<PAGE>
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 December 31, 1999
------------------------------------
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
- --------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 VIRGINIA DRIVE, SUITE 125, FT. WASHINGTON, PA 19034
- --------------------------------------------------- ------------
(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 February 10, 2000, 15,907,053 shares of the registrant's Common Stock, par
value $0.001 per share, were outstanding.
<PAGE>
ESPS, INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<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 15
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
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
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
ESPS, INC.
-----------
BALANCE SHEETS
--------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------------- -----------------------
(Unaudited)
Assets
Current assets:
<S><C> <C> <C>
Cash and cash equivalents $20,467 $ 1,812
Accounts receivable, net of allowance of $107 and $127 6,666 6,210
Accounts receivable, related party 315 158
Other current assets 749 340
Prepaid income taxes 1,031 160
Deferred income taxes 322 322
Deferred offering costs - 696
------- -------
Total current assets 29,550 9,698
Property and equipment, net 3,905 2,330
Other assets 28 28
------- -------
Total assets $33,483 $12,056
======= =======
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 114 $ -
Accounts payable and accrued expenses 2,110 3,427
Deferred revenues 2,019 1,905
------- -------
Total current liabilities 4,243 5,332
Long-term debt 465 -
Stockholders'equity:
Preferred stock, $0.001 par value: Authorized shares
6,000, issued and outstanding shares, 0 shares at December 31,
1999 and 6,000 shares of series A preferred stock at March 31,
1999 - 6
Common stock, $0.001 par value: Authorized shares 50,000,
issued and outstanding shares, 15,679 shares at December 31,
1999 and 3,154 shares at March 31, 1999 16 3
Additional paid-in capital 28,917 6,570
Retained earnings (deficit) (52) 349
Deferred stock compensation (106) (204)
------- -------
Stockholders' equity 28,775 6,724
------- -------
Total liabilities and stockholders' equity $33,483 $12,056
======= =======
</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 Nine months ended
--------------------------- ---------------------------
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
Revenues:
<S> <C> <C> <C> <C>
Software licenses $ 3,068 $ 3,197 $10,144 $ 8,323
Software licenses - related party 157 540 274 1,138
Services and maintenance 2,126 1,098 6,472 2,878
------- ------- ------- -------
Total revenues 5,351 4,835 16,890 12,339
Cost of revenues:
Software licenses 105 110 346 272
Services and maintenance 1,577 881 4,415 2,021
------- ------- ------- -------
Total cost of revenues 1,682 991 4,761 2,293
------- ------- ------- -------
Gross profit 3,669 3,844 12,129 10,046
Operating expenses:
Research and development 1,263 1,183 3,707 2,778
Sales and marketing 2,313 1,476 7,185 3,026
General and administrative 828 979 2,458 2,214
------- ------- ------- -------
Total operating expenses 4,404 3,638 13,350 8,018
------- ------- ------- -------
Income (loss) from operations (735) 206 (1,221) 2,028
Interest, net 259 40 595 127
------- ------- ------- -------
Income (loss) before income taxes (476) 246 (626) 2,155
Income tax provision (benefit) (168) 95 (225) 836
------- ------- ------- -------
Net income (loss) $ (308) $ 151 $ (401) $ 1,319
======= ======= ======= =======
Earnings (loss) per share:
Basic $(0.02) $ 0.06 $ (0.03) $ 0.55
======= ======= ======= =======
Diluted $(0.02) $ 0.01 $ (0.03) $ 0.09
======= ======= ======= =======
Shares used in computation of earnings (loss)per share:
Basic 15,635 2,707 12,130 2,404
======= ======= ======= =======
Diluted 15,635 14,811 12,130 14,501
======= ======= ======= =======
Pro forma earnings (loss) per share:
Basic $ 0.01 $ (0.03) $ 0.12
======= ======= =======
Diluted $ 0.01 $ (0.03) $ 0.09
======= ======= =======
Shares used in computation of pro forma earnings (loss) per
share:
Basic 11,407 14,534 11,104
======= ======= =======
Diluted 14,811 14,534 14,501
======= ======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
4
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ESPS, INC.
