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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JUNE 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-29319
EPRISE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3179480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1671 WORCESTER ROAD
FRAMINGHAM, MA 01701
(Address of principal executive offices)
(508) 661-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant 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).
Yes X No
--- ---
Indicate by check mark whether the Registrant has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of August 4, 2000, there were
25,144,673 shares of the Registrant's Common Stock, $0.001 par value per share,
outstanding.
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EPRISE CORPORATION
FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2000 and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and June 30, 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 22
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
2
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
EPRISE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 79,203 $ 22,456
Accounts receivable (less allowance
for doubtful accounts of $257 and $189
at June 30, 2000 and December 31, 1999,
respectively) 4,044 2,045
Due from related parties 37 58
Prepaid expenses and other current assets 1,281 317
-------- --------
Total current assets 84,565 24,876
Property and equipment, net 2,077 613
Other assets, net 104 45
-------- --------
Total assets $ 86,746 $ 25,534
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of equipment line of credit $ 86 $ 86
Accounts payable 1,474 148
Accrued compensation and benefits 1,408 597
Other accrued expenses 1,913 495
Deferred revenue 1,394 572
-------- --------
Total current liabilities 6,275 1,898
Long-term equipment line of credit,
less current portion 36 79
-------- --------
Total liabilities 6,311 1,977
-------- --------
Redeemable convertible preferred
stock (Aggregate liquidation
preference of $38,818) -- 35,316
Stockholders' equity (deficiency):
Common stock, $.001 par value; 90,000 and
58,500 shares authorized at June 30, 2000
and December 31, 1999, respectively;
25,159 and 2,838 shares issued and
outstanding at June 30, 2000 and
December 31, 1999, respectively 25 3
Additional paid-in capital 124,845 24,332
Accumulated deficit (43,854) (36,025)
Notes receivable from officers (576) (69)
Other comprehensive income (loss) (5) --
-------- --------
Total stockholders' equity (deficiency) 80,435 (11,759)
-------- --------
Total liabilities and stockholders'
equity (deficiency) $ 86,746 $ 25,534
======== ========
See notes to the condensed consolidated financial statements.
3
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EPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 3,600 $ 223 $ 5,830 $ 331
Services 1,079 305 1,446 358
-------- -------- -------- --------
Total net revenues 4,679 528 7,276 689
Cost of revenues (includes compensation costs of $64
and $75 for stock options in 2000, respectively) 1,721 161 2,643 287
-------- -------- -------- --------
Gross Profit 2,958 367 4,633 402
Operating expenses:
Research and development (includes compensation
costs of $58 and $110 for stock options in 2000,
respectively) 1,343 545 2,282 1,113
Selling and marketing (includes compensation costs
of $285 and $553 for stock options in 2000,
respectively) 5,602 1,099 9,456 1,864
General and administrative (includes compensation
costs of $122 and $215 for stock options in 2000,
respectively) 1,283 410 2,232 774
-------- -------- -------- --------
Total operating expenses 8,228 2,054 13,970 3,751
-------- -------- -------- --------
Operating loss (5,270) (1,687) (9,337) (3,349)
Other income (expense):
Interest income 1,288 42 1,623 103
Interest expense and other (18) (9) (21) (15)
-------- -------- -------- --------
Other income, net 1,270 33 1,602 88
-------- -------- -------- --------
Net loss (4,000) (1,654) (7,735) (3,261)
Accretion of redeemable convertible preferred stock -- (5) (94) (10)
-------- -------- -------- --------
Loss to common stockholders $ (4,000) $ (1,659) $ (7,829) $ (3,271)
======== ======== ======== ========
Loss per share (Note 2) $ (0.16) $ (0.74) $ (0.51) $ (1.46)
======== ======== ======== ========
Weighted-average common shares outstanding (Note 2) 25,163 2,245 15,363 2,241
======== ======== ======== ========
Pro forma loss per share (Note 2) $ (0.16) $ (0.14) $ (0.35) $ (0.27)
======== ======== ======== ========
Pro forma weighted-average common shares outstanding
(Note 2) 25,163 11,985 22,659 11,981
======== ======== ======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
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EPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2000 1999
--------- --------
Cash flows from operating activities
Net loss $ (7,735) $ (3,261)
Adjustments to reconcile net loss
to net cash used for
operating activities:
Depreciation and amortization 225 79
Provision for doubtful accounts 98 --
Compensation cost for stock options 953 --
Loss on disposal of fixed assets -- 4
Increase (decrease) in cash from:
Accounts receivable (2,097) (208)
Due from related parties 21 --
Prepaid expenses and other current
assets (964) (18)
Other assets (59) 3
Accounts payable 1,326 (25)
Accrued expenses 2,224 258
Deferred revenue 822 86
-------- --------
Net cash used for operating activities (5,186) (3,082)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,689) (198)
Proceeds from sales of property and equipment -- --
-------- --------
Net cash used for investing activities (1,689) (198)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs 63,152 --
Payments on notes payable (43) (36)
Proceeds from exercise of stock options 336 4
Proceeds from exercise of warrants 113 --
Repayments of stock holder notes 66 --
Payments for repurchase of unvested common stock (2) --
-------- --------
Net cash provided by (used for) financing
activities 63,622 (32)
-------- --------
Net increase (decrease) in cash 56,747 (3,312)
Cash and cash equivalents, beginning of period 22,456 6,357
-------- --------
Cash and cash equivalents, end of period $ 79,203 $ 3,045
======== ========
Supplemental disclosures of cash flow information -
cash paid for interest $ 22 $ 11
======== ========
Summary of noncash investing and financing activities
Issuance of stock for notes receivable $ 573 $--
======== ========
See notes to the condensed consolidated financial statements.
