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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000
-------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from __________ to __________
Commission File Number: 0-26245
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ESPS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2762324
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Virginia Drive, Suite 125, Ft. Washington, Pa 19034
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 619-6000
---------------
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 ____
---
As of November 9, 2000, 17,131,696 shares of the registrant's Common Stock, par
value $0.001 per share, were outstanding.
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ESPS, INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
----------------------------------------------------
ITEM 1. Financial Statements
Balance Sheets (Unaudited) 3
Statements of Operations (Unaudited) 4
Statements of Cash Flows (Unaudited) 5
Notes to Unaudited Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II - Other Information
----------------------------------------------------
ITEM 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-k 15
Signatures 16
Exhibit 27 Financial Data Schedule 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
-----------------------------
ESPS, INC.
-----------
BALANCE SHEETS
--------------
(In thousands)
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
----------------------- ---------------------
(Unaudited)
Assets
Current assets:
<S><C> <C> <C>
Cash and cash equivalents $22,434 $22,593
Accounts receivable, net of allowance of $217 and $239 7,758 6,271
Other current assets 856 684
Prepaid income taxes 253 1,282
Deferred income taxes 634 634
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Total current assets 31,935 31,464
Property and equipment, net 3,969 3,869
Purchased software 1,158 1,191
Other assets 40 40
------- -------
Total assets $37,102 $36,564
======= =======
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 121 $ 116
Accounts payable and accrued expenses 2,113 2,136
Deferred revenues 3,375 3,288
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Total current liabilities 5,609 5,540
Long-term debt 374 435
Deferred income taxes 142 142
Stockholders'equity:
Common stock, $0.001 par value: Authorized shares 50,000 issued and
outstanding shares, 16,992 shares at September 30, 2000 and 16,147
shares at March 31, 2000 17 16
Additional paid-in capital 30,743 30,469
Retained earnings 241 17
Deferred stock compensation (24) (55)
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Stockholders' equity 30,977 30,447
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Total liabilities and stockholders' equity $37,102 $36,564
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
3
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ESPS, INC.
----------
STATEMENTS OF OPERATIONS
------------------------
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------- ----------------------------
September 30, September 30,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- ------- -------
Revenues:
Software licenses $ 3,702 $ 3,364 $ 7,740 $ 7,193
Services and maintenance 2,850 2,261 5,256 4,346
------- ------- ------- -------
Total revenues 6,552 5,625 12,996 11,539
Cost of revenues:
Software licenses 99 144 189 241
Services and maintenance 1,745 1,437 3,418 2,838
------- ------- ------- -------
Total cost of revenues 1,844 1,581 3,607 3,079
------- ------- ------- -------
Gross profit 4,708 4,044 9,389 8,460
Operating expenses:
Research and development 1,275 1,246 2,619 2,444
Sales and marketing 2,940 2,546 5,172 4,872
General and administrative 929 838 1,911 1,630
------- ------- ------- -------
Total operating expenses 5,144 4,630 9,702 8,946
------- ------- ------- -------
Loss from operations (436) (586) (313) (486)
Interest, net 341 265 677 336
------- ------- ------- -------
Income (loss) before income taxes (95) (321) 364 (150)
Income tax provision (benefit) (23) (122) 140 (57)
------- ------- ------- -------
Net income (loss) $ (72) $ (199) $ 224 $ (93)
======= ======= ======= =======
Earnings (loss) per share:
Basic $0.00 $(0.01) $0.01 $(0.01)
======= ======= ======= =======
Diluted $0.00 $(0.01) $0.01 $(0.01)
======= ======= ======= =======
Shares used in computation of earnings (loss)per share:
Basic 16,841 15,500 16,582 10,368
======= ======= ======= =======
Diluted 16,841 15,500 18,271 10,368
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
4
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ESPS, INC.