-----------
STATEMENTS OF CASH FLOWS
------------------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
----------------------------------------
December 31,
----------------------------------------
1999 1998
------------------- -------------------
Operating activities:
<S> <C> <C>
Net income (loss) $ (401) $ 1,319
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 702 329
Deferred income taxes - 346
Amortization of deferred stock compensation 98 167
Provision for losses on accounts receivable - 66
Changes in operating assets and liabilities:
Accounts receivable (613) (1,106)
Other assets (409) (162)
Prepaid taxes (871) -
Accounts payable and accrued expenses (621) 732
Deferred revenues 114 (2,097)
------- -------
Net cash used in operating activities (2,001) (406)
Investing activities:
Purchases of property and equipment (1,635) (1,125)
Financing activities:
Proceeds from the sale of common stock 22,241 -
Repayments of long-term debt (63) -
Proceeds from exercise of stock options 113 115
------- -------
Net cash provided by financing activities 22,291 115
Net increase (decrease) in cash and cash equivalents 18,655 (1,416)
Cash and cash equivalents balance, beginning of period 1,812 4,558
------- -------
Cash and cash equivalents balance, end of period $20,467 $ 3,142
======= =======
Supplemental cash flow disclosure:
Interest paid $ 29 $ -
Income taxes paid $ 1,134 $ 214
Fixed assets financed through capital lease obligations $ 642 $ -
</TABLE>
See accompanying notes to unaudited financial statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------
ESPS, INC.
----------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
---------------------------------------
1. Description of Business and Basis of Presentation
- -- --------------------------------------------------
Description of ESPS, Inc.
ESPS, Inc. is a leading provider of enterprise compliance management solutions
to businesses in highly regulated industries. Our 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 and publishing and reuse of compliance information and
regulatory submissions. We designed our CoreDossier software products to
utilize advanced technologies, such as corporate intranets and the Internet, and
to meet emerging electronic compliance requirements and standards. We believe
our solution enables our customers to realize a return on their investment by
reducing the cost and burden of compliance while also reducing the time required
to bring new products and services to market.
On June 15, 1999, the board of directors declared a 1.45 for 1 stock split in
the form of a stock dividend. All periods presented have been restated to
reflect this stock split.
Initial Public Offering
On June 16, 1999, we completed an initial public offering of 3.5 million shares
of common stock at $7.50 per share. The sale of the shares resulted in net
proceeds to ESPS, Inc. of approximately $22.2 million. Concurrent with the
offering, all 6,000,000 shares of our preferred series A stock automatically
converted into 8,700,000 shares of common stock.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles 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 generally accepted accounting
principles 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, 1999,
included in our prospectus, dated June 16, 1999, filed with the Securities and
Exchange Commission in connection with our initial public offering, and the Form
10-Q for the quarter ended September 30, 1999.
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
-------------------
Prepaid income taxes as of March 31, 1999 are now disclosed separately. They
were previously classified with accrued expenses.
3. Net Income (loss) Per Common Share
----------------------------------
Basic and diluted net income (loss) per common share is calculated by dividing
the net income (loss) by the weighted average number of common shares
outstanding. Pro forma earnings (loss) per share for all periods presented is
computed using the weighted average number of shares outstanding and the
weighted average convertible preferred stock outstanding as if such shares were
converted to common stock at the time of issuance.
6
<PAGE>
Diluted net income (loss) 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.
Common equivalent shares are excluded from the calculation if their effect is
anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock
and convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net loss per share as if they were outstanding
for all periods presented. To date, the Company has not had any issuances or
grants for nominal consideration.
