................................... 397 809
Accrued offering costs...................................... -- 613
Other....................................................... 271 156
------ ------
Total accrued expenses...................................... $1,045 $2,311
====== ======
</TABLE>
5. Capital Stock
The holders of the series A preferred stock are entitled to noncumulative
dividends at a rate of $.08 per share prior to any payment of dividends on
common stock.
Each share of preferred stock is convertible into 1.45 shares of common
stock, subject to adjustment in certain circumstances, and has a liquidation
preference of $1.00 per share. Conversion is at the option of the stockholders
until such time, if ever, that the Company consummates a public offering at a
designated price and from which the Company receives proceeds of at least
$10,000,000 at which time such conversion becomes mandatory. The preferred
stock has voting rights equal to its common stock conversion ratio.
Stock Options
The Company has a stock option plan whereby the Company may grant either
incentive or nonqualified stock options to purchase shares of the Company's
common stock. Twenty-five percent of the options are exercisable on the first
anniversary of the date of grant or the participant's hire date, whichever is
earlier. The additional amounts become exercisable at varying rates from 6.25%
to 9.40% on the last day of each quarter thereafter. The Company has authorized
6,720,170 shares to be issued under the plan.
The incentive stock options may be granted at no less than the fair market
value of the shares at the date of grant, and the nonqualified stock options
are to be granted at no less than eighty-five percent of the
F-10
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Capital Stock (continued)
Stock Options (continued)
fair market value of the shares at the date of grant. The fair market value of
the Company's common stock is determined by the board of directors based on
Company specific objective evidence, including periodic outside independent
valuations. Under APB No. 25, if the exercise price of the Company's employee
stock options equals the fair value of the underlying stock on the date of
grant, no compensation expense is recognized. During the years ended March 31,
1998 and 1999, the Company determined that certain common stock options were
issued at a price that was lower than the estimated fair value of the common
stock, resulting in deferred compensation expense of $170,000 and $252,000,
respectively. The deferred compensation is being amortized over the vesting
period of the underlying options using a graded vesting schedule. Amortization
expense of $218,000 was recognized during the year ended March 31, 1999.
Amortization of the deferred stock-based compensation balance of $204,000 will
approximate $116,000, $62,000, and $26,000 for the fiscal years ending
March 31, 2000, 2001, 2002, respectively.
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------ --------------------------
Weighted Average
Per Share Number of Weighted Average Remaining Contractual Number of Weighted Average
Prices Shares Per Share Price Life (years) Shares Per Share Price
--------- --------- ---------------- --------------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.07-
0.08 2,745,139 $0.07-0.08 3.11 767,572 $0.07
0.34 45,678 0.34 4.21 -- --
2.07 486,475 2.07 4.50 -- --
4.14 152,250 4.14 4.74 -- --
8.28 263,887 8.28 4.49 -- --
10.34 180,888 10.34 4.96 -- --
--------- -------
3,874,317 767,572
========= =======
</TABLE>
FASB No. 123 requires pro forma information regarding net income as if the
Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using the minimum value method option pricing model with the
following weighted average assumptions for all periods presented: risk-free
interest rate of 5.2%, dividend yield of 0%, weighted average expected life of
the option of 4 years, and minimum value volatility.
