<PAGE>
As filed with the Securities and Exchange Commission on May 18, 1999
Registration Statement No. 333-75397
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
ESPS, INC.
(Exact name of Registrant as specified in its charter)
----------------
Delaware 7373 24-2845135
(State or other (Primary Standard (IRS Employee
jurisdiction of Industrial Classification Identification Number)
incorporation or Code No.)
organization)
1300 Virginia Drive, Suite 125
Fort Washington, PA 19034
215/619-6000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
TERRENCE P. BRENNAN
President and Chief Executive Officer
ESPS, Inc.
1300 Virginia Drive
Suite 125
Fort Washington, PA 19034
215/619-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Stephen M. Goodman, Esq. Alexander D. Lynch, Esq.
James W. McKenzie, Jr., Esq. Luci Staller Altman, Esq.
Morgan, Lewis & Bockius LLP Brobeck, Phleger & Harrison LLP
1701 Market Street 1633 Broadway, 47th Floor
Philadelphia, PA 19103 New York, NY 10019
215/963-5000 212/581-1600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to such Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+Underwriters may not confirm sales of these securities until the registration +
+statement filed with the Securities and Exchange Commission becomes +
+effective. This prospectus is not an offer to sell these securities and it is +
+not soliciting offers to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 18, 1999
PROSPECTUS
4,000,000 Shares
Common Stock
This is an initial public offering of common stock by ESPS, Inc. Of the
4,000,000 shares of common stock being sold in this offering, 3,500,000 shares
are being sold by ESPS and 500,000 shares are being sold by the selling
stockholders identified on page 53. ESPS will not receive any of the proceeds
from the sale of shares by the selling stockholders. We estimate that the
initial public offering price will be between $9.00 and $11.00 per share.
---------
There is no public market for the common stock. We have applied for listing
of the shares of common stock on the Nasdaq National Market under the symbol
ESPS.
---------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to ESPS, before expenses............................... $ $
Proceeds to selling stockholders, before expenses............... $ $
</TABLE>
ESPS has granted the underwriters an option for a period of 30 days to
purchase up to 308,308 additional shares of common stock. Several selling
stockholders have granted the underwriters an option for a period of 30 days to
purchase up to 291,692 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.
, 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," "Domain 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, .Domain 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........................................... 14
Use of Proceeds...................................................... 15
Dividend Policy...................................................... 15
Capitalization....................................................... 16
Dilution............................................................. 17
Selected Financial Data.............................................. 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 20
Our Business......................................................... 31
Management........................................................... 44
Certain Transactions................................................. 51
Principal and Selling Stockholders................................... 52
Description of Capital Stock......................................... 54
Shares Eligible for Future Sale...................................... 56
Underwriting......................................................... 57
Legal Matters........................................................ 59
Experts.............................................................. 59
Additional ESPS Information.......................................... 59
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.
Businesses throughout the world are subject to rules, regulations and
standards imposed by federal, state and foreign regulatory agencies. As part of
their oversight of these businesses, regulatory agencies typically require that
businesses compile information to demonstrate their compliance with specific
regulations, such as those governing product safety, environmental protection,
fair business practices and manufacturing processes. This process often
requires participation by numerous individuals throughout an organization and
can be very time consuming and costly. For example, the U.S. Office of
Management and Budget reported that in 1997, an estimated 115.6 million hours
were required for mandated record keeping and compliance reporting to the U.S.
Environmental Protection Agency.
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. Our products comprise a modular system that may be configured in a
variety of ways to meet customers' industry-specific compliance requirements.
The modular design of the system allows for rapid deployment with minimal
customization. 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 those 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.
3
<PAGE>
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.
The Offering
<TABLE>
<S> <C>
Common stock offered by ESPS........ 3,500,000 shares
Common stock offered by selling
stockholders....................... 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.
Proposed 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 will be effective immediately before the effectiveness of this
registration statement. 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 $32,722
Working capital................................. 4,366 4,366 35,193
Total assets.................................... 11,896 11,896 42,110
Preferred stock................................. 6 -- --
Stockholders' equity............................ 6,724 6,724 37,634
</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 of such fiscal year 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 our company. 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
A small number of our license agreements account for a large portion of our
total revenues
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, for technological or other reasons, 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
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 industries. If we are unable to compete
7
<PAGE>
successfully against these new competitors our business and results of
operations would be harmed. See "Our Business--Strategy."
The success of our products depends upon the continued adoption of the Windows
NT platform
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. We sell our products primarily through our direct
sales force and support our customers with our professional services
organization. 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, any such expansion may not result
in increased revenues. The complexity of our products and the large-scale
deployments anticipated by our customers will require us to hire a number of
highly trained professional services personnel, and, if we are unable to do so,
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. Our revenues have increased from $753,000 for
the fiscal year ended March 31, 1996 to $17.9 million for the fiscal year ended
March 31, 1999. 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.
Several key executive officers have recently joined our management team and
they may not successfully work together to meet our business objectives
Our current management team has been in place for only a relatively short
period of time. Our Chief Financial Officer joined us in October 1998, our Vice
President of Marketing joined us in June 1998 and our Vice President of
Professional Services joined us in October 1998. Accordingly, each of these
individuals has limited experience with our operating activities. Our success
will depend to a significant extent on the ability of our new executive
officers to integrate themselves into our daily operations, to gain the trust
and confidence of other employees and to work effectively as a team. See "Our
Business--Management."
8
<PAGE>
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. We do not have employment
agreements with any of our key employees, including our senior executives. The
market for such persons is extremely competitive. We may not find qualified
replacements for personnel who leave us. In the past, we have experienced
difficulty in hiring qualified technical, professional services, sales,
marketing and managerial personnel. In addition, we do not maintain key person
life insurance on any of our key personnel, and have no plans to do so. The
loss of any of our key personnel may harm our business.
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:
. 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.
We expect our relationships with these service vendors to provide marketing
and sales opportunities for our direct sales force and expand the distribution
of our products. 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 license agreement expires in December 1999, subject to
automatic yearly renewal, unless otherwise terminated by either party. 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 be reduced 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
9
<PAGE>
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.
Any claims relating to our infringement of proprietary rights, even if not
meritorious, could result in costly litigation, divert 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.
Our upgraded products may contain defects or errors which would interfere with
our ability to sell our products and result in considerable expenses
We periodically upgrade our products to respond to customer needs and to
incorporate enhanced technology. We anticipate that in May 1999, we will
release version 4.0 of CoreDossier. This new version, as well as any future
versions or enhancements of our products, may contain defects or errors.
Discovery of errors could result in a loss of revenues or delay in or
prevention of market acceptance of our products or damage to our reputation. We
may need to divert development resources to correct any errors.
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.
10
<PAGE>
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. See
"Our Business--Competition."
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. Sales of our products and services depend upon the growth of the
electronic compliance management market. 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. We have spent, and will continue to spend,
considerable resources to educate potential customers about our products and
our software solutions in general. However, even with these educational
efforts, our products and services may not achieve market acceptance.
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.
11
<PAGE>
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 will be 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 may have interests that differ from yours
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately 66% of the
outstanding shares of our common stock, 62% 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, thereby, our management
and affairs. These stockholders may have interests that differ from yours.
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.
We will have broad discretion as to use of proceeds from this offering
Our primary purpose for this offering is to create a public market for our
common stock. We plan to use the proceeds from this offering for working
capital and general corporate purposes. We may use the proceeds for purposes
with which you do not agree or which are disadvantageous to our stockholders.
See "Use of Proceeds."
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
12
<PAGE>
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
11,229,475 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 $7.55 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."
Our charter documents and Delaware law may deter potential acquisition bids for
our business, including bids which may be beneficial to our stockholders
Provisions in our charter documents specify procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
Delaware law regulates take-over bids and prevents transactions between ESPS
and stockholders who own 15% or more of our voting stock. Our charter documents
authorize our board of directors to issue preferred stock. These provisions
could discourage potential acquisition proposals and could delay or prevent a
change in control transaction. They could also discourage others from making
tender offers for our shares. As a result, these provisions may prevent the
market price of our common stock from reflecting the effects of actual or
rumored takeover attempts. These provisions may also prevent changes in our
management. See "Description of Capital Stock."
13
<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.
14
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $30.9 million in net proceeds from the
sale of the 3,500,000 shares of common stock in this offering, assuming that
the initial public offering price is $10.00 per share, the underwriters'
discount is $2.5 million and our offering expenses are $1.6 million. We expect
to receive a total of approximately $33.8 million if the underwriters' over-
allotment option is exercised in full. We will not receive any proceeds from
the sale of common stock by the selling stockholders.
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.
15
<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 an assumed initial public offering price of $10.00 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 37,474
Retained earnings........................... 349 349 349
Deferred stock compensation................. (204) (204) (204)
------ ------ -------
Total stockholders' equity................ 6,724 6,724 37,634
------ ------ -------
Total capitalization...................... $6,724 $6,724 $37,634
====== ====== =======
</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.
16
<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 an assumed initial public
offering price of $10.00 per share and after deducting the underwriting
discounts and commissions and other estimated offering expenses, would have
been approximately $2.45 per share. This represents an immediate increase of
$1.88 per share to existing stockholders and an immediate dilution of $7.55 per
share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $10.00
Pro forma net tangible book value per share at March 31,
1999........................................................ $0.57
Pro forma increase per share attributable to new investors... 1.88
Pro forma net tangible book value per share after the
offering.................................................... 2.45
------
Dilution per share to new investors............................ $7.55
======
</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 an assumed
initial public offering price of $10.00 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 15% $ 0.52
New investors.................. 3,500,000 23 35,000,000 85 10.00
---------- --- ----------- ---
Total........................ 15,354,221 100% $41,189,000 100%
========== === =========== ===
</TABLE>
17
<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>
18
<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>
19
<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
for the foreseeable 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.
20
<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. However, we may not be able to successfully address such risks and
difficulties. 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.
21
<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 as our customer base continued to grow and, to a lesser
extent, increases in consulting and training services. 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.
We do not believe that we can sustain the historical percentage growth
rates of software licenses and services and maintenance revenues.
