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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the six month period ended July 31, 2000
Commission File Number: 0-30320
TRINTECH GROUP PLC
(Exact name of registrant as specified in its charter)
Ireland
(Jurisdiction of incorporation or organization)
Trintech Group PLC
Trintech Building
South County Business Park
Leopardstown
Dublin 18, Ireland
(Address of principal executive offices)
Indicate by check whether the registrant files or will file annual reports
under Form 20-F or Form 40-F.
Form 20-F X Form 40-F _____
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Indicate by check whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities and Exchange Act of
1934.
Yes _____ No X
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If "Yes" is marked, indicate below the file number assigned to the registrant
in connection Rule 12g3-2(b):
82- N/A
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Trintech Group PLC
Form 6-K
Table of Contents
<TABLE>
<CAPTION>
Financial Information:
Page
----
<S> <C>
Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the Three Months and Six Months Ended July 31, 2000 and
1999.................................................................................................. 3
Condensed Consolidated Balance Sheets as of July 31, 2000 and January 31, 2000.............................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2000 and 1999............. 5
Notes to Condensed Consolidated Financial Statements............................................................... 6
Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 9
Risk Factors....................................................................................................... 21
Signatures......................................................................................................... 32
</TABLE>
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months Six months
ended July 31, ended July 31,
-------------------------- ----------------------------
2000 1999 2000 1999
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product $ 5,376 $ 4,727 $ 9,476 $ 8,536
License 4,327 1,846 8,454 3,336
Service 962 618 1,543 1,294
------------ ----------- ------------- -----------
Total Revenue 10,665 7,191 19,473 13,166
------------ ----------- ------------- -----------
Cost of revenue:
Product 3,538 3,157 6,305 5,692
License 1,421 725 2,511 1,372
Service 705 432 1,330 1,062
------------ ----------- ------------- -----------
Total Cost of Revenue 5,664 4,314 10,146 8,126
------------ ----------- ------------- -----------
Gross margin 5,001 2,877 9,327 5,040
Operating expenses:
Research & development 4,192 1,950 8,366 3,588
Sales & marketing 3,825 1,996 7,321 3,918
General & administrative 2,530 1,697 4,980 3,243
Stock compensation 1,157 - 2,929 -
------------ ----------- ------------- -----------
Total operating expenses 11,704 5,643 23,596 10,749
------------ ----------- ------------- -----------
Income (loss) from operations (6,703) (2,766) (14,269) (5,709)
Interest income (expense), net 2,229 41 2,974 139
Exchange (loss) gain, net (251) 228 (200) 262
------------ ----------- ------------- -----------
Income (loss) before
provision for income taxes (4,725) (2,497) (11,495) (5,308)
Provision for income taxes - - (2) (1)
------------ ----------- ------------- -----------
Net income (loss) $ (4,725) $ (2,497) $ (11,497) $ (5,309)
============ =========== ============= ===========
Basic and diluted net income (loss)
per Ordinary Share $ (0.17) $ (0.15) $ (0.43) $ (0.33)
============ =========== ============= ===========
Shares used in computing basic and diluted net
income (loss) per Ordinary Share 27,690,093 16,244,513 26,451,760 16,237,073
============ =========== ============= ===========
Basic and diluted net income (loss)
per equivalent American Depositary Share $ (0.09) $ (0.08) $ (0.22) $ (0.16)
============ =========== ============= ===========
</TABLE>
3
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CONDENSED CONSOIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
July 31, January 31,
----------- -----------
2000 2000
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,797 $ 10,862
Marketable securities 129,420 48,830
Accounts receivable, net of allowance for doubtful accounts of
$1,245 and $330 respectively 11,629 7,799
Inventories 1,648 840
Value added taxes 264 192
Prepaid expenses and other assets 2,920 1,332
---------- -----------
Total current assets 159,678 69,855
Property and equipment, net 3,624 3,190
Other assets - software development costs 625 1,250
---------- -----------
Total assets $ 163,927 $ 74,295
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,902 $ 4,082
Accrued payroll and related expenses 2,104 871
Other accrued liabilities 4,107 2,677
Value added taxes 526 460
Warranty reserve 521 556
Deferred revenue 2,090 3,406
---------- -----------
Total current liabilities 13,250 12,052
---------- -----------
Capital lease due after more than one year 390 409
Government grants repayable and related loans 365 718
Series B preference shares, $0.0027 par value
10,000,000 authorized;
None issued and outstanding - -
Shareholders' equity:
Ordinary Shares, $0.0027 par value: 100,000,000 shares authorized;
27,880,353 and 25,140,722 shares issued and outstanding at
July 31, 2000 and January 31, 2000 respectively 77 71
Additional paid-in capital 183,136 84,286
Accumulated deficit (33,082) (21,585)
Accumulated other comprehensive income (loss) (209) (1,656)
---------- -----------
Total shareholders' equity 149,922 61,116
---------- -----------
Total liabilities and shareholders' equity $ 163,927 $ 74,295
========== ===========
</TABLE>
4
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Three months Six months
ended July ended July
31, 31,
------------------------- -----------------------
2000 1999 2000 1999
------------------------- -----------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,725) $ (2,498) $ (11,497) $ (5,309)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 689 556 1,357 1,092
Stock compensation 1,157 20 2,929 40
(Profit) loss on marketable securities (1,935) 19 (2,632) (4)
Purchase of marketable securities (438,051) (1,301) (608,648) (5,005)
Sale of Marketable Securities 355,063 4,257 530,690 10,857
Effect of changes in foreign currency exchange rates 1,842 (311) 1,331 (374)
Changes in operating assets and liabilities:
Inventories (1,309) (376) (844) (186)
Accounts receivable (2,489) (483) (4,232) (1,835)
Prepaid expenses and other assets (1,243) (570) (1,660) (1,060)
Value added tax receivable (72) 154 (83) 346
Accounts payable 907 858 (31) 1,231
Accrued payroll and related expenses 730 119 1,269 191
Deferred revenues (531) (268) (1,242) 562
Value added tax payable 282 (28) 85 6
Warranty reserve (3) (1) (4) (9)
Government grants repayable and related loans (205) 126 (319) 247
Other accrued liabilities 551 244 1,498 292
------------ -------- ---------- ---------
Net cash (used in) provided by operating activities (89,342) 517 (92,033) 1,082
------------ -------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (448) (209) (1,181) (487)
------------ -------- ---------- ---------
Net cash used in investing activities (448) (209) (1,181) (487)
------------ -------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (32) (25) (65) (59)
Issuance of ordinary shares 97,200 31 97,640 35
Expense of share issue (1,547) - (1,713) -
Repayments under bank overdraft - (186) - (388)
------------ -------- ---------- ---------
Net cash provided by (used in) financing activities 95,621 (180) 95,862 (412)
------------ -------- ---------- ---------
Net increase in cash and cash equivalents 5,831 128 2,648 183
Effect of exchange rate changes on cash and cash equivalents (111) (6) 287 -
Cash and cash equivalents at beginning of period 8,077 1,752 10,862 1,691
------------ -------- ---------- ---------
Cash and cash equivalents at end of period $ 13,797 $ 1,874 $ 13,797 $ 1,874
============ ======== ========== =========
Supplemental disclosure of cash flow information
Interest paid $ 3 $ 1 $ 6 $ 2
============ ======== ========== =========
Taxes paid $ - $ - $ 2 $ 1
============ ======== ========== =========
Supplemental disclosure of non-cash flow information
Acquisition of property and equipment under capital leases $ 24 $ 22 $ 116 $ 22
============ ======== ========== =========
</TABLE>
5
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TRINTECH GROUP PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Condensed Consolidated Financial Statements.