Stock Option Activity
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported..................................... $(2,813) $2,875 $1,476
SFAS No. 123 pro forma.......................... (2,815) 2,870 1,309
Diluted earnings (loss) per share:
As reported--diluted............................ (3.51) 0.25 0.10
SFAS No. 123 pro forma.......................... (3.51) 0.25 0.09
</TABLE>
F-11
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Capital Stock (continued)
Stock Option Activity (continued)
The weighted average fair value of options granted during the years ended
March 31, 1997, 1998, and 1999 for which the estimated fair value of the stock
equaled the exercise price is $0.06, $0.06 and $0.89, respectively. The
weighted average fair value of options granted during the years ended 1998 and
1999 for which the stock price exceeded the exercise price is $0.06 and $1.84,
respectively.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Weighted
Number of Average Exercise
Shares Price Per Share
----------- ----------------
<S> <C> <C>
Outstanding at April 1, 1996................... 1,496,581 $0.07
Granted...................................... 2,891,300 0.07
Canceled..................................... (72,500) 0.07
----------- -----
Outstanding at March 31, 1997.................. 4,315,381 0.07
Granted...................................... 904,800 0.07
Exercised.................................... (787,169) 0.08
Canceled..................................... (114,368) 0.07
----------- -----
Outstanding at March 31, 1998.................. 4,318,644 0.07
Granted...................................... 1,820,305 3.74
Exercised.................................... (1,837,220) 0.07
Canceled..................................... (427,412) 0.30
----------- -----
Outstanding at March 31, 1999.................. 3,874,317 $1.77
=========== =====
</TABLE>
6. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred income taxes are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
March 31,
-----------
1998 1999
---- -----
<S> <C> <C>
Current deferred tax assets:
Deferred revenue........................................... $ 18 $ --
Depreciation and amortization.............................. 5 --
Bad debt reserves.......................................... 20 51
Stock compensation and vacation pay........................ -- 153
Other accrued liabilities.................................. 40 18
Tax credits................................................ 60 17
Net operating loss carryforwards........................... 664 83
---- -----
Total deferred tax asset................................. 807 322
Less: valuation allowance.................................... (157) --
---- -----
Net deferred tax asset................................... $650 $ 322
==== =====
</TABLE>
F-12
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Income Taxes (continued)
A reconciliation of the income tax provision to amounts computed using
federal statutory rates is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Federal statutory rate............................. $ (957) $ 791 $ 820
Change in valuation allowance...................... 951 (1,406) (157)
State income taxes, net............................ -- 90 158
Other.............................................. 6 11 115
------ -------- ------
Income tax provision (benefit)................... $ -- $ (514) $ 936
====== ======== ======
Income tax provision (benefit):
Current:
Federal........................................ $ -- $ -- $ 508
State.......................................... -- 136 100
------ -------- ------
-- 136 608
Deferred:
Federal........................................ -- (598) 270
State.......................................... -- (52) 58
------ -------- ------
-- (650) 328
------ -------- ------
$ -- $ (514) $ 936
====== ======== ======
</TABLE>
For federal income tax purposes, the Company utilized approximately
$1,295,000 of net operating loss carryforwards to reduce taxable income for the
fiscal year ended March 31, 1999. In addition, during the same period the
Company utilized $1,000,000 of net operating losses for state tax purposes. For
state income tax purposes the Company has approximately $1,270,000 of operating
losses which begin to expire in 2006.
7. Commitments
The Company leases its office space under an operating lease. Future minimum
lease payments subsequent to March 31, 1999 are as follows: $237,000 in 2000,
$404,000 in 2001, $379,000 in 2002, $379,000 in 2003, $237,000 in 2004 and
$29,000 thereafter.
Rent expense was approximately $77,000, $96,000, and $697,000 during the
years ended March 31, 1997, 1998, and 1999, respectively.
The Company is obligated to pay royalties to a third party for the use of
its software, which is incorporated into the Company's products. The Company
pays royalties ranging from 1.8% to 2.5% of the net selling price of its
software licenses. Royalty expense is recorded as software licenses revenue is
recognized. The term of this royalty agreement expires in December 1999 and is
subject to renewal.
8. Related Party Transaction
During fiscal 1998, the Company signed a $1,800,000 license agreement with a
related party which required the Company to customize software and grant an
exclusive, nontransferable
F-13
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Related Party Transaction (continued)
worldwide license to use the customized software. In conjunction with the
agreement, the Company received approximately $900,000 in cash during fiscal
1998 and had a receivable of $300,000 as of March 31, 1998 relating to license
fees. As of March 31, 1998, the Company deferred all revenue relating to this
contract, as delivery of the product had not occurred as of March 31, 1998.
The Company recognized the revenue related to this contract after delivery
occurred in June of 1998 over the period that the required services were
performed. The Company recognized $1,800,000 of revenue related to this
agreement during the fiscal year ended March 31, 1999.
The agreement also includes a royalty arrangement in which the Company
receives royalties based on sales of the software product. The Company received
royalties of approximately $158,000 during the fiscal year ended March 31,
1999.
