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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For The Fiscal Year Ended: March 31, 2000
or
[_]Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from to
Commission File Number: 0-26245
ESPS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2762324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Virginia Drive, Suite 125, Ft. 19034
Washington, PA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (215) 619-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 22, 2000 (based on the closing price of $3.875 as quoted
by Nasdaq National Market as of such date) was approximately $64,071,000.
As of June 22, 2000, 16,534,435 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE--NONE
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................... 3
Item 2. Facilities.................................................... 17
Item 3. Legal Proceedings............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 19
Item 6. Selected Financial Data....................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 21
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..... 30
Item 8. Financial Statements and Supplementary Data................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant............ 46
Item 11. Executive Compensation........................................ 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 49
Item 13. Certain Relationships and Related Transactions................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 51
Signature Page................................................ 53
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PART I
Item 1. Business
General
ESPS is a leading developer of publishing software solutions for document-
intensive industries. ESPS software and consulting solutions are utilized by a
majority of the world's pharmaceutical manufacturers and serves a growing and
diversified customer base requiring a robust publishing initiative. ESPS'
software solutions are recognized as best-of-breed and have become the most
widely used software solution for regulatory and pre-market approval
initiatives.
ESPS is building its presence in a new, growing field--knowledge publishing.
Knowledge publishing utilizes advanced electronic technology to efficiently
manage the collection of raw data, develop it into information, and further
transform it into usable, documented knowledge. With the exponential rise in
e-commerce transactions, businesses are increasingly shifting to the highly
efficient process of electronic publishing and away from the traditional time
consuming and complex paper-based documentation.
As the de facto standard for electronic publishing, the ESPS software suite
enables its customers--enterprise-wide--to transform raw data into documented,
referential information required for product approval, regulatory submissions
and other document intensive applications.
ESPS provides its customers with in-depth industry-specific expertise to
better determine the customer's publishing needs and requirements. With a more
efficient publication and distribution process, ESPS customers can deliver
their product to market faster, reduce collaboration and production costs, and
earn a higher return on their investment.
Founded in 1994, ESPS helps businesses in many industries including those
that are highly regulated and document-intensive to manage and meet their
publishing needs more efficiently by using advanced technology. As a result,
CoreDossier(R), the Company's flagship product, was introduced in 1995 to
enable electronic management and publishing of regulatory compliance
documents. Five years later, CoreDossier has established a majority presence
in the world's pharmaceutical and biotechnology companies, and also is
utilized by contract research organizations, medical device companies,
chemical companies, and other industries.
CoreDossier functionality is enhanced with industry-specific modules and
application programming interfaces (API's). The CoreDossier product platform
provides the foundation for managing large, complex and compound documents for
multiple applications including the pre-market approval processes throughout
an organization. For example, CoreDossier enables users to input information
stored enterprise-wide in almost any file format including paper, word
processing, voice, video, spreadsheets, graphics programs and proprietary
software and output the information in any format. Industry-specific modules
work with the CoreDossier platform to perform functions designed to meet
industry-specific requirements. The CoreDossier APIs enable third parties to
develop custom applications and extend access to additional external
information sources.
Outlook and Competition:
The pharmaceutical and medical products arena will continue to drive
significant revenues for ESPS as this market is witnessing a significant trend
toward electronic filings to regulatory agencies. In addition to its
prominence in this space, newer ESPS products, kPortal(TM) and kPublisher(TM)
are selling into the installed base. By October 2002, all United States
Federal agencies are mandated to receive their information electronically per
the Paperwork Reduction Act as enacted by the U.S. Senate and House of
Representatives. This proactive law is driving Federal agencies to become more
responsible and accountable for reducing the burden of Federal paperwork on
the public. Similar European and Asian initiatives are also underway.
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The market for knowledge publishing solutions is new and rapidly evolving
with expected higher levels of competition. ESPS' kPortal and kPublisher
primarily competes against departmental publishing software and the internal
information technology departments of its current and prospective customers.
ESPS believes the principal competitive factors in the knowledge publishing
market are product scalability, flexibility, customer support, and price. The
Company believes its solutions to be superior to products and services offered
by competitors or legacy systems.
Business Objective and Strategic Initiatives:
Today, ESPS is a leader in knowledge publishing--transitioning businesses
away from paper documentation to on-line publications. The Company has earned
a solid reputation by providing its customers with advanced technology, high
quality implementations, and knowledge publishing expertise. Its business
objective is to become the eWorld leader of publishing solutions by developing
and delivering high quality products and solutions. To build upon its current
success and posture to achieve future goals, the following strategies are
underway:
. Enhance technology leadership and product functionality: ESPS products
provide the most advanced solutions to meet the rigors of managing order
and intelligence to the coalescing of data and information including
those for Web-based applications. The Company intends to maintain and
enhance its position as a technology leader by continuing to invest in
product development which will expand the base functionality of the
knowledge publishing product suite; to support emerging publishing
standards and formats; enhance existing industry-specific modules;
develop new applications for knowledge publishing across a wide variety
of industries; and partner with technology leaders to broaden its reach
in the publishing arena. Additionally, third parties will be encouraged
to develop industry-specific modules that enhance the functionality of
CoreDossier through the use of application programming interfaces.
. Expand consulting engagements: ESPS on-staff consultants enhance its
customers' ability to maximize their investment return by utilizing its
products. The Company recently established a service bureau model where
its consultants take CoreDossier software, hardware and its consulting
team to customer sites for leased engagements, specifically to assist
with the final steps of drug or biologic submissions to a regulatory
agency. In addition to helping customers realize faster time to market
and maximum returns, ESPS consultants assist customers in addressing
other requirements and functions within their business such as record
keeping and internal compliance.
. Leverage and develop strategic alliances. The Company's strategic
alliances with leading systems integration firms, information technology
consulting firms, and technology companies enable it to promote
awareness of its products and services, expand territorial coverage and
provide implementation services to end users. ESPS intends to maintain
and strengthen those relationships as well as establish new
relationships with leaders in the information technology industry.
. Develop international presence. ESPS intends to expand its international
presence and enhance its solutions to address the needs of international
companies. The Company believes that significant opportunities exist for
knowledge publishing solutions that are designed for businesses needing
a robust collaborative publishing tool with multiple applications. ESPS
currently maintains a European office for the development of an
international presence.
. Target other opportunities. ESPS intends to expand its marketing efforts
to embrace new applications beyond the pre-market approval and
regulatory areas. Currently, ESPS products are used for bids and
proposals, proposal management, litigation support, and other
collaborative publishing applications. The Company intends to grow by
utilizing its current sales team; leveraging its partnerships and
alliances, as well as employing its value-added reseller (VAR) network
to build new business opportunities.
The strategic initiatives are intended to leverage the strength of the
Company's core competencies and diversify its sources. As ESPS and its actions
evolve, the Company cannot offer a definitive schedule for the implementation
of certain components of its strategic initiatives.
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Supporting Actions:
. Establish new business units. Subsequent to the close of Fiscal Year
2000, the Company established three business units--pharmaceutical and
medical products, business services, and solutions. The pharmaceutical
and medical products business unit sells the knowledge publishing suite
directly to pharmaceutical, medical products, and agrochemical
customers. The business services unit provides technical support and
training for all ESPS products. The solutions business unit sells
products and services in the knowledge publishing suite via a global
sales network. The framework for the unit has been established and work
is currently underway to build on alliances forged with Computer
Sciences Corporation (CSC), Xerox and others while building
relationships with new vendors familiar with the publishing,
collaborative document and content management businesses. This is the
new business model that will drive global expansion for ESPS.
. Develop service bureau delivery model. Another component of the new
strategic plan includes future revenue sources from a service bureau
delivery model called CoreDossier Direct(TM) and kPublisher and kPortal.
Both of these new products were delivered and sold at the close of the
fourth quarter of Fiscal Year 2000, creating a cross-industry publishing
product suite. These line extensions were introduced to and are selling
in the pharmaceutical and medical products markets and will diversify
into other markets that require a robust, collaborative multi-media
publishing solution.
kPublisher is a departmental, report-level solution that may be used as
a stand-alone product or in conjunction with CoreDossier. kPortal is a
publishing portal used as a viewing and annotation tool for both
CoreDossier and kPublisher. These new offerings allow ESPS to leverage
the efficiency of the Internet to better move and manage information
more quickly.
. New business framework. ESPS has developed a new internal business
framework to support several new global revenue sources derived from
direct and indirect sales models. Historically, with one flagship
product offered, ESPS marketed through a direct sales team receiving
leads and opportunities through inside marketing and sales as well as
referrals from partners and alliances. With the introduction of two new
products, ESPS is expeditiously building an indirect sales channel of
value added resellers to quickly take products to new markets.
Additionally, ESPS has defined original equipment manufacturer (OEM)
opportunities as a new recurring revenue source and is aggressively
teaming with and selling technology to its partners.
. Expand knowledge publishing presence. ESPS is building a presence in a
new and expanding arena--knowledge publishing--which creates complex
information components by succinctly navigating user information.
Supporting over 130 file formats, the process accelerates the assembly,
management, exchange, use and reuse of information. Data input is
accepted from multiple sources including text, spreadsheets,
presentations, drawings, graphs, mpeg, avi, real-time audio and video.
Outputs include e-mail, Web portals, CD-ROM and paper with 100% page
fidelity. The ESPS Knowledge Publishing Suite is a complete one-stop
solution for publishing corporate information to enable businesses to
better plan, manage, assemble, share, and publish both electronic and
paper publications.
As of March 31, 2000, ESPS has licensed versions of its CoreDossier products
to 62 customers in the pharmaceutical and biotechnology industry, the chemical
industry and the utilities industry. A partial list of ESPS customers includes
Pfizer Inc., Glaxo-Wellcome Inc., Bayer Corporation, Hoechst Marion Roussel,
Inc., Rhone-Poulenc Rorer, Merck KGaA and Baltimore Gas & Electric.
ESPS corporate headquarters is located at 1300 Virginia Drive, Fort
Washington, Pennsylvania, 19034. Telephone: (215) 619-6000. ESPS was
incorporated in Delaware in April 1994 under the name Electronic Submission
Publishing Systems, Inc. The Company changed its name to ESPS, Inc. on March
30, 1999. Additional information about ESPS product and services may be viewed
via the Internet at www.esps.com.
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Current Product Offerings
Background
As businesses move toward embracing publishing solutions that integrate
corporate knowledge into both the paper and eWorlds, a variety of approaches
have emerged that attempt to address the requirements and to realize the
benefits of electronic publishing. These approaches include:
. Internally-developed systems. Systems developed by internal information
technology departments tend to be highly customized and are designed to
meet specific regulatory requirements at the time of development. As
technology advances, these systems are increasingly costly and difficult
to maintain due to lack of flexibility. Furthermore, many systems were
not originally designed to take advantage of intranet and Internet
technologies and are having difficulties bridging this ever-widening
technology gap.