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EPRISE CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Eprise Corporation and its subsidiaries, together referred to as the
"Company," develop, market and implement web content management solutions that
help businesses shape and direct e-business communications effectively and
efficiently. The Company also provides design and other consultative services
designed to help organizations maximize the value they derive from the Company's
web content management solutions. Business is conducted primarily in the United
States.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the Company's audited financial
statements and related footnotes included in the Company's prospectus dated
March 23, 2000.
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the interim
periods presented. The operating results for the interim periods presented are
not necessarily indicative of the results which could be expected for the full
year.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Software license fees are generally recognized when a signed contract has
been received, the product has been shipped, the fee is fixed or determinable
(based on vendor specific objective evidence), and collectibility is probable.
Vendor specific objective evidence is based on the prices at which products and
services are separately sold, as listed in our current price lists. Discounts
from established prices are infrequent and require management approval. Revenue
from maintenance agreements is deferred and recognized ratably over the term of
the agreement. Consulting revenue is recognized as services are performed.
STOCK-BASED COMPENSATION
Compensation expense associated with awards of stock or options to
employees is measured using the intrinsic-value method. Compensation expense
associated with awards to nonemployees is measured using the fair-value method.
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EPRISE CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period. In addition,
for purposes of pro forma net loss per share, all shares of Series A, B and C
preferred stock, which were converted into common stock on a one-for-one basis
at the time of the Company's initial public offering, have been treated as
though they were common stock in all periods in which such shares were
outstanding. In addition, no effect is given to accretion of the preferred stock
for purposes of this computation.
HISTORICAL NET LOSS PER SHARE
Historical net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period. Diluted amounts
per share would include the impact of the Company's outstanding potential common
shares, such as options and warrants (computed using the treasury stock method)
and convertible preferred stock. However, the effect of these items would be
antidilutive in all periods presented and are therefore excluded from the
computation. Had such shares been included in the computation, weighted average
shares would have increased by 1,794,176 shares in the six months ended June 30,
2000.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's revenues are derived from various customers who generally are
not required to provide collateral for amounts owed to the Company. The Company
operates in one segment. The Company's customers are dispersed over a wide
geographic area.
For the three-month and six-month periods ended June 30, 2000, there were
no customers who individually accounted for more than 10% of the Company's
revenue. For the three-month and six-month periods ended June 30, 1999, five
customers accounted for 80% and four customers accounted for 66% of the
Company's revenue, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS
On June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 2000. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for based on the use of the derivative and whether it qualifies for
hedge accounting. Management is currently assessing the impact of SFAS No. 133
on the financial statements of the Company. The Company will adopt this
accounting standard on January 1, 2001.
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EPRISE CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE REVENUE RECOGNITION
In December 1998, the American Institute of Certified Public Accountants
released Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to provide guidance related to determination of the allocation
of revenues in multiple element contracts under certain circumstances. The
Company adopted SOP 98-9 for its fiscal year beginning January 1, 2000. The
adoption of SOP 98-9 does not have a material impact on the Company's financial
position or its results of operations.
SEC VIEWS ON REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which sets forth the SEC's views on appropriate revenue recognition
practices. The Company believes that its current revenue recognition practices
are in accordance with accounting principles generally accepted in the United
States and does not expect any impact when the bulletin becomes effective.
3. INCOME TAXES
A reconciliation of the statutory federal rate to the effective rate for
all periods is as follows:
Statutory Federal rate benefit..................................(34)%
State, net of Federal effect.....................................(6)
Valuation allowance provided.....................................40
--
Effective rate.................................................. --%
==
4. STOCKHOLDERS' EQUITY
On March 24, 2000, the Company completed its initial public offering of
common stock. A total of 4,600,000 shares were sold at a price of $15.00 per
share. The offering resulted in net proceeds to the Company of approximately
$63.2 million, net of an underwriting discount of approximately $4.8 million and
estimated offering expenses of approximately $1.0 million.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and related notes which appear elsewhere in this report.