These interim condensed consolidated financial statements have been
prepared by Trintech Group PLC ("Trintech") pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance
with U.S. generally accepted accounting principles for interim financial
information. Accordingly, certain information and footnote disclosures
normally included in annual financial statements have been omitted or
condensed. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals) have been made for a fair
presentation of financial positions, results of operations and cash flows
at the date and for the periods presented. The operating results for the
quarter ended July 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending January 31, 2001. See "Factors
Affecting Future Results." For further information refer to the
consolidated financial statements and footnotes for the year ended January
31, 2000 included in Trintech's Annual Report on Form 20-F and the German
Verkaufsprospekt/Untermechmensbericht dated May 8, 2000.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and the accompanying footnotes. Actual results could differ from those
estimates.
2. Irish Companies Acts, 1963 to 1999
The condensed consolidated financial information in this document does not
comprise full accounts as referred to in Section 19 of the Companies
(Amendment) Act, 1986, copies of which are required by that Act to be
annexed to Trintech's annual return and the information as of and for the
periods ended July 31, 2000 and July 31, 1999 is unaudited. A copy of the
full accounts for the year ended January 31, 2000, prepared in accordance
with Irish generally accepted accounting principles, will be annexed to the
relevant annual return, which will be filed in due course. The auditors
have reported without qualification under Section 193 of the Companies Act,
1990 in respect of such accounts.
The accompanying condensed consolidated financial statements are prepared
in accordance with generally accepted accounting principles in the United
States and include the Company and its wholly-owned subsidiaries in
Ireland, the United Kingdom, the Cayman Islands, Germany and the United
States after eliminating all material inter-company accounts and
transactions.
3. Marketable Securities
Marketable securities are considered to be trading securities per SFAS 115
and are carried on the balance sheet at their market value.
6
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4. Inventories
July 31 January 31
2000 2000
(in thousands) (in thousands)
------------- -------------
Raw materials............................... $ 122 $ 78
Finished goods............................... 1,526 762
------------- ------------
Total........................................ $ 1,648 $ 840
============= ============
5. Comprehensive Income (Loss)
The following table sets forth the calculation of comprehensive income
(loss) for the three month and six month periods ended July 31, 2000 and
July 31, 1999:
Three months ended Six months ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
Net loss $ (4,725) $ (2,497) $ (11,497) $ (5,309)
Other comprehensive income (loss) 1,760 (342) 1,447 (396)
-------- -------- --------- --------
Comprehensive loss $ (2,965) $ (2,839) $ (10,050) $(5,705)
======== ======== ========= ========
6. Computation of Net Loss Per Ordinary Share
Three months ended Six months ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except share and per share data)
Numerator:
Numerator for basic and diluted
net loss per ordinary share
Net loss $ (4,725) $ (2,497) $(11,497) $ (5,309)
--------- --------- --------- ---------
7
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<TABLE>
<CAPTION>
Denominator:
<S> <C> <C> <C> <C>
Denominator for basic and diluted
net loss per ordinary share
Weighted average ordinary shares 27,690,093 16,244,513 26,451,760 16,237,073
----------- ----------- ----------- -----------
Basic and diluted net loss per
ordinary share $ (0.17) $ (0.15) $ (0.43) $ (0.33)
----------- ----------- ----------- -----------
</TABLE>
7. Common Stock Offering
On May 4, 2000 Trintech completed a secondary public offering of 4,450,000
American Depositary Shares representing 2,225,000 ordinary shares including
450,000 ADSs sold to the underwriters upon the exercise on May 11, 2000 of their
over-allotment option. The aggregate offering price of the shares registered was
$100,392,000, $4,717,000 of which was applied toward the underwriters' discounts
and commissions. Other expenses related to the offering were approximately
$2,204,000. Trintech received net proceeds of approximately $93,471,000 from the
sale of ordinary shares in the secondary public offering.
8. Subsequent Events
On August 25, 2000 the Company acquired Checkline plc, a privately held company
in the United Kingdom, for a total consideration of approximately $44 million.
The consideration comprises of ordinary shares equivalent to 1.2 million
American depositary shares, $10 million in cash and a two-year performance earn-
out of approximately $5 million. Checkline plc is a transaction processing and
electronic card payment company. It combines expertise in software,
communications and systems integration to provide a comprehensive range of
secure payment solutions for transaction processing, integrated merchant
transaction management and eCommerce. Checkline has been accounted for under the
purchase accounting method. As a result there will be significant goodwill and
other intangible assets amortized to the income statement over their useful
lives.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and the Notes thereto appearing elsewhere in
this report. The following discussion contains "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Any "forward
looking statements" are subject to certain risks and uncertainties that could
cause actual results to differ materially from those stated. Factors that could
cause or contribute to such differences include Trintech's ability to develop,
market and sell its eCommerce and mobile commerce (m-commerce) software, the
market acceptance of the SSL or SET standards for eCommerce payment
transactions, its ability to effectively respond to future changes in the e-
payment software market, the continued market demand for its electronic
point-of-sale systems and the performance of third parties, including
MasterCard, Visa, Discover and Motorola under technology, marketing or other
strategic alliances. Actual performance may also be affected by other factors
more fully discussed in Trintech's Form 20-F for the fiscal year ended January
31, 2000, and Form 6K for the fiscal quarter ended April 30th, 2000, filed with
the U.S. Securities and Exchange Commission.
"Fiscal 1999" refers to the fiscal year ended January 31, 1999, "fiscal 2000"
refers to the fiscal year ended January 31, 2000 and "fiscal 2001" refers to the
fiscal year ending January 31, 2001.
Overview
From our organization through 1995, we developed and marketed electronic PoS
systems and e-payment software for payment card transactions in the physical
world. In early fiscal 1997, we launched our first products for Internet e-
payment transactions. Today, our revenue is primarily derived from three
sources:
Product Revenue. Product revenue, which continues to represent a significant
proportion of our total revenue, is derived from sales of our electronic PoS
system products, primarily the Compact 9000 and 9000i PoS devices and the
Compact 950-PP pin pad. Revenue for these products is recognized at the time the
products are shipped.
License Revenue. Software license revenue is derived from license fees from our
e-payment software products for payment card transactions in the physical world
and over the Internet, and the provision of related support and maintenance
services to customers. We recognize software license revenue under SOP 97-2.
Under the terms of SOP 97-2, where an arrangement to deliver software does not
require significant production, modification or customization, we recognize
software license revenue when all of the following criteria are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred;
. our fee is fixed or determinable; and
. collectibility is probable.
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We also license our software on a recurring rental basis, and, under SOP 97-2,
we recognize revenue from these arrangements ratably over the life of the
agreement. Customer support and maintenance fees are established as a percentage
of the software license price, typically 18% per year, and are generally paid
quarterly. We recognize revenue related to customer support and maintenance fees
ratably over the life of the agreement.
Service Revenue. We derive service revenue from consulting services, educational
and training services and customization and implementation services. Services
are provided primarily on a time and materials basis for which revenue is
recognized in the period that the services are provided.
With the launch of our first Internet product in the twelve month period ended
January 31, 1997, or fiscal 1997, we shifted our growth strategy to emphasize e-
payment software products for Internet applications. We have historically sold
our products primarily through a direct sales force in Europe and North and
South America. We have established strategic relationships with VISA, RSA Data
Security, SAP America, Sun Microsystems, Unisys, MasterCard, VeriSign, Motorola,
Logica, ValiCert, Planet Payment and Baltimore which provide joint marketing
opportunities as well as lead-generation for our direct sales force. To
facilitate worldwide market penetration, we have begun to establish indirect
sales channels, such as resellers and systems integrators. Revenue from products
sold through indirect sales channels is recognized net of commissions and
discounts.