22
<PAGE>
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 professional services and customer support personnel to support our
increased customer base. 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
23
<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 primarily from the addition of
executive, finance and administrative personnel to support the growth of our
business and the amortization of deferred stock compensation expense as
described below. 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 maintenance revenues
from fiscal 1997 to fiscal 1998 resulted primarily from the increase in
consulting, customer support and training services associated with increased
sales of our software applications and overall growth of our installed base of
customers.
Revenues outside of the United States were insignificant for fiscal 1997.
Revenues outside of the United States were $1.2 million for fiscal 1998.
24
<PAGE>
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 from the hiring and training of professional services and customer
support personnel to support our growing customer base. 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 increase in general and
administrative expenses for fiscal 1997 to fiscal 1998 resulted primarily from
increased compensation and consulting expenses. General and administrative
costs represented 107% of our 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.
25
<PAGE>
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>
26
<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.
27
<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
28
<PAGE>
expenditures for at least the next twelve months. Thereafter, 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 such
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 in such proceedings, 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 of such disputes, 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.
29
<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 in the event our year 2000 compliance initiatives
fall behind schedule.
30
<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
31
<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. 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
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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 Electronic 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.
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. 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
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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.
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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 such 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.
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
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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
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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
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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.
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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:
Pharmaceutical and Biotechnology Industry
Abbott Laboratories
Alcon Laboratories, Inc. Ligand Pharmaceuticals Incorporated
Allergan, Inc. Molecular Biosystems, Inc.
Athena Neurosciences, Inc. NPS Pharmaceuticals, Inc.
Baxter Healthcare Corp. (a subsidiary of
Baxter International Inc.) Organon Laboratories, Ltd. (a
Biogen, Inc. subsidiary of Akzo Noble Pharma
N.V.)
Coulter Pharmaceutical, Inc. Otsuka America Pharmaceutical, Inc.
DuPont Pharmaceuticals Company Pfizer, Inc.
Dura Pharmaceuticals Inc. PharmaNet, Inc.
G.D. Searle & Co. Quintiles, Inc.
Glaxo-Wellcome Inc. (a subsidiary of Rhone-Poulenc Rorer Pharmaceuticals
Glaxo Wellcome PLC) Inc. (a subsidiary of Rhone-Poulenc
Health Decisions, Inc. Rorer Inc.)
Immunex Corp. Schering AG
Sequus Pharmaceuticals, Inc.
TAP Holdings, Inc.
Chemical Industry Warner Lambert Company
Utilities Industry
Bayer Corporation (Agriculture Division)
Baltimore Gas & Electric
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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 electronic 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 anticipate releasing 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
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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.
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.
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
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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 agreement, which is effective until December 31, 1999, will
automatically renew for additional one-year periods. Unless we negotiate
otherwise, at the end of the initial term, 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.
43
<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.
44
<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 and HAHT Software, Inc. Mr.
Hollenbeck holds a B.A. in American Studies from Stanford University.
45
<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 such matters.
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.
We granted Dr. Heller options to purchase shares of our common stock
pursuant to option grant agreements. 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 thereafter. 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 $100,000.
We did not pay any executive officer named in the summary compensation
table any fringe benefits, perquisites or other compensation in excess of 10%
of his salary and bonus during the fiscal year ended March 31, 1999.
46
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term Compensation
Compensation Awards
------------------ ----------------------
Securities
Name and Principal Position Year Salary($) 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
$140,000.
The following table contains information regarding options granted in the
fiscal year ended March 31, 1999 to the executive officers named in the summary
compensation table above. The potential realizable value over the terms of the
options is based on assumed rates of stock appreciation in compliance with the
rules of the SEC and do not represent our estimate of future stock price.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of ESPS common stock. For the fiscal year ended March 31, 1999, we
granted options to acquire up to an aggregate of 1,394,005 shares to employees
and directors, all under the 1995 stock incentive plan and all at an exercise
price equal to not less than the fair market value of our common stock on the
date of grant as determined in good faith by the board of directors. We also
granted options to acquire 426,300 shares to employees at a price that was
lower than the estimated fair value of the common stock. Optionees may pay the
exercise price by cash, check, promissory note, delivery of already-owned
shares of our common stock or by a cashless exercise procedure. Options under
the 1995 stock incentive plan generally vest over four years with 25% of the
shares vesting on the first anniversary of the grant date, and the remaining
option shares vesting 6.25% in every calendar quarter thereafter. We may modify
the standard vesting schedule.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realized
Individual Grants Value at Assumed
-------------------------------------- Annual Rates of
Number of % of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration -------------------
Name Granted(#) Fiscal Year ($/per share) 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 1,770,109 2,134,174
Jeffrey C. Sager........ 58,000 3.2 10.34 3/25/04 140,243 334,098
George B. Pearcy........ -- -- -- -- -- --
</TABLE>
47
<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 $10.00 per share, the assumed initial
public offering price, minus the per share exercise price, multiplied by the
number of shares underlying the option.
Aggregated Option Exercises in Fiscal Year Ended March 31, 1999
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at Fiscal Year End(#) at Fiscal Year End($)
On Exercise Realized -------------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Terrence P. Brennan..... 1,096,563 $83,188 99,688 398,750 $ 988,900 $3,955,600
Michael T. Hoey......... 203,145 14,010 193,793 255,563 1,924,360 2,537,736
Kevin Leininger......... 18,125 1,250 -- 126,875 -- 1,259,869
Jeffrey C. Sager........ 59,813 4,125 43,500 114,188 431,955 1,133,882
George B. Pearcy........ 58,000 4,000 151,797 123,703 1,507,343 1,228,372
</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 the
company 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 in the event of 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
48
<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 pursuant to the 1995 plan shall be in the form of
written award agreements approved by the plan administrator. The plan
administrator may impose restrictions and forfeiture conditions on stock
awards.
In the event that 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
49
<PAGE>
maximum extent 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.
50
<PAGE>
CERTAIN 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 shares convert into common stock.
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<PAGE>
PRINCIPAL AND SELLING 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;
. All directors and executive officers as a group; and
. All other selling stockholders.
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>
Prior To Offering Number of After Offering
----------------------------------- Shares -----------------------------------
Name Shares Options Total Percent Being Offered Shares Options Total Percent
---- ------ ------- ----- ------- ------------- --------- ------- --------- -------
<S> <C> <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>
52
<PAGE>
<TABLE>
<CAPTION>
Prior To Offering Number of After Offering
------------------------------------- Shares -------------------------------------
Name Shares Options Total Percent Being Offered Shares Options Total Percent
---- ------ ------- ----- ------- ------------- ---------- ------- ---------- -------
<S> <C> <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% 112,018 984,545 99,688 1,084,233 7.0%
Michael T. Hoey......... 203,145 193,793 396,938 3.3% 33,351 169,794 193,793 363,587 2.3%
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% 9,674 50,139 43,500 93,639 0.6%
George B. Pearcy........ 58,000 151,798 209,798 1.7% 19,647 38,353 151,798 190,151 1.2%
Michael J. Egan......... -- -- -- -- -- -- -- -- --
Charles O. Heller....... 147,719 13,594 161,313 1.4% 50,000 97,719 13,594 111,313 0.7%
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% 224,690 10,058,675 520,498 10,579,173 68.8%
Other Selling
Stockholders
Mark Gavin.............. 36,540 -- 36,540 0.3% 18,270 18,270 -- 18,270 0.1%
Ronald M. Swartz........ 328,860 -- 328,860 2.8% 128,860 200,000 -- 200,000 1.3%
Larry D. Tindell........ 164,430 -- 164,430 1.4% 128,180 36,250 -- 36,250 0.2%
</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
291,692 shares of common stock, then the following stockholders named in the
table above will sell up to the following number of additional shares: Terrence
P. Brennan, 187,044 shares, Michael T. Hoey, 55,688 shares, George B. Pearcy,
32,806 shares, and Jeffrey C. Sager, 16,154 shares.
53
<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:
54
<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 such 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 tender offers which may provide 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 prior to 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.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 15,362,182 shares to be outstanding after the offering assuming that
the underwriters do not exercise their over-allotment option, 4,000,000 shares
of common stock will be freely tradeable. After the offering, 10,058,675 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 an issuer is
a person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, the issuer. 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
certain holding periods under 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 such 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 prior 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,
11,229,475 additional shares will be available for sale in the public market,
subject to the limitations of Rule 144.
56
<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 and the selling stockholders:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................
BancBoston Robertson Stephens Inc. ..............................
U.S. Bancorp Piper Jaffray Inc...................................
Charles Schwab & Co., Inc........................................
---------
Total.......................................................... 4,000,000
=========
</TABLE>
The underwriters are obligated to purchase shares of common stock offered in
this prospectus if any of the shares are purchased. However, we and the selling
stockholders 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, the
selling stockholders, 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 $ per share. The underwriters may allow and the dealers may
reallow a maximum concession of $ 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....
Underwriting discounts and commissions paid by
selling stockholders................................
</TABLE>
We will pay the offering expenses, estimated to be $1.6 million.
We have granted the underwriters an option exercisable no later than 30 days
after the date of this prospectus to purchase up to 308,308 additional shares
of common stock, and several of the selling stockholders have granted the
underwriters an option to purchase up to 291,692 additional shares of common
stock at the initial 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 have a firm commitment to purchase a
number of shares that approximately reflects the same percentage of total
shares the underwriter purchased in the above table. We and the selling
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.
57
<PAGE>
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 11,229,475 shares of our
common stock after the offering, have agreed that they will not, without the
prior 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 prior 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 prior to
the date of this prospectus, and may grant additional options under our stock
option plans, provided that, without the prior 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,
in the over-the counter market, or otherwise. 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 will be determined by
negotiation among us, the selling stockholders and the representatives. Among
the factors to be considered in determining the initial public offering price
are 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 estimated initial public offering
price range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions.
We have applied for quotation of our common stock 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
as such this offering is being made under Rule 2720 (d)(2). Accordingly, the
public offering price can be no higher than 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,
58
<PAGE>
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 set forth 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.
ADDITIONAL ESPS 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 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.
Ernst & Young LLP
Philadelphia, Pennsylvania
April 28, 1999, except as to Note 13, as to which the date is June , 1999
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 13 to the financial statements.