. Document management systems. Document management systems are designed to
scan, store, secure and archive documents. These systems are not
designed to support a knowledge publishing function and generally lack
the capability to support complex document publication, automatic cross-
referencing and different pre-defined forms and formats.
. Point solutions. Point solutions are software tools designed to address
a very specific requirement within the publishing process. These tools
generally do not have the breadth to address all of the needs of
business publishing.
. Desktop publishing tool. Desktop publishing tools are typically word
processing tools that are used to create individual pieces of a
document. These tools often lack the features and functions required to
enable a business to create much larger and more complex documents.
. Outsourcing. Businesses sometimes hire third parties to prepare and
publish large compound documents. This approach can be costly and time-
consuming and may limit the ability of businesses to reuse prepared
information.
We believe that businesses, in an effort to significantly improve their
complex, mission-critical publishing processes, are seeking an enterprise-wide
knowledge publishing 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.
. 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.
. Multiple information format support. 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 knowledge
publishing systems to reduce costs and the time required to bring new products
and services to market and create knowledge from disparate corporate-wide
information pools.
ESPS Solutions
Our solutions, the ESPS Knowledge Publishing Suite, enable users throughout
an enterprise to effectively collaborate in the authoring, compilation,
distribution, publishing and reuse of data and information. We design our
software products to utilize advanced technologies, such as corporate
intranets and the Internet. We believe our solution enables companies to
reduce the time required to bring new products and services to market.
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ESPS solutions provide our customers with the following key advantages:
Scalable enterprise-wide solution. Our solutions extend throughout an
enterprise, providing multiple departments in various locations throughout
the world with the ability to collaborate electronically in the authoring,
assembling, distributing and publishing of information, bringing order to
data and information, creating knowledge. We also designed our solutions to
support the growth of our customers as they add new users and processes
throughout the enterprise.
Modular product architecture. Our solutions address publishing
requirements of customers in various industries through the use of
industry-specific modules to enhance the functionality of the knowledge
publishing platform. Furthermore, our solutions enable large diversified
businesses that operate in numerous industries to address various
publishing requirements with a single 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 are increasingly becoming the new
standard for accessing information.
Multiple input and output capabilities. We designed our solutions 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,
the suite of products supports older formats, such as WordStar and Wang
Office. The knowledge publishing suite also enables users to output
information in numerous formats, including 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.
CoreDossier
The ESPS CoreDossier software solution is designed to meet the pre-market
approval and compliance needs of organizations, taking mission-critical
documents off paper and on-line. CoreDossier enables users to collaborate on
the assembly, distribution, review, publishing and reuse of compliance
information. CoreDossier smoothly facilitates the transition from data and
information to orderly and easily navigable knowledge with industry-specific
modules that enhance the functionality of the CoreDossier platform, addressing
requirements and issues applicable to each industry. ESPS continues to add new
product features based on feedback from corporate regulatory managers and
regulatory agencies.
With CoreDossier, users can assemble, collaborate, distribute, review,
publish and reuse business and regulatory compliance information from
corporate networks or document management systems to support NDAs, ANDAs,
INDs, annual reports, bioequivalence/CMC reporting, 510Ks, PMAs, bids and
proposals, ISO 9000 & 14001 certifications, standard operating procedures and
other applications.
The software improves publication/submission quality with varied output
options to regulatory authorities (FDA--CDER and CBER, EMEA, HPB, MCA, etc.),
contract research organizations, partners, vendors and other stakeholders.
CoreDossier compiles business, pre-market approval and compliance information
from multiple locations and from over 130 different native formats including
legacy documents, word processing, spreadsheets, charts, photos, graphs, audio
and video files and more.
Reduced creation and publication time is part of the benefits of using
CoreDossier for this labor- and time-intensive process, as well as realizing
real-time information management. Customers can gain real-time reuse of
resources and information on a global basis across divisions, leverage
Internet and corporate intranet platforms and reduce the costs associated with
the development and publishing of large compound documents.
CoreDossier optimizes publication review with faster publishing and more
output channels. Users have fast access to the latest published output.
CoreDossier publishes active and archive documents to HTML, PDF, TIFF,
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CD-ROM, Web portals and/or paper, as well as industry-specified standards.
Additionally, CoreDossier's functionality can be tailored to meet the specific
needs of the publishers within an organization with the CoreDossier Developers
API Toolkit.
After installing the software, CoreDossier also provides a universal data-
publishing gateway for seamless integration of data and documents to work with
most document management systems, including FileNET, Documentum, Lotus Notes,
Open Text, native file systems, and PC DOCS.
CoreDossier lets publication managers assemble publications on a document
level, as well as on a paragraph level. Component documents can be assembled
from Word, RTF, Text, Excel, XML or HTML. This gives publication managers
additional levels of control over information components and enables reuse of
information at a much more granular level.
kPublisher
ESPS' kPublisher software is a departmental, report-level publishing tool
within the ESPS Knowledge Publishing Suite. kPublisher offers Web-enabled
knowledge assembly and publishing focused on the small- to mid-range report
and document publishing area.
kPublisher allows users to quickly and easily assemble and publish documents
from a few pages up to thousands of pages from multiple file formats and
deliver them to multiple outputs. kPublisher's technology is fully scalable,
enabling its use in a workgroup environment, departmentally or at an
enterprise level.
Easy navigation is key to kPublisher's user interface. Users can speedily
navigate through several simple workflow steps to create a publication.
Additionally, kPublisher supports all the major document management systems,
and other DMS products can be integrated easily through the kPublisher
application programming interface (API). kPublisher helps knowledge workers
create high-impact publications from any input, leverage intellectual data,
enhance benefits of existing infrastructures, focus on good publishing
practices and exceptional publication content and improve individual
productivity.
Additionally, kPublisher eliminates lengthy technology learning curves,
refines business processes, fosters knowledge-sharing and enhances
collaboration.
kPortal
As part of the ESPS Knowledge Publishing Suite, ESPS has created a
publishing portal, kPortal, which offers CoreDossier and kPublisher users a
personalized gateway to information collaboration, in real-time over the
Internet. kPortal optimizes business knowledge across the enterprise.
kPortal is a document-centric, repository-neutral, publication portal that
allows users to find, access and consume the vast information contained in
compound documents, regulatory submissions and other large publications.
Utilizing a personalized gateway to the information, users can minimize the
time and costs associated with reviewing pertinent information necessary for
timely business decisions.
kPortal facilitates Web-based review and annotation, management and
dissemination of electronic publications created from ESPS knowledge
publishing products, such as CoreDossier(R) and kPublisher(TM). It is
seamlessly integrated to both products, so that a user simply indicates that
the published output should be registered with a specific kPortal Web server
upon publishing. Further, kPortal complements an enterprise corporate portal,
providing specialized functionality for easily consuming electronic
publications. kPortal respects the security model in an established document
repository so users and user groups need not be maintained twice.
Since kPortal utilizes the latest in dynamically-served Web rendering
technology, a document is presented exactly as it will be printed, with 100%
page fidelity. The product enables users to view documents over the
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Web with a standard browser--so the information is immediately available and
easy to consume. kPortal assists users in finding desired publications with
familiar Web metaphors. Publications can be filtered by type or status, so
users see only publications relevant to them.
CoreDossier Direct(TM)
During the last fiscal year, ESPS developed a new product offering,
CoreDossier Direct, in response to requests from companies wishing to deploy
CoreDossier for projects on an ad hoc basis, without the purchase of the
software. With CoreDossier Direct, ESPS provides a comprehensive packaged
solution that includes hardware, software and professional consulting support
on-site at the customer's location, for a limited engagement. Most
specifically, CoreDossier Direct has been designed for specific projects,
enabling companies to outsource the preparation of large, complex dossiers for
submittal to worldwide regulatory agencies, while maintaining a secure project
environment. This offering combines the power of CoreDossier with the
substantial regulatory and submission experience of the ESPS professional
services staff.
With CoreDossier Direct, ESPS offers a full range of customer services,
including business, technical, and regulatory consulting. Our staff provides
on-site CoreDossier set-up, installation and process validation, publishing
and technical support services, as well as regulatory expertise to ensure
success. ESPS' extensive partner network allows access to additional resources
and specialized skills, as needed. CoreDossier Direct services can range from
a one-time project that focuses on a single, regulatory event to longer-term
strategic partnerships.
ESPS consultants bring all the hardware and software necessary to
electronically assemble and publish a regulatory dossier on-site, ensuring the
security of your information. The dossier can be published in paper or
electronic format, or both. A time-proven, seven-phase submission methodology
is employed during the process. ESPS aggressively manages project cost,
schedule, logistics, and deliverables that are unique to each client and
submission.
Products
The CoreDossier product family includes the CoreDossier platform, industry-
specific modules and the CoreDossier application programming interfaces or
APIs. (Additionally, the family extends to an alternative product delivery
model, CoreDossier Direct, which is the CoreDossier product, applicable APIs,
hardware and ESPS consultants leased to a customer for an on-site per project
service solution.). Our software products comprise a modular system 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 reusing 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 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 130 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(R) Word, WordPerfect
and Interleaf, and older word processing formats such as Wang Office and
WordStar;
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. Spreadsheet formats, such as Microsoft 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 Lotus Notes, Open Text, Documentum, PC DOCS and FileNET.
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. The ability to support multiple outputs is essential for our
customers, as many regulatory agencies require that companies publish both in
electronic formats and in paper format. In addition to publishing in multiple
output formats, CoreDossier 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 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, Lotus Notes, Open Text, and shared file systems.
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.
Industry-Specific Modules
We have developed customized modules for the CoreDossier platform to meet
the specific needs of targeted industries. Because of the modular architecture
of the CoreDossier solution, we are able to develop and introduce
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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/CBER compiler modules. These modules enable our customers in the
pharmaceutical and biotechnology industry to produce electronic
submissions for new drug applications that comply with the U.S. Food &
Drug Administration's (FDA) specifications. These electronic submissions
enable our customers to reduce time required for the assembly and review
process of a new drug application. Currently, we offer a CDER and a CBER
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 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 took place
during fiscal 2000. This module is designed to enable utilities
companies to collect and organize information from multiple sources
quickly for regulatory filings.
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.
kPublisher
kPublisher(TM), focuses on the small- to mid-range report and document
publishing needs. It allows users to quickly and easily publish documents from
a few pages, up to thousands of pages from any input (130 file formats
supported). kPublisher's technology is fully scalable for use in a workgroup
environment, departmentally or at an enterprise level.
kPortal
kPortal, our document-centric, repository-neutral, corporate portal product,
allows users to find, consume and access the vast information contained in
compound documents, regulatory submissions and other large publications.