OVERVIEW
Eprise, originally named Inner Circle Technologies and then NovaLink, was
founded in 1992 as a provider of online interactive games. Between 1994 and
1997, our principal business shifted to creating and hosting Web sites for
corporate clients. During this period, we encountered recurring problems arising
out of the inadequacy of software tools that were commercially available to
build and maintain Web sites. Realizing that there was an opportunity to
streamline and automate these processes, we began to develop a software product
called Eprise Participant Server to facilitate the construction and updating of
Web sites. We shipped our initial product in early 1998. Eprise now markets and
sells version 2.6 of Eprise Participant Server.
We generate revenues from two principal sources: (1) license fees for our
software products and (2) professional services and technical support revenues
derived from consulting, implementation, training and maintenance services
related to our software products. In the three-month and six-month periods ended
June 30, 2000, there were no individual customers accounting for 10% or more of
our total revenues. In the three-month and six-month periods ended June 30,
1999, five customers represented 80% and four customers represented 66% of our
total revenues, respectively.
As our revenue generated from license sales has increased, our gross profit
margins have improved. License revenue represented 80% of total revenue in the
first six months of 2000. License sales produce significantly higher margins
than service sales due to nominal costs associated with licenses and their
delivery.
Software licenses. Customers typically pay an up-front, one-time fee for a
perpetual non-exclusive license of our software. Generally, the amount of the
fee is based on the number of licensed servers. To date, software license
revenues have principally come from direct sales to customers. The sales cycle
for our products is typically three to six months. Although we have limited
historical financial data, we believe that our quarterly operating results may
experience seasonal fluctuations due to clients' fiscal year budgeting cycles
and purchasing patterns. Because of our server-based licensing, we experience
significant variation in the size of our licensing transactions.
We generally recognize license fee revenues upon delivery of the product.
If the product is subject to acceptance and/or return and refund, we defer
revenues until acceptance has occurred or the refund period has expired.
Services. Services revenues consist principally of revenues derived from
professional services associated with the implementation and integration of our
software products, training of customers' employees and ongoing customer
support, which primarily includes customer technical support services and
product enhancements. We deliver professional services on either a fixed price
basis or a time and materials basis. We generally complete implementation and
training services within three to six months following license contract signing.
We recognize revenues from professional services as such services are
performed. We recognize maintenance revenues, which are invoiced annually in
advance, ratably over the term of the maintenance agreement, which is generally
12 months. Our maintenance revenues currently account for less than 10% of total
revenues. As part of these agreements, we provide product enhancements and
technical support services to customers for an annual fee, which typically
amounts to 20% of the license fee. While a 60-day warranty is included in the
software license, maintenance agreements typically are entered into as of the
date of the software license. Maintenance agreements are renewable at the
discretion of the customer. As of June 30, 2000, there have been 72 customers
who have entered into maintenance agreements with
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Eprise. Of the 72 contracts, to date seven have expired, and 2 have currently
been renewed. The remaining contracts have not yet come up for renewal.
Backlog. Delivery lead times for our products are very short and,
consequently, substantially all of our license fee revenues in each quarter
result from orders received in that quarter. Accordingly, we generally only
maintain a backlog for our professional services and maintenance activities, and
we believe that our backlog at any point in time is not a reliable indicator of
future revenues and earnings.
Cost of revenues. The costs associated with software licenses, including
CDs and packaging, arise primarily from the production of software products, and
have not been significant in any period presented, nor are they expected to be
significant in the foreseeable future. Cost of services revenues consists
primarily of salaries and related personnel costs and other allocated expenses
of our consulting, support and training organizations, as well as costs related
to servicing our legacy products.
Research and development. We maintain a product development staff to
enhance our existing products and to develop new products. Software costs are
expensed as incurred until technological feasibility of the software is
determined, after which any additional costs are capitalized. To date, we have
expensed all software development costs because development costs incurred
subsequent to the establishment of technological feasibility have been minimal.
Selling and marketing. We license our products primarily through our direct
sales force. Selling and marketing expenses consist primarily of costs
associated with personnel, sales commissions, office facilities, travel and
promotional events such as trade shows, seminars and technical conferences,
advertising and public relations programs.
General and administrative. General and administrative expenses include
salaries and related personnel expenses and other costs of the finance, human
resources, information technology, and administrative functions at Eprise.