/s/ Ernst & Young LLP
Philadelphia, Pennyslvania
May 18, 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. 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. 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
Common Stock
--------------
PROSPECTUS
--------------
Hambrecht & Quist
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
Charles Schwab & Co., Inc.
--------------
, 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 in any such jurisdiction. 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 , 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions and the
underwriters' non-accountable expense allowance) payable in connection with the
sale of the common stock offered in this Registration Statement are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................. $ 12,788
NASD filing fee...................................................... 5,100
Nasdaq filing fee.................................................... 95,000
Printing and engraving expenses...................................... 175,000
Directors' and officers' liability insurance......................... 450,000
Legal fees and expenses.............................................. 400,000
Accounting fees and expenses......................................... 450,000
Blue Sky fees and expenses (including legal fees).................... 10,000
Transfer agent and rights agent and registrar fees and expenses...... 10,000
Miscellaneous........................................................ 32,112
----------
Total............................................................ $1,640,000
==========
</TABLE>
All expenses are estimated except for the SEC fee and the NASD fee.
Item 14. Indemnification of Directors and Officers
ESPS's certificate of incorporation permits indemnification to the fullest
extent permitted by Delaware law. ESPS's bylaws require ESPS to indemnify any
person who was or is an authorized representative of ESPS, and who was or is a
party or is threatened to be made a party to any corporate proceeding, by
reason of the fact that such person was or is an authorized representative of
ESPS, against expenses, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such third party proceeding if such person acted in good faith and in a manner
such person reasonably believed to be in, or not opposed to, the best interests
of ESPS and, with respect to any criminal third party proceeding (including any
action or investigation which could or does lead to a criminal third party
proceedings had no reasonable cause to believe such conduct was unlawful. ESPS
shall also indemnify any person who was or is an authorized representative of
ESPS and who was or is a party or is threatened to be made a party to any
corporate proceeding by reason of the fact that such person was or is an
authorized representative of ESPS, against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of such
corporate action if such person acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interests of ESPS, except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to ESPS unless and only
to the extent that the Delaware Court of chancery or the court in which such
corporate proceeding was pending shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such authorized representative is fairly and reasonably entitled to indemnity
for such expenses which the Court of Chancery or such other court shall deem
proper. Such indemnification is mandatory under the ESPS's bylaws as to
expenses actually and reasonably incurred to the extent that an authorized
representative of ESPS had been successful on the merits or otherwise in
defense of any third party or corporate proceeding or in defense of any claim,
issue or matter therein. The determination of whether an individual is entitled
to indemnification may be made by a majority of disinterested directors,
independent legal counsel in a written legal opinion or the stockholders.
Delaware law also permits indemnification in connection with a proceeding
brought by or in the right of ESPS to procure a judgment in its favor. Insofar
as indemnification for liabilities
II-1
<PAGE>
arising under the Securities Act of 1933 may be permitted to directors,
officers or persons controlling ESPS pursuant to the foregoing provisions, ESPS
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is therefore unenforceable. ESPS expects to obtain a directors
and officers liability insurance policy prior to the effective date of this
Registration Statement.
The Underwriting Agreement provides that the underwriter is obligated, under
certain circumstances, to indemnify directors, officers, and controlling
persons of ESPS against certain liabilities, including liabilities under the
Securities Act of 1933. Reference is made to Section 7 of the form of
Underwriting Agreement which will be filed by amendment as Exhibit 1.1 to this
Registration Statement.
Item 15. Recent Sales of Unregistered Securities
In the preceding three years, ESPS has issued the following securities that
were not registered under the Securities Act of 1933:
In March 1997, ESPS sold 4,000,000 shares of series A preferred stock par
value $.001 per share at a purchase price of $1.00 per share. All of such sales
were made under the exemption from registration provided under Section 4(2) of
the Securities Act of 1933.
Since inception through April 30, 1999, ESPS has granted options to purchase
a total of 6,498,706 shares of common stock at a weighted average exercise
price of $1.34 per share under its 1995 stock incentive plan. In the past three
years ESPS issued an aggregate of 2,624,390 shares of common stock par value
$.001 per share upon the exercise of options granted under the 1995 stock
incentive plan as follows:
<TABLE>
<CAPTION>
Shares Exercise Price Per Share
------ ------------------------
<S> <C>
1,527,827 .07
1,096,563 .08
</TABLE>
For a more detailed description of this plan, see "Management--Employee
Benefit Plans" in this registration statement. In granting the options and
selling the underlying securities upon exercise of the options, ESPS is relying
upon exemptions from registration set forth in Rule 701 and Section 4(2) of the
Securities Act of 1933.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Second Amended and Restated Certificate of Incorporation of
the Company.
3.2* Form of Second Amended and Restated Bylaws of the Company.
5.1* Opinion of Morgan, Lewis & Bockius LLP.
10.1+ 1995 Stock Incentive Plan, as amended.
10.2+ Lease between Maplewood Center Limited Partnership and the Company
dated June 10, 1998.
10.3+ ESPS Rights Agreement dated July 5, 1994.
10.4+ License and Marketing Agreement between Adobe Systems Incorporated
and the Company dated November 6, 1997.
10.5# Value Added Reseller License Agreement between Versant Object
Technology and the Company dated December 31, 1996.
10.6+ Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated July 29, 1996.
10.7+ Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated September 18, 1996.
10.8+ Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated November 6, 1996.
10.9+ Series A Preferred Stock Purchase Agreement between Adobe Ventures
L.P., H&Q Investors L.P. and the Company.
10.10 ESPS, Inc. Employee Stock Purchase Plan.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit
5.1).
24.1+ Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------------------
+ Previously filed.
* To be filed by amendment.
# We intend to request confidential treatment of certain portions of this
exhibit pursuant to Rule 406 of the Securities Act of 1933. The entire
agreement will be filed separately with the Securities and Exchange
Commission.
(b) Financial Statement Schedules
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriter at the closing specified in the standby underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of
the subscription offer, the transactions by the underwriters during the
subscription period, the amount of unsubscribed securities to be purchased by
the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Fort Washington, Pennsylvania, on
May 18, 1999.
ESPS, Inc.
/s/ Terrence P. Brennan
By: _________________________________
Terrence P. Brennan
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terrence P. Brennan President, Chief Executive May 18, 1999
______________________________________ Officer and Director
Terrence P. Brennan (Principal Executive
Officer)
/s/ Leonard W. von Vital Chief Financial Officer May 18, 1999
______________________________________ (Principal Financial and
Leonard W. von Vital Accounting Officer)
* Director May 18, 1999
______________________________________
Charles O. Heller
* Director May 18, 1999
______________________________________
Christopher B. Hollenbeck
+ /s/ Michael J. Egan Director May 18, 1999
______________________________________
Michael J. Egan
* /s/ Leonard W. von Vital May 18, 1999
______________________________________
Leonard W. von Vital
As Attorney-in-Fact
</TABLE>
+Know All Men By These Presents, that Michael J. Egan constitutes and appoints
Terrence P. Brennan and Leonard W. von Vital or either of them acting alone,
his true and lawful attorney-in-fact and agent, with full power of substitution
and revocation, for him and in his name, place and stead, in any and all
capacities, to sign (i) any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith and (ii) any
registration statements and any and all amendments thereto, relating to the
offer covered hereby filed pursuant to Rule 462(b) sunder the Securities Act of
1933, with the Securities and Exchange Commission, granting unto said attorney-
in-fact and agents, full power and authority to do and perform each and every
act and thing requisite and necessary to be done as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Second Amended and Restated Certificate of Incorporation of
the Company.
3.2* Form of Second Amended and Restated Bylaws of the Company.
5.1* Opinion of Morgan, Lewis & Bockius LLP.
10.1+ 1995 Stock Incentive Plan, as amended.
10.2+ Lease between Maplewood Center Limited Partnership and the Company
dated June 10, 1998.
10.3+ ESPS Rights Agreement dated July 5, 1994.
10.4+ License and Marketing Agreement between Adobe Systems Incorporated
and the Company dated November 6, 1997.
10.5# Value Added Reseller License Agreement between Versant Object
Technology and the Company dated December 31, 1996.
10.6+ Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated July 29, 1996.
10.7+ Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated September 18, 1996.
10.8+ Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated November 6, 1996.
10.9+ Series A Preferred Stock Purchase Agreement between Adobe Ventures
L.P., H&Q Investors L.P. and the Company.
10.10 ESPS, Inc. Employee Stock Purchase Plan.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).
24.1+ Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Previously filed.
* To be filed by amendment.
# We intend to request confidential treatment of certain portions of this
exhibit pursuant to Rule 406 of the Securities Act of 1933. The entire
agreement will be filed separately with the Securities and Exchange
Commission.
II-6
<PAGE>
VERSANT OBJECT TECHNOLOGY
VALUE ADDED RESELLER LICENSE AGREEMENT
This Value Added Reseller License Agreement (the "AGREEMENT") is entered into in
Menlo Park, California on 12/31/96 (the "EFFECTIVE DATE") between
---------------------
Versant Object Technology Corporation, a California corporation with principal
offices at 1380 Willow Road, Menlo Park, California 94025 ("VERSANT") and
Electronic Submission Publishing Systems, Inc. with offices at 1300 Virginia
Drive, Suite 215, Fort Washington PA 19034 ("VAR").
1. DEFINITIONS
1. "APPLICATION" shall mean software programs which are developed by VAR, and
which are identified in Exhibit A of this Agreement, and which contain Embedded
Run Time Software. The definition of Application does not include any software
developed or marketed by any third party.
2. "CLIENT" shall mean a specific computer that is periodically connected to
one or more Servers.
3. "DEVELOPMENT SOFTWARE" shall mean the software licensed by Versant which is
used for developing the Application and which can create or modify arbitrary
data base schema.
4. "DOCUMENTATION" shall mean any manual(s) shipped by Versant with the
Software.
5. "EMBEDDED" shall mean completely contained within the Application in such a
manner as to limit access to the Run-Time Software except through the
Application.
6. "VAR" shall mean the party accepting the Software according to the terms and
conditions set out in this Agreement.