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
2000 1999 2000 1999
------- ------ ------- -------
(in thousands of U.S. dollars) (in thousands of U.S. dollars)
<S> <C> <C> <C> <C>
Germany 10,948 9,873 17,911 17,794
Europe (excluding Germany) 7,139 1,491 8,432 3,853
Rest of the world 5,107 1,746 8,130 2,286
Eliminations (12,529) (5,919) (15,000) (10,767)
------- ------ ------- -------
Total 10,665 7,191 19,473 13,166
======= ====== ======= =======
</TABLE>
Cost of product revenue includes outsourced manufacturing costs, packaging,
documentation, labor and other costs associated with packaging and shipping our
electronic PoS system products. Cost of license revenue includes shipping,
software documentation, labor, third-party license fees and other costs
associated with the delivery of software products from which license revenue is
derived, the cost of providing after-sale support and maintenance services to
customers and the amortization of capitalized software development costs. Cost
of service revenue includes labor, travel and other non-recoverable costs
associated with the delivery of services to customers.
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Research and development expenses consist primarily of labor and associated
costs connected with the development of our software products and electronic PoS
system products. Sales and marketing expenses consist of labor costs, including
commissions, travel and other costs associated with sales activity, and
advertising, trade show participation, public relations and other marketing
costs. General and administrative expenses consist primarily of labor and
recruitment costs, facilities costs, telephone and other office costs and
depreciation.
Due to our decision to emphasize e-payment software products for Internet
applications, in fiscal 1999 and in fiscal 2000, we substantially increased our
operating expenditures to build our presence in this business. This has included
significant increases in our research and development expenses related to the
development of e-commerce capable products, and substantial increases in our
sales and marketing personnel as we have expanded our global sales capabilities.
More recently, we have increased our research and development expenditure to
develop software applications for the mobile commerce payment market. We intend
to continue to grow our operating expenditures and, consequently, we expect to
continue to report losses from operations through at least fiscal 2002.
We operate as a holding company with operating subsidiaries in Ireland, Germany,
the United Kingdom and the United States and a financing subsidiary in the
Cayman Islands. Each subsidiary is taxed based on the laws of the jurisdiction
in which it is incorporated. Because taxes are incurred at the subsidiary level,
and one subsidiary's tax losses cannot be used to offset the taxable income of
subsidiaries in other tax jurisdictions, our consolidated effective tax rate may
increase to the extent that we report tax losses in some subsidiaries and
taxable income in others. In addition, our tax rate may also be affected by
costs that are not deductible for tax purposes, such as amortization of
goodwill.
We have significant operations and generate substantially all of our taxable
income in the Republic of Ireland, and some of our Irish operating subsidiaries
are taxed at rates substantially lower than U.S. tax rates. One Irish subsidiary
currently qualifies for a 10% tax rate which, under current legislation, will
remain in force until December 31, 2010, and another Irish subsidiary qualifies
for an exemption from income tax as our revenue source is license fees from
qualifying patents within the meaning of Section 234 of the Irish Taxes
Consolidation Act, 1997. We currently anticipate that we will continue to
benefit from this tax treatment, although the extent of the benefit could vary
from period to period, and our tax situation may change. In addition, if these
subsidiaries were no longer to qualify for these tax rates or if the tax laws
were rescinded or changed, our operating results could be materially adversely
affected.
A significant portion of our revenue, costs, assets and liabilities are
denominated in currencies other than the U.S. dollar, and we and all of our
subsidiaries, other than our U.S. and Cayman Islands subsidiaries, have
functional currencies other than the U.S. dollar. These currencies fluctuate
significantly against the U.S. dollar. As a result of the currency fluctuations
resulting primarily from fluctuations in the U.S. dollar and the Irish pound and
the conversion to U.S. dollars for financial reporting purposes, we experience
fluctuations in our operating results on an annual and, in particular, on a
quarterly basis.
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From time to time we have in the past and may in the future hedge against the
fluctuations in exchange rates. Future hedging transactions may not successfully
mitigate losses caused by currency fluctuations. We expect to continue to
experience exchange rate fluctuations on an annual and quarterly basis, and
currency fluctuations could have a material adverse impact on our results of
operations.
The conversion to the euro has not had a material effect on the pricing of,
or the market for, our products, licenses and services, and we do not expect the
conversion will have a material effect in the future.
Our quarterly revenue and operating results have historically been subject
to significant fluctuations due to a variety of factors described below, and we
anticipate that this volatility will continue. As a result, period-to-period
comparisons of our results of operations are not necessarily meaningful and
these comparisons should not be relied upon as indications of our future
performance. It is likely that in some future quarters our results of
operations will be below the expectations of public market analysts and
investors, which could have a severe adverse effect on the trading price of our
American depository shares.
We have experienced significant fluctuations in our quarterly product
revenue. In particular, electronic PoS systems revenue has generally been
higher in the quarter ended January 31 of each year as customers on a calendar-
based fiscal year complete their capital spending plans in December and have
capital budgets available in January.
License revenue can fluctuate significantly from quarter to quarter for a
number of reasons. A significant portion of our software revenue is typically
derived from a limited number of customers. As a result, small changes in the
number of customers in a particular quarter can significantly affect software
license revenue for that quarter. Additionally, because the price of our
software products varies significantly based on the product and the
functionality, the product mix in a particular quarter can also significantly
affect license revenue in that quarter.
Service revenue has varied significantly from quarter to quarter. Service
revenue has been significantly impacted by the number of customers requesting
services and the scope of the service engagements undertaken in a particular
quarter. The demand for customization services can vary as a result of the mix
of products that are licensed to our customers as well as the requirements of
the customers for customization of our products to suit their needs. As the
functionality of our product line has broadened, the portion of service revenue
attributable to customization has declined. This is being replaced by increased
demand for consultancy, integration, educational and training services.
Cost of revenue and gross margin has varied substantially from quarter to
quarter, both in line with revenue fluctuations and due to factors such as
headcount costs, currency fluctuations and facilities cost increases. Cost of
license revenue may be further impacted by license fees
12
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payable to third parties from whom we license technology, which can vary
depending upon product mix. Because a substantial percentage of our costs are
fixed, quarterly fluctuations in total revenue result in significant
fluctuations in our costs as a percentage of revenue.
The level of research and development expenditures can vary from quarter to
quarter due to changing labor costs and other costs associated with growth in
headcount. In connection with our strategy emphasizing e-payment software
products for Internet applications, we have generally increased our research and
development expenditures over the past few years.
Sales and marketing expenditure can vary significantly from quarter to
quarter depending on the timing of our advertising and promotion campaigns, the
hiring of sales personnel and the establishment of sales offices. We are
continuing to build our sales and marketing organization, and these expenditures
generally have increased from quarter to quarter.