RESULTS OF OPERATIONS
The following table sets forth our operating results for the periods indicated
as a percentage of revenues.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Software licenses ................... 77% 42% 80% 48%
Services ............................ 23 58 20 52
---- ---- ---- ----
Total revenues ................. 100 100 100 100
---- ---- ---- ----
Cost of revenues ....................... 37 30 36 42
---- ---- ---- ----
Gross profit ........................... 63 70 64 58
Operating expenses:
Research and development ............ 29 103 31 162
Selling and marketing ............... 120 208 130 270
General and administrative .......... 27 79 31 112
---- ---- ---- ----
Total operating expenses ....... 176 390 192 544
---- ---- ---- ----
Operating loss ......................... (113) (320) (128) (486)
Other income (expense), net ............ 27 6 22 13
---- ---- ---- ----
Net loss ............................... (86)% (314)% (106)% (473)%
==== ==== ==== ====
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THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Total revenues increased by 786.2% to approximately $4.7 million for the
three months ended June 30, 2000 compared to $528,000 for the three months ended
June 30, 1999. The increase was attributable to the release of Eprise
Participant Server version 2.0, the first commercial release of this product, in
the second quarter of 1999 and the consulting, training, and maintenance
revenues generated by the license sales to our growing customer base.
Software licenses. Revenues from software licenses increased by 1,514.3% to
approximately $3.6 million for the three months ended June 30, 2000 compared to
$223,000 for the three months ended June 30, 1999. Software license revenues
represented 77% and 42% of total revenues for the three months ended June 30,
2000 and 1999, respectively. The increase in revenues from software licenses was
primarily due to the release of version 2.0 of Eprise Participant Server in
April 1999 and the resulting increases in licenses delivered, in addition to
follow-on orders received from our existing customers.
Services. Revenues from services increased by 253.8% to approximately $1.1
million for the three months ended June 30, 2000 compared to $305,000 for the
three months ended June 30, 1999. Services revenues represented 23% and 58% of
total revenues for the three months ended June 30, 2000 and 1999, respectively.
Approximately 60% of the increase in absolute dollars is attributable to
consulting, 28% to training and 13% to maintenance revenue generated by new
software license sales. The decrease as a percentage of total revenues is
attributable to the fact that prior to the release of Participant Server, we
derived the majority of our revenues from Web site development as well as
supporting and operating customer websites.
Cost of revenues. Cost of revenues, which primarily relate to services
because costs of licenses are insignificant, increased by 968.9% to
approximately $1.7 million for the three months ended June 30, 2000 compared to
$161,000 for the three months ended June 30, 1999. Cost of revenues represented
37% and 30% of total revenues for the three months ended June 30, 2000 and 1999,
respectively. The increase in absolute dollars was due to the expansion of our
professional services organization, including technical consulting, technical
support, and training. The increase as a percentage of total revenues was
primarily due to the period of time needed to train our expanding service
organization as well as the use of third party contractors.
Research and development. Research and development expenses increased by
146.4% to approximately $1.3 million for the three months ended June 30, 2000
compared to $545,000 for the three months ended June 30, 1999. Research and
development expenses represented 29% and 103% of total revenues for the three
months ended June 30, 2000 and 1999, respectively. The increase in absolute
dollars was primarily attributable to an increase in personnel and
employee-related expenses incurred as well as utilizing contracted resources
more extensively as part of our development effort for version 2.6 of Eprise
Participant Server and future product releases.
Selling and marketing. Selling and marketing expenses increased by 409.7%
to approximately $5.6 million for the three months ended June 30, 2000 compared
to approximately $1.1 million for the three months ended June 30, 1999. Selling
and marketing expenses represented 120% and 208% of total revenues for the three
months ended June 30, 2000 and 1999, respectively. Approximately 54% of the
increase in absolute dollars was attributable to an increase in the number of
sales and sales support personnel as we expanded our direct sales force
nationally and globally. In addition, approximately 35% of the increase was
attributable to the launching of an extensive advertising and branding campaign
as we expand our presence in the market.
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General and administrative. General and administrative expenses increased
by 212.9% to approximately $1.3 million for the three months ended June 30, 2000
compared to $410,000 for the three months ended June 30, 1999. General and
administrative expenses represented 27% and 79% of total revenues for the three
months ended June 30, 2000 and 1999, respectively. The increase in absolute
dollars primarily reflects personnel increases and the related costs associated
with supporting our recent and anticipated revenue and headcount growth.
Compensation cost for stock options. Options were granted during 1999 at
exercise prices which were the best estimate of our board of directors as to the
fair value of the underlying common stock on the date of grant. However,
subsequent to the grant date, management concluded that for grants after the
release of Eprise Participant Server version 2.0, these estimates may not have
fully reflected the impact of this release. Management has determined that for
grants made from May to August 1999, $3.93 is a more reliable estimate of the
fair value of the common stock during this period. For grants made from August
1999 through the initial public offering, management determined that the
mid-point of the preliminary price range for our anticipated public offering
represented the best estimate of the fair value of the common stock during this
period. For grants during 2000 and 1999, compensation cost aggregated
approximately $1.4 million and $6.8 million, respectively, which will be
amortized to expense over the four year vesting period of the option grants. For
the three months ended June 30, 2000, compensation expense recorded related to
these grants aggregated $529,000.