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 NINE MONTHS ENDED
------------------- ------------------
DECEMBER 31, DECEMBER 31,
------------------- ------------------
1999 1998 1999 1998
---------- ------- --------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ (308) $ 151 $ (401) $ 1,319
======= ======= ======= =======
Weighted average number of common shares outstanding 15,635 2,707 12,130 2,404
Effect of dilutive securities:
Stock options - 3,404 - 3,397
Series A preferred stock - 8,700 - 8,700
------- ------- ------- -------
Adjusted weighted average shares outstanding and assumed conversions 15,635 14,811 12,130 14,501
======= ======= ======= =======
Pro forma adjustment to weighted average number of common shares
outstanding for the conversion of series A preferred stock 8,700 2,404 8,700
------- ------- -------
Pro forma weighted average shares:
Basic 11,407 14,534 11,104
======= ======= =======
Diluted 14,811 14,534 14,501
======= ======= =======
Earnings (loss) per share:
Basic $ (0.02) $ 0.06 $ (0.03) $ 0.55
======= ======= ======= =======
Diluted $ (0.02) $ 0.01 $ (0.03) $ 0.09
======= ======= ======= =======
Pro forma earnings (loss) per share:
Basic $ 0.01 $ (0.03) $ 0.12
======= ======= =======
Diluted $ 0.01 $ (0.03) $ 0.09
======= ======= =======
</TABLE>
4. Long-Term Debt
--------------
In June, 1999, the Company entered into a $642,000 capital lease agreement,
consisting of software and hardware to support the Company's infrastructure.
The term of the lease is 60 months with monthly payments of approximately
$13,000.
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 S-1 for March 31, 1999 and Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
7
<PAGE>
Overview
- --------
ESPS provides software solutions that enable businesses in highly regulated
industries to reduce the costs and overall burden associated with traditional
compliance processes. Our electronic compliance management solution utilizes
advanced technologies, such as corporate intranets and the Internet, and has the
ability to scale throughout an enterprise. The CoreDossier family of software
products and related services enables users to collaborate in the authoring,
compilation, distribution, publishing and reuse of compliance information and
regulatory submissions. In addition to advanced technology, we provide our
customers with in-depth industry-specific compliance expertise that allows us to
better understand their compliance needs and requirements.
Results of Operations
- ---------------------
The following table presents statement of operations data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------------------------------------------
Three months Nine months
Ended December 31, Ended December 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses 60.3% 77.3% 61.7% 76.7%
Services and maintenance 39.7 22.7 38.3 23.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses 1.9 2.3 2.0 2.2
Services and maintenance 29.5 18.2 26.2 16.4
----- ----- ----- -----
Total cost of revenues 31.4 20.5 28.2 18.6
----- ----- ----- -----
Gross profit 68.6 79.5 71.8 81.4
Operating expenses:
Research and development 23.6 24.5 21.9 22.5
Sales and marketing 43.2 30.5 42.5 24.5
General and administrative 15.5 20.2 14.6 18.0
----- ----- ----- -----
Total operating expenses 82.3 75.2 79.0 65.0
----- ----- ----- -----
Income (loss) from operations (13.7) 4.3 (7.2) 16.4
Interest, net 4.8 0.8 3.5 1.1
----- ----- ----- -----
Income (loss) before income taxes (8.9) 5.1 (3.7) 17.5
Income tax (benefit) (3.1) 2.0 (1.3) 6.8
----- ----- ----- -----
Net income (loss) (5.8)% 3.1% (2.4)% 10.7%
===== ===== ===== =====
</TABLE>
Comparison of Three Months Ended December 31, 1999 and 1998
- -----------------------------------------------------------
For the three months ended December 31, 1999, revenues were $5.4 million,
representing an increase of 11% over the $4.8 million for the comparable period
in 1998. Net loss for the three months ended December 31, 1999 was $308,000, or
$0.02 per diluted share, compared to net income of $151,000, or $0.01 per
diluted share for the same period in 1998. Weighted average shares used in
computing diluted earnings per share in the third fiscal quarter were 15.6
million versus 14.8 million in the same period in the prior year.
Revenues
License revenues. License revenues (excluding related party revenues)
decreased 4% to $3.1 million for the three months ended December 31, 1999, from
$3.2 million for the three months ended December 31, 1998. Related party
license revenues from Adobe Systems, Incorporated were $157,000 in the current
quarter compared to $540,000 reported for the same period last year. This
decline is primarily due to a large customized software contract for Adobe in
the prior period.
Services and maintenance revenues. Services and maintenance revenues increased
94% to $2.1 million for the three months ended December 31, 1999 from $
1.1million, for the three months ended December 31, 1998. This increase
8
<PAGE>
resulted primarily from an increase in demand for implementation and maintenance
services on a larger customer base.