Utilizing an individualized gateway to the information, users can minimize the
time and costs associated with aggregating pertinent information necessary for
timely business decisions.
kPortal is geared toward aiding in the review, management and dissemination
of PDF publications created from ESPS knowledge publishing products, such as
CoreDossier and kPublisher.
11
<PAGE>
ESPS Services
Our service professionals provide customers with on-site product
implementation and consulting, technical support and educational services. Our
services include:
Implementation and Consulting. Our services professionals implement the
ESPS Knowledge Publishing Suite for our customers at a single site or
multiple sites. As part of our implementation services offering, we work
with clients to customize our solutions to effectively meet their specific
business needs. We provide ongoing consulting services to assist our
customers in optimizing the use of our solutions 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.
Education. 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 solutions. 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 CSC, 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.
CorePartner Strategic Alliances. Through strategic alliances, we seek to
promote awareness of our knowledge publishing solutions and gain strategic
support for our overall marketing, sales and development programs. We
currently have a strategic alliance partnership with Adobe Systems
Incorporated and Xerox Corporation.
Customers and Markets
Our targeted customers are mid- to large-sized businesses and divisions of
large companies that have a need for collaborative document publishing,
multimedia or mixed-content compound document publishing, content management
or regulatory submission publishing. We believe that these opportunities exist
in most marketplaces and that the burden of coalescing disparate information
from multiple locations is a problem that is shared by those working in
compliance, regulatory submissions, bids and proposals, management of change
documents, licensing documentation, Web content management and many other
applications.
As of March 31, 2000, we licensed versions of our CoreDossier products to 62
customers. For the fiscal year ended March 31, 2000, no customer accounted for
more than 10% of total revenues. For the year ended
12
<PAGE>
March 31, 1999, Adobe Systems, Incorporated accounted for $2.0 million, or 11%
of total revenues. Our agreement with Merck KGaA accounted for approximately
$1.4 million in fiscal year 2000. 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.
Sales and Marketing
In support of the Company's business objective, a team of sales and alliance
professionals have been assembled to develop a reseller network. This value-
added reseller network is responsible for penetrating the Company's reach into
diversified markets that require a robust publishing solution. Those new
market opportunities are identified and quantified by support teams consisting
of marketing, consulting, and software development professionals.
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 knowledge publishing solutions. We have also initiated marketing
strategies for both the pharmaceutical and the solutions business unit. We are
also leveraging our expertise to sell our products to additional departments
within our current customer base.
As of March 31, 2000, we employed 32 people in sales and marketing in the
United States, and six people in sales and marketing in Europe.
Product Development
We have substantially invested in the development of our knowledge
publishing suite with products including CoreDossier, our industry-specific
modules, kPublisher and kPortal. 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, members from each of these areas form product
teams that work closely with other organizations, customers and prospective
customers to better understand their knowledge publishing 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 each product's 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, for example, the industry-
specific module development groups are able to develop new modules independent
of the development cycles of the CoreDossier platform.
We released the next version of our CoreDossier platform, version 4.0, in
April 1999. CoreDossier 4.0 provided new features, including support for XML,
the ability to create publications using paragraphs of
13
<PAGE>
information in addition to full documents, support for publishing documents
based on forms and enhanced tables of contents and cross-references. In
addition, we released the CoreDocket module, an industry-specific module
designed to enable utility companies to more efficiently collect and organize
information for their regulatory filings. In March 2000, we also released
kPublisher and kPortal, rounding out the ESPS Knowledge Publishing Suite.
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, 2000, we employed 45 people in our product development
department. Our research and development expenses were $5.0 million in the
fiscal year ended March 31, 2000; $3.8 million in the fiscal year ended March
31, 1999 and $2.0 million in the fiscal year ended March 31, 1998.
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;
. CoreDossier Direct;
. kPublisher;
. kPortal;
. CDER compiler;
. CADDY compiler;
. compiler;
. CoreDocket; and
. ESPS Knowledge Publishing Suite.
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 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 of 2.5% based on sales of
our products. In September 1999, we prepaid Versant $500,000 for a credit of
$832,500 of pre-paid royalty fees.
14
<PAGE>
As of March 31, 2000, we have a prepayment of approximately $323,000 of the
original $500,000 prepayment. Upon the exhaustion of the pre-payment, ESPS may
elect to prepay Versant an additional royalty pre-payment in the amount of
$500,000 in exchange for a credit of $832,500.
Employees
As of March 31, 2000, we had a total of 139 employees in the United States,
including 45 people engaged in product development, 32 people in sales and
marketing, 43 people in professional services and 19 people in general and
administrative services. We also employed a total of 17 people in Europe,
including six people in sales and marketing, eight people in professional
services and three 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.
15
<PAGE>
MANAGEMENT
The following table contains information about our executive officers and
directors as of May 31, 2000. Our audit committee consists of Charles O.
Heller, Christopher B. Hollenbeck and Michael J. Egan. Our compensation
committee consists of Charles O. Heller, Christopher B. Hollenbeck and Michael
J. Egan.
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
R. Richard Dool......... 46 President, Chief Executive Officer and Director
Terrence P. Brennan..... 49 Chairman of the Board and Director
George B. Pearcy........ 54 Chief Financial Officer, Acting
Margaret Archdeacon..... 46 Vice President, Corporate Marketing
Bradley R. Burget....... 39 Vice President, General Manager, Business Services
Kevin Buxton............ 40 Vice President, General Manager, Business Solutions
Michael T. Hoey......... 33 Vice President, Research and Development
Jeffrey C. Sager........ 33 Vice President, Business Development
Michael J. Egan......... 47 Director
Charles O. Heller....... 64 Director
Christopher B.
Hollenbeck............. 32 Director
Kenneth Kaisen.......... 42 Director
</TABLE>
R. Richard Dool joined ESPS in February 2000 and currently holds the
position of President, Chief Executive Office and Director. Mr. Dool has over
20 years of extensive international sales and marketing experience in the
technology arena. From 1994 to February 2000, Mr. Dool was president and chief
executive officer at LabVantage Solutions, a leading marketer of laboratory
automation software. Mr. Dool holds a B.A. in political science/public
administration from Fordham University.
Terrence P. Brennan joined ESPS in October 1995 and currently holds the
position of Chairman of the Board. Mr. Brennan had previously held the
position of president and chief executive officer from October 1995 until
April 2000. From February 1995 until October 1995, Mr. Brennan was an
independent consultant to the pharmaceutical industry. Mr. Brennan holds a
B.S. in business administration and a M.B.A. from the University of Dayton.
George B. Pearcy joined ESPS in November 1995 and currently holds the
position of Chief Financial Officer. 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. Mr. Pearcy holds a
B.S./B.A. in accounting and an M.B.A. from the University of Missouri.
Margaret Archdeacon has served as Vice President of Corporate Marketing of
ESPS since September 1999. From September 1998 to September 1999, Ms.
Archdeacon was global director of marketing communications of ESPS. From March
1998 to September 1998, Ms. Archdeacon was Vice President, Account Services,
The DEM Group, an IT marketing agency. From July 1996 to March 1998, Ms.
Archdeacon was Vice President of Marketing for TOPCALL Corporation. From 1985
to July 1996, Ms. Archdeacon was the Principal Consultant for Archdeacon
Communications. Ms. Archdeacon holds a B.S. in management/marketing from St.
Joseph's University.
Kevin Buxton has served as Vice President, General Manager, Business
Solutions of ESPS since May 2000. From November 1999 to April 2000, Mr. Buxton
was vice president of the business partner program at LabVantage Solutions.
Before 1995 to November 1999, Mr. Buxton held various sales manager positions
for PerkinElmer, Inc., formerly EG&G Instruments. Mr. Buxton holds a B.S. in
applied physics from the University of Strafford--U.K.
16
<PAGE>
Bradley R. Burget was recently appointed Vice President and General Manager
Business Services and previously 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.
Jeffrey C. Sager was recently appointed Vice President Business Development
and previously 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. 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. Mr. Egan holds a B.S. in Business Administration from Saint
Joseph's University.
Charles O. Heller has served as a member of the Board of Directors of ESPS
since May 1995. Since April 2000, Dr. Heller has served as Senior Principal of
Gabriel Venture Partners, L.P., a venture capital firm. From 1990 to March
2000, he served as Director of the Dingman Center for Entrepreneurship at the
University of Maryland, and, concurrently, as President of the Annapolis
Consulting Group, a management consulting firm. Currently, he serves on a
number of boards of directors, including those of Avatech Solutions, American
Venture Resource Association (AVRA), Baltimore-Washington Venture Group (as
Chairman), Bahamas Venture Capital Fund, interSOURCE Solutions, and Rentmaker.
Dr. Heller holds B.S. and M.S. degrees in civil engineering from Oklahoma
State University and a Ph.D. in engineering from The Catholic University of
America.
Christopher B. Hollenbeck has served as a member of the board of directors
of ESPS since July 1997. Mr. Hollenbeck is a principal of H&Q Venture
Associates LLC, a venture capital firm, where he has been an Investment
Manager for the Adobe Ventures Funds since July 1998. From June 1996 until
June 1998, Mr. Hollenbeck served as a vice president in the venture capital
department of Hambrecht & Quist LLC. From April 1991 until September 1995, Mr.
Hollenbeck held various positions in the investment banking department of
Hambrecht & Quist LLC. Mr. Hollenbeck is a member of the board of directors of
several privately held companies, including AvantGo, Inc., Glyphica
Corporation and HAHT Software, Inc. Mr. Hollenbeck holds a B.A. in American
Studies from Stanford University.
Kenneth Kaisen has served as a member of the board of directors of ESPS
since April 2000. Since January 1997, Mr. Kaisen has held the position of Vice
President, Information Management and Chief Information Officer for the
Industry Solutions Operations organization within Xerox Corporation. From
January 1988 to December 1996, Mr. Kaisen worked for New England Business
Service, Inc. and held various manager positions, including the position of
Vice President, Chief Information Officer from January 1995 to December 1996.
Mr. Kaisen holds a M.S. in computer science from Rochester Institute of
Technology and a B.S. in electrical engineering from Rensselaer Polytechnic
Institute.
Item 2. 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 December 31, 2005.
We also lease office space for sales and marketing in La Jolla, California,
Research Triangle Park, North Carolina, and Burlington, Massachusetts and in
the United Kingdom.
17
<PAGE>
Item 3. Legal Proceedings.