Other income (expense). Other income and expense consisted primarily of
interest income on invested cash balances and interest expense on borrowings.
The increase in other income between the two periods was the result of higher
cash balances generated from our private placement financing in November 1999
and public offering in March 2000.
Income taxes. During the three months ended June 30, 2000 and 1999, we
reported losses for both financial and income tax purposes. No provision or
benefit for income taxes was recorded in either period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Total revenues increased by 956.0% to approximately $7.3 million for the
six months ended June 30, 2000 compared to $689,000 for the six months ended
June 30, 1999. The increase was attributable to the release of Eprise
Participant Server version 2.0, the first commercial release of this product, in
the second quarter of 1999 and the corresponding consulting, training, and
maintenance revenues generated by the license sales.
Software licenses. Revenues from software licenses increased by 1,661.3% to
approximately $5.8 million for the six months ended June 30, 2000 compared to
$331,000 for the six months ended June 30, 1999. Software license revenues
represented 80% and 48% of total revenues for the six months ended June 30, 2000
and 1999, respectively. The increase in revenues from software licenses was
primarily due to the release of version 2.0 of Eprise Participant Server in
April 1999 resulting in a larger number of licenses delivered to a growing
customer base.
Services. Revenues from services increased by 303.9% to approximately $1.4
million for the six months ended June 30, 2000 compared to $358,000 for the six
months ended June 30, 1999. Services revenues represented 20% and 52% of total
revenues for the six months ended June 30, 2000 and 1999, respectively.
Approximately 61% of the increase in absolute dollars is attributable to
consulting, 26% to training and 12% to maintenance revenue generated by new
software license sales. The decrease as a percentage of total revenues is
attributable to the fact that prior to the release of Participant Server, we
derived the majority of our revenues from Web site development; supporting and
operating, or hosting customer websites; and online interactive games.
Cost of revenues. Cost of revenues, which primarily relate to
services because costs of licenses are insignificant, increased by 820.6%
to approximately $2.6 million for the six months ended June 30, 2000
compared to $287,000 for the six months ended June 30, 1999. Cost of revenues
represented 36%
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and 42% of total revenues for the six months ended June 31, 2000 and 1999,
respectively. The increase in absolute dollars was due to an increase in
personnel in our technical consulting, technical support, and training
organizations in the six months ended June 30, 2000. The decrease as a
percentage of total revenues was primarily due to a larger percentage of total
revenues being derived from software license fees (which have significantly
higher gross profit margins) in the six months ended June 30, 2000 compared to
the six months ended June 30, 1999.
Research and development. Research and development expenses increased by
105.0% to approximately $2.3 million for the six months ended June 30, 2000
compared to approximately $1.1 million for the six months ended June 30, 1999.
Research and development expenses represented 31% and 162% of total revenues for
the six months ended June 30, 2000 and 1999, respectively. The increase in
absolute dollars was primarily attributable to an increase in personnel and
employee-related expenses incurred in the six months ended June 30, 2000 for the
development of version 2.6 of Eprise Participant Server and future product
releases.
Selling and marketing. Selling and marketing expenses increased by 407.3%
to approximately $9.5 million for the six months ended June 30, 2000 compared to
approximately $1.9 million for the six months ended June 30, 1999. Selling and
marketing expenses represented 130% and 270% of total revenues for the six
months ended June 30, 2000 and 1999, respectively. Approximately 60% of the
increase was attributable to an increase in the number of sales and sales
support personnel as we expanded our direct sales force nationally and globally.
In addition, approximately 29% of the increase was attributable to significant
increases in marketing programs and public relations activities as we expanded
our presence in the market and further developed our brand.
General and administrative. General and administrative expenses increased
by 188.4% to approximately $2.2 million for the six months ended June 30, 2000
compared to $774,000 for the six months ended June 30, 1999. General and
administrative expenses represented 31% and 112% of total revenues for the six
months ended June 30, 2000 and 1999, respectively. The increase primarily
reflects personnel increases and the related costs associated with supporting
our recent and anticipated revenue and headcount growth.
Compensation cost for stock options. For the six months ended June 30,
2000, compensation expense recorded related to stock option grants aggregated
$953,000.
Other income (expense). Other income and expense consisted primarily of
interest income on invested cash balances and interest expense on borrowings.
The increase in other income between the two periods was the result of higher
cash balances generated from our private placement financing in November 1999
and public offering in March 2000.