Total revenues outside of the United States increased 26% to $573,000 for the
three months ended December 31, 1999, from $454,000 for the three months ended
December 31, 1998. This increase resulted primarily from an increase in license
sales and from the sale of our products and services to existing customers for
their operations outside the United States. International license revenues
represented 9% of total license revenues, or $278,000, in the three months ended
December 31, 1999, compared to 10%, or $364,000, for the three months ended
December 31, 1998.
For the three months ended December 31, 1999, no customers accounted for more
than 10% of revenues and for the three months ended December 31, 1998, two
customers accounted for 23% 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. Cost of software
licenses revenues remained at 3% of license revenue for the three months ended
December 31, 1999 and the three months ended December 31, 1998.
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 79%
to $1,577,000 for the three months ended December 31, 1999 from $881,000 for the
three months ended December 31, 1998. This increase resulted primarily from the
hiring and training of additional professional services and customer support
personnel to support our increased customer base. Cost of services and
maintenance revenues as a percentage of services and maintenance revenues
decreased to 74% for the three months ended December 31, 1999 from 80% for the
three months ended December 31, 1998. 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.
Service and maintenance gross profits were 26% for the three months ended
December 31, 1999 compared to 20% for the three months ended December 31, 1998.
Operating Expenses
Research and development. Research and development expenses consist primarily
of salaries and benefits for software developers, quality assurance personnel,
and program managers and technical writers. Research and development expenses
increased 7% to $1,263,000 for the three months ended December 31, 1999 from
$1,183,000 for the three months ended December 31, 1998. This increase resulted
primarily from an increase in the number of software developers and quality
assurance personnel, to 51 employees as of December 31, 1999 from 43 employees
as of December 31, 1998 to support our product development and testing
activities. Research and development expenses represented 24% of our total
revenues for the three months ended December 31, 1999 and 25% for the three
months ended December 31, 1998.
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 57% to $2,313,000 in the three months ended December 31, 1999
from $1,476,000 for the three months ended December 31, 1998. This increase
resulted primarily from our increased investment in sales and marketing
infrastructure, both domestically and internationally. Sales and marketing
expenses represented 43% of our total revenues for the three months ended
December 31, 1999 and 31% for the three months ended December 31, 1998. The
number of our executive, sales and marketing personnel grew to 44 at December
31, 1999 from 31 at December 31, 1998. The increase in sales and marketing
expenses as a percentage of total revenues primarily reflects the increased
investment in our sales and marketing activities during this period.
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 decreased 15% to $828,000 for the three months ended
December 31, 1999 from $979,000 for the three months ended December 31, 1998.
This decrease resulted primarily from a provision for losses on accounts
receivable and deferred compensation expense
9
<PAGE>
booked in the three months ended December 31, 1998. The number of our executive,
finance and administrative personnel grew to 21 at December 31, 1999 from 17 at
December 31, 1998.
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 548% to $259,000 for the three months ended December
31, 1999 from $40,000 for the three months ended December 31, 1998. 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 decreased by $263,000 to
a benefit of $168,000 for the three months ended December 31, 1999 from income
tax expense of $95,000 for the three months ended December 31, 1998. This
decrease resulted from the loss before income taxes for the three months ended
December 31, 1999 versus income before income taxes for the three months ended
December 31, 1998.
Comparison of Nine Months Ended December 31, 1999 and 1998
- ----------------------------------------------------------
For the nine months ended December 31, 1999, revenues were $16.9 million, an
increase of 37% over the $12.3 million for the comparable period in 1998. Net
loss for the nine months ended December 31, 1999 was $401,000, or $.03 per
diluted share, compared to net income of $1.3 million, or $.09 per diluted share
for the same period in 1998. Weighted average shares used in computing diluted
earnings per share in the nine months ended December 31, 1999 were 12.1 million
versus 14.5 million in the same period in the prior year.
Revenues
License revenues. License revenues (excluding related party revenues)
increased 22% to $10.1 million for the nine months ended December 31, 1999, from
$8.3 million for the nine months ended December 31, 1998. Related party license
revenues were $274,000 in the nine months ending December 31, 1999 compared to
$1.1 million reported for the same period last year. This decline is primarily
due to a large customized software contract for Adobe in the prior period.