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Quarterly Results of Operations
The following table presents our results of operations expressed as a percentage
of total revenue, after giving effect to rounding, for the periods indicated:
<TABLE>
<CAPTION>
Three months Six months
ended July 31, ended July 31,
--------------------- --------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Product 50% 66% 49% 65%
License 41% 26% 43% 25%
Service 9% 8% 8% 10%
------- ------ ------ ------
Total Revenue 100% 100% 100% 100%
------- ------ ------ ------
Cost of revenue:
Product 33% 44% 32% 43%
License 13% 10% 13% 10%
Service 7% 6% 7% 8%
------- ------ ------ ------
Total Cost of Revenue 53% 60% 52% 61%
------- ------ ------ ------
Gross margin 47% 40% 48% 39%
Operating expenses:
Research & development 39% 27% 43% 27%
Sales & marketing 36% 28% 38% 30%
General & administrative 24% 23% 26% 25%
Stock compensation 11% -- 15% --
------- ------ ------ ------
Total operating expenses 110% 78% 121% 82%
------- ------ ------ ------
Income (loss) from operations (63%) (38%) (73%) (43%)
Interest income (expense), net 21% 1% 15% 1%
Exchange (loss) gain, net (2%) 3% (1%) 2%
Income (loss) before
------- ------ ------ ------
provision for income taxes (44%) (34%) (59%) (40%)
Provision for income taxes -- -- -- --
------- ------ ------ ------
Net income (loss) (44%) (34%) (59%) (40%)
------- ------ ------ ------
</TABLE>
Revenue
Total Revenue. Total revenue increased $3.5 million to $10.7 million in the
quarter ended July
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31, 2000 from $7.2 million in the quarter ended July 31, 1999, an increase of
48%. In the six months ended July 31, 2000, total revenue increased $6.3 million
to $19.5 million from $13.2 million in the six months ended July 31, 1999, an
increase of 48%. The increase was primarily attributable to increased sales of
electronic PoS system products and software license fees.
We have historically derived a significant portion of our total revenue from a
small number of customers. In the quarter ended July 31, 2000, Tyco accounted
for 16% of our total revenue. In the quarter ended July 31, 1999, Tyco accounted
for 31% of our total revenue and Visa USA accounted for 13% of our total
revenue. In the six months ended July 31, 2000, Tyco accounted for 18% of our
total revenue. In the six months ended July 31, 1999, Tyco accounted for 29% of
our total revenue and B&S accounted for 12% of our total revenue
Product. Product revenue increased $649,000 to $5.4 million in the quarter ended
July 31, 2000 from $4.7 million in the quarter ended July 31, 1999, an increase
of 14%. In the six months ended July 31, 2000 product revenue increased $940,000
to $9.5 million from $8.5 million in the six months ended July 31, 1999, an
increase of 11%. Product sales represented 50% and 49% of total revenue in the
quarter and six months ended July 31, 2000, respectively, compared to 66% and
65% of total revenue in the quarter and six months ended July 31, 1999,
respectively. The increase in product sales was due primarily to increased
volume of sales. This increase, however, was partially offset by lower average
selling prices for our electronic PoS system products.
License. Software license revenue increased $2.5 million to $4.3 million in the
quarter ended July 31, 2000 from $1.8 million in the quarter ended July 31,
1999, an increase of 134%. In the six months ended July 31, 2000 software
license revenue increased $5.1 million to $8.5 million from $3.3 million in the
six months ended July 31, 1999, an increase of 153%. Software license revenue
represented 41% and 43% of total revenue in the quarter and six months ended
July 31, 2000, respectively, compared to 26% and 25% of total revenue in the
quarter and six months ended July 31, 1999, respectively. The increase in
software license revenue was primarily due to increased sales of our e-payment
software infrastructure products to new customers and associated service and
maintenance fees.
Service. Service revenue increased $344,000 to $962,000 in the quarter ended
July 31, 2000 from $618,000 in the quarter ended July 31, 1999, an increase of
56%. In the six months ended July 31, 2000 service revenue increased $249,000 to
$1.5 million from $1.3 million in the six months ended July 31, 1999, an
increase of 19%. The increase in service revenue primarily resulted from an
increase in sales of software licenses, which resulted in increased demand for
training, project management and consulting services.
Cost of Revenue
Total Cost of Revenue. Total cost of revenue increased $1.4 million to $5.7
million in the quarter ended July 31, 2000 from $4.3 million in the quarter
ended July 31, 1999, an increase of 31%. In the six months ended July 31, 2000
total cost of revenue increased $2.0 million to $10.1 million from $8.1 million
in the six months ended July 31, 1999, an increase of 25%. Total gross margin
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increased to 47% and 48% for the quarter and six months ended July 31, 2000,
respectively, from 40% and 39% for the quarter and six months ended July 31,
1999, respectively. Improvements in the gross margins are attributable to the
increase in high margin software license revenue as a percentage of total
revenue.
Product. Cost of product revenue increased $381,000 to $3.5 million in the
quarter ended July 31, 2000 from $3.2 million in the quarter ended July 31,
1999, an increase of 12%. In the six months ended July 31, 2000, cost of product
revenue increased $613,000 to $6.3 million from $5.7 million in the six
months ended July 31, 1999, an increase of 11%. The increase in the cost of
product revenue in absolute dollars primarily resulted from increased volume of
sales. Product revenue costs represented 66% and 67% of product revenue for the
quarter and six months ended July 31, 2000 and July 31, 1999 respectively,
compared to 67% of product revenue in the quarter and six months ended July 31,
1999.
License. Cost of software license revenue increased $696,000 to $1.4 million in
the quarter ended July 31, 2000 from $725,000 in the quarter ended July 31,
1999, an increase of 96%. In the six months ended July 31, 2000, cost of
software license revenue increased $1.1 million to $2.5 million from $1.4
million in the six months ended July 31, 1999, an increase of 83%. The increase
primarily resulted from increased expenditures in both infrastructure and labor
costs associated with the expansion of our support and maintenance facilities
and the cost of third-party software products sold as part of our e-payment
software. Software license costs were 33% and 30% of license revenue in the
quarter and six months ended July 31, 2000, respectively, compared to 39% and
41% in the quarter ended July 31, 1999, respectively. The decrease as a
percentage of license revenue reflects the substantial increase in license
revenue compared to the quarter ended July 31, 1999. The increase in absolute
dollars resulted from increased expenditures in both infrastructure and labor
costs associated with the expansion of our support and maintenance facilities
and the cost of third-party software products sold as part of our e-payment
software solution.
Service. Cost of service revenue increased $273,000 to $705,000 for the quarter
ended July 31, 2000 from $432,000 for the quarter ended July 31, 1999 an
increase of 63%. In the six months ended July 31, 2000 cost of service revenue
increased $268,000 to $1.3 million from $1.1 million in the six months ended
July 31, 1999, an increase of 25%. Service costs were 73% and 86% of service
revenue in the quarter and six months ended July 31, 2000, respectively,
compared to 70% and 82% of service revenue in the quarter ended July 31, 1999,
respectively. The increase in the cost of service revenue primarily resulted
from increased headcount and investment in infrastructure in advance of
associated revenue.
Operating Expenses
Research and Development. Research and development expenses increased $2.2
million to $4.2 million in the quarter ended July 31, 2000 from $2.0 million in
the quarter ended July 31, 1999, an increase of 115%. In the six months ended
July 31, 2000, research and development expenses increased $4.8 million to $8.4
million from $3.6 million in the six months ended July 31, 1999,
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an increase of 133%. Research and development expenses were 39% and 43% of total
revenue in the quarter and six months ended July 31, 2000, respectively compared
to 27% of total revenue in both the quarter and six months ended July 31, 1999.
The increase in absolute dollars and as a percentage of total revenue was
primarily due to an increase in number of research and development employees
required to accelerate research and development activity.