-----------
STATEMENTS OF CASH FLOWS
------------------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
--------------------------
September 30,
--------------------------
<S> <C> <C>
2000 1999
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Operating activities:
Net income (loss) $ 224 $ (93)
Adjustments to reconcile net income to net cash provided in
Operating activities:
Depreciation and amortization 699 414
Amortization of deferred stock compensation 18 70
Provision for losses on accounts receivable 25 -
Changes in operating assets and liabilities:
Accounts receivable (1,512) 175
Other assets (172) (510)
Prepaid taxes 1,029 (701)
Accounts payable and accrued expenses (23) (965)
Deferred revenues 87 420
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Net cash provided by (used in) operating activities 375 (1,190)
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Investing activities:
Purchases of property and equipment (766) (1,206)
Financing activities:
Proceeds from the sale of common stock - 22,241
Repayments of long-term debt (56) (36)
Proceeds from exercise of stock options 288 74
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Net cash provided by financing activities 232 22,279
Net increase (decrease) in cash and cash equivalents (159) 19,883
Cash and cash equivalents balance, beginning of period 22,593 1,812
------- -------
Cash and cash equivalents balance, end of period $22,434 $21,695
======= =======
Supplemental cash flow disclosure:
Interest paid $ 21 $ 16
Income taxes paid $ - $ 1,132
Fixed assets financed through capital lease obligations $ - $ 642
</TABLE>
See accompanying notes to unaudited financial statements.
5
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Item 1. FINANCIAL STATEMENTS (Continued)
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ESPS, INC.
----------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
---------------------------------------
1. Description of Business and Basis of Presentation
--------------------------------------------------
ESPS, Inc., a Delaware corporation, 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 serve 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 solutions 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.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in conformity
with accounting principles generally accepted in the United States for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In our opinion, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These financial statements should be
read in conjunction with our audited financial statements for the fiscal year
ended March 31, 2000, included in our Form 10-K, filed which are hereby
incorporated by reference in this quarterly report on Form 10-Q.
Our results of operations for any interim period are not necessarily indicative
of the results of operations for any other interim period or for a full fiscal
year.
2. Accounting Policies
-------------------
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.
3. Net Income Per Common Share
--------------------------------
Basic and diluted net income per common share is calculated by dividing the net
income by the weighted average number of common shares outstanding.
Diluted net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the incremental common shares issuable upon
the exercise of stock options using the treasury stock method.
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The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------- -----------------
September 30, September 30,
-------------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ (72) $ (199) $ 224 $ (93)
======= ======= ======= =======
Weighted average number of common shares outstanding 16,841 15,500 16,582 10,368
Effect of dilutive securities:
Stock options - - 1,689 -
------- ------- ------- -------
Adjusted weighted average shares outstanding and assumed conversions 16,841 15,500 18,271 10,368
======= ======= ======= =======
Earnings per share:
Basic $ 0.00 $ (0.01) $ 0.01 $ (0.01)
======= ======= ======= =======
Diluted $ 0.00 $ (0.01) $ 0.01 $ (0.01)
======= ======= ======= =======
</TABLE>
4. Subsequent Event
----------------
On November 7, 2000 the Company entered into a convertible note agreement with a
technology company partially owned by an employee and shareholder of the
Company, who is a related party. Under the terms of the agreement, the Company
committed to loan the borrower $1,000,000 in two equal installments. The first
installment was paid upon execution of the agreement. The remaining commitment
of $500,000 is contingent upon the borrower achieving certain milestones related
to development of its technology. The debenture is convertible in whole or in
part, into stock of the borrower either upon the borrower securing $3 million in
additional financing, or upon a change of control of the borrower. The note is
due on July 31, 2002, and bears interest at the rate of 7% annually. Under the
terms of the agreement, the Company received a license to use the technology
under development, and is also obligated to pay the borrower a royalty based on
future sales of the Company's product which include technology licensed from the
borrower.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS
--------------
Certain statements in this Form 10-Q contain "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933, as amended) that involve
risks and uncertainties which may cause actual results to differ materially from
those predicted in the forward-looking statements. If any of our assumptions on
which the statements are based prove incorrect or should unanticipated
circumstances arise, our actual results could materially differ from those
anticipated by such forward-looking statements. The differences could be caused
by a number of factors or combination of factors, including, but not limited to,
those listed under the caption "Factors Affecting Operating Results" described
herein and the Risk Factors set forth in our filings with the Securities and
Exchange Commission, including our Form 10-K for March 31, 2000.