ESPS is not currently a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
18
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "ESPS." The following table sets forth the high and low closing sale
prices for the Common Stock as reported by the Nasdaq National Market since
the Initial Public Offering on June 16, 1999:
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Fiscal Year ended March 31, 2000:
First quarter (June 16, 1999 to June 30, 1999)................ $ 7.44 $6.69
Second quarter................................................ $14.19 $7.38
Third quarter................................................. $ 8.75 $3.50
Fourth quarter................................................ $ 9.63 $4.53
</TABLE>
As of June 22, 2000, there were approximately 105 holders of record of the
Company's Common Stock. (Because "holders of record" include only stockholders
listed with the Company's transfer agent and exclude stockholders listed
separately with financial nominees, this number does not accurately reflect
the actual number of beneficial owners of the Company's Common Stock, of which
the Company estimates there were more than 1,000 on such date.) On June 22,
2000 the last reported sale price of the Common Stock on the Nasdaq National
Market was $3.875 per share.
The Company has not paid a dividend since inception and does not presently
intend to declare a cash dividend on the Common Stock in the foreseeable
future and expects to retain future earnings to fund the development and
growth of its business.
As of March 31, 2000 the Company has used approximately $1.5 million of the
$22.2 million of net proceeds from its initial public offering of common
stock. The use of proceeds was used for purchases and installation of property
and equipment.
19
<PAGE>
Item 6. Selected Financial Data.
The selected financial data presented below for each of the Company's last
five fiscal years have been derived from and are qualified by reference to the
Company's financial statements. The financial statements of the Company have
been audited by Ernst & Young LLP, independent public accountants.
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses............... $13,545 $11,676 $ 6,814 $ 648 $ 721
Software licenses--related
party.......................... 431 1,778 -- -- --
Services and maintenance........ 8,850 4,315 1,832 420 32
Services and maintenance--
related party.................. -- 180 -- -- --
------- ------- ------- ------- -------
Total revenues................ 22,826 17,949 8,646 1,068 753
------- ------- ------- ------- -------
Cost of revenues:
Software licenses............... 427 298 258 68 --
Services and maintenance........ 6,033 3,193 1,589 506 72
------- ------- ------- ------- -------
Total cost of revenues........ 6,460 3,491 1,847 574 72
------- ------- ------- ------- -------
Gross profit...................... 16,366 14,458 6,799 494 681
Operating expenses:
Research and development........ 4,999 3,829 1,978 1,407 725
Sales and marketing............. 9,311 5,185 1,283 714 95
General and administrative...... 3,488 3,162 1,229 1,147 633
------- ------- ------- ------- -------
Total operating costs......... 17,798 12,176 4,490 3,268 1,453
Income (loss) from operations..... (1,432) 2,282 2,309 (2,774) (772)
Interest, net..................... 877 130 52 (39) 18
------- ------- ------- ------- -------
Income (loss) before income
taxes............................ (555) 2,412 2,361 (2,813) (754)
Income tax provision (benefit).... (223) 936 (514) -- --
------- ------- ------- ------- -------
Net income (loss)................. $ (332) $ 1,476 $ 2,875 $(2,813) $ (754)
======= ======= ======= ======= =======
Earnings (loss) per share:
Basic........................... $ (0.03) $ 0.57 $ 3.81 $ (3.51) $ (0.76)
Diluted......................... $ (0.03) $ 0.10 $ 0.25 $ (3.51) $ (0.76)
Shares used in computation of
earnings (loss) per share:
Basic........................... 13,041 2,575 754 801 989
Diluted......................... 13,041 14,641 11,326 801 989
Balance Sheet Data:
Working capital................... $25,924 $ 4,366 $ 4,119 $ 1,608 $ 429
Total assets...................... 36,564 12,056 10,017 3,211 1,262
Long-term debt, less current
portion.......................... 435 -- -- -- --
Retained earnings (deficit)....... 17 349 (1,127) (4,003) (1,189)
Total stockholders' equity........ 30,447 6,724 4,896 1,962 786
</TABLE>
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Result
of Operation
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 publishing needs and requirements.
Source of Revenues and Revenue Recognition Policy
We generate revenues through software licenses, 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.
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."
21
<PAGE>
Results of Operations
The following table presents statement of operations data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Percentage of
Revenues
--------------------
Fiscal Years
Ended March 31,
--------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses....................................... 61.2% 75.0% 78.8%
Services and maintenance................................ 38.8 25.0 21.2
----- ----- -----
Total revenues........................................ 100.0 100.0 100.0
Cost of revenues:
Software licenses....................................... 1.9 1.7 3.0
Services and maintenance................................ 26.4 17.8 18.4
----- ----- -----
Total cost of revenues................................ 28.3 19.5 21.4
----- ----- -----
Gross profit.............................................. 71.7 80.5 78.6
Operating expenses:
Research and development................................ 21.9 21.3 22.9
Sales and marketing..................................... 40.8 28.9 14.8
General and administrative.............................. 15.3 17.6 14.2
----- ----- -----
Total operating expenses.............................. 78.0 67.8 51.9
----- ----- -----
Income (loss) from operations............................. (6.3) 12.7 26.7
Interest, net............................................. 3.9 0.7 0.6
----- ----- -----
Income (loss) before income taxes......................... (2.4) 13.4 27.3
Income tax provision (benefit)............................ (1.0) 5.2 (6.0)
----- ----- -----
Net income (loss)......................................... (1.4)% 8.2% 33.3%
===== ===== =====
</TABLE>
Comparison of Fiscal Year Ended March 31, 2000 and Fiscal Year Ended March 31,
1999
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
27% to $22.8 million for the fiscal year ended March 31, 2000 from $17.9
million for the fiscal year ended March 31, 1999. For fiscal 2000, no customer
accounted for more than 10% of revenues, and during fiscal 1999, one customer
accounted for 11% of revenues.
Software licenses revenues increased 4% to $14.0 million for the fiscal year
ended March 31, 2000 from $13.5 million for the fiscal year ended March 31,
1999. We attribute this increase to greater market acceptance of CoreDossier.
In April 1999, we delivered the first release of CoreDossier 4.0 and the CDER
compiler module specific to the pharmaceutical industry.
Services and maintenance revenues increased 97% to $8.9 million for the
fiscal year ended March 31, 2000 from $4.5 million for the fiscal year ended
March 31, 1999. This increase resulted primarily from an increase in customer
support revenues and an increase in consulting and training services revenues,
as we had service and maintenance revenue for the entire year for customers
added during fiscal year 1999 and our customer base grew to 62 at March 31,
2000 from 43 at March 31, 1999. We expect the proportion of services and
maintenance revenues to total revenues to fluctuate in the future, depending
in part on our customers' direct use of third-party consulting and
implementation service providers and the ongoing renewals of customer support
contracts.
22
<PAGE>
Revenues derived from international customers were $4.5 million for the
fiscal year ended March 31, 2000, and $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.
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 to $427,000 for the fiscal year ended March 31,
2000 from $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 were 3% for fiscal 2000 and 2% for fiscal 1999. We expect cost of
software license revenues to increase due to the amortization of software
purchased from Xerox in the fourth quarter of fiscal 2000.
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 89% to $6.0 million for the fiscal year ended March 31, 2000 from
$3.2 million for the fiscal year ended March 31, 1999. This increase resulted
primarily from the hiring and training of 13 professional services and
customer support personnel to support our increased customer base. The number
of our professional services and customer support personnel increased to 51 at
March 31, 2000 from 38 at March 31, 1999. Cost of services and maintenance
revenues as a percentage of services and maintenance revenues was 68% for
fiscal 2000 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 31% to $5.0 million for the
fiscal year ended March 31, 2000 from $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, to support our product
development and testing activities. Research and development expenses
represented 22% of our total revenues for fiscal 2000 and 21% for the fiscal
year ended March 31, 1999. The increase in research and development expenses
as a percentage of total revenues primarily reflects our 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.
23
<PAGE>
Sales and marketing expenses increased 80% to $9.3 million for the fiscal
year ended March 31, 2000 from $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 expense, recruiting fees,
travel and entertainment, and related facility and equipment costs. In
addition, we increased marketing activities, including trade shows, public
relations, direct mail campaigns and other promotional activities. Sales and
marketing expenses represented 41% of our total revenues for fiscal 2000 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 10% to $3.5 million for the
fiscal year ended March 31, 2000 from $3.2 million for the fiscal year ended
March 31, 1999. The number of our executive, finance and administrative
personnel grew to 22 at March 31, 2000 from 18 at March 31, 1999. General and
administrative expenses represented 15% of our total revenues for fiscal 2000
and 18% for fiscal 1999. The decrease in general and administrative expenses
as a percentage of our sales was primarily due to fixed costs which did not
increase as revenues increased. 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 being a
public company for the entire year, including annual and other public
reporting costs, directors' and officers' liability insurance, investor
relations programs and legal, accounting and consulting fees.
Deferred stock compensation expense was $105,000 for the fiscal year ended
March 31, 2000 and $218,000 for the fiscal year ended March 31, 1999.
Interest, net. Interest, net is derived from interest income earned on our
cash and cash equivalents. Interest income increased 575% to $877,000 for the
fiscal year ended March 31, 2000 from $130,000 for the fiscal year ended March
31, 1999. This increase was primarily attributable to income earned on the
invested proceeds from the Company's initial public offering on June 16, 1999.
Income taxes. Income taxes decreased to a benefit of $223,000 for the fiscal
year ended March 31, 2000 from a provision of $936,000 for the fiscal year
ended March 31, 1999. This decrease resulted primarily from our net operating
loss and the tax benefit received from the exercise of stock options.
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% to $17.9 million for the fiscal year ended March 31, 1999 from $8.6
million for the fiscal year ended March 31, 1998. 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% to $13.5 million for the fiscal
year ended March 31, 1999 from $6.8 million for the fiscal year ended March
31, 1998. 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
24
<PAGE>
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% to $4.5 million for the
fiscal year ended March 31, 1999 from $1.8 million for the fiscal year ended
March 31, 1998. This increase resulted primarily from an increase in customer
support revenues of $1.4 million and an increase in consulting and training
services revenues of $1.3 million, as our customer base grew to 43 at March
31, 1999 from 20 at March 31, 1998.
Revenues outside of the United States were $3.3 million for the fiscal year
ended March 31, 1999, and increased from $1.2 million for the fiscal year
ended March 31, 1998. This increase resulted primarily from the sale of our
products and services to existing customers with operations outside the United
States.
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 to $298,000 for the fiscal year ended March 31,
1999 from $258,000 for the fiscal year ended March 31, 1998. 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 were 2% for fiscal 1999 and 4% for fiscal 1998. 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% to $3.2 million for
the fiscal year ended March 31, 1999 from $1.6 million for the fiscal year
ended March 31, 1998. This increase resulted primarily from the hiring and
training of 23 professional services and customer support personnel to support
our increased customer base. The number of our professional services and
customer support personnel increased to 38 at March 31, 1999 from 15 at March
31, 1998. Cost of services and maintenance revenues as a percentage of
services and maintenance revenues was 71% for fiscal 1999 and 87% for fiscal
1998. 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% to $3.8 million for the
fiscal year ended March 31, 1999 from $2.0 million for the fiscal year ended
March 31, 1998. This increase resulted from an increase in the number of
software developers and quality assurance personnel, to 49 from 26 employees,
to support our product development and testing activities. Research and
development expenses represented 21% of our total revenues for fiscal 1999 and
23% for the fiscal year ended March 31, 1998. 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.