Sales and Marketing. Sales and marketing expenses increased $1.8 million to $3.8
million in the quarter ended July 31, 2000 from $2.0 million in the quarter
ended July 31, 1999, an increase of 92%. In the six months ended July 31, 2000,
sales and marketing expenses increased $3.4 million to $7.3 million from $3.9
million in the six months ended July 31, 1999, an increase of 87%. Sales and
marketing expenses were 36% and 38% of total revenue in the quarter and six
months ended July 31, 2000, respectively, compared to 28% and 30% of total
revenue in the quarter and six months ended July 31, 1999 respectively. The
increase primarily resulted from the recruitment of additional sales personnel,
the expansion of our sales offices in the United States and Europe, and
increases in direct marketing activities and travel costs.
General and Administrative. General and administrative expenses increased
$833,000 to $2.5 million in the quarter ended July 31, 2000 from $1.7 million in
the quarter ended July 31, 1999, an increase of 49%. In the six months ended
July 31, 2000 general and administrative expenses increased $1.7 million to $5.0
million from $3.2 million in the six months ended July 31, 1999, a 54% increase.
General and administrative expenses were 24% and 26% of total revenue for the
quarter and six months ended July 31, 2000, respectively, compared to 23% and
25% for the quarter and the six months ended July 31, 1999. The increase in
absolute dollars primarily resulted from increases in labor costs related to
hiring additional management and administrative personnel, telecommunications
and management information systems costs, provision for doubtful debts and an
increase in depreciation costs.
Stock Compensation. We recognized in the quarter ended July 31, 2000 and in the
six months ended July 31, 2000 $1.2 million and $2.9 million, respectively, of
non-cash stock compensation associated with options to acquire an aggregate of
230,000 ordinary shares (460,000 equivalent ADSs) granted to members of our
advisory board and MasterCard at fair market value on the date of grant. The
options are treated as variable options for accounting purposes under Financial
Accounting Standard 123 and Emerging Issues Task Force Abstract 96-18
("Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods and Services" (EITF 96-18)). As
a result non-cash stock compensation is related to the difference between the
exercise price of these options and the fair market value of our ADSs on the
measurement date of the options, multiplied by the number of options time-
apportioned over their respective vesting periods, less the aggregate amount of
stock compensation charges previously recognized for these option grants. In May
2000, we revised these option grants so that in future periods the non-cash
compensation charge is fixed on a quarterly basis as follows:
Quarter Ending October 31, 2000..................................... $1,157,300
Quarter Ending January 31, 2001..................................... $1,157,300
Quarter Ending April 30, 2001....................................... $ 469,175
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Quarter Ending July 31, 2001........................................ $ 97,231
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income and interest expense. Interest income, net was $2.2 million in
the quarter ended July 31, 2000 compared to $41,000 of interest income, net in
the quarter ended July 31, 1999. In the six months ended July 31, 2000 interest
income, net increased $2.8 million to $3.0 million of interest income, net
compared to $139,000 of interest income, net in the six months ended July 31,
1999. The increase was due to higher cash balances arising from the completion
of an initial public offering in September 1999 and our secondary offering in
May 2000.
Provision for Income Taxes. Provision for income taxes was $2,000 in the six
months ended July 31, 2000 compared to $1,000 for income taxes in the six months
ended July 31, 1999.
Liquidity and Capital Resources
On May 4, 2000, we completed a secondary public offering and received net
proceeds of $93.5 million from the sale of 2,225,000 ordinary shares. On
September 24, 1999, we completed our initial public offering and received net
proceeds of approximately $59.5 million from the sale of 5,887,598 ordinary
shares. In fiscal 1999, we raised an aggregate of $20.0 million in private
placements of 482,765 ordinary shares and 3,000,000 redeemable convertible
preference shares. Prior to fiscal 1999, we had satisfied our cash requirements
principally through cash generated by operations, proceeds from the sale of
ordinary shares to a single outside investor and borrowings under our bank
credit facilities.
We have an approved credit facility from Bank of Ireland of IR(Pounds)650,000 or
approximately $750,000 as of July 31, 2000. The credit facility bears interest
at the bank's overdraft rate which was 7.21% per year as of July 31, 2000. The
facility does not have a stated expiration date, but all amounts drawn under it
are repayable on demand. As of July 31, 2000, there was $0 outstanding under the
credit facility. As of July 31, 2000, we had working capital of $146.4 million,
including cash and cash equivalents totaling $13.8 million and marketable
securities totaling $129.4 million.
Net cash used in operating activities was approximately $92 million in the six
months ended July 31, 2000 compared to cash provided of $1.1 million in the same
period in 1999. This is due to our allocation of cash to marketable securities
and our net loss of $11.5 million. Net cash used in investing activities was
approximately $1.2 million for the six months ended July 31, 2000 compared with
$487,000 for the six months ended July 31, 1999. Cash used in investing
activities was related to the purchase of property and equipment.
Net cash provided by financing activities was $95.9 million for the six months
ended July 31, 2000 compared to net cash used of $412,000 for the six months
ended July 31, 1999. Cash, cash equivalents and short-term investments totaled
$143.2 million at July 31, 2000 compared with $59.7 million at January 31, 2000.
This increase is due the completion of our secondary offering but offset due to
our net loss for the six months.
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Although we have no material commitments for capital expenditures or strategic
investments, we anticipate an increase in the rate of capital expenditures
consistent with our anticipated growth in operations, infrastructure and
personnel. Our future liquidity and capital requirements will depend upon
numerous factors including the cost and timing of expansion of product
development efforts and the success of these development efforts, the cost and
timing of expansion of sales and marketing activities, the extent to which our
existing and new products gain market acceptance, market developments, the level
and timing of license revenue and available borrowings under line of credit
arrangements.
We believe that the proceeds generated by the sale of our securities in our
initial public offering and our follow-on offering, together with funds
available under our credit facility, cash generated from operations and cash and
cash equivalents on hand, will be sufficient to meet our projected working
capital requirements for at least the next 12 months. However, the underlying
assumed levels of revenues and expenses may prove to be inaccurate. We may be
required to finance any additional requirements within the next twelve months or
beyond through additional equity, debt financings or credit facilities. We may
not be able to obtain additional financings or credit facilities, or if these
funds are available, they may not be available on satisfactory terms. If funding
is insufficient at any time in the future, we may be unable to develop or
enhance our products or services, take advantage of business opportunities or
respond to competitive pressures. If we raise additional funds by issuing
equity securities, dilution to existing shareholders will result.
Qualitative and Quantitative Disclosure About Market Risk
Interest income and expense are sensitive to changes in the general level of
Irish and U.S. interest rates, particularly since our investments are in short-
term instruments and our available line of credit requires interest payments at
variable rates. One of our foreign subsidiaries has in the past entered into
foreign exchange contracts as a hedge against accounts receivable in currencies
other than the Irish pound. However, as of July 31, 2000, neither we nor our
subsidiaries were parties to any foreign currency hedging or other derivative
financial instruments. Based on the nature and current levels of our investments
and debt, we have concluded that there is no material market risk exposure.
Our investment policy requires us to invest funds in excess of current operating
requirements in marketable securities such as commercial paper, corporate bonds
and U.S. government agency fixed income securities. As stated in our investment
policy, we are averse to principal loss and seek to ensure the safety and
preservation of invested funds by limiting default and market risks. We mitigate
default risk by investing in only investment-grade securities.
At July 31, 2000, our cash and cash equivalents consisted primarily of highly
liquid investments with maturity of three months or less. We have concluded that
this does not result in any material market risk exposure.
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Year 2000
The year 2000 issue exists because many computer systems and applications use
two-digit rather than four-digit date fields to designate a year. As a result,
the systems and applications may not properly recognize the year 2000 or be able
to process data including it, which has the potential to cause data
miscalculations or inaccuracies, operational malfunctions or failures.
We have not experienced any problems with our computer systems relating to such
systems being unable to recognize appropriate dates related to the year 2000. We
are also not aware of any material problems with our clients or vendors.