Overview
--------
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 solutions 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
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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, government
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 API's enable third parties to develop custom
applications and extend access to additional external information sources.
Results of Operations
---------------------
The following table presents statement of operations data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Three months Six months
Ended September 30, Ended September 30,
----------------------- -----------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
----- ----- ----- -----
Statement of Operations Data:
Revenues:
Software licenses 56.5% 59.8% 59.6% 62.3%
Services and maintenance 43.5 40.2 40.4 37.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses 1.5 2.6 1.5 2.1
Services and maintenance 26.6 25.5 26.3 24.6
----- ----- ----- -----
Total cost of revenues 28.1 28.1 27.8 26.7
----- ----- ----- -----
Gross profit 71.9 71.9 72.2 73.3
Operating expenses:
Research and development 19.5 22.1 20.2 21.2
Sales and marketing 44.9 45.3 39.8 42.2
General and administrative 14.2 14.9 14.7 14.1
----- ----- ----- -----
Total operating expenses 78.6 82.3 74.7 77.5
----- ----- ----- -----
Loss from operations (6.7) (10.4) (2.5) (4.2)
Interest, net 5.2 4.7 5.2 2.9
----- ----- ----- -----
Income (loss) before income taxes (1.5) (5.7) 2.8 (1.3)
Income tax (benefit) (0.4) (2.2) 1.1 (0.5)
----- ----- ----- -----
Net income (loss) (1.1)% (3.5)% 1.7% (0.8)%
===== ===== ===== =====
</TABLE>
8
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Comparison of Three Months Ended September 30, 2000 and 1999
------------------------------------------------------------
For the three months ended September 30, 2000, revenues were $6.6 million,
representing an increase of 16% over the $5.6 million for the comparable period
in 1999. Net loss for the three months ended September 30, 2000 was $72,000, or
$0.00 per diluted share, compared to net loss of $199,000, or $0.01 per diluted
share for the same period in 1999. Weighted average shares used in computing
diluted earnings per share in the second fiscal quarter were 16.8 million versus
15.5 million in the same period in the prior year.
Revenues
License revenues. License revenues increased 10% to $3.7 million for the three
months ended September 30, 2000, from $3.4 million for the three months ended
September 30, 1999. This increase is primarily due to a large deployment of our
new kPublisher software to a DMS vendor in the current period.
Services and maintenance revenues. Services and maintenance revenues increased
26% to $2.9 million for the three months ended September 30, 2000 from $ 2.3
million, for the three months ended September 30, 1999. This increase resulted
primarily from an increase in demand for implementation and maintenance services
on a larger customer base.
For the three months ended September 30, 2000, two customers accounted for 28%
of revenues and for the three months ended September 30, 1999, no customers
accounted for more than 10% of 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 and amortization for
purchased software. Cost of software licenses as a percentage of revenues were
1.5% of license revenues for the three months ended September 30, 2000 and 2.6%
for the three months ended September 30, 1999. The reduced cost of software
license revenues percentage is due to the contract with a DMS vendor, which did
not have any cost of software license revenues as no third party software was
embedded in our kPublisher product. There is $33,000 of amortization for
purchased software in the quarter ended September 30, 2000. We expect the cost
of software license revenues to increase in future periods as we deploy this
technology to our customers and amortize the purchased software.