25
<PAGE>
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% to $5.2 million for the fiscal
year ended March 31, 1999 from $1.3 million for the fiscal year ended March
31, 1998. 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 $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 29% of our total revenues for fiscal 1999 and
15% for fiscal 1998.
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% to $3.2 million for the
fiscal year ended March 31, 1999 from $1.2 million for the fiscal year ended
March 31, 1998. This increase resulted from an increase of $948,000 in hiring,
training and payroll related costs associated with the addition of 13
executive, finance and administrative personnel to support the growth of our
business and the amortization of deferred stock compensation expense as
described below. In addition, rent and utilities expense increased $489,000
due to the additional office space and travel and entertainment costs
increased $149,000 due to the increased personnel. The number of our
executive, finance and administrative personnel grew to 18 at March 31, 1999
from five at March 31, 1998. General and administrative expenses represented
18% of our total revenues for fiscal 1999 and 14% for fiscal 1998.
Deferred stock compensation expense was $218,000 for the fiscal year ended
March 31, 1999 and $0 for the fiscal year ended March 31, 1998.
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%.
26
<PAGE>
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for the last eight fiscal quarters ended March 31, 2000. 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>
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
2000 1999 1999 1999 1999 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software licenses..... $3,558 $3,225 $3,364 $3,829 $3,993 $3,737 $3,684 $2,040
Services and
maintenance.......... 2,378 2,126 2,261 2,085 1,617 1,098 865 915
------ ------ ------ ------ ------ ------ ------ ------
Total revenues...... 5,936 5,351 5,625 5,914 5,610 4,835 4,549 2,955
Cost of revenues:
Software licenses..... 81 105 144 97 26 110 92 70
Services and
maintenance.......... 1,618 1,577 1,437 1,401 1,172 881 553 587
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues........... 1,699 1,682 1,581 1,498 1,198 991 645 657
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 4,237 3,669 4,044 4,416 4,412 3,844 3,904 2,298
Operating expenses:
Research and
development.......... 1,292 1,263 1,246 1,198 1,051 1,183 894 701
Sales and marketing... 2,126 2,313 2,546 2,326 2,159 1,476 963 587
General and
administrative....... 1,030 828 838 792 948 979 686 549
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 4,448 4,404 4,630 4,316 4,158 3,638 2,543 1,837
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (211) (735) (586) 100 254 206 1,361 461
Interest, net........... 282 259 265 71 3 40 37 50
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... 71 (476) (321) 171 257 246 1,398 511
Income tax provision
(benefit).............. 2 (168) (122) 65 100 95 543 198
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 69 $ (308) $ (199) $ 106 $ 157 $ 151 $ 855 $ 313
====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) per
share:
Basic................. $ 0.00 $(0.02) $(0.01) $ 0.02 $ 0.05 $ 0.06 $ 0.37 $ 0.14
Diluted............... $ 0.00 $(0.02) $(0.01) $ 0.01 $ 0.01 $ 0.01 $ 0.06 $ 0.02
Shares used in compution
of earnings (loss) per
share:
Basic................. 15,931 15,635 15,500 5,179 3,087 2,707 2,340 2,165
Diluted............... 18,374 15,635 15,500 15,455 15,058 14,811 14,556 14,138
</TABLE>
Liquidity and Capital Resources
As of March 31, 2000, we had cash and cash equivalents of $22.6 million, an
increase of $20.8 million from cash and cash equivalents held at March 31,
1999. Our working capital at March 31, 2000 was $25.9 million, compared to
$4.4 million at March 31, 1999.
Net cash provided by (used in) operating activities was $338,000 for the
year ended March 31, 2000 compared to $(796,000) for the year ended March 31,
1999. This increase was primarily attributable to increases in deferred
revenues, and decrease in accounts receivable offset by the net loss for the
fiscal year ended March 31, 2000, and decreases in accounts payable and
accrued expenses, payment of income taxes and an increase in other current
assets.
27
<PAGE>
Investing activities used cash of $1.9 million for the fiscal year ended
March 31, 2000 and $2.0 million for the fiscal year ended March 31, 1999, for
the purchase of property and equipment.
Financing activities provided cash of $22.3 million for the fiscal year
ended March 31, 2000 due primarily to the proceeds from the sale of common
stock from the Company's initial public offering. Financing activities
provided cash of $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 the public
offering. We believe that the net proceeds of the public offering, together
with our existing cash and cash equivalents, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at
least the next twelve months.
Year 2000
To date we have not experienced any material problems attributable to the
inability to recognize dates beginning with the year 2000 in our software
products, services, or internal systems. Based on our current assessment, 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. Although we have passed the rollover from December 31,
1999 to January 1, 2000, we still face risks to the extent that products are
generally integrated into enterprise systems involving sophisticated hardware
and complex software products that we cannot adequately evaluate for Year 2000
compliance. To date, we have not incurred any material costs directly
associated with our Year 2000 compliance efforts, except for compensation
expense associated with our salaried employees who have devoted some of their
time to our Year 2000 assessment and remediation efforts.
Although we have not been a party to any litigation or arbitration
proceeding involving our products or services related to Year 2000 compliance
issues, we may in the future 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 have for Year
2000 related damages, including consequential damages, could materially
adversely affect our business, financial condition and operating results. Year
2000 issues did cause a delay in, or cancellation of, decisions to purchase
our products or services, our business, financial condition and operating
results have not at this point been materially adversely affected.
Factors Affecting Operating Results
Our future operating results are uncertain and likely to fluctuate. Our
operating results have varied widely in the past, and we expect that they will
continue to fluctuate in the future. In addition, our operating results may
not follow any past trends. It is particularly difficult to predict the timing
or amount of our license revenues because
. Our sales cycles are lengthy and variable, typically ranging between six
to nine months from our initial contact with a potential customer to the
signing of a license agreement, although occasionally sales require
substantially more time;
. The amount of unfulfilled orders for our products at the beginning of a
quarter is small because our products are typically shipped shortly
after orders are received; and
. We recognize a substantial portion of our license revenues in the last
month of a quarter, and often in the last weeks or days of a quarter.
28
<PAGE>
Nevertheless, we base our decisions regarding our operating expenses on
anticipated revenue trends. Because many of our expenses are relatively fixed,
a delay in recognizing revenue from a limited number of license transactions
could cause our operating results to vary significantly from quarter to
quarter and could result in operating losses. To the extent these expenses are
not followed by increased revenues, our operating results will suffer.
Our results fluctuate from quarter to quarter. In the past, the software
industry has experienced significant downturns, particularly when general
economic conditions decline and spending on management information systems
decreases. Our business, financial condition and operating results may
fluctuate substantially from quarter to quarter as a consequence of general
economic conditions in the software industry. In addition, the fiscal or
quarterly budget cycles of our customers can cause our revenues to fluctuate
from quarter to quarter. As a result of all of these factors, we believe that
period-to-period comparisons of our operating results are not meaningful, and
you should not rely on such comparisons to predict our future performance.
Fluctuations in our operating results, particularly compared to the
expectations of market analysts or investors, could cause volatility in the
price of our common stock.
We have a limited operating history. We commenced operations on April 29,
1994 and commercially released the initial version of CoreDossier in November
1995. Accordingly, we have a limited operating history, and we face all of the
risks and uncertainties encountered by early-stage companies. Our limited
operating history makes it difficult to forecast our future operating results.
The new and evolving nature of the electronic compliance market increases
these risks and uncertainties. We expect to continue to devote substantial
resources to our product development, sales and marketing, and customer
support. As a result, we will need to generate significant quarterly revenues
to achieve and maintain profitability. Our business strategies may not be
successful, and we may not be profitable in any future period.
We may be unable to expand our sales and support infrastructure. To date, we
have sold our products primarily through our direct sales force and have
supported our customers with our consulting and customer support staff. Our
future revenue growth will depend in large part on recruiting and training
additional direct sales, consulting and customer support personnel. We have
not experienced difficulty in recruiting qualified sales and support
personnel. We may not be able to successfully expand our direct sales force or
other distribution channels and any such expansion may not result in increased
revenues. If we are unable to hire highly trained consulting and customer
support personnel, we may be unable to meet customer demands. Our business,
financial condition and operating results will be materially adversely
affected if we fail to expand our direct sales force or our technical and
customer support staff.
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 industries requiring robust publishing
initiatives. Our business strategy includes targeting applications that are
document-intense publishing operations including bids and proposed management
of large documents, and others. We may not experience the same level of sales
in other industries as in the pharmaceutical and biotechnology industry.
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 successfully
against these new competitors our business and results of operations would be
harmed.
We depend on certain key employees. Our future performance will also largely
depend on the efforts and abilities of our key technical, customer support,
sales and managerial personnel and on our ability to retain them. Our success
will depend on our ability to attract and retain such personnel in the future.
In addition, the loss of any of our executive officers could materially
adversely affect our business, financial condition and operating results.
29
<PAGE>
Our market is subject to rapid technological change. The software market in
which we compete is characterized by rapid technological change. Existing
products become obsolete and unmarketable when products using new technologies
are introduced and new industry standards emerge. For example, we may need to
modify our products when third parties change software that we integrate into
our products. As a result, the lifecycles of our products are difficult to
estimate. To be successful, we must continue to enhance our current product
line and develop new products that successfully respond to such developments.
Our business, financial condition and operating results would be materially
adversely affected if we delay release of our products and product
enhancements or if these products and product enhancements fail to achieve
market acceptance when released.
We face risks from expansion of our international operations. We intend to
expand our international operations and may enter new international markets.
This expansion will require significant management attention and financial
resources. We may not be able to maintain or increase international market
demand for CoreDossier. We do not currently engage in currency hedging
activities, but we may do so in the future. Increases in the value of the U.S.
dollar relative to foreign currencies could materially adversely affect our
operating results.
We depend on service revenues. Support and service revenues represented 39%
of our total revenues for fiscal 2000 and 25% of our total revenues for fiscal
1999. We anticipate that service revenues will continue to represent a
significant percentage of total revenues. Because service revenues have lower
gross margins than license revenues, a continued increase in the percentage of
total revenues represented by service revenues resulting from increased
services and maintenance revenues or a decrease in license revenues could have
a detrimental impact on overall gross margins and our operating results.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are
short-term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. All of the potential changes noted above are based on
sensitivity analysis performed on our balances as of March 31, 2000.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
ESPS, Inc.