Accordingly, we do not anticipate incurring material expenses or experiencing
any material operational disruptions as a result of year 2000 issues.
Employees
We employed the following numbers of employees as of July 31, 2000 and 1999:
As of
-----------------
July 31, July 31,
2000 1999
-----------------
Research and development.................................. 189 132
Professional and support services......................... 53 40
Sales and marketing....................................... 66 49
Administration............................................ 56 37
---- ----
Total..................................................... 364 258
---- ----
Of our total number of employees as of July 31, 2000, 184 are located in
Ireland, 46 are located in Europe outside Ireland and 134 are located in North
America.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other factors identified in this Report on Form 6-K, the
following risk factors could materially and adversely affect the Company's
future operating results, and could cause actual events to differ materially
from those predicted in the Company's forward looking statements relating to its
business.
We recently emphasized e-commerce software for Internet payment transactions, an
area in which we have limited experience.
We introduced our first e-commerce software product for Internet payment
transactions in 1996, and the majority of our e-commerce products and modules
that we currently market have been released in the last twelve months. As a
result, we have a very limited operating history in developing, marketing and
selling our e-commerce software, which makes the prediction of future operating
results for this portion of our business very difficult. A substantial majority
of our research and development expenses in the past two years has related to e-
commerce software for payment card transactions, and this effort will continue
to account for a significant percentage of our total research and development
expenses. Demand for our e-commerce software may not increase and these products
may not gain market acceptance. If we fail to increase sales of our e-commerce
software, our future revenue and net income, as well as the prospects for this
critical portion of our business, will be materially adversely affected.
The standards for e-commerce payment transactions that we support may not
achieve broad market acceptance or market acceptance may be slower than
anticipated.
A significant part of our business strategy is to continue to develop
software products that support both SSL and SET standards for payment card
transactions over the Internet. If neither achieves broad market acceptance, our
results of operations and prospects will be materially adversely affected. In
addition, if a new standard emerges that is more accepted by the marketplace, we
may not be successful in developing products that comply with that standard on a
timely basis, or at all.
The SSL standard was developed in 1996, but it has not achieved broad
acceptance outside of North America. In particular, SSL has not achieved broad
acceptance in Europe, which is currently our primary market for our e-payment
solutions for payment card transactions in the physical world. The SET standard
was first implemented in 1997 to address perceived security limitations of SSL.
However, the SET standard has been adopted at a slower rate than we originally
anticipated, and currently the SET standard has achieved limited market
acceptance, particularly in the United States. Because our product development
efforts have focused on these two standards, future sales of our e-payment
products for Internet transactions and the rate of revenue growth attributable
to these products, will be materially adversely affected if these standards do
not achieve broad market acceptance.
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Part of our strategy has been, and continues to be, to develop products that
support the SET standard. We pursue this strategy because we believe that
marketing SET-compliant products can differentiate us from competitors that do
not market SET-compliant products. We further believe that this differentiation
is important to our business because the level of competition relating to SSL
products is significantly greater than that relating to SET products. However,
the adoption of SET has been impeded by several factors, including:
. the ease of using SSL as compared to SET
. limited financial incentives for cardholders and merchants to use SET
. the installed base of SSL technology, including embedded functionality
in Netscape products
If SET technology is not broadly adopted, we will lose a potential
competitive advantage, and our prospects and results of operations could be
materially adversely affected.
To be successful, we will need to effectively respond to future changes in the
rapidly developing markets in which we sell our software products.
The markets for our e-payment software solutions for the physical world
and, in particular, for payment card transactions over the Internet, are at
early stages of development and are rapidly evolving. Our ability to design,
develop, introduce and support new e-payment software products and enhancements
to existing products on a timely basis that meet changing market needs and
respond to technological developments is critical to our future success. In
addition, these products will need to support industry standards and
interoperate with a variety of third parties' products, including those of our
competitors. We may be unable to develop interoperable products, and widespread
adoption of a proprietary or closed e-payment standard could preclude us from
effectively doing so. Also, the number of businesses and cardholders engaged in
e-commerce may not grow or could decrease, reducing the potential market for our
e-commerce products.
The market for e-payment solutions for mobile commerce may not develop and, if
it does develop, we may not be able to develop products that successfully
compete in this market, either of which would significantly impact our financial
results and prospects.
In February 2000, we announced the availability of our first e-payment solution
for making online purchases from mobile phones and other wireless devices. We
have not yet begun to market or sell this m-commerce payment product, nor do we
currently have any commercial customers for this product. We intend to invest a
significant portion of our future research and development expenses to enhance
this first product and to develop one or more additional products for the m-
commerce payment market. However, we cannot predict whether we will be
successful in these development efforts or whether our existing product or any
future m-commerce products will gain market acceptance. We do not currently
expect to recognize significant revenue from m-commerce products until at least
late fiscal 2002. In addition, if this market develops, we may face significant
competition from major telecommunication service providers and mobile phone
handset and
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equipment providers, among others. These companies have significantly more
resources than us and may develop new standards for payment card mobile phone
based transactions which we do not address and may not be able to support in the
future. In addition, these companies may provide similar products to ours at a
lower cost or at no cost to facilitate sales of their telecom equipment or
mobile phones. If we fail to generate significant sales of our m-commerce
payment products, our future revenue and net income, as well as the prospects
for this portion of our business, will be materially adversely affected.
We depend on sales of our electronic point-of-sale systems for payment card
transactions for a significant majority of our total revenue.
A significant majority of our total revenue historically has been derived
from the sale of our electronic payment card point-of-sale system products. We
expect that these products will continue to account for a significant percentage
of our total revenue through at least fiscal 2002. We have historically marketed
our electronic PoS system products solely in Europe, and particularly in
Germany. For fiscal 2000, our customers in Germany accounted for over 60% of our
electronic PoS system product revenues. We intend to continue to focus
substantially all of our marketing efforts for our electronic PoS system
products in Europe, and particularly in Germany. As a result, our future results
of operations will depend on continued market demand for, and acceptance of,
these products in Europe in general and Germany in particular. A reduction in
demand for our electronic PoS system products could have a material adverse
effect on our business, financial condition and results of operations.
Average selling prices for electronic PoS system products may continue to
decline, adversely affecting our results of operations, particularly our revenue
and operating and net income.
The market for electronic PoS system products is characterized by
increasing price competition, which historically has caused the average selling
prices of our electronic PoS systems to decrease over the life of each product.
We expect this trend to continue. To offset declines in the average selling
prices of our electronic PoS system products, we will need to reduce the cost of
these products by implementing cost reduction design changes, obtaining cost
reductions as and if volumes increase and successfully managing manufacturing
and subcontracting relationships. We do not operate our own manufacturing
facilities, and, as a result, we may not be able to reduce our costs as rapidly
as companies that operate their own manufacturing facilities. If we do not
design and introduce lower cost versions of our electronic PoS system products
in a timely manner or successfully manage our manufacturing relationships,
margins on our electronic PoS system products will decrease. A decrease in
margins or an accelerated decrease in average selling prices could have a
material adverse effect on our business, financial condition and results of
operations.
We have incurred losses and expect continued losses.
We incurred a net loss of $12.1 million for the year ended January 31,
2000, and we have incurred net losses in our last ten quarters. As of July 31,
2000, we had an accumulated deficit
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of $33.1 million. In fiscal 2000 we substantially increased our operating
expenditures to build our presence in the e-commerce software business. This has
included significant increases in our research and development expenses related
to the development of e-commerce capable products, and substantial increases in
our sales and marketing personnel. We intend to continue to grow our operating
expenditures and, consequently, we expect to continue to report losses from
operations for at least two years.