Services and maintenance revenues. Services and maintenance revenues increased
125% to $6.5 million for the nine months ended December 31, 1999 from $2.9
million, for the nine months ended December 31, 1998. The increase reflects the
greater implementation capabilities and increased maintenance on a larger
customer base.
Total revenues outside of the United States increased 26% to $2.8 million for
the nine months ended December 31, 1999, from $2.2 million for the nine months
ended December 31, 1998. This increase resulted from an increase in license
sales and from the sale of our products and services to existing customers with
operations outside the United States. International license revenues
represented 18% of total license revenues for the nine months ended December 31,
1999, compared to 20% for the nine months ended December 31, 1998.
For the nine months ended December 31, 1999, no customers accounted for more
than 10% of revenues and for the nine months ended December 31, 1998, one
customer accounted for 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. Cost of software
licenses revenues increased 27% to $346,000 for the nine months ended December
31, 1999 from $272,000 for the nine months ended December 31, 1998. Cost of
software licenses revenues as a percentage of software licenses revenues were 3%
for both periods.
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 118%
to $4.4 million for the nine months ended December 31, 1999 from $2.0 million
for the nine months ended December 31, 1998. This increase resulted primarily
from the hiring and training of professional services and customer support
personnel to support our increased customer base. Cost of services and
maintenance revenues as a percentage of services and maintenance revenues were
68% for the nine months ended December 31, 1999 and 70% for the nine months
ended December 31, 1998. The cost of services and maintenance revenues as a
percentage of
10
<PAGE>
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 consist primarily
of salaries and benefits for software developers, quality assurance personnel,
and program managers and technical writers. Research and development expenses
increased 33% to $3.7 million for the nine months ended December 31, 1999 from
$2.8 million the nine months ended December 31, 1998. This increase resulted
from an increase in the number of software developers and quality assurance
personnel, to 51 employees as of December 31, 1999 from 43 employees as of
December 31, 1998. This increase was needed to support our product development
and testing activities. Research and development expenses were 22% of total
revenues for the nine months ended December 31, 1999 and 23% for the nine months
ended December 31, 1998.
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 137% to $7.2 million in the nine months ended December 31,
1999 from $3.0 million for the nine months ended December 31, 1998. This
increase resulted primarily from our increased investment in sales and marketing
infrastructure, both domestically and internationally. The increased
investments included personnel-related expenses, travel and entertainment
expenses 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 43% of total revenues for the nine months ended December 31, 1999
and 25% for the nine months ended December 31, 1998. The increase in sales and
marketing expenses as a percentage of total revenues primarily reflects the
increased investment in our sales and marketing activities during this period.
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 11% to $2.5 million for the nine months ended December 31,
1999 from $2.2 million for the nine months ended December 31, 1998. This
increase resulted from increased hiring, training and payroll related costs
associated with the addition of executive, finance and administrative personnel
to support the growth of our business. The number of our executive, finance and
administrative personnel grew to 21 at December 31, 1999 from 17 at December 31,
1998. General and administrative expenses represented 15% of our total revenues
for the nine months ended December 31, 1999 and 18% of total revenues for the
nine months ended December 31, 1998.
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 369% to $595,000 for the nine months ended December
31, 1999 from $127,000 for the nine months ended December 31, 1998. 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 decreased by $1,061,000
to a benefit of $225,000 for the nine months ended December 31, 1999 from income
tax expense of $836,000 for the nine months ended December 31, 1998. This
decrease resulted from the loss before income taxes for the nine months ended
December 31, 1999 versus income before income taxes for the nine months ended
December 31, 1998.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1999, we had cash and cash equivalents of $20.5 million, an
increase of $18.7 million from cash and cash equivalents held at March 31, 1999.
Our working capital at December 31, 1999 was $25.3 million, compared to $4.4
million at March 31, 1999.