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 21%
to $1.7 million for the three months ended September 30, 2000 from $1.4 million
for the three months ended September 30, 1999. This increase resulted primarily
from the hiring and training of 10 additional professional services and customer
support personnel to support our increased customer base. The number of
professional services and maintenance professional services and customer support
personnel increased to 63 at September 30, 2000 from 53 at September 30, 1999.
Cost of services and maintenance revenues as a percentage of services and
maintenance revenues decreased to 61% for the three months ended September 30,
2000 from 64% for the three months ended September 30, 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. Service and maintenance gross profits were 39%
for the three months ended September 30, 2000 compared to 36% for the three
months ended September 30, 1999. The increase in service margins is due to
increased consultant utilization.
Operating Expenses
Research and development. Research and development expenses consist primarily
of salaries and benefits for software developers, quality assurance personnel,
program managers and technical writers. Research and development expenses
increased 2% to $1.3 million for the three months ended September 30, 2000 from
$1.2 million for the three months ended September 30, 1999. This increase
resulted primarily from an increase in depreciation, office rent and recruiting.
Research and development expenses represented 19% of our total revenues for the
three months ended September 30, 2000 and 22% for the three months ended
September 30, 1999.
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Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions earned by sales personnel, travel, promotional expenses
and communication costs related to direct sales efforts. Sales and marketing
expenses increased 15% to $2.9 million in the three months ended September 30,
2000 from $2.5 million for the three months ended September 30, 1999. The
number of our executive, sales and marketing personnel was 57 at September 30,
2000 and 49 at September 30, 1999. Sales and marketing expenses represented 45%
of our total revenues for the three months ended September 30, 2000 and
September 30, 1999. In an effort to expand our market position and further
increase our penetration and acceptance of our products in our targeted
industries, we expect to make aggressive investments in sales and marketing in
the future, and accordingly, expect sales and marketing expenses to 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 investor relations. General and administrative
expenses increased 11% to $929,000 for the three months ended September 30, 2000
from $838,000 for the three months ended September 30, 1999. This increase
resulted primarily from increased investor relations costs. The number of our
executive, finance and administrative personnel remained constant at 22 as of
September 30, 2000 and September 30, 1999.
Interest, net. Interest, net is derived from interest income earned on our
cash and cash equivalents, offset by interest expense on our capital lease. Net
interest income increased 29% to $341,000 for the three months ended September
30, 2000 from $265,000 for the three months ended September 30, 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 tax provision (benefit). Income tax benefit decreased by $99,000 to a
benefit of $23,000 for the three months ended September 30, 2000 from a benefit
of $122,000 for the three months ended September 30, 1999. This decrease
resulted from a lower loss before income taxes for the three months ended
September 30, 2000.
Comparison of Six Months Ended September 30, 2000 and 1999
----------------------------------------------------------
For the six months ended September 30, 2000, revenues were $13.0 million, an
increase of 13% over the $11.5 million for the comparable period in 1999. Net
income for the six months ended September 30, 2000 was $224,000, or $.01 per
diluted share, compared to net loss of $93,000, or $.01 loss per diluted share
for the same period in 1999. Weighted average shares used in computing diluted
earnings per share in the six months ended September 30, 2000 were 18.3 million
versus 10.3 million in the same period in the prior year.
Revenues
License revenues. License revenues increased 8% to $7.7 million for the six
months ended September 30, 2000, from $7.2 million for the six months ended
September 30, 1999.
Services and maintenance revenues. Services and maintenance revenues increased
21% to $5.3 million for the six months ended September 30, 2000 from $4.3
million, for the six months ended September 30, 1999. The increase reflects the
greater implementation capabilities and increased maintenance on a larger
customer base.
For the six months ended September 30, 2000, one customer accounted for 12% of
revenues and for the six months ended September 30, 1999, no customers accounted
for more than 10% of revenues.