We have audited the accompanying balance sheets of ESPS, Inc. as of March
31, 2000 and 1999, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended March
31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ESPS, Inc. at March 31,
2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 18, 2000
31
<PAGE>
ESPS, INC.
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31,
----------------
2000 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $22,593 $ 1,812
Accounts receivable, net of allowance of $239 and $127..... 6,271 6,210
Accounts receivable--related party......................... -- 158
Prepaid income taxes....................................... 1,282 160
Deferred income taxes...................................... 634 322
Deferred offering costs.................................... -- 696
Other current assets....................................... 684 340
------- -------
Total current assets..................................... 31,464 9,698
Property and equipment, net.................................. 3,869 2,330
Purchased software........................................... 1,191 --
Other assets................................................. 40 28
------- -------
Total assets........................................... $36,564 $12,056
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................... $ 116 $ --
Accounts payable........................................... 502 956
Accrued expenses........................................... 1,634 2,471
Deferred revenues.......................................... 3,288 1,905
------- -------
Total current liabilities................................ 5,540 5,332
Long-term debt............................................... 435 --
Deferred income taxes........................................ 142 --
Stockholders' equity:
Series A preferred stock, $0.001 par value:
Authorized shares--6,000
Issued and outstanding shares--0 at March 31, 2000, 6,000
at March 31, 1999......................................... -- 6
Common stock, $0.001 par value:
Authorized shares--50,000
Issued and outstanding shares--16,147 and 3,154 at March
31, 2000 and 1999, respectively........................... 16 3
Additional paid-in capital................................. 30,469 6,570
Retained earnings.......................................... 17 349
Deferred stock compensation................................ (55) (204)
------- -------
Total stockholders' equity............................... 30,447 6,724
------- -------
Total liabilities and stockholders' equity............. $36,564 $12,056
======= =======
</TABLE>
See accompanying notes.
32
<PAGE>
ESPS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Revenues:
Software licenses.................................. $13,545 $11,676 $6,814
Software licenses--related party................... 431 1,778 --
Services and maintenance........................... 8,850 4,315 1,832
Services and maintenance--related party............ -- 180 --
------- ------- ------
Total revenues................................... 22,826 17,949 8,646
Cost of revenues:
Software licenses.................................. 427 298 258
Services and maintenance........................... 6,033 3,193 1,589
------- ------- ------
Total cost of revenues........................... 6,460 3,491 1,847
------- ------- ------
Gross profit......................................... 16,366 14,458 6,799
Operating expenses:
Research and development........................... 4,999 3,829 1,978
Sales and marketing................................ 9,311 5,185 1,283
General and administrative......................... 3,488 3,162 1,229
------- ------- ------
Total operating expenses......................... 17,798 12,176 4,490
------- ------- ------
Income (loss) from operations........................ (1,432) 2,282 2,309
Interest, net........................................ 877 130 52
------- ------- ------
Income (loss) before income taxes.................... (555) 2,412 2,361
Income tax provision (benefit)....................... (223) 936 (514)
------- ------- ------
Net income (loss).................................... $ (332) $ 1,476 $2,875
======= ======= ======
Earnings (loss) per share:
Basic.............................................. $ (0.03) $ 0.57 $ 3.81
Diluted............................................ $ (0.03) $ 0.10 $ 0.25
Shares used in computation of earnings (loss) per
share:
Basic.............................................. 13,041 2,575 754
Diluted............................................ 13,041 14,641 11,326
</TABLE>
See accompanying notes.
33
<PAGE>
ESPS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series A
Preferred Retained
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,
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
Issuance of common
stock.................. -- -- 3,683 3 23,358 -- -- 23,361
Conversion of preferred
stock into common
stock.................. (6,000) (6) 8,700 9 (3) -- -- --
Exercise of stock
options................ -- -- 610 1 166 -- -- 167
Stock options
cancelled.............. -- -- -- -- (44) -- 44 --
Tax benefits of exercise
of stock options....... -- -- -- -- 422 -- -- 422
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 105 105
Net loss................ -- -- -- -- -- (332) -- (332)
------ ---- ------ ---- ------- ------- ----- -------
Balance at March 31,
2000................... -- $-- 16,147 $ 16 $30,469 $ 17 $ (55) $30,447
====== ==== ====== ==== ======= ======= ===== =======
</TABLE>
See accompanying notes.
34
<PAGE>
ESPS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Operating activities:
Net income (loss).................................... $ (332) $1,476 $2,875
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 1,006 464 223
Deferred income taxes.............................. (170) 328 (650)
Provision for losses on accounts receivables....... 50 77 50
Amortization of deferred stock compensation........ 105 218 --
Changes in assets and liabilities:
Accounts receivable.............................. 47 (2,506) (3,619)
Prepaid income taxes............................. (700) -- --
Other current assets............................. (356) (291) (16)
Accounts payable and accrued expenses............ (695) 1,579 757
Deferred revenue................................. 1,383 (2,141) 3,115
------- ------ ------
Net cash provided by (used in) operating
activities.................................... 338 (796) 2,735
Investing activities:
Purchase of property and equipment................... (1,903) (2,001) (547)
Financing activities:
Proceeds from sale of common stock, net of offering
costs of $3,980..................................... 22,270 -- --
Repayments of long-term debt......................... (91) -- --
Stock issuance and deferred offering costs........... -- (83) --
Proceeds from exercise of stock options.............. 167 134 59
------- ------ ------
Net cash provided by financing activities...... 22,346 51 59
------- ------ ------
Net increase (decrease) in cash and cash
equivalents......................................... 20,781 (2,746) 2,247
Cash and cash equivalents, beginning of year......... 1,812 4,558 2,311
------- ------ ------
Cash and cash equivalents, end of year............... $22,593 $1,812 $4,558
======= ====== ======
Supplemental disclosures of cash flow information:
Fixed assets financed through capital lease
obligations......................................... $ 642 $ -- $ --
Liability incurred for offering costs................ $ -- $ 613 $ --
Issuance of common stock for purchased software...... $ 1,091 $ -- $ --
Cash paid for income taxes........................... $ 1,134 $ 236 $ 6
Cash paid for interest............................... $ 40 $ -- $ --
</TABLE>
See accompanying notes.
35
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
1. Business
ESPS, 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 and biotechnology
industries.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
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 ended March 31, 1998.
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. The adoption of this pronouncement did not have material impact
on the Company's revenue recognition practices. Based upon their
interpretation of SOP 97-2, SOP 98-4 and SOP 98-9, the Company believes its
current revenue recognition policies and practices are consistent with this
guidance.
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 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
36
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
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.
In fiscal year ended March 31, 2000 no customers accounted for more than 10%
of revenues. 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 9). 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.
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, 2000, the Company had the following financial instruments: cash
and cash equivalents, accounts receivable, capitalized lease, accounts payable
and accrued liabilities. The carrying value of cash and cash equivalents,
accounts receivable, capitalized lease, 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.
Initial Public Offering and Deferred Offering Costs
On June 16, 1999, the Company completed an initial public offering of 3.5
million shares of common stock at $7.50 per share. The offered shares
generated net proceeds to ESPS, Inc. of approximately $22.3 million.
Concurrent with the offering, all 6,000,000 of our convertible preferred stock
automatically converted into 8,700,000 shares of common stock.
Property and Equipment
Property and equipment is recorded at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
which range from three to eight 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
37
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
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
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.
Advertising Costs
The Company expenses advertising costs as incurred. For the years ended
March 31, 2000, 1999 and 1998, the Company incurred advertising costs of
$499,000, $331,000 and $180,000, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recent Pronouncements
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
fiscal year ended March 31, 1999. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income (loss) or
stockholders' equity.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the fiscal year ended March 31, 1999.
The adoption of SFAS No. 131 did not affect the Company's results of
operations or financial position. The Company operates in one industry
segment.
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, 2000.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the
38
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company is currently in the process of evaluating
the impact that SAB101 will have on its financial position and results of
operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for the purposes of
applying Accounting Practice Board Opinion No. 25, Accounting for Stock Issued
to Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. The Company believes that FIN 44 will not have a
material effect on the financial position or results of operations of the
Company.
3. Property and Equipment
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- ------
<S> <C> <C>
Computer equipment.......................................... $ 2,793 $1,832
Computer software........................................... 608 237
Furniture, fixtures, and office equipment................... 1,189 903
Leasehold improvements...................................... 558 273
Equipment under capital lease............................... 642 --
------- ------
5,790 3,245
Accumulated depreciation.................................... (1,921) (915)
------- ------
Total property and equipment.............................. $ 3,869 $2,330
======= ======
</TABLE>
4. Acquisition of Software
On March 2, 2000, the Company acquired the XDP software product from Xerox
Corporation in exchange for 175,824 shares of common stock valued at $1.1
million plus acquisition costs of $100,000. Components of the software are to
be used by the Company to develop additional software products to add to the
Company's suite of products. The Company will begin amortization of the
purchased software over its estimated useful life when the products are
available for general release, which is expected to occur in fiscal 2001.
Amortization of the costs will be based on the greater of the amount computed
using the ratio that current gross revenues for a product bear to the total of
the current and anticipated future gross revenues of that product or the
straight line method over the remaining estimated economic life of the
product.
Additionally, the Company entered into a reseller agreement, whereby Xerox
will act as a non-exclusive reseller for all of the Company's products. Xerox
will receive discounts off of the list price of the products sold based on
sales volume. The discounts given to Xerox will be paid in the form of both
cash and shares of common stock and are reflected in net sales. During the
year ended March 31, 2000, the Company recognized $773,000 in revenues under
the reseller agreement. No shares of common stock were issued under the
reseller agreement during the year ended March 31, 2000.
39
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
5. Accrued Expenses
Accrued expenses consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31,
-------------
2000 1999
------ ------
<S> <C> <C>
Income taxes.................................................. $ -- $ 488
Sales taxes................................................... 360 405
Payroll and related........................................... 848 809
Accrued offering costs........................................ -- 613
Other......................................................... 426 156
------ ------
Total accrued expenses...................................... $1,634 $2,471
====== ======
</TABLE>
6. Capital Stock
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. In general, twenty-five percent of the options are exercisable
on the first anniversary of the date of grant or the participant's hire date.
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
7,880,170 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 fair market value
of the shares at the date of grant. 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, 1999 and 1998, 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 producing deferred stock compensation of
$422,000. The deferred compensation is being amortized over the vesting period
of the underlying options using a graded vesting schedule. Amortization
expense of $105,000, $218,000 was recognized during the years ended March 31,
2000 and March 31,1999, respectively. Amortization of the remaining deferred
stock compensation will be amortized in fiscal 2001.