Our operating activities resulted in net cash outflows of $2.0 million for the
nine months ended December 31, 1999 and $406,000 for the nine months ended
December 31, 1998. The operating cash outflows for the nine months ended
December 31, 1999 were primarily from the operating loss for the period,
payments of taxes, decreases in accounts payable and accrued expenses, and
increases in accounts receivable and other assets. Depreciation, amortization
of deferred stock compensation, and increase in deferred revenues offset the
cash used in operating
11
<PAGE>
activities. The operating cash outflows for the nine months ended December 31,
1998 resulted from decreases in deferred revenue and an increase in accounts
receivable and other assets, partially offset by an increase in accounts payable
and accrued expense and the net income for the nine months ended December 31,
1998.
Investing activities used cash of $1.6 million for the nine months ended
December 31, 1999, and $1.1 million for the nine months ended December 31, 1998
for the purchase of property and equipment.
Financing activities provided cash of $22.3 million for the nine months ended
December 31, 1999 due primarily to the proceeds from the sale of common stock
from the Company's initial public offering. Financing activities provided cash
of $115,000 for the nine months ended December 31, 1998, which represents
proceeds from the exercise of stock options.
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.
Risk Associated with the 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.
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. In addition, we believe
that the purchasing patterns of customers and potential customers may be
affected by Year 2000 issues as companies expend significant resources to
correct or upgrade their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those we offer. 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.
Many currently installed computer systems are not capable of distinguishing 21st
century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries (including technology, transportation, utilities,
finance and telecommunications) will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change. We recognize the need to ensure our operations will not be adversely
affected by Year 2000 software failures. We have completed our assessment of
the potential overall impact of the impending century change on our business,
financial condition and operating results.
We have reviewed our internal management information and other critical business
systems to identify any Year 2000 problems. We also have communicated with the
external vendors that supply us with material software and information systems
and with our significant suppliers to determine their Year 2000 readiness. In
the course of these investigations, we have not encountered any material Year
2000 problems with these third-party products.
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. As discussed above, we do not expect the
total cost of Year 2000
12
<PAGE>
problems to be material to our business, financial condition and operating
results. We will continue to evaluate new versions of our software products, new
software and information systems provided to us by third parties and any new
infrastructure systems that we acquire to determine whether they are Year 2000
compliant.
Despite our current assessment, we may not identify and correct all significant
Year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could materially
adversely affect our business, financial condition and operating results. We
currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems.
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 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
13
<PAGE>
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 businesses in the chemical industry and the utilities
industry. Our business strategy includes targeting industries in which we do not
currently sell products and services, such as the financial services, insurance,
and discrete manufacturing industries. We may not experience the same level of
sales in these industries as in the pharmaceutical and biotechnology industry.
Our success in these industries will depend upon many factors, including:
. Our ability to obtain expertise in these industries;
. Our ability to develop industry-specific modules for these industries; and
. Market acceptance of our products and services in these industries.
If we are unable to adequately address these factors we may not successfully
market and sell our products and services in these targeted industries.
Consequently, we may not generate revenues. In addition, as we develop new
industry-specific products, we may begin competing with companies we have not
competed against in the past. These companies may have greater experience and
expertise in these industries. If we are unable to compete 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.
Our sales cycle is long. Consequently, the period between initial contact and
the purchase of our products is often long and subject to delays associated with
the lengthy budgeting, approval and competitive evaluation processes that
typically accompany significant capital expenditures. 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. Sales delays could
cause our operating results to vary widely.
We depend on service revenues. Support and service revenues represented 25% of
our total revenues for fiscal 1999 and 38% of our total revenues for the first
nine months of 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 or an
14
<PAGE>
unexpected 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 December 31, 1999.
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
- ------- -----------------------------------------
There have been no changes in securities during the quarter ended December 31,
1999.
We are using the net proceeds raised in the initial public offering for working
capital and general corporate purposes, including increased domestic and
international sales and marketing expenditures, product development
expenditures, expenditures related to the expansion of our professional services
organization and capital expenditures made in the ordinary course of business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
third quarter of the fiscal year covered by this report through the solicitation
of proxies or otherwise.
ITEM 5. OTHER INFORMATION
- ------- -----------------
none
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this Form10-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 February
1999.
ESPS, INC.
By: /s/Terrence P. Brennan
----------------------
Terrence P. Brennan
President and Chief Executive Officer
By: /s/Leonard W. von Vital
-----------------------
Leonard W. von Vital
Chief Financial Officer
16
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