Cost of Revenues
Cost of software licenses revenues. Cost of software licenses revenues
decreased 22% to $189,000 for the six months ended September 30, 2000 from
$241,000 for the six months ended September 30, 1999. The reduced cost of
software license revenues percentage is due to the contracts with a DMS vendor
this quarter and File Net last quarter, which did not have any cost of software
license revenues as no third party software was embedded in our kPublisher
product.
Cost of services and maintenance revenues. Cost of services and maintenance
revenues increased 20% to $3.4 million for the six months ended September 30,
2000 from $2.8 million for the six months ended September 30, 1999. This
increase resulted primarily from the hiring and training of professional
services and
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customer support personnel to support our increased customer base. Cost of
services and maintenance revenues as a percentage of services and maintenance
revenues remained at 65% for the six months ended September 30, 2000 and
September 30, 1999. The cost of services and maintenance revenues as a
percentage of services and maintenance revenues may vary among periods because
the various services we provide have different cost structures.
Operating Expenses
Research and development. Research and development expenses increased 7% to
$2.6 million for the six months ended September 30, 2000 from $2.4 million the
six months ended September 30, 1999. This increase resulted from an increase in
depreciation, office rent and recruiting. Research and development expenses
represented 20% of our total revenues for the six months ended September 30,
2000 and 21% for the six months ended September 30, 1999.
Sales and marketing. Sales and marketing expenses increased 6% to $5.2 million
in the six months ended September 30, 2000 from $4.9 million for the six months
ended September 30, 1999. This increase resulted primarily from our increased
investment in sales and marketing infrastructure. The increased investments
included recruiting, payroll, and related office costs. Sales and marketing
expenses represented 40% of our total revenues for the six months ended
September 30, 2000 and 42% for the six months ended September 30, 1999.
General and administrative. General and administrative expenses increased 17%
to $1.9 million for the six months ended September 30, 2000 from $1.6 million
for the six months ended September 30, 1999. This increase resulted from
increased payroll costs, travel, professional fees and investor relation fees
partially offset by lower amortization of deferred stock compensation. The
number of our executive, finance and administrative personnel remained at 22 at
September 30, 2000 and September 30, 1999. General and administrative expenses
represented 15% of our total revenues for the six months ended September 30,
2000 and 14% of total revenues for the six months ended September 30, 1999.
Interest, net. Net interest income increased 101% to $677,000 for the six
months ended September 30, 2000 from $336,000 for the six months ended September
30, 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 tax provision (benefit). Income tax provision increased by $197,000 to
expense of $140,000 for the six months ended September 30, 2000 from income tax
benefit of $57,000 for the six months ended September 30, 1999. This increase
resulted from income before income taxes for the six months ended September 30,
2000 versus a loss before income taxes for the six months ended September 30,
1999.
Effective June 15, 2000, the Company adopted the Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities ("Statement 133"). Statement
133 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. The
Company will adopt Statement 133 on April 1, 2001. Because the Company has never
used nor currently intends to use derivatives, management does not believe that
the adoption of Statement 133 will have a material effect on the Company's
financial position, results of operations, or liquidity.
In December 1999, the Securities and Exchange Commission's ("SEC") staff issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides the staff's views on applying generally
accepted accounting principles to selected revenue recognition issues. In March
and again in September 2000, the SEC staff delayed the implementation date of
SAB No. 101 which must now be implemented by the Company no later than the
fourth quarter of fiscal year ended March 31, 2001, effective retroactively to
the first quarter of such fiscal year. In addition, on October 12, 2000, the SEC
staff issued a Frequently Asked Questions ("FAQ") document which clarifies and
elaborates on the SEC staff's views regarding revenue recognition. The Company
does not believe that SAB 101 in consideration with the related FAQ will have a
material effect on its financial position, results of operations, or liquidity.
Liquidity and Capital Resources
-------------------------------
As of September 30, 2000, we had cash and cash equivalents of $22.4 million, a
decrease of $159,000 from cash and cash equivalents held at March 30, 2000. Our
working capital at September 30, 2000 was $26.3 million, compared to $25.9
million at March 30, 2000.