7. "LIMITED DEVELOPMENT SOFTWARE" shall mean the software licensed by Versant
which is used for developing the Application but which does not use language
interfaces developed by Versant, but rather uses interfaces developed by VAR
using the Development Software.
8. "MAINTENANCE" shall mean telephone consultation during Versant's normal
business hours, bug fixes, error corrections and work-arounds, as well as
updates and new releases, if any, and which are not separately priced.
9. "MAINTENANCE FEES" shall mean the maintenance fees set out in Exhibit B.
10. "NET SELLING PRICE" shall mean the price for the Application recognized as
revenue on VAR's income statement in accordance with Generally Accepted
Accounting Principles, which price shall in no event include: (a) actual cash
and trade discounts given to customers; (b) shipping charges actually billed to
customers; or (c) sales, use and excise taxes (to the extent included in gross
revenue).
11. "ROYALTY PERCENTAGE" shall mean the percentage of Net Selling Price that
VAR agrees to pay Versant each time the Application is distributed, as set forth
in Exhibit D hereto.
12. "ROYALTY AMOUNT" shall mean the absolute dollar amount that VAR agrees to
pay Versant each time the Application is distributed and recognized as revenue
on
1
<PAGE>
VAR's income statement in accordance with Generally Accepted Accounting
Principles, as set forth in Exhibit D hereto.
13. "RUN TIME SOFTWARE" shall mean software that is Embedded in the Application
and deployed as part of the Application and which is a limited version of the
Development Software and Limited Development Software and which does not allow
the Application or a user of the Application direct access to the general
purpose capabilities of the Development Software or the Limited Development
Software for creating or modifying arbitrary database schema and which does not
allow substantive modification of the Application built with the Development
Software and Limited Development Software. The Application may, subject to the
forgoing, create or modify database schema.
14. "SEATS" shall mean a keyboard and a terminal which is connected to a
computer.
15. "SERVER" is a computer which has one or more Users periodically connected
to it.
16. "SOFTWARE" shall mean the Development Software, Limited Development Software
and Run Time Software.
17. "SUBSTANTIAL VALUE" shall mean that an Application has an overall functional
purpose that is not the same overall functional purpose as any Software
licensed.
18. "USER" shall mean a person using a keyboard and a terminal which is
connected to a computer.
2. GRANT OF LICENSE FOR SOFTWARE
Provided that VAR pays all fees required to be paid under this Agreement:
1. Versant hereby grants VAR a non-exclusive, nontransferable, non-assignable
license to use and copy the Development Software and Limited Development
Software as follows:
a. to use the Development Software and Limited Development Software solely for
VAR's own data processing operations on the number of Seats VAR has paid for,
and only on the specific computer serial number(s) which VAR agrees to supply to
Versant within thirty (30) days of putting the Development Software and Limited
Development Software into use. VAR may also use the Development Software and
Limited Development Software temporarily on a back-up computer if the designated
computer is inoperative provided that Versant is informed in writing.
b. To combine the Development Software and Limited Development Software with
VAR's Software products to create the Application, provided that the Software
remains subject to the provisions of this Agreement.
2. Provided that the Application has Substantial Value, Versant hereby grants
VAR a non-exclusive, nontransferable, non-assignable, royalty bearing, license
to use and to copy Run Time Software as follows:
a. VAR may use Run Time Software on the number of Servers, with up to the
authorized number of Users, per Server, and total number of Clients authorized
by Versant, as is set forth on Exhibit A. VAR may distribute Run Time Software
solely for use with the Application to end users or to subdistributors;
b. Provided that VAR or VAR's subdistributor receives no compensation from its
customer for the license of the
2
<PAGE>
Application, VAR, with no payment due to Versant, may provide directly to end
users, or indirectly through subdistributors, a reasonable number of copies of
Run-Time Software solely for use with the Application for evaluation or beta
test purposes for a period not to exceed one hundred eighty (180) days, provide
that any such period shall not be extended or renewed without written permission
from Versant.
c. Any distribution shall be pursuant to a license agreement which shall
provide no more rights concerning the Software than are provided under this
Agreement and which shall limit the use of the Run-Time Software to End User
Software.
d. Any Software distribution rights granted under this Agreement shall remain
in force for three (3) years from the date of the Purchase Order and shall be
automatically renewed for additional one year periods unless notice is provided
in accordance with this Agreement 90 days prior to the date of termination. In
no event will any termination of this Agreement terminate the right of any of
VAR's customers (for which Versant has been paid the applicable Software license
fees) that have been granted a license to use the Run Time Software hereunder,
which right shall be perpetual and paid in full, subject to the terms of any
Agreement that such customer may enter into with VAR.
3. LICENSE GRANT: DOCUMENTATION
Versant hereby grants VAR a non-exclusive, nontransferable, non-assignable
license to use the Documentation. VAR is expressly not given a right to copy
Documentation.
4. PROHIBITIONS ON USE OF THE SOFTWARE
4.1 VAR agrees not to cause or permit the reverse engineering, disassembly, or
decompilation of the Software and not to use the Software for commercial time-
sharing, rental or service bureau use.
4.2 Results of any benchmark tests run by VAR on the Software (standing alone)
may not be disclosed outside of VAR's organization without prior written
permission from Versant.
5. TITLE
All right, title and interest in the Software and Documentation remains with
Versant or Versant's licensor. VAR acquires no rights of ownership. Versant
reserves all rights to the Software not expressly granted herein.
6. PAYMENT & SHIPPING
6.1 Shipment of Software and Documentation is FOB Menlo Park, CA.
6.2 All payments shall be due and payable within thirty (30) days of the date
of invoice.
6.3 Any amounts payable under this Agreement and the Purchase Order are net
amounts and are payable in full to Versant. VAR is responsible for all taxes,
duties and levies (except for taxes on Versant's income) related to the Software
and Documentation.
7. WARRANTY
7.1 Provided that VAR has paid for Maintenance, Versant warrants to VAR for a
period of one year from the date of shipment that the Software will
substantially perform the functions described in the Documentation when operated
on the
3
<PAGE>
designated computer. If Versant finds a deviation in the Software's performance
during this period, Versant will, as VAR's sole remedy, replace or modify the
Software so that it performs substantially in accordance with the Documentation.
If VAR does not pay for Maintenance or is in default of any maintenance
obligations, the Software is licensed "AS IS".
OTHER THAN AS STATED IN THIS SECTION, THERE IS NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION,
THE CONDITION OF SOFTWARE, ITS MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
7.2 From time to time Versant may desire to provide and VAR may wish to test
certain experimental releases of Software labeled "Beta" ("Beta Software").
Beta Software is not suitable for production use. Versant makes no warranty on
Beta Software and such software is distributed "AS IS". At Versant's request,
VAR will promptly return all copies of the Beta Software to Versant or certify
in writing to Versant that VAR has destroyed the Beta Software and all copies.
7.3 Versant further represents to VAR that: (a) Versant has the right to enter
into this Agreement and grant the rights granted thereunder; (b) to the best of
Versant's knowledge, the Software does not and will not contain any "software
locks" which, upon occurrence of a certain event, the passage of a certain
amount of time, or the taking of any action (or the failure to take action) by
or on behalf of Versant, will cause VAR's or any of VAR's subdistributor's or
customer's computer systems, or any component parts thereof, to be destroyed,
erased, damaged or otherwise made inoperable; (c) the Software will be capable
of correctly performing all functions, calculations, comparisons, sequencing
displays and other processing of calendar dates, and date related data before,
during and after the year 2000 without error or degradation of performance; (d)
there are no pending or threatened suits, legal proceedings, claims or
governmental investigations against or with respect to Versant relating to the
Software or any component part thereof; and (e) Versant has not received any
notice of any claim of infringement or violation of any third party's
copyrights, patents, trade secrets, trademarks or other proprietary rights.
8. INDEMNIFICATION
8.1 Versant will defend at its expense, and hold harmless in, any action
brought against VAR to the extent it is based on a claim that the Software and
Documentation or any part thereof, when used within the scope of this Agreement,
infringes a patent, copyright or other proprietary right in the United States
and Versant will pay any settlements, expenses, costs, damages and attorney's
fees finally awarded against VAR in such action and which are attributable to
such claim, provided that VAR notifies Versant promptly in writing of any claim
or confidential claim, gives Versant the exclusive control in the defense and
settlement thereof, and provides all reasonable assistance in connection
therewith.
Versant shall have no liability for any claim of infringement based on: (i) use
of a superseded or altered release of the Software or portion thereof if such
infringement
4
<PAGE>
would have been avoided by the use of a current, unaltered release of the
Software or (ii) the combination, operation or use of the Software furnished
under this Amendment with products or data not furnished by Versant if such
infringement would have been avoided by the use of the Software without such
products or data.
In the event use of the Software becomes, or in Versant's reasonable opinion is
likely to become, the subject of a claim of infringement of a patent, copyright
or other proprietary right in the United States, it is Versant's option to
remedy the situation by: a) procuring the continuing right to use the Software
or b) replacing or modifying the Software so that it no longer infringes or c)
terminating the license and refunding the license fees paid for the Infringing
Software.
THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATION OF VERSANT WITH
RESPECT TO INFRINGEMENT OR CLAIMS OF INFRINGEMENT OF ANY PATENT, COPYRIGHT,
TRADE SECRET, OR ANY OTHER PROPRIETARY RIGHT.
8.2 VAR will defend at its expense any action brought against Versant to the
extent it is based on a claim that the Application or any part thereof (with the
exception of the Software), infringes a patent or copyright in the United
States, and VAR will pay any settlements and any costs, damages and reasonable
attorney's fees finally awarded against Versant in such action which are
attributable to such claim; provided that the foregoing obligation will be
subject to Versant notifying VAR promptly in writing of any claim or potential
claim, giving VAR the exclusive control of the defense and settlement thereof,
and providing all reasonable assistance in connection therewith.
9. MAINTENANCE
9.1 After payment of the Maintenance Fees, VAR shall be provided Maintenance
for the applicable term. Versant shall inform VAR thirty (30) days prior to the
expiry of any maintenance terms of any additional fees to be paid to Versant for
a one year renewal of Maintenance.