40
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
The following table summarizes information about stock options outstanding
at March 31, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Per Weighted Average
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 1,490,446 $ .07 2.10 950,778 $0.07
0.08-
2.07 901,591 0.92 2.32 548,773 0.61
3.88-
7.50 868,404 5.68 4.90 149,074 5.32
8.28-
12.56 368,718 9.21 3.90 125,639 9.08
12.94 4,000 12.94 4.32 -- --
13.69 1,200 13.69 4.30 -- --
--------- ---------
3,634,359 $ 2.57 3.01 1,774,264 $1.32
========= =========
</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 on
the date of grant using the Black-sholes option-pricing model with the
following weighted average assumptions: risk-free interest rate of 6.27%,
5.20% and 5.20% for fiscal year ended March 31, 2000, 1999 and 1998
respectively; an expected life of 4 years; volatility of 130% for fiscal year
ended March 31, 2000 and no volatility for fiscal years ended March 31, 1999
and March 31, 1998; and a dividend yield of zero for all periods presented.
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,
----------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported........................................ $ (332) $1,476 $2,875
SFAS No. 123 pro forma............................. (4,098) 1,309 2,870
Diluted earnings (loss) per share:
As reported--diluted............................... $ (0.03) $ 0.10 $ 0.25
SFAS No. 123 pro forma............................. $ (0.31) $ 0.09 $ 0.25
</TABLE>
The weighted average fair value of options granted during the years ended
March 31, 2000, 1999, and 1998 for which the estimated fair value of the stock
equaled the exercise price is $6.22, $0.89 and $0.06, respectively. The
weighted average fair value of options granted during the years ended 2000 and
1999 for which the stock price exceeded the exercise price is none and $1.84,
respectively.
41
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Price
Number of Per
Shares Share
---------- --------
<S> <C> <C>
Outstanding at April 1, 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
Granted............................................... 888,566 6.22
Exercised............................................. (609,906) 0.27
Canceled.............................................. (518,618) 3.98
---------- -----
Outstanding at March 31, 2000........................... 3,634,359 $2.57
========== =====
</TABLE>
Employee Stock Purchase Plan
In June 1999, the Company adopted an Employee Stock Purchase Plan (the
"ESPP") which allows full-time employees the opportunity to purchase shares of
the Company's common stock through payroll deductions at the end of bi-annual
purchase periods. The purchase price is the lower of 85% of the average market
price on the first or last day of the purchase periods. An employee may
purchase up to 15% of the employee's base salary, but no more than stock
having an aggregate market value of $25,000, determined at the beginning of
each purchase period. Pursuant to the ESPP, 350,000 shares of common stock
were reserved for issuance. During fiscal year ended March 31, 2000, 6,824
shares were purchased under the ESPP. At March 31, 2000, 343,176 shares are
available for future purchases.
42
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
7. 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,
-----------
2000 1999
----- ----
<S> <C> <C>
Current deferred tax assets:
Bad debt reserves............................................. $ 97 $ 51
Accrued vacation pay.......................................... 109 153
Other accrued liabilities..................................... 30 18
Tax credits................................................... 494 17
Net operating loss carryforwards.............................. 88 83
Other......................................................... 46 --
----- ----
Total deferred tax asset.................................... 864 322
Less: valuation allowance..................................... (230) --
----- ----
Total deferred tax asset.................................... $ 634 $322
Long term deferred tax liabilities:
Depreciation and amortization................................. $(142) $--
----- ----
Total deferred tax liability................................ (142) --
----- ----
Net deferred tax asset...................................... $ 492 $322
===== ====
</TABLE>
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,
---------------------
2000 1999 1998
----- ----- -------
<S> <C> <C> <C>
Federal statutory rate............................... $(189) $ 820 $ 791
State income taxes, net.............................. 7 158 90
Tax Credits.......................................... (331) -- --
Change in valuation allowance........................ 230 (157) (1,406)
Other................................................ 60 115 11
----- ----- -------
Income tax provision (benefit)..................... $(223) $ 936 $ (514)
----- ----- -------
Income tax provision (benefit):
Current:
Federal............................................ $ (46) $ 508 $ --
State.............................................. (7) 100 136
----- ----- -------
(53) 608 136
Deferred:
Federal............................................ (187) 270 (598)
State.............................................. 17 58 (52)
----- ----- -------
(170) 328 (650)
----- ----- -------
$(223) $ 936 $ (514)
===== ===== =======
</TABLE>
43
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
For the year ended March 31, 2000, the Company has a net operating loss of
approximately $1,387,000 for federal income tax purposes that will be carried
back to the years ended March 31, 1999 and 1998 to recover taxes paid in those
years. The Company also has $494,000 of research and development tax credits
at March 31, 2000 relating to research expenses incurred in 1994 through 1999.
These credits will be carried forward and will begin to expire in years 2009
through 2019. For state tax purposes, the Company has net operating losses of
approximately $1,833,000 that begin to expire during the year 2006. The
Company recorded a valuation allowance of $230,000 because management believes
that the research and development tax credits and net operating loss
carryforward may not be fully realizable.
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.
8. Commitments
The Company leases facilities and equipment under noncancelable operating
leases and equipment under a noncancelable capital lease. The interest rate on
the capital lease is 8.0%. Interest expense for the years ended March 31,
2000, 1999 and 1998 was $40,000, $0, and $0, respectively.
Rent expense under all operating leases for the years ended March 31, 2000,
1999 and 1998 was $1,176,000, $697,000, and $96,000, respectively.
Future minimum lease payments under the Company's leases as of March 31,
2000 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
---------- ---------
<S> <C> <C>
2001................................................... $ 973,000 $ 156,000
2002................................................... 623,000 156,000
2003................................................... 620,000 156,000
2004................................................... 620,000 156,000
Thereafter............................................. 438,000 26,000
---------- ---------
Total minimum lease payments........................... $3,274,000 $ 650,000
==========
Less: Amount representing interest..................... (99,000)
---------
Present value of future minimum lease payments......... 551,000
Less: Current portion.................................. (116,000)
---------
Long-term debt......................................... $ 435,000
=========
</TABLE>
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 1.7% to 2.5% of the net selling price of its
software licenses. Royalty expense is recorded as software licenses revenue is
recognized. The royalty agreement is renewable at the Company's election at a
rate of 1.7%.
9. 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 worldwide license to use the customized software.
In conjunction with the agreement, 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
44
<PAGE>
ESPS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000
received royalties of approximately $431,000 during the fiscal year ended
March 31, 2000 and $158,000 for the fiscal year ended March 31, 1999.
10. 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. Effective July 1, 2000, the Company will
begin matching 25% of eligible employees' contributions to the 401(k) plan up
to a maximum of 1.5% of the employee's compensation.
11. 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,
----------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Revenues:
United States...................................... $18,336 $14,631 $7,449
Europe............................................. 4,490 3,318 1,197
------- ------- ------
Total revenues................................... $22,826 $17,949 $8,646
======= ======= ======
Long-lived assets:
United States...................................... $ 4,713 $ 2,027 $ 747
Europe............................................. 347 303 16
------- ------- ------
Total long-lived assets.......................... $ 5,060 $ 2,330 $ 763
======= ======= ======
</TABLE>
12. 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,
------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss)................................. $ (332) $ 1,476 $ 2,875
Weighted average number of common shares
outstanding...................................... 13,041 2,575 754
Effect of dilutive securities:
Stock options................................... -- 3,366 1,872
Series A preferred stock........................ -- 8,700 8,700
------- ------- -------
Adjusted weighted average shares outstanding and
assumed conversions.............................. 13,041 14,641 11,326
======= ======= =======
Earnings (loss) per share:
Basic........................................... $ (0.03) $ 0.57 $ 3.81
Diluted......................................... $ (0.03) $ 0.10 $ 0.25
</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,
2000.
45
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and ten-percent shareholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of
such reports received by the Company and written representations from certain
reporting persons that no Forms 5 were required for those persons. The Company
believes that during the fiscal year ended March 31, 2000, all filing
requirements applicable to its officers, directors and ten-percent
shareholders were satisfied except for a Form 3 for R. Richard Dool which was
filed 22 days late, and a Form 4 for Charles Heller which has not been filed.
Compensation of Directors
In general, Directors who are not employees of the Company receive a fee of
$1,000 for attendance at each regular meeting of the Board of Directors, and
are also reimbursed for their reasonable out-of-pocket expenses incurred in
attending meetings. Non-employee Directors are also eligible to receive annual
stock option grants under the Company's 1995 Incentive Stock Option Plan. Mr.
Hollenbeck does not receive a fee of $1,000 for attendance at regular meetings
of the Board of Directors or stock option grants. Directors who are employees
are not compensated for their service on the Board of Directors or any
committee thereof.
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation for
services in all capacities to the Company for the fiscal years ended March 31,
2000, 1999, and 1998, of those persons who at March 31, 2000 were (i) the
Chief Executive Officer, (ii) each of the four other most highly compensated
executive officers of the Company in office who earned more than $100,000 in
salary and bonus in fiscal 2000, and (iii) an additional executive officer of
the Company who would otherwise be required to be named in this table except
for the fact that he is no longer an executive officer as of March 31, 2000
(collectively, the "Named Executive Officers").
46
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
--------------------------- ---------------------
Restricted Securities
Name and Principal Stock Underlying All Other
Position Year Salary($) Bonus($) Other($) Awards Options(#) Compensation
------------------ ---- --------- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Terrence P. Brennan(3).. 2000 $175,000 $84,415 $-- $-- -- $--
President and Chief 1999 175,000 65,625 -- -- -- --
Executive Officer 1998 150,000 38,000 -- -- -- --
Michael T. Hoey.........
Vice President, 2000 155,517 19,447 -- -- -- --
Research and 1999 150,000 15,000 -- -- -- --
Development 1998 119,166 30,000 -- -- 217,500 --
Kevin Leininger(2)...... 2000 73,828 21,820 -- -- -- --
Vice President, 1999 113,950 18,250 -- -- 145,000 --
Marketing
Jeffrey C. Sager(4)..... 2000 139,756 58,472 -- -- 66,666 --
Vice President, Sales 1999 130,000 36,750 -- -- 58,000 --
1998 102,244 30,000 -- -- 29,000 --
George B. Pearcy(5)..... 2000 127,718 40,071 -- -- -- --
Vice President, Finance 1999 120,000 31,500 -- -- -- --
and Administration 1998 117,499 30,000 -- -- 72,500 --
Leonard W. von 2000 147,598 28,529 -- -- 29,000 --
Vital(1)............... 1999 61,026 -- -- -- 286,004 --
Vice President, Chief
Financial Officer
</TABLE>
--------
(1) Mr. von Vital joined ESPS on October 26, 1998 and terminated employment on
April 4, 2000.