Income taxes. During the six months ended June 30, 2000 and 1999, we
reported losses for both financial and income tax purposes. No provision or
benefit for income taxes was recorded in either period.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through 1997, we primarily financed our operations and
met our capital expenditure requirements through funds generated from
operations, funds borrowed from several stockholders and a director, and funds
borrowed from Silicon Valley Bank. Since December 1997, we have raised
approximately $38.0 million in venture capital and private placement funding and
approximately $63.2 million in net proceeds from our initial public offering in
order to expand the product development and sales and marketing efforts of the
business.
At June 30, 2000, our primary source of liquidity consisted of cash
totaling approximately $79.2 million as well as accounts receivable of
approximately $4.0 million. On March 24, 2000, we completed the initial public
offering of our common stock and raised net cash proceeds of approximately $63.2
million. In addition, we have a borrowing agreement with Silicon Valley Bank
that provides us with a working capital revolving line of credit. The working
capital line of credit, which expires on June 30, 2001, provides for borrowings
up to a maximum amount equal to the lesser of $1.0 million or a percentage of
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eligible accounts receivable, is subject to financial performance covenants,
bears interest at a rate per annum equal to the bank's prime rate plus 0.50%,
and is collateralized by all of our tangible assets. There have been no
borrowings under the working capital line of credit. As of June 30, 2000, there
was a term note outstanding relating to a previous equipment line of credit with
Silicon Valley Bank totaling $121,716.
Cash used in operating activities was approximately $5.2 million and $3.1
million in the six months ended June 30, 2000 and 1999, respectively. Net cash
used in operating activities is primarily attributable to the net losses
incurred in both periods.
Cash used in investing activities was approximately $1.7 million and
$198,000 in the six months ended June 30, 2000 and 1999, respectively. The cash
used in investing activities was primarily used for purchases of computer
systems and software for internal development used to support our growth, as
well as furniture and equipment to accommodate the increased number of
personnel.
Cash provided by financing activities was approximately $63.6 million in
the six months ended June 30, 2000. Cash used in financing activities was
$32,000 in the six months ended June 30, 1999.
We currently anticipate that the net proceeds from the initial public
offering, together with our current cash and equivalents and line of credit,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. However, we may need to
raise additional funds in future periods through public or private financings,
or other arrangements. Any additional financings, if needed, might not be
available on reasonable terms or at all. Failure to raise capital when needed
could harm our business, financial condition and results of operations. If
additional funds are raised through the issuance of equity securities,
additional dilution could result. In addition, any equity securities issued
might have rights, preferences or privileges senior to our common stock.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 2000. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for based on the use of the derivative and whether it qualifies for
hedge accounting. Management is currently assessing the impact of SFAS No. 133
on our financial statements. Eprise will adopt this accounting standard on
January 1, 2001, as required.
In December 1998, the American Institute of Certified Public Accountants
released Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to provide guidance related to determination of the allocation
of revenues in multiple element contracts under certain circumstances. Eprise
adopted SOP 98-9 for its fiscal year beginning January 1, 2000. The adoption of
SOP 98-9 does not have a material impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which sets forth the SEC's view on appropriate revenue recognition
practices. The Company believes that its current revenue recognition practices,
are in accordance with accounting principles generally accepted in the United
States and does not expect any impact when the bulletin becomes effective.
YEAR 2000 ISSUES
We have designed Eprise Participant Server and its add-on modules to be
Year 2000 compliant, and, as a result, to date we have not experienced Year 2000
problems related to these products. We licensed a precursor of Eprise
Participant Server that may not be Year 2000 compliant to one customer, but have
not been advised of any Year 2000 problems by such customer to date.
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The majority of the computer programs and hardware we currently use in our
own internal operations did not require replacement or modification as a result
of the Year 2000 issue.
We believe that our significant vendors and service providers are Year 2000
compliant and have not, to date, been made aware that any of our significant
vendors or service providers have suffered Year 2000 disruptions in their
systems.
Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result on any Year 2000
problems.
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RISK FACTORS
You should carefully consider the risks described below together with the
other information about Eprise in this report. If one or more of the following
risks actually occurs, our business, results of operations and financial
condition could be materially adversely affected.
Some of the statements under "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this report constitute forward-looking statements. These statements are
identified by terminology such as "may," "will," "could," "should," "expects,"
"plans," "intends," "seeks," "anticipates," "believes," "estimates,"
"potential," or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions. You should not place undue
reliance on these forward-looking statements. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various important factors, including the risks outlined below. These
factors may cause our actual results to differ materially from any
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform such
statement to actual results.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, AND MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN
PROFITABILITY.