Our operating activities resulted in net cash inflows of $375,000 for the six
months ended September 30, 2000 and net cash outflows of $1.2 million for the
six months ended September 30, 1999. The operating cash inflows for the six
months ended September 30, 2000 were from the income for the period, and refund
of prepaid income taxes, partially offset by increases in accounts receivable
and other assets. The operating cash outflows for the six months ended September
30, 1999 were primarily from payments of taxes, decreases in accounts payable
and accrued expenses, and increases in other assets and the operating loss for
the period, offset by an increase in deferred revenues and a decrease in
accounts receivable.
Investing activities used cash of $766,000 for the six months ended September
30, 2000, and $1.2 million for the six months ended September 30, 1999 for the
purchase of property and equipment.
11
<PAGE>
Financing activities provided cash of $232,000 for the six months ended
September 30, 2000 due to proceeds from the exercise of stock options and
proceeds from the employee stock purchase plan, partially offset by the payment
of long term debt. Financing activities provided $22.3 million for the six
months ended September 30, 1999 due primarily to the proceeds from the sale of
common stock from the Company's initial public offering.
We anticipate that we will continue to experience significant growth in our
operating expenses. Operating expenses will consume a material amount of our
cash inflows, 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.
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.
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
12
<PAGE>
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 other 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.
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.
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We depend on service revenues. Support and service revenues represented 40% of
our total revenues for the first six months of fiscal 2001 and 38% of our total
revenues for fiscal 2000. 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 3. 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 September 30, 2000.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------- -----------------
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not involved in any legal proceedings, which would, in management's opinion,
have a material adverse effect on the Company's business or results of
operations.
ITEM 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The following matters were voted upon at the Annual Meeting of Stockholders held
on September 8, 2000, and received the votes set forth below:
1. All of the following persons nominated were elected to serve as directors
and received the number of votes set opposite their respective names:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
For Withheld
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
R. Richard Dool 12,207,564 2,948,133
-----------------------------------------------------------------------------------------------------------------
Charles O. Heller 12,198,147 2,957,550
-----------------------------------------------------------------------------------------------------------------
Christopher B. Hollenbeck 12,196,047 2,959,650
-----------------------------------------------------------------------------------------------------------------
Kenneth R. Kaisen 12,205,764 2,949,933
-----------------------------------------------------------------------------------------------------------------
</TABLE>
2. A stockholder proposal to amend the ESPS, Inc. Stock Incentive Plan by
increasing the number of shares of ESPS common stock that may be issued
under the plan from 7,880,170 to 10,380,170 received 10,925,971 votes FOR
and 888,860 votes AGAINST, with 16,867 abstentions.
14
<PAGE>
Item 5. Other Information
------- -----------------
Subsequent Event
----------------
On November 7, 2000 the Company entered into a convertible note agreement with a
technology company partially owned by an employee and shareholder of the
Company, who is a related party. Under the terms of the agreement, the Company
committed to loan the borrower $1,000,000 in two equal installments. The first
installment was paid upon execution of the agreement. The remaining commitment
of $500,000 is contingent upon the borrower achieving certain milestones related
to development of its technology. The debenture is convertible in whole or in
part, into stock of the borrower either upon the borrower securing $3 million in
additional financing, or upon a change of control of the borrower. The note is
due on July 31, 2002, and bears interest at the rate of 7% annually. Under the
terms of the agreement, the Company received a license to use the technology
under development, and is also obligated to pay the borrower a royalty based on
future sales of the Company's product which include technology licensed from the
borrower.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this Form 10-Q.
15
<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 14th day of November
2000.
ESPS, INC.
By: /s/ R. Richard Dool
--------------------------------------------
R. Richard Dool
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Christopher Meshginpoosh
--------------------------------------------
Christopher Meshginpoosh
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