(2) Mr. Leininger joined ESPS on June 8, 1998 and terminated employment on
September 30, 1999.
(3) Terry Brennan resigned as President and Chief Executive Officer effective
as of April 24, 2000. He remains as Chairman of the Board.
(4) Mr. Sager was recently appointed Vice President, Business Development.
(5) Mr. Pearcy was recently appointed Chief Financial Officer.
47
<PAGE>
The following table contains information regarding options granted to the
Named Executive Officers in the fiscal year ended March 31, 2000 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, 2000, we granted options to acquire
up to an aggregate of 888,566 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. Optionees may pay the exercise price
by cash or check, promissory note, delivery of already-owned shares of our
common stock or by a cashless exercise procedure. Options under the 1995 stock
incentive plan generally vest over four years with 25% of the shares vesting
on the first anniversary of the grant date, and the remaining option shares
vesting 6.25% in every calendar quarter after the first anniversary of the
grant date. We may modify the standard vesting schedule. The options granted
to Mr. Sager during the fiscal year ended March 31, 2000 had immediate
vesting.
<TABLE>
<CAPTION>
Potential
realized Value
at Assumed
Annual rates of
Stock Price
Appreciation
Individual Grants for Option Term
-------------------------------------- ---------------
Number of % of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted (#) Fiscal Year Price ($/Sh.) Date 5% 10%
---- ----------- ------------- ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Terrence P. Brennan..... -- -- -- -- -- --
Michael T. Hoey......... -- -- -- -- -- --
Kevin Leininger......... -- -- -- -- -- --
Jeffrey C. Sager (1).... 66,666 7.5 (1) (1) 247,374 627,280
George B. Pearcy........ -- -- -- -- -- --
Leonard W. von Vital
(2).................... 29,000 3.3 7.50 6/15/04 60,091 132,786
</TABLE>
Option Grants in Last Fiscal Year
--------
(1) Mr. Sager was granted 33,333 options at $4.94, expiration date of
12/31/04 and 33,333 options at $6.88, expiration date of 3/31/05.
(2) Mr. von Vital terminated employment with ESPS on April 4, 2000.
The following table presents information regarding the value realized upon
exercise of options and the number and value of vested and unvested options
held by the Named Executive Officers as of March 31, 2000, in the summary
compensation table above using the Black-Sholes option-pricing model.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at Fiscal Year End In-the-Money Options
Acquired Value (#) at Fiscal Year End ($)(2)
On Exercise Realized ------------------------------ -------------------------
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Terrence P. Brennan..... -- $ -- 398,747 99,688 $2,711,121 $677,789
Michael T. Hoey......... 50,000 293,550 277,915 121,440 1,891,489 826,521
Kevin Leininger......... 36,250 196,874 -- -- -- --
Jeffrey C. Sager........ -- -- 164,540 59,814 607,264 135,705
George B. Pearcy........ -- -- 227,015 48,485 1,545,064 329,989
Leonard W. von
Vital(3)............... 2,000 9,702 75,250 157,754 277,843 479,101
</TABLE>
--------
(1) Value Realized represents the fair market value of the shares of common
stock underlying the options on the date of exercise less the aggregate
exercise price of the option.
(2) Value is based on the difference between the option exercise price and the
fair market value of the Company's Common stock at March 31, 2000, the
fiscal year-end ($6.875 per share), multiplied by the number of shares
underlying the option.
(3) Mr. von Vital terminated employment with ESPS on April 4, 2000.
48
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table presents stock ownership information, as of May 31,
2000, with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our
common stock, each director and each Named Executive Officer and all current
directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares Options Percent
Beneficial Owner(1) Owned Exercisable(2) Total of Class
------------------- --------- -------------- --------- --------
<S> <C> <C> <C> <C>
Adobe Incentive Partners L.P...... 4,916,244 -- 4,916,244 30.2%
345 Park Avenue
San Jose, CA 95110
H & Q ESPS Investors LP........... 2,900,000 -- 2,900,000 17.8%
One Bush Street
San Francisco, CA 94104
Adobe Ventures LP................. 820,201 -- 820,201 5.0%
One Bush Street
San Francisco, CA 94104
Terrence P. Brennan(3)............ 898,246 448,591 1,346,837 8.0%
Michael T. Hoey................... 144,100 311,447 455,547 2.7%
Jeffrey C. Sager.................. 35,186 131,508 347,694 2.1%
George B. Pearcy.................. 23,216 243,780 266,996 1.6%
Charles O. Heller................. 134,501 36,590 171,091 1.1%
Christopher B. Hollenbeck......... 50,000 6,500 56,500 *
Margaret A. Archdeacon............ -- 41,005 41,005 *
Bradley R. Burget................. -- 49,155 49,155 *
Michael J. Egan................... -- 16,329 16,629 *
Kevin Buxton...................... -- -- -- *
R. Richard Dool................... -- -- -- *
Kenneth Kaisen.................... -- -- -- *
Leonard W. von Vital(4)........... -- -- -- *
Kevin Leininger(5)................ -- -- -- *
All current Directors, nominees
and executive
officers as a group (12 persons).. 1,285,249 1,284,905 2,751,454 15.4%
</TABLE>
--------
*Represents less than 1% of our outstanding common stock.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days are deemed to be outstanding
and to be beneficially owned by the person holding such options or
convertible notes for the purpose of computing the percentage ownership
of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Options Exercisable are options currently exercisable or exercisable
within 60 days of May 31, 2000.
(3) Includes 162,530 shares of Common Stock held by trusts of which Mrs.
Brennan is trustee.
(4) Mr. von Vital joined ESPS on October 26, 1998 and terminated on April 4,
2000.
(5) Mr. Leininger joined ESPS on June 8, 1998 and terminated employment on
September 30, 1999.
49
<PAGE>
Item 13. Certain Relationships and Related Transactions.
On April 14, 2000, Kenneth R. Kaisen was appointed to the ESPS Board of
Directors. Mr. Kaisen currently is the Vice President, Information Management
and Chief Information Officer for the Industry Solutions Operations
organization within Xerox Corporation. Mr. Kaisen's appointment took place
shortly after Xerox entered a long-term, multi-million dollar technology
development and reseller agreement with ESPS that included the creation of a
Xerox seat on the ESPS board of directors and Xerox participation on the ESPS
Technical Advisory Board. As part of the industry partnership, Xerox and ESPS
also have agreed to collaborate on a common product, incorporating the
innovative functionality and features of Xerox Dossier Publisher (XDP) and
ESPS' CoreDossier(R) into a single, "best of breed" Web content publishing
solution.
50
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)(A)Financial Statements.
(a)(1)(B)Report of Independent Auditors.
i) Balance Sheets at March 31, 2000 and 1999
ii) Statements of Income for the years ended March 31, 2000, 1999 and
1998
iii) Statements of Stockholders' Equity for the years ended March 31,
2000, 1999 and 1998
iv) Statements of Cash Flows for the years ended March 31, 2000, 1999
and 1998
v) Notes to Financial Statements
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Financial Statements or notes thereto.
(a)(3)List of Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Form of Second Amended and Restated Certificate of Incorporation
of the Company. (Filed as Exhibit 3.1 to the Form S-1/A dated June
3, 1999 and incorporated herein by reference.)
3.2 Form of Second Amended and Restated Bylaws of the Company. (Filed
as Exhibit 3.2 to the Form S-1/A dated June 3, 1999 and
incorporated herein by reference.)
10.1 1995 Stock Incentive Plan, as amended. (Filed as Exhibit 10.1 to
the Form S-1/A dated April 1, 1999 and incorporated herein by
reference.)
10.2 Lease between Maplewood Center Limited Partnership and the Company
dated June 10, 1998. (Filed as Exhibit 10.2 to the Form S-1 dated
March 31, 1999 and incorporated herein by reference.)
10.3 ESPS Rights Agreement dated July 5, 1994. (Filed as Exhibit 10.3
to the Form S-1 dated March 31, 1999 and incorporated herein by
reference.)
10.4 License and Marketing Agreement between Adobe Systems Incorporated
and the Company dated November 6, 1997. (Filed as Exhibit 10.4 to
the Form S-1 dated March 31, 1999 and incorporated herein by
reference.)
10.5 Value Added Reseller License Agreement between Versant Object
Technology and the Company dated December 31, 1996. (Filed as
Exhibit 10.5 to the Form S-1/A dated June 15, 1999 and
incorporated herein by reference.)#
10.6 Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated July 29, 1996. (Filed as Exhibit 10.6 to the Form S-
1 dated March 31, 1999 and incorporated herein by reference.)
10.7 Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated September 18, 1996. (Filed as Exhibit 10.7 to the
Form S-1 dated March 31, 1999 and incorporated herein by
reference.)
10.8 Convertible Promissory Note between Adobe Ventures L.P. and the
Company dated November 6, 1996. (Filed as Exhibit 10.8 to the Form
S-1 dated March 31, 1999 and incorporated herein by reference.)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.9 Series A Preferred Stock Purchase Agreement between Adobe Ventures
L.P., H&Q Investors L.P. and the Company. (Filed as Exhibit 10.9
to the Form S-1/A dated June 3, 1999 and incorporated herein by
reference.)
10.10 ESPS, Inc. Employee Stock Purchase Plan. (Filed as Exhibit 10.10
to the Form S-1/A dated May 18, 1999 and incorporated herein by
reference.)
21 Subsidiaries/None
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (included on signature page).
27* Financial Data Schedule.
</TABLE>
--------
* Filed herewith.
# Portions of this exhibit were omitted and filed separately with the Secretary
of the Securities and Exchange Commission pursuant to a request for
confidential treatment.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized this 27th day of
June, 2000.
ESPS, Inc.
/s/ R. Richard Dool
By: _________________________________
R. Richard Dool
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints R. Richard Dool and George B. Pearcy, his
attorney-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K and to file
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorney-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. Richard Dool President, Chief Executive June 29, 2000
______________________________________ Officer and Director
R. Richard Dool (Principal Executive
Officer)
/s/ George B. Pearcy Vice President and Chief June 29, 2000
______________________________________ Financial Officer
George B. Pearcy (Principal Financial and
Accounting Officer)
/s/ Terrence P. Brennan Chairman of the Board June 29, 2000
______________________________________
Terrence P. Brennan
/s/ Michael J. Egan Director June 29, 2000
______________________________________
Michael J. Egan
/s/ Charles O. Heller Director June 29, 2000
______________________________________
Charles O. Heller
/s/ Christopher B. Hollenbeck Director June 29, 2000
______________________________________
Christopher B. Hollenbeck
/s/ Kenneth Kaisen Director June 29, 2000
______________________________________
Kenneth Kaisen
</TABLE>
53