9. Employee Benefit Plan
The Company maintains a retirement plan for eligible employees under the
provisions of Internal Revenue Code section 401(k). Participants may defer a
portion of their annual compensation on a pretax basis, subject to maximum
limits on contributions prescribed by law. Contributions by the Company are at
the discretion of the board of directors. No discretionary contributions have
been made by the Company to date.
10. International Operations
The Company licenses and markets its products through direct channels
throughout the world. Information about the Company's operations in different
geographic regions is shown below. Revenues were attributed to geographic areas
based on the location of the customer (amounts in thousands.)
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Revenues:
United States..................................... $1,068 $7,449 $14,631
United Kingdom.................................... -- 778 2,137
Rest of world..................................... -- 419 1,181
------ ------ -------
Total revenues...................................... $1,068 $8,646 $17,949
====== ====== =======
</TABLE>
The majority of the rest of world revenue is from countries within
continental Europe.
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Long-lived assets:
United States.................................... $ 401 $ 747 $ 2,027
United Kingdom................................... 9 16 303
------ ------ --------
Total long-lived assets............................ $ 410 $ 763 $ 2,330
====== ====== ========
</TABLE>
F-14
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
11. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands except per share data):
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Net income (loss)...................................... $(2,813) $2,875 $ 1,476
======= ====== =======
Weighted average number of common shares outstanding... 801 754 2,575
Effect of dilutive securities:
Stock options........................................ -- 1,872 3,366
Series A preferred stock............................. -- 8,700 8,700
------- ------ -------
Adjusted weighted average shares outstanding and
assumed conversions................................... 801 11,326 14,641
======= ====== =======
Pro forma adjustment to weighted average number of
common shares outstanding for the conversion of series
A preferred stock..................................... 8,700
-------
Pro forma weighted average shares:
Basic................................................ 11,275
=======
Diluted.............................................. 14,641
=======
Earnings (loss) per share:
Basic................................................ $ (3.51) $ 3.81 $ 0.57
Diluted.............................................. (3.51) 0.25 0.10
Pro forma earnings per share:
Basic................................................ $ 0.13
Diluted.............................................. 0.10
</TABLE>
Due to their antidilutive effects, series A preferred stock and outstanding
stock options to purchase shares of common stock were excluded from the
computation of diluted (loss) per share for the fiscal year ended March 31,
1997.
12. Initial Public Offering
On March 30, 1999, the board of directors of the Company authorized
management to pursue an underwritten sale of shares of the Company's common
stock in an initial public offering ("IPO") pursuant to the Securities Act of
1933. Upon closing of the IPO, all outstanding shares of the series A preferred
stock will automatically convert into an aggregate of 8,700,000 shares of
common stock.
13. Subsequent Events
On May 17, 1999, the board of directors approved a 1.45 for 1 stock split in
the form of a stock dividend to be effective immediately prior to the
effectiveness of their initial public offering. The board of directors declared
the stock split effective on June 15, 1999. All periods presented have been
restated to reflect this stock split. Further, on May 17, 1999, the Company
authorized an additional 1,160,000 shares to be issued under its stock option
plan.
F-15
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
14. Pro Forma Information (unaudited)
The pro forma financial statements include unaudited pro forma information
as of March 31, 1999 to reflect the conversion of all outstanding shares of
series A preferred stock into shares of common stock, upon consummation of the
Company's IPO. This information does not give effect to the proceeds from the
IPO.
F-16
<PAGE>
[Graphic: The ESPS logo appears on a background depicting a spiral. The
following text appears below the logo: "CoreDossier Enabling e-Compliance"]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 Shares
[LOGO OF ESPS(TM) APPEARS HERE]
Common Stock
--------------
PROSPECTUS
--------------
Hambrecht & Quist
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
Charles Schwab & Co., Inc.
--------------
June 16, 1999
--------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus. Persons who come into possession of this prospectus in
jurisdictions outside the United States are required to inform themselves about
and to observe any restrictions as to this offering and the distribution of
this prospectus applicable to that jurisdiction.
Until July 11, 1999, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