Our business is subject to currency fluctuations that can adversely affect our
operating results.
Due to our multinational operations, our business is subject to
fluctuations based upon changes in the exchange rates between the currencies in
which we collect revenues or pay expenses and the Irish pound and the euro. In
particular the value of the U.S. dollar impacts our operating results. Our
expenses are not necessarily incurred in the currency in which revenue is
generated, and, as a result, we are required from time to time to convert
currencies to meet our obligations. These currency conversions are subject to
exchange rate fluctuations, and changes to the value of the Irish pound or the
euro relative to other currencies could adversely affect our business and
results of operations. For example, sales of our electronic PoS systems in
Germany are denominated in euro while a portion of the related manufacturing
costs are denominated in U.K. pounds sterling. As a result, in the year ended
January 31, 2000, margins on electronic PoS systems were negatively impacted.
In addition, our consolidated financial statements are prepared in Irish
pounds and translated to U.S. dollars for reporting purposes. As a result, even
when foreign currency expenses substantially offset revenues in the same
currency, our net income may be diminished, or our net loss increased, when
reported in U.S. dollars in our financial statements.
Our quarterly operating results are difficult to predict because they can
fluctuate significantly. This limits your ability to evaluate our historical
financial results and increases the likelihood that our results will fall below
market analysts' expectations, which could cause the price of our ADSs to drop
rapidly and severely.
We have experienced significant quarterly fluctuations in operating results
and cash flows and we expect that these fluctuations will continue in future
periods. In addition, our revenue is difficult to predict for several reasons.
As a result, we believe that our quarterly revenue, expenses and operating
results are likely to vary significantly in the future. Thus, it is likely that
in some future quarters our results of operations will be below the expectations
of public market analysts and investors, which could have a severe adverse
effect on the trading price of our ADSs. We also believe that period-to-period
comparisons of our quarterly operating results are not necessarily meaningful
and that, as a result, these comparisons should not be relied upon as
indications of our future performance.
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Quarterly fluctuations have been, and may in the future be, caused by
factors which include:
. the size and timing of orders
. currency fluctuations
. product mix
. the rate of acceptance of new products
. purchasing and payment patterns of our customers
. our pricing policies and those of our competitors
In addition, our revenue is difficult to predict for the following
reasons:
. we have generally recognized a substantial portion of our revenue
in the last month of each quarter
. the market for our e-commerce products is new and rapidly changing
. the sales cycle for our products is typically 6 to 12 months and
varies substantially from customer to customer
Over the past few years, we have substantially increased our investment in
our infrastructure, and we expect to continue to do so. As a result, if revenue
in any quarter falls below expectations, expenditure levels could be
disproportionately high as a percentage of revenue, and our business and
operating results for that quarter would be adversely affected, perhaps
materially.
We derive a significant amount of our revenues from a limited number of
customers.
A significant percentage of our revenue is derived from a limited number of
our customers. Approximately 40% of our total revenue for the year ended January
31, 2000 and 34% of our total revenue for the three months ended July 31, 2000
was attributable to our three largest customers in those periods. The loss of
any major customer, or any reduction or delay in orders by any major customer,
could have a material adverse effect on our business, financial condition and
results of operations.
We rely on strategic relationships that may not continue in the future.
We have developed strategic relationships with larger, public companies. We
rely in part on these relationships to co-market our products and generate leads
for our direct sales force. However, these relationships are not exclusive, and
the third party generally is not obligated to market our products or provide
leads. We will need to establish additional strategic relationships to be
successful.
Two of the companies with which we have developed a strategic relationship
are VISA International and MasterCard International. We believe that our
reputation has benefited from past transactions and joint press releases with
these companies, as well as from VISA's equity
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investment in us in 1998. Neither customer is obligated to continue to conduct
business or marketing activities with us. VISA or MasterCard's endorsement of
one or more of our competitors could cause existing customers to switch to
competitors and could materially adversely affect our ability to add new
customers.
Our success depends on our ability to expand our direct sales force.
We have sold our products almost exclusively through our direct sales
force. Our future revenue growth will depend in large part on our ability to
recruit, train and manage additional sales personnel worldwide. We have
experienced and continue to experience difficulty in recruiting qualified sales
personnel, and the market for these personnel is highly competitive. We may not
be able to successfully expand our direct sales force, and any expansion of the
sales force may not result in increased revenue. Our business and results of
operations will be materially adversely affected if we fail to successfully
expand our direct sales force.
Our growth may be limited if we fail to build an indirect sales channel.
Indirect sales channels accounted for approximately 4% of our total revenue
in fiscal 2000. We recently have established relationships with a limited number
of resellers and systems integrators and consultants. These are new, early-stage
relationships and, as such, are generally untested. Our existing indirect
channels will have to generate significant revenue and we will need to establish
additional indirect channels to be successful.
Increased competition may result in decreased demand for our products and
services, which may result in reduced revenues and gross margins and loss of
market share.
The market for e-payment software and electronic PoS systems is intensely
competitive, and we expect competition to continue to increase. Our competitors
include Verifone, a subsidiary of Hewlett-Packard, and Giesecke & Devrient for
our electronic PoS system products, and IBM, Verifone and GlobeSet for our e-
payment software. Growing competition may result in reduced revenues and gross
margins and loss of market share, any one of which could have a material adverse
effect on our business, financial condition and results of operations. Some
competitors in our market have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater brand recognition
and a larger installed customer base than we do. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships to expand their product offerings and to offer more comprehensive
e-payment solutions. We also expect to face additional competition as other
established and emerging companies enter the market for e-payment solutions.
We depend on a few key personnel to manage and operate us.
Our success is largely dependent on the personal efforts and abilities
of our senior management, including in particular John McGuire, Cyril McGuire,
George Burne, Kevin Shea,
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Paul Byrne, Chris Meehan and John Harte. The loss of one or more of members of
our senior management could have a material adverse effect on our business and
prospects.
If we are unable to attract and retain highly skilled personnel with experience
in the e-payment and banking industries, we may be unable to grow our business.
The market for qualified personnel with experience in the e-payment and
banking industries in general, and software engineers with this experience in
particular, is highly competitive. Our strategic plan requires continued
investment in research and development and sales and marketing personnel.
Failure to successfully attract, hire, assimilate and retain qualified personnel
could limit the rate at which we develop new products and generate sales, which
could have a material adverse effect on our business, prospects and results of
operations.
Our reliance on third parties to manufacture our electronic PoS system products
involves risks, including, in particular, reduced control over the manufacturing
process and product quality.
Our electronic PoS system products are manufactured by Keltek and Fujitsu.
Our reliance on outsourced manufacturers involves significant risks, including:
. reduced control over delivery schedules, quality assurance and cost
. the potential lack of adequate manufacturing capacity
. the potential misappropriation of our intellectual property
We must make binding forecasts as much as three months in advance of
expected delivery dates. If product sales do not meet these forecasts, our
cashflow would be adversely impacted, and the risk that our inventory could
become obsolete would increase. If Keltek or Fujitsu cease manufacturing our
electronic PoS system products or increase their prices, we may not be able to
rapidly obtain alternative capacity at a comparable price. Any delay in delivery
of products to our customers or any increase in manufacturing costs could have a
material adverse effect on our business and results of operations.
We have in the past received products that contained defects from our
manufacturers. Because we warrant the quality of our electronic PoS system
products to our customers, we have been required to repair or replace defective
products at our own expense. This expense has in the past exceeded the amounts
reimbursed to us by the manufacturers. This expense has not in the past had a
material adverse effect on our results of operations. However, any repetition of
these or similar problems could have a material adverse effect on our
reputation, business and results of operations.