9.2 Maintenance is available only for the most recent version of the Software
and the preceding version for no longer than 12 months after the current version
becomes generally available, provided that all maintained Software must be in an
environment supported by Versant.
9.3 VAR shall appoint one person as the principal Maintenance Contact for the
communication of bugs and errors to Versant and for the receipt of bug and error
fixes, work-arounds and updates, if any. Additionally, VAR shall appoint
another person as a back-up to the principal Maintenance Contact.
9.4 VAR shall be solely responsible for the maintenance of its Application.
10. CONSULTATION AND TRAINING
Versant will provide VAR with Consulting and Training as set out in Exhibit C.
11. ROYALTIES
VAR will pay Versant Royalties as set out in Exhibit D hereto.
5
<PAGE>
12. TERMINATION
If either party defaults in the material performance of any provision of this
Agreement, then the non-defaulting party may give written notice to the
defaulting party that if the default is not cured within thirty (30) days of
receipt of such notice this Agreement will be terminated. If the non-defaulting
party gives such notice and the default is not cured in the thirty (30) day
period, this Agreement will terminate immediately at the end of such period.
Except as expressly provided herein, if this Agreement is terminated, VAR shall
(a) cease all use of the Software and Documentation and (b) certify to Versant
in writing within thirty (30) days after termination that VAR has destroyed or
has returned the Software and Documentation and all copies in any form at VAR's
expense. Articles 4, 5, 7, 8, 14 and 16 as well as VAR's obligation to pay all
fees survives termination.
Notwithstanding the foregoing and provided that VAR pays Versant all fees
required to be paid hereunder, in the event of any termination of this
Agreement, VAR shall have the right to complete any and all obligations under
any agreement that has been entered into as of the date of termination.
13. GENERAL
13.1 In all cases, this Agreement shall be governed by and construed in
accordance with the laws of the state of California, without reference to
conflicts of laws principles.
13.2 VAR agrees to comply fully with all relevant United States export
controls.
13.3 This Agreement sets forth the entire agreement and understanding of the
parties relating to the subject matter herein and merge all prior agreements,
discussions, and understandings. This Agreement shall supercede the terms and
conditions of VAR's Purchase Order. This Agreement may not be changed, modified
or amended except by a written document signed by both of the parties hereto.
13.4 Any notice required or permitted by this Agreement shall be in writing and
shall be sent by prepaid or certified mail, return receipt requested, addressed
to Versant's and VAR's addresses shown on the Purchase Order.
REGARDLESS OF WHETHER ANY REMEDY FAILS OF ITS ESSENTIAL PURPOSE, IN NO EVENT
WILL VERSANT BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL,
DAMAGES, NOTWITHSTANDING BEING AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
VERSANT'S LIABILITY FOR ANY DAMAGES OR CLAIMS SHALL NOT EXCEED THE LICENSE
FEES PAID.
14. RESTRICTION
If VAR is any unit or agency of the United States Government, or this license is
pursuant to a contract with any such unit or agency, VAR agrees that the
Software and Documentation is "Commercial Computer Software" as defined under
DFARS and that the Government will receive only "restricted rights" to the
Software and Documentation. All such Software shall contain the
6
<PAGE>
following legend: RESTRICTED RIGHTS LEGEND: Use, duplication, or disclosure by
the Government is subject to restrictions as set forth in subparagraph (c) (1)
(ii) of the Rights in Technical Data and Computer Software clause at DFARS
52.227-7013. Versant Object Technology Corporation 1380 Willow Road, Menlo Park,
CA 94025 Unpublished - rights reserved under the copyright laws of the United
States.
15. REPORTING TO VERSANT
15.1 At Versant's request and not more frequently than twice a year, VAR will
submit to Versant a signed statement containing the number of Run-Time copies in
use. VAR agrees to provide the information within thirty (30) days of such
request.
15.2 Subsequent to the initial purchase of Software and forty-five (45) days
after the end of each calendar quarter, VAR will pay any royalties due less any
prepaid amounts, whether a Royalty Percentage or Royalty Amount and submit to
Versant a statement which includes at a minimum:
a. a list of all shipments of the Application; and
b. Application product code & the number of copies of each; and
c. Run-Time Software installed and the number of copies of each.
d. VAR will make best efforts to obtain the above information and to provide
it to VERSANT on a timely basis.
e. Any other information reasonably required by Versant and so requested in
writing from time to time.
15.3 VAR agrees to allow an independent accountant to review VAR's books and
records to determine the accuracy of the reports. The independent accountant
will be chosen by Versant and approved by VAR, whose approval shall not be
unreasonably withheld. The cost of the independent accountant's review will be
at Versant's cost unless an error of more than 5% is found, in which case it
shall be at VAR's cost. The reviews will occur at mutually agreeable times
during normal business hours and will not occur more frequently than one time
per year. The independent accountant will be instructed to keep all information
learned strictly confidential.
16. CONFIDENTIAL INFORMATION
16.1 The term "Confidential Information" shall include, but not be limited to,
any and all information, data know-how and documentation which is related to
Versant's object-oriented database system, language interfaces, database
utilities, development tools, system internals, program strategies, and business
plans, as well as any information clearly marked as confidential or proprietary.
16.2 A party's Confidential Information shall not include information which (a)
is or becomes a part of the public domain through no act or omission of the
other party; or (b) was in the other party's lawful possession prior to the
disclosure and had not been obtained by the other party either directly or
indirectly from the disclosing party; or (c) is lawfully disclosed to the other
party by a third party without restriction on disclosure; or (d) is
independently developed by the other party.
16.3 The parties agree, both during the term of this Agreement and for a period
of two years after termination of the Agreement and
7
<PAGE>
of all licenses granted hereunder, to hold each other's Confidential Information
in confidence. The parties agree not to make each other's Confidential
Information available in any form to any third party or to use each other's
Confidential Information for any other purpose than the implementation of this
Agreement. Each party agrees to take all reasonable steps to ensure that
Confidential Information is not disclosed or distributed by its employees or
agents in violation of the provisions of this Agreement.
17. PUBLICITY
VAR and Versant agree that they will cooperate to publicize the existence of
this Agreement as appropriate, and specifically, VAR consents to Versant's
identification of VAR as a customer of Versant.
18. ESCROW
18.1 VAR may, at its option, enter into a Software source code escrow agreement
with Versant using National Safe Depository, located at 2109 Bering Drive, San
Jose, CA 95131-2014, as Software escrow agent. VAR agrees to pay all costs of
entering into the Software Escrow Agreement and all annual renewal costs.
Such Source Code escrow agreement will, at a minimum provide VAR with the right
to access such Source Code upon the occurrence of a Triggering Event (as
hereinafter defined).
18.2 Versant further agrees that, if there should occur a Triggering Event, VAR
may request in writing that Versant deliver a copy of the Source Code (as
defined below) to VAR, and Versant shall comply with such request as promptly
and as reasonably possible after its receipt thereof. As used herein, the term
"Source Code" shall mean a full source language statement of the most recent
version of the Software licensed under this Agreement, stored on a master
diskette or tape, as applicable, together with related documentation.
18.3 As used herein, the term "Triggering Event" means each of the following:
(a) Versant's material failure to perform maintenance services as set out in
this Agreement, and (b) the filing of a voluntary or involuntary petition by or
against Versant under the federal Bankruptcy Act or any other applicable federal
or state law, or any chapter of part thereof, or the commencement of any other
voluntary or involuntary proceeding against Versant under any state or general
insolvency or similar law, rule or regulation, which petition or proceeding is
not removed or dismissed within sixty days of the date on which it is filed.
19. CUMULATIVE RIGHTS/REMEDIES
All rights and remedies conferred upon or reserved to the parties in this
Agreement shall be cumulative and concurrent and shall be in addition to all
other rights and remedies available to such parties at law or in equity or
otherwise. Such rights and remedies are not intended to be exclusive of any
other rights or remedies and the exercise by any party of any right or remedy
herein provided shall be without prejudice to the exercise of any other right or
remedy by such party provided herein or available at law or in equity.
8
<PAGE>
SO AGREED BETWEEN THE PARTIES:
"Versant"
VERSANT OBJECT TECHNOLOGY
/s/ Laura Cahan
By:______________________________
Laura Cahan
Name:____________________________
Controller
Title:___________________________
12/31/97
Date:____________________________
"VAR"
ELECTRONIC SUBMISSION PUBLISHING SYSTEMS, INC.
/s/ Terrence Brennan
By:______________________________
AUTHORIZED REPRESENTATIVE
Terrence Brennan
Name:____________________________
CEO
Title:___________________________
12/31/97
Date:____________________________
9
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SOFTWARE PART NUMBER PRICE QTY # OF USERS, EXTENTION COMPUTER SERIAL COMPUTER
IF SERVER, IF SERVER MFG/MODEL OR
OR NUMBER OF TERMINAL MFG
CLIENTS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
#1. VERSANT 120-1004 $[ * ] [ * ] [ * ] $[ * ] WIN NT
ODBMS/NT
Server
Versant Client 120-0153 $[ * ] [ * ] [ * ] $[ * ] WIN NT
License NT
#2. VERSANT 120-1008 $[ * ] [ * ] [ * ] $[ * ] WIN NT
ODBMS/NT
Server
Versant Client 120-0153 $[ * ] [ * ] [ * ] $[ * ] WIN NT
License NT
#3. VERSANT 120-1012 $[ * ] [ * ] [ * ] $[ * ] WIN NT
ODBMS/NT
Versant Client 120-0153 $[ * ] [ * ] [ * ] $[ * ] WIN NT
License NT
- -----------------------------------------------------------------------------------------------------------------------------
*VERSANT 120-1004 $[ * ] [ * ] $[ * ] WIN NT
ODBMS/NT 4
Server
*VERSANT 120-0153 $[ * ] [ * ] $[ * ] WIN NT
Client
License NT
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Applications Shall Mean: ESPS CoreDossierTM and Publishing Software
Total License Fees: $[ * ]
#1, #2, #3 = Three current customer deployments
* = Trial Licenses which may be provided to VAR's end users pursuant to the
terms of Article 2.2(b) hereof
This Agreement shall not apply to the Development Software or the Limited
Development Software, which VAR has already acquired from Versant.