We incurred net losses of $7.7 million for the six months ended June 30,
2000 and $6.6 million for the year ended December 31, 1999. As of June 30, 2000,
we had an accumulated deficit of $43.9 million. We have not yet achieved
profitability and we expect to incur net losses for the foreseeable future. To
date, we have funded our operations from the sale of equity securities and have
not generated cash from operations. We expect to continue to incur significant
research and development, selling and marketing, and general and administrative
expenses and, as a result, we will need to generate significant revenues to
achieve and maintain profitability. Although our revenues have grown
significantly in recent quarters, we cannot be certain that we can sustain these
growth rates or that we will achieve sufficient revenues for profitability. If
we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and notes to those statements found
elsewhere in this report.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
Eprise was founded in 1992 as a provider of online interactive games. We
made the transition to our current business in 1997 and, as a result, have a
limited operating history. We are still in the early stages of our development,
which makes the evaluation of our business operations and our prospects
difficult. We shipped our first commercial Web content management software
product in February 1998. Since that time, we have derived substantially all of
our revenues from licensing our Eprise Participant Server product and related
services. As a result of our limited operating history, we cannot forecast
operating expenses based on our historical results. Our ability to forecast
accurately our quarterly revenue is limited because our software products have a
long sales cycle, making it difficult to predict the quarter in which sales
revenue will be recognized. We would expect our business, operating results and
financial condition to be materially adversely affected if our revenues do not
meet our projections, and that net losses in a given quarter could be even
greater than expected.
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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND YOU SHOULD NOT
RELY ON THEM TO PREDICT OUR FUTURE PERFORMANCE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- demand for our products and services;
- the timing of sales of our products and services;
- the timing of customer orders and product implementation;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to selling and marketing, research and
development or general and administrative;
- changes in the rapidly evolving market for Web content management
solutions;
- the mix of product license and service revenue; and
- the timing and size of sales derived through our strategic partners.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful. You should not rely on the
results of one quarter as an indication of our future performance.
We plan to increase our operating expenditures to expand our sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden professional services and support and improve
operational and financial systems. If our revenues do not increase along with
these expenses, our business, operating results or financial condition could be
materially adversely affected and net losses in a given quarter could be greater
than expected. Although we have limited historical financial data, we believe
that our quarterly operating results may experience seasonal fluctuations due to
clients' fiscal year budgeting cycles and purchasing patterns.
ONLY A LIMITED NUMBER OF CUSTOMERS HAVE LICENSED OUR PRODUCT, AND OUR WEB
CONTENT MANAGEMENT SOLUTION MAY NEVER ACHIEVE BROAD MARKET ACCEPTANCE.
We first introduced Eprise Participant Server in February 1998 and
delivered a second major release in April 1999. To date, only a limited number
of customers have licensed Eprise Participant Server, and an even smaller number
are operating Web sites using the most recent version. Therefore, we have not
demonstrated broad market acceptance of Eprise Participant Server. If our
product does not gain broad market acceptance, or if it fails to meet customer
expectations, our business would be harmed.
A LARGE PORTION OF OUR REVENUES ARE CURRENTLY DERIVED FROM A LIMITED NUMBER OF
CUSTOMERS.
Although we believe that our customer concentration will decrease as we
continue to build our client base, we expect that a small number of customers
will continue to account for a substantial portion of revenues in the near term.
As a result, our inability to secure major customers during a given period or
the loss of existing customers could have a material adverse effect on our
business, financial condition or results of operations. Our largest customer in
1998, American Express, accounted for 58% of our revenues for the year ended
December 31, 1998. Two of our customers accounted for an aggregate of 23% of our
revenues for the year ended December 31, 1999. There were no customers who
individually accounted for greater than 10% of our revenues for the three-month
and six-month periods ended June 30, 2000.
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IF WE DO NOT SUCCESSFULLY EXPAND OUR DIRECT SALES AND SERVICES ORGANIZATIONS, WE
MAY NOT BE ABLE TO INCREASE OUR SALES OR SUPPORT OUR CUSTOMERS.
In the fiscal year ended December 31, 1999, we licensed substantially all
of our products through our direct sales organization. As of June 30, 2000, we
had 25 direct sales representatives. Our future success depends on substantially
increasing the size and scope of our direct sales force, both domestically and
internationally. There is intense competition for personnel, and we cannot
guarantee that we will be able to attract, assimilate or retain additional
qualified sales personnel on a timely basis. Moreover, we believe that as our
sales increase, and given the large-scale deployment required by our customers,
we will need to hire and retain a number of highly trained customer service and
support personnel. As of June 30, 2000, our customer service and support
organization included 30 individuals. We cannot guarantee that we will be able
to increase the size of our customer service and support organization on a
timely basis to provide the high quality of support required by our customers.
Failure to add additional sales and customer service representatives would have
a material adverse effect on our business, operating results and financial
condition.