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We may not be able to timely respond to rapid technological changes that impact
our business.
The markets for our e-payment software and electronic PoS system solutions
are susceptible to rapid changes due to technology innovation, evolving industry
standards, changes in customer and cardholder needs and frequent new product
introductions. We will need to use leading technologies effectively, continue to
develop our technical expertise and enhance our existing products on a timely
basis to compete successfully in these markets. We may not be successful in
achieving these business requirements.
We may be unable to protect our proprietary rights. Unauthorized use of our
technology may result in development of products which compete with our
products.
Our success depends in part on our ability to protect our rights in our e-
payment and PoS system technology. We rely upon a combination of patents,
contractual rights, trade secrets, copyright laws and trademarks to establish
and protect these rights. We also enter into confidentiality agreements with our
employees, consultants and third parties to seek to limit and protect the
distribution of our proprietary information regarding this technology. However,
we have not signed protective agreements in every case. Unauthorized parties may
copy aspects of our products and obtain and use information that we regard as
proprietary. Other parties may breach confidentiality agreements and other
protective contracts we have executed. We may not become aware of, or have
adequate remedies in the event of, a breach.
Some may claim that we infringe their intellectual property rights, which could
result in costly litigation or require us to reengineer or cease sales of our
products.
We believe that our products do not infringe upon the intellectual property
rights of others and that we have all rights necessary to use the intellectual
property employed in our business. However, we have not performed patent
searches for all of the technologies encompassed in our products. Third parties
may in the future claim that our current or future products infringe their
proprietary rights. Any infringement claim, with or without merit, could result
in costly litigation or require us to reengineer or cease sales of our products,
any of which could have a material adverse effect on our business, financial
condition, results of operations and prospects. Infringement claims could also
require us to enter into royalty or licensing agreements. Licensing agreements,
if required, may not be available on terms acceptable to us or at all.
Our industry and our customers' industry are subject to government regulations
that could limit our ability to market our products.
Our current and prospective customers include non-U.S. and state and
federally chartered banks and savings and loan associations. These customers, as
well as customers in other
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industries that we plan to target in the future, operate in markets that are
subject to extensive and complex regulation. While we are not directly subject
to this regulation, our products and services must be designed to work within
the extensive and evolving regulatory constraints under which our customers
operate. If our products fail to comply with regulations applicable to our
customers, or if we cannot timely and cost-effectively respond to changes in the
regulatory environments of each of our customers, our product sales could be
materially adversely affected, which could have a material adverse effect on our
business, prospects and results of operations.
Exports of software products utilizing encryption technology are generally
restricted by the U.S., Irish, German and various other foreign governments. Our
inability to obtain and maintain required approvals under these regulations
could adversely affect our ability to sell our products. Also, U.S., Irish,
German or other foreign legislation or regulations may further limit levels of
encryption or authentication technology that may be sold or exported. Any export
restrictions of this sort, new legislation or regulations, or increased costs of
compliance could have a material adverse effect on our business, results of
operations and prospects.
Our electronic PoS system products must comply with standards established
by telecommunications authorities in various countries, as well as with
recommendations of quasi-regulatory authorities and standards-setting
committees. Failure to comply with these standards and recommendations could
limit our ability to sell these products.
Rapid growth could strain our personnel and systems.
We have recently experienced rapid expansion of our operations in multiple
countries, which has placed, and is expected to continue to place, significant
demands on our administrative, operational and financial personnel and systems.
Because of these demands, we hired a significant number of employees in fiscal
1999 and fiscal 2000 and expect to continue hiring during fiscal 2001. Our
inability to train and integrate our new employees and promptly address and
respond to rapid growth if it occurs could have a material adverse effect on our
business and results of operations.
We may fail to integrate adequately acquired products, technologies or
businesses.
From time to time, we evaluate opportunities to acquire additional product
offerings, complementary technologies and businesses. Any future acquisition
could result in difficulties assimilating acquired products, technologies and
businesses, amortization of acquired intangible assets and diversion of our
management's attention. Our management has limited experience in assimilating
acquired organizations and products into our operations. We may not be able to
integrate successfully any products or technologies or businesses that might be
acquired in the future, and the failure to do so could have a material adverse
effect on our business and results of operations.
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Trading in our shares could be subject to extreme price fluctuations and you
could have difficulty trading your shares.
The market for shares in newly public technology companies is subject to extreme
price and volume fluctuations, often unrelated to the operating performance of
these companies. Due to the potential volatility of our stock price, we may in
the future be the target of securities class action litigation. Securities
litigation could result in substantial costs and divert our management's
attention and resources. In addition, although the ADSs are quoted on the
Nasdaq National Market and the Neuer Markt, the daily trading volume has been
limited. An active trading market may not develop or be sustained. In addition,
the Neuer Markt is a new trading market. The Neuer Markt may experience delays
in settlement and clearance as trading volume increases. These factors could
adversely affect the market price of the ADSs.
The rights of shareholders in Irish corporations may be more limited than the
rights of shareholders in United States and German corporations.
The rights of holders of ordinary shares and, therefore, some of the rights of
ADS holders, are governed by Irish law and the laws of the European Union. As a
result, the rights of our shareholders differ from, and may be more limited
than, the rights of shareholders in typical United States or German
corporations. In particular, Irish law significantly limits the circumstances
under which shareholders of Irish corporations may bring derivative actions.
Our three largest shareholders have the ability to significantly influence
corporate actions, which limits your ability to influence or control corporate
actions. This concentration of ownership also can reduce the market price of the
ADSs.
Our three largest shareholders own approximately 46% of our equivalent ADSs. If
these shareholders act together, they will have the ability to significantly
influence the election of directors and the outcome of all corporate actions
requiring shareholder approval. This concentration of ownership also may have
the effect of delaying or preventing a change in control of us, which in turn
could reduce the market price of the ADSs.
Our corporate tax rate may increase, which could adversely impact our cash flow,
financial condition and results of operations.
We have operations and generate substantially all of our taxable income in
the Republic of Ireland. Currently, some of our Irish subsidiaries are taxed at
rates substantially lower than U.S. or German tax rates. If our Irish
subsidiaries were no longer to qualify for these lower tax rates or if the
applicable tax laws were rescinded or changed, our operating results could be
materially adversely affected. In addition, if German, U.S. or other foreign tax
authorities were to change applicable tax laws or successfully challenge the
manner in which our subsidiaries' profits are currently recognized, our taxes
could increase, and our business, cash flow, financial condition and results of
operations could be materially adversely affected.
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The German takeover code, our articles of association and Irish law may make an
acquisition of us more difficult, which could affect the trading price of our
ADSs.
As required by the Neuer Markt, we have adopted the takeover code recommended by
the Stock Exchange Expert Commission at the German Federal Ministry of Finance.
Although this takeover code does not have the force of law, it is generally
required by the Frankfurt Stock Exchange that companies listed on the Neuer
Markt acknowledge these takeover provisions. The applicability of the takeover
code, as well as provisions of our articles of association and Irish law, could
delay, defer or prevent a change of control of us, which in turn could reduce
the market price of the ADSs. In addition, the rights of our shareholders under
the takeover code could differ from the rights of shareholders under the United
States federal and state laws governing tender offers and takeovers.
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SIGNATURES
Pursuant to the requirements 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.
TRINTECH GROUP PLC
By: /s/ John McGuire
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John McGuire
Chief Executive Officer
Dated: September 14, 2000
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