10
The terms of this Agreement are confidential
[ * ] WE ARE SEEKING CONFIDENTIAL TREATMENT OF THESE TERMS, WHICH HAVE BEEN
OMITTED. THE CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE>
EXHIBIT B
MAINTENANCE FEES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SOFTWARE PART NUMBER PRICE QTY EXTENSION TERM COMPUTER MFG/MODEL OR
TERMINAL MFG
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
#1. Versant M120-1004 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
OBDMS/NT Server 12/31/97
Versant Client M120-0153 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
License NT 12/31/97
#2. VERSANT M120-1008 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
ODBMS/NT Server 12/31/97
Versant Client M120-0153 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
License NT 12/31/97
#3. VERSANT M120-1012 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
ODBMS/NT Server 12/31/97
Versant Client M120-0153 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
LICENSE NT 12/31/97
- --------------------------------------------------------------------------------------
*VERSANT ODBMS/NT M120-1004 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
4 Server 12/31/97
*Versant Client M120-0153 $[ * ] [ * ] $[ * ] 1/1/97 - WIN NT
License NT 12/31/97
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total Maintenance Fees: $ [ * ]
VAR Principal Maintenance Contract:_________________________________
VAR Back-up Maintenance Contract:_________________________________
#1, #2, #3 = Three current customer deployments
* = Trial Licenses which shall be provided to VAR's end users pursuant to the
terms of Article 2.2(b) hereof
No customer shall be obligated to purchase maintenance. The Maintenance Fee
applicable to copies of Run Time Software in addition to those listed above will
be equal to [ * ] percent ([ * ]) of the Royalty Amount payable to Versant under
this Agreement. Notwithstanding Article 9.1, the Maintenance Fee will not be
increased during the term of this Agreement.
11
The terms of this Agreement are confidential
[ * ] WE ARE SEEKING CONFIDENTIAL TREATMENT OF THESE TERMS, WHICH HAVE BEEN
OMITTED. THE CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE>
EXHIBIT C
CONSULTING & TRAINING
DESCRIPTION OF SERVICES AMOUNT
None at time of Execution of Agreement.
Total Consulting Fees__________________________________
- --------------------------------------------------------------------------------
NOTE:
TRAINING AND CONSULTING FEES DO NOT INLCUDE TRAVEL AND RELATED EXPENSES FOR
VERSANT CONSULTANTS. VAR SHALL BE RESPONSIBLE FOR THESE EXPENSES AND SHALL
BE INVOICED BY VERSANT.
- --------------------------------------------------------------------------------
12
The terms of this Agreement are confidential
<PAGE>
EXHIBIT D
ROYALTIES
PRICING IS VERSANT CONFIDENTIAL INFORMATION AND PROTECTED BY THE TERMS OF THIS
AGREEMENT
DEPLOYMENT LICENSE FEES FOR THE APPLICATION:
VAR will pay a Royalty Amount to Versant calculated as a Royalty Percentage of
the Net Selling Price of VAR Applications.
All prices quoted in this Agreement are stated in US dollars.
Run Time license fees quoted are valid for a [ * ] term. Unless the parties
otherwise agree in writing, at the end of the [ * ] term set out in this Exhibit
D, the Royalty Percentage for deployed Run Time Software Shall be [ * ] % of
VAR's Net Selling Price.
CUMULATIVE DEPLOYMENT ROYALTIES:
TABLE A:
Royalties: $[ * ] $[ * ] $[ * ]
================================================================================
ESPS ROYALTY PERCENTAGE [ * ]% [ * ]% [ * ]%
IF VAR LICENSES THE APPLICATION AS A COMPONENT PART OF A LARGER TRANSACTION VAR
SHALL NOT DISCOUNT THE APPLICATION TO A GREATER EXTENT THAN THE OTHER PARTS OF
THE TRANSACTION.
13
The terms of this Agreement are confidential
[ * ] WE ARE SEEKING CONFIDENTIAL TREATMENT OF THESE TERMS, WHICH HAVE BEEN
OMITTED. THE CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE>
AMENDMENT #1 TO
VALUE ADDED RESELLER LICENSE AGREEMENT CLIENT/SERVER
This Amendment #1 to the Value Added Retailer :License Agreement is entered into
in Fremont, California on March 31, 1998, between Versant Object Technology
Corporation, with offices at 6539 Dumbarion Circle, Fremont, California 94555
("Versant"), and Electronic Submission Publishing Systems, Inc. ("VAR"), with
offices at 1300 Virginia Drive, Suite 215 Fort Washington, PA 19034, and amends
Value Added Reseller License Agreement dated December 31, 1996 (the
"Agreement").
For valuable consideration, set out herein, the parties hereby agree to amend
this Agreement as follows:
1. Exhibit D of the Agreement is hereby cancelled and replaced with Exhibit D1
which is attached and incorporated hereto.
2. All references in the Agreement to "Exhibit D" shall be deleted and
replaced with references to "Exhibit D1".
3. This Amendment shall be effective if executed by the parties on or before
March 31, 1998.
4. All other terms and conditions of the Agreement shall remain unchanged.
So Agreed by the Parties:
"Versant"
VERSANT OBJECT TECHNOLOGY CORPORATION
/s/ Gary Rhea
By:___________________________
Gary Rhea
Name:_________________________
C.F.O.
Title:________________________
3/31/98
Date:_________________________
"VAR"
ELECTRONIC SUBMISSION PUBLISHING SYSTEMS, INC.
/s/ George B. Pearcy
By:___________________________
George B. Pearcy
Name:_________________________
CFO
Title:________________________
3/31/98
Date:_________________________
14
The terms of this Agreement are confidential
<PAGE>
EXHIBIT D1
ROYALTIES
PRICING IS VERSANT CONFIDENTIAL AND PROTECTED BY THE TERMS OF THE AGREEMENT
RUN TIME LICENSE FEES FOR THE APPLICATION:
VAR will pay a Royalty Account to Versant calculated as a Royalty Percentage of
the Net Selling Price of the VAR Application.
IF VAR LICENSES THE APPLICATION AS A COMPONENT PART OF A LARGER TRANSACTION VAR
SHALL NOT DISCOUNT THE APPLICATION OF A GREATER EXTENT THAT THE OTHER COMPONENTS
OF THE TRANSACTION.
All prices quoted to this Agreement are in US Dollars.
This pricing expires on [ * ].
CALCULATION OF ROYALTY AMOUNTS
VAR shall pay to Versant Royalty Accounts calculated as follows:
Royalty Amount = VAR's Royalty Percentage of [ * ]% (?) Applied on Net Selling
Price
FEE PAYMENT OF ROYALTY AMOUNTS
In consideration of VAR's agreement to have a $[ * ] Royalty Amount prepayment
the "Pre-Payment") paid to Versant on or before March 31, 1998, Versant will
extend the following discounts on Run Time Software to VAR:
1. Versant will credit VAR's Prepaid Run Time Software balance with a credit
of $[ * ] which ___be used for Run Time Software.
2. Versant will use the Royalty Reports submitted by VAR pursuant to Article
15 of the Agreement to credit Royalty Amounts against the Pre-Payment.
3. All Run Time Software will be displayed on _______________ where VAR has
licensed Development Software.
If prior to VAR's evaluation of the Pre Payment, Versant _______________the
agreement for any reason except for VAR's material breach of VAR's Intellectual
property obligation to Versant, Versant agrees that VAR will retain the right to
distribute Run Time License as if the Agreement had not _______________________.
15
The terms of this Agreement are confidential
[ * ] WE ARE SEEKING CONFIDENTIAL TREATMENT OF THESE TERMS, WHICH HAVE BEEN
OMITTED. THE CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE>
MAINTENANCE FOR RUN TIME SOFTWARE
Maintenance fees for the Run Time Software will be calculated at the rate set
out in the Agreement. VAR agrees to pay Maintenance fees for each Run Time
Software as levied by Versant based on the Royalty papers submitted by VAR.
16
The terms of this Agreement are confidential
<PAGE>
ESPS, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
ARTICLE I
Introduction
Sec. 1.01 Statement of Purpose. The purpose of the ESPS, Inc. Employee
Stock Purchase Plan is to provide eligible employees of the Company and its
subsidiaries an opportunity to purchase common stock of the Company. The Board
of Directors of the Company believes that employee participation in stock
ownership will be to the mutual benefit of the employees and the Company. The
Plan will be implemented if and when the Company has a public offering of its
stock. The Plan must be approved by the shareholders of the Company within 12
months after the date on which the Plan is adopted.
Sec. 1.02 Internal Revenue Code Considerations. The Plan is intended to
constitute an "employee stock purchase plan" within the meaning of section 423
of the Internal Revenue Code of 1986, as amended.
Sec. 1.03 ERISA Considerations. The Plan is not intended and shall not
be construed as constituting an "employee benefit plan," within the meaning of
section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.
ARTICLE II
Definitions
Sec. 2.01 "Board of Directors" means the Board of Directors of the
Company.
Sec. 2.02 "Code" means the Internal Revenue Code of 1986, as amended.
References to specific sections of the Code shall be taken to be references to
corresponding sections of any successor statute.
Sec. 2.03 "Committee" means the committee appointed by the Board of
Directors to administer the Plan, as provided in Section 6.03.
Sec. 2.04 "Company" means ESPS, Inc.
Sec. 2.05 "Effective Date" shall mean the date on which the
underwriting agreement between the Company and the principal underwriters for
the Company's Public Offering is executed.
Sec. 2.06 "Election Date" means the Effective Date and each January 1
and July 1 thereafter, or such other dates as the Committee shall specify.
<PAGE>
Sec. 2.07 "Eligible Employee" means each employee of the Employer (i)
who is classified by the Employer as a full or part-time employee (and not as an
independent contractor), (ii) whose customary employment is for more than 20
hours per week and for more than five months per year, and (iii) who is not
deemed for purposes of section 423(b)(3) of the Code to own stock possessing
five percent or more of the total combined voting power or value of all classes
of stock of the Company or any subsidiary.
Sec. 2.08 "Employer" means the Company and each Subsidiary.
Sec. 2.09 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and as the same may hereafter be amended.
Sec. 2.10 "Market Value" means the last price for the Stock as reported
on the principal market on which the Stock is traded for the date of reference.
If there was no such price reported for the date of reference, "Market Value"
means the last reported price for the Stock on the day next preceding the date
of reference for which such price was reported, or, if there was no such
reported price, the fair market value of the Stock as determined by the
Committee.
Sec. 2.11 "Participant" means each Eligible Employee who elects to
participate in the Plan.
Sec. 2.12 "Plan" means the ESPS, Inc. Employee Stock Purchase Plan, as
set forth herein and as hereafter amended.
Sec. 2.13 "Plan Year" means each calendar year during which the Plan is
in effect.
Sec. 2.14 "Public Offering" means the effective date of the initial
registration of the Company's Stock under Section 12(g) of the Exchange Act.
Sec. 2.15 "Purchase Agreement" means the instrument prescribed by the
Committee pursuant to which an Eligible Employee may enroll as a Participant and
subscribe for the purchase of shares of Stock on the terms and conditions
offered by the Company. The Purchase Agreement is intended to evidence the
Company's offer of an option to the Eligible Employee to purchase Stock on the
terms and conditions set forth therein and herein.
Sec. 2.16 "Purchase Date" means the last day of each Purchase Period.
-2-
<PAGE>
Sec. 2.17 "Purchase Period" means each six-month period or other period
specified by the Committee, beginning on or after the Effective Date, during
which the Participant's Stock purchase is funded through payroll deduction
accumulations (or a lump sum deposit if permitted under Section 4.05(b)). The
initial Purchase Period shall begin on the Effective Date and end on
December 31, 1999.
Sec. 2.18 "Purchase Price" means the purchase price for shares of Stock
purchased under the Plan, determined as set forth in Section 4.03.
Sec. 2.19 "Stock" means the common stock of the Company.
Sec. 2.20 "Subsidiary" means any present or future corporation (i)
which constitutes a "subsidiary corporation" of the Company as that term is
defined in section 424 of the Code and (ii) is designated as a participating
entity in the Plan by the Committee. Unless the Committee specifically
designates otherwise, a Canadian or other foreign subsidiary shall not be
considered a Subsidiary for purposes of the Plan, and employees of such a
subsidiary shall not be Eligible Employees.
ARTICLE III
Admission to Participation
Sec. 3.01 Elections to Participate. An Eligible Employee may elect to
participate in the Plan and to become a Participant effective as of any Election
Date after the Eligible Employee's date of hire. An Eligible Employee may make
such election by executing and filing with the Committee a Purchase Agreement at
least 10 days before the Election Date as of which the election is to be
effective (or within such other period as the Committee shall prescribe). A
Participant's Purchase Agreement shall remain in effect until it is modified
through discontinuance of participation under Section 3.02 or a change under
Section 4.05.
Sec. 3.02 Discontinuance of Participation. A Participant may
voluntarily cease his or her participation in the Plan and stop payroll
deductions at any time by filing a notice of cessation of participation on such
form and at such time in advance of the effective date as the Committee shall
prescribe. Unless the Committee determines otherwise, a Participant's election
to discontinue participation in the Plan shall be made at least 10 days before
the next Purchase Date. Notwithstanding anything in the Plan to the contrary, if
a Participant ceases to be an Eligible Employee, his or her participation
automatically shall cease, no further purchase of Stock shall be made for the
Participant and the Participant shall receive payment of any funds held in his
or her account under the Plan.
-3-
<PAGE>
Sec. 3.03 Readmission to Participation. Any Eligible Employee who has
previously been a Participant, who has discontinued participation (whether by
cessation of eligibility or otherwise), and who wishes to be reinstated as a
Participant may again become a Participant by executing and filing with the
Committee a new Purchase Agreement. Reinstatement to Participant status shall be
effective as of any Election Date, provided the Participant files a new Purchase
Agreement with the Committee at least 10 days before the Election Date (or
within such other period as the Committee shall prescribe).
ARTICLE IV
Stock Purchase and Resale
Sec. 4.01 Reservation of Shares. There shall be 350,000 shares of Stock
reserved for issuance or transfer under the Plan, subject to adjustment in
accordance with Section 5.02. Except as provided in Section 5.02, the aggregate
number of shares of Stock that may be purchased under the Plan shall not exceed
the number of shares of Stock reserved under the Plan.
Sec. 4.02 Limitation on Shares Available.
(a) The maximum number of shares of Stock that may be purchased for each
Participant on a Purchase Date is the lesser of (a) the number of whole and
fractional shares of Stock that can be purchased by applying the full balance of
the Participant's withheld funds to the purchase of shares of Stock at the
Purchase Price, or (b) the Participant's proportionate part of the maximum
number of shares of Stock available under the Plan, as stated in Section 4.01.
(b) Notwithstanding the foregoing, if any person entitled to purchase
shares pursuant to any offering under the Plan would be deemed for purposes of
section 423(b)(3) of the Code to own stock (including any number of shares of
Stock that such person would be entitled to purchase under the Plan) possessing
five percent or more of the total combined voting power or value of all classes
of stock of Company, the maximum number of shares of Stock that such person
shall be entitled to purchase pursuant to the Plan shall be reduced to that
number which, when added to the number of shares of stock that such person is
deemed to own (excluding any number of shares of Stock that such person would be
entitled to purchase under the Plan), is one less than such five percent. Any
amounts withheld from a Participant's compensation that cannot be applied to the
purchase of Stock by reason of the foregoing limitation shall be returned to the
Participant as soon as practicable.
-4-
<PAGE>
Sec. 4.03 Purchase Price of Shares. Before the beginning of each
Purchase Period, the Committee shall establish the method for determining the
Purchase Price per share of the Stock to be sold to Participants for the
Purchase Period. Unless the Committee determines otherwise, the Purchase Price
per share shall be the lower of (i) 85% of the Market Value of such share on the
first day of the Purchase Period or (ii) 85% of the Market Value of such share
on the Purchase Date. The Board of Directors may determine that the Purchase
Price shall be the Market Value, or a percentage of the Market Value, on either
of such dates or the lower of such dates, so long as the percentage shall not be
lower than 85% of such Market Value. The Purchase Price per share of the Stock
to be sold to Participants for the initial Purchase Period beginning on the
Effective Date shall be the lower of (i) the Market Value per share on the
Effective Date or (ii) 85% of the Market Value per share on the Purchase Date.
Sec. 4.04 Exercise of Purchase Privilege.
(a) As of the first day of each Purchase Period, each Participant
shall be granted an option to purchase shares of Stock at the Purchase Price
specified in Section 4.03. The option shall continue in effect through the
Purchase Date for the Purchase Period. The maximum number of shares that a
Participant may purchase during a Purchase Period is 2000 shares. The Committee
may also impose a maximum limit on the number of shares that may be purchased by
all Participants during a Purchase Period, which limit shall be imposed
uniformly according to Section 5.01. Subject to the provisions of Section 4.02
above and Section 4.04(c), on each Purchase Date, the Participant shall
automatically be deemed to have exercised his or her option to purchase shares
of Stock, unless he or she notifies the Committee, in such manner and at such
time in advance of the Purchase Date as the Committee shall prescribe, of his or
her desire not to make such purchase.
(b) There shall be purchased for the Participant on each Purchase
Date, at the Purchase Price for the Purchase Period, the largest number of whole
shares of Stock as can be purchased with the amounts withheld from the
Participant's compensation (or deposited by the Participant as described in
Section 4.05(b)) during the Purchase Period. Each such purchase shall be deemed
to have occurred on the Purchase Date occurring at the close of the Purchase
Period for which the purchase was made.
(c) A Participant may not purchase shares of Stock having an
aggregate Market Value of more than $25,000, determined at the beginning of each
Purchase Period, for any calendar year in which one or more offerings under this
Plan are outstanding at any time, and a Participant may not purchase a share of
Stock under any offering after the expiration of the Purchase Period for the
offering.
-5-
<PAGE>
Sec. 4.05 Payroll Deductions and Deposits.
(a) Each Participant shall authorize payroll deductions from his
or her base compensation for the purpose of funding the purchase of Stock
pursuant to their Purchase Agreement. In the Purchase Agreement, each
Participant shall authorize an after-tax payroll deduction from each payment of
base compensation (that is, regular base wages, salary and commissions,
excluding payments for overtime, bonuses, incentive compensation and other
compensation) during a Purchase Period of an amount equal to a whole percentage
(from 1% to 15%) of the Participant's base compensation. A Participant may
change the deduction to any permissible level effective as of any Election Date.
A change shall be made by the Participant's filing with the Committee a notice
in such form and at such time in advance of the Election Date on which the
change is to be effective as the Committee shall prescribe.
(b) The Committee may allow Participants to deposit funds with the
Company to be used for the purpose of purchasing Stock pursuant to their
Purchase Agreements, instead of or in addition to payroll deductions pursuant to
Section 4.05(a). The total amount that a Participant may contribute to the Plan
during a Purchase Period (through payroll deductions and deposits) may not
exceed 15% of the Participant's base compensation for the Purchase Period. The
Committee shall designate the dates by which any such deposits must be made for
a Purchase Period.
Sec. 4.06 Payment for Stock. The Purchase Price for all shares of Stock
purchased by a Participant under the Plan shall be paid out of the Participant's
authorized payroll deductions (and any deposits made by a Participant pursuant
to Section 4.05(b), if permitted by the Committee). All funds received or held
by the Company under the Plan are general assets of the Company, shall be held
free of any trust or other restriction, and may be used for any corporate
purpose.
Sec. 4.07 Share Ownership; Issuance of Certificates.
(a) The shares of Stock purchased by a Participant on a Purchase
Date shall, for all purposes, be deemed to have been issued or sold at the close
of business on the Purchase Date. Prior to that time, none of the rights or
privileges of a shareholder of the Company shall inure to the Participant with
respect to such shares of Stock. All the shares of Stock purchased under the
Plan shall be delivered by the Company in a manner as determined by the
Committee.
(b) The Committee, in its sole discretion, may determine that
shares of Stock shall be delivered by the Company by (i) issuing and delivering
to the Participant a certificate for the number of shares of Stock purchased by
the Participant, (ii) issuing and delivering certificates for the number of
shares of Stock purchased by Participants to a firm
-6-
<PAGE>
which is a member of the National Association of Securities Dealers, as selected
by the Committee from time to time, which shares shall be maintained by such
firm in a separate brokerage account for each Participant, or (iii) issuing and
delivering certificates for the number of shares of Stock purchased by
Participants to a bank or trust company or affiliate thereof, as selected by the
Committee from time to time, which shares may be held by such bank or trust
company or affiliate in street name, but with a separate account maintained by
such entity for each Participant reflecting such Participant's share interests
in the Stock. Each certificate or account, as the case may be, may be in the
name of the Participant or, if he or she so designates on the Participant's
Purchase Agreement, in the Participant's name jointly with the Participant's
spouse, with right of survivorship or in such other form as the Committee may
permit. A Participant who is a resident of a jurisdiction that does not
recognize such joint tenancy may have a certificate or account held in the
Participant's name as tenant in common with the Participant's spouse, with or
without right of survivorship.
(c) The Committee, in its sole discretion, may impose such
restrictions or limitations as it shall determine on the resale of Stock, the
issuance of individual stock certificates or the withdrawal from any shareholder
accounts established for a Participant.
(d) If, under Section 4.07(b), certificates for Stock are held for
the benefit of the Participant, any dividends payable with respect to shares of
Stock credited to a shareholder account of a Participant established pursuant to
Section 4.07(b) will, at the Participant's election, either (i) be reinvested in
shares of Stock and credited to the Participant's account or (ii) paid directly
to the Participant. If dividends are reinvested in shares of Stock, such
reinvestment shall be made based on the Market Value of the Stock at the date of
the reinvestment, with no discount from Market Value.
Sec. 4.08 Distribution of Shares or Resale of Stock.
(a) A Participant may request a distribution of shares of Stock
purchased for the Participant under the Plan or order the sale of such shares at
any time by making a request in such form and at such time as the Committee
shall prescribe.
(b) If a Participant terminates his or her employment with the
Employer or otherwise ceases to be an Eligible Employee, the Participant shall
receive a distribution of his or her shares of Stock held in any shareholder
account established pursuant to Section 4.07(b), unless the Participant elects
to have the shares of Stock sold in accordance with such procedures as the
Committee shall prescribe.
-7-
<PAGE>
(c) If a Participant is to receive a distribution of shares of Stock,
or if shares are to be sold, the distribution or sale shall be made in whole
shares of Stock, with fractional shares paid in cash. Any brokerage commissions
resulting from a sale of Stock shall be deducted from amounts payable to the
Participant.
ARTICLE V
Special Adjustments
Sec. 5.01 Shares Unavailable. If, on any Purchase Date, the aggregate
funds available for the purchase of Stock would purchase a number of shares in
excess of the number of shares of Stock then available or allowed for purchase
under the Plan, the following events shall occur:
(a) The number of shares of Stock that would otherwise be
purchased by each Participant shall be proportionately reduced on the Purchase
Date in order to eliminate such excess; and
(b) The Plan shall automatically terminate immediately after the
Purchase Date as of which the supply of available shares under Section 4.01 is
exhausted, unless the Board acts to increase the number of available shares
pursuant to Section 6.04.
Sec. 5.02 Anti-Dilution Provisions. The aggregate number of shares of
Stock reserved for purchase under the Plan, as provided in Section 4.01, the
maximum number of shares that may be purchased during a Purchase Period pursuant
to Section 4.04(a), and the calculation of the Purchase Price per share may be
appropriately adjusted by the Committee to reflect any increase or decrease in
the number of issued shares of Stock resulting from a subdivision or
consolidation of shares or other capital adjustment, or the payment of a stock
dividend, or other increase or decrease in such shares, if effected without
receipt of consideration by the Company.
Sec. 5.03 Corporate Transactions. In the event of a proposed
dissolution or liquidation of the Company, the Purchase Period then in effect
will terminate immediately prior to the consummation of such proposed action,
unless otherwise provided by the Committee. In the event of a proposed sale of
all or substantially all of the assets of the Company, or a merger of Company
with or into another corporation, each option under the Plan shall be assumed,
or an equivalent option shall be substituted, by such successor corporation or a
parent or subsidiary of such successor corporation, unless the Committee
decides, in lieu of such assumption or substitution, to terminate the Plan and
to shorten the Purchase Period then in effect by setting a new Purchase Date
(the "New Purchase Date"). If the Committee shortens the Purchase Period then in
effect, the Committee shall notify each
-8-
<PAGE>
Participant in writing, at least 10 days prior to the New Purchase Date, that
the Purchase Date for his or her option has been changed to the New Purchase
Date and that his or her option will be exercised automatically on the New
Purchase Date, unless prior to such date the Participant withdraws from the
Purchase Period as provided in Section 3.02.
ARTICLE VI
Miscellaneous.
Sec. 6.01 Non-Alienation. Except as set forth below, the right to
purchase shares of Stock under the Plan is personal to the Participant, is
exercisable only by the Participant during the Participant's lifetime and may
not be assigned or otherwise transferred by the Participant. If a Participant
dies, unless the executor, administrator or other personal representative of the
deceased Participant directs otherwise, any amounts previously withheld from the
Participant's compensation (or deposited pursuant to Section 4.05(b) before the
Participant's death) during the Purchase Period in which the Participant dies
shall be used to purchase Stock on the Purchase Date for the Purchase Period.
After that Purchase Date, there shall be delivered to the executor,
administrator or other personal representative of the deceased Participant all
shares of Stock and such residual amounts as may remain to the Participant's
credit under the Plan.
Sec. 6.02 Administrative Costs. The Company shall pay the
administrative expenses associated with the operation of the Plan (other than
brokerage commissions resulting from sales of Stock directed by Participants).
Sec. 6.03 The Committee. The Board of Directors shall appoint a
Committee, which shall have the authority and power to administer the Plan and
to make, adopt, construe, and enforce rules and regulations not inconsistent
with the provisions of the Plan. The Committee shall adopt and prescribe the
contents of all forms required in connection with the administration of the
Plan, including, but not limited to, the Purchase Agreement, payroll withholding
authorizations, requests for distribution of shares, and all other notices
required hereunder. The Committee shall have the fullest discretion permissible
under law in the discharge of its duties. The Committee's interpretations and
decisions with respect to the Plan shall be final and conclusive.
-9-
<PAGE>
Sec. 6.04 Amendment of the Plan. The Board of Directors may, at any
time and from time to time, amend the Plan in any respect, except that any
amendment that is required to be approved by the shareholders under Section 423
of the Code shall be submitted to the shareholders of the Company for approval.
Sec. 6.05 Expiration and Termination of the Plan. The Plan shall
continue in effect for ten years from the Effective Date, unless terminated
prior to that date pursuant to the provisions of the Plan or pursuant to action
by the Board of Directors. The Board of Directors shall have the right to
terminate the Plan at any time without prior notice to any Participant and
without liability to any Participant. Upon the expiration or termination of the
Plan, the balance, if any, then standing to the credit of each Participant from
amounts withheld from the Participant's compensation or deposited by the
Participant which has not, by such time, been applied to the purchase of Stock
shall be refunded to the Participant.
Sec. 6.06 Repurchase of Stock. The Company shall not be required to
purchase or repurchase from any Participant any of the shares of Stock that the
Participant acquires under the Plan.
Sec. 6.07 Notice. A Purchase Agreement and any notice that a
Participant files pursuant to the Plan shall be on the form prescribed by the
Committee and shall be effective only when received by the Committee. Delivery
of such forms may be made by hand or by certified mail, sent postage prepaid, to
1300 Virginia Drive, Suite 215, Fort Washington, PA 19034, or such other address
as the Committee designates. Delivery by any other mechanism shall be deemed
effective at the option and discretion of the Committee.
Sec. 6.08 Government Regulation. The Company's obligation to sell and
to deliver the Stock under the Plan is at all times subject to all approvals of
any governmental authority required in connection with the authorization,
issuance, sale or delivery of such Stock.
Sec. 6.09 Headings, Captions, Gender. The headings and captions herein
are for convenience of reference only and shall not be considered as part of the
text. The masculine shall include the feminine, and vice versa.
Sec. 6.10 Severability of Provisions, Prevailing Law. The provisions of
the Plan shall be deemed severable. In the event any such provision is
determined to be unlawful or unenforceable by a court of competent jurisdiction
or by reason of a change in an applicable statute, the Plan shall continue to
exist as though such provision had never been included therein (or, in the case
of a change in an applicable statute, had been deleted as of the date of such
change). The Plan shall be governed by the laws of the Commonwealth of
Pennsylvania to the extent such laws are not in conflict with, or superseded by,
federal law.
-10-
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated April 28, 1999, except as
to Note 13, as to which the date is June __, 1999, in Amendment No. 2 to the
Registration Statement on Form S-1 and related Prospectus of ESPS, Inc. dated
May 18, 1999.
Ernst & Young LLP
Philadelphia, Pennsylvania
The foregoing consent is in the form that will be signed upon the completion of
the stock split described in Note 13 to the financial statements.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
May 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,812
<SECURITIES> 0
<RECEIVABLES> 6,337
<ALLOWANCES> 127
<INVENTORY> 0
<CURRENT-ASSETS> 9,538
<PP&E> 3,245
<DEPRECIATION> 915
<TOTAL-ASSETS> 11,896
<CURRENT-LIABILITIES> 5,172
<BONDS> 0
0
6
<COMMON> 2
<OTHER-SE> 204
<TOTAL-LIABILITY-AND-EQUITY> 11,896
<SALES> 17,949
<TOTAL-REVENUES> 17,949
<CGS> 3,491
<TOTAL-COSTS> 3,491
<OTHER-EXPENSES> 130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,412
<INCOME-TAX> 936
<INCOME-CONTINUING> 1,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,476
<EPS-PRIMARY> .83
<EPS-DILUTED> .15
</TABLE>