IF WE DO NOT SUCCESSFULLY MAINTAIN AND EXPAND OUR RELATIONSHIPS WITH INDIRECT
SALES CHANNELS, OUR SALES COULD DECLINE OR GROW MORE SLOWLY THAN EXPECTED.
To offer products and services to a larger customer base, our direct sales
force must establish and expand relationships with alliance partners, including
systems integrators, consulting firms, Web developers and application service
providers who build customer solutions based on Eprise Participant Server. We
must also build relationships, which we refer to as original equipment
manufacturer or OEM relationships, with companies offering complementary
products that can package our software along with their products. We are
currently investing, and we intend to continue to invest, significant resources
to develop these relationships. If our efforts are unsuccessful, our sales
growth would be adversely affected. We cannot guarantee that we will be able to
market our products effectively through our established partners. Further, these
third parties are under no obligation to recommend or support our products.
These companies could recommend or give higher priority to the products of other
companies or to their own products. A significant shift by these companies
toward favoring competing products could negatively affect our license and
service revenues. We cannot guarantee that we will be able to attract additional
distribution partners for desired distribution arrangements. The loss of
distribution partners or failure to establish new relationships could materially
adversely affect our business, operating results and financial condition.
WE NEED TO MANAGE OUR GROWTH EFFECTIVELY TO REMAIN COMPETITIVE AND CONTINUE TO
EXPAND OUR OPERATIONS.
We have expanded our operations rapidly since inception. We intend to expand in
the foreseeable future to pursue existing and potential opportunities. This
rapid growth places a significant demand on management, administrative and
operations resources. Our ability to compete effectively and to manage our
anticipated future growth requires us to continue to improve our financial and
management controls, reporting systems and procedures on a timely basis. We
recently hired a significant number of employees, and must continue to add
personnel to maintain our ability to grow in the future. We cannot guarantee
that we will be able to do so successfully. Failure to manage our growth
effectively could have a material adverse effect upon our business, operating
results and financial condition.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET.
Qualified personnel are in great demand throughout the computer software,
hardware and networking industries. The demand for qualified personnel is
particularly acute in the New England area because of the large number of
software and other high technology companies and the low unemployment rate in
the region. Our success depends in large part upon our ability to attract,
train, motivate and retain highly-skilled employees, particularly sales and
marketing personnel, software engineers, and technical
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support personnel. We have had difficulty hiring these highly-skilled employees
in the past. If we are unable to attract and retain the highly-skilled technical
personnel that are integral to our sales, marketing, product development and
customer support teams, the rate at which we can generate sales and develop new
products or product enhancements may be limited. This inability could have a
material adverse effect on our business, operating results and financial
condition.
COMPETITION COULD REDUCE OUR REVENUES AND MARKET SHARE, AND PREVENT US FROM
EXPANDING IN THE FUTURE.
The market for Web content management software and services is rapidly
evolving and highly competitive and there are a number of products that compete
directly with our software solutions. Our clients' requirements and the
technology available to satisfy those requirements continually change. Some of
our current and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than we do. This may enable
them to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products. In addition, other companies could develop
new products or incorporate additional functionality into their existing
products that could directly compete with our products. Barriers to entering the
software market are relatively low. Furthermore, cooperative relationships among
our competitors could increase their ability to address the Web site content
management needs of our prospective customers, and they could rapidly acquire
significant market share. We cannot guarantee that we will compete successfully
against existing or new competitors. Further, competitive pressures may require
us to lower the prices of our software and services. Failure to compete
successfully would have a material adverse effect on our business, operating
results and financial condition.
IF WE ARE UNABLE TO ENHANCE AND EXPAND OUR PRODUCT LINE TO MEET THE RAPID
CHANGES IN THE MARKET FOR WEB CONTENT MANAGEMENT TECHNOLOGY, OUR BUSINESS WILL
BE UNABLE TO GROW.
To succeed, we will need to enhance our current Eprise Participant Server
product and develop new products on a timely basis to keep pace with
developments related to Internet technology and to satisfy the increasingly
sophisticated requirements of our customers. The market for our products is
marked by rapid technological change, frequent new product introductions and
Internet-related technology enhancements, uncertain product life cycles, changes
in client demands and evolving industry standards. We cannot be certain that we
will successfully develop and market new products or new product enhancements
compliant with present or emerging Internet technology standards. New products
based on new technologies or new industry standards can rapidly render existing
products obsolete and unmarketable. Internet commerce technology is complex and
new products and product enhancements can require long development and testing
periods. Any delays in developing, testing and releasing enhanced or new
products could harm our business. New products or upgrades may not be released
according to schedule or may contain defects when released. Either situation
could result in adverse publicity, loss of sales, delay in market acceptance of
our products or customer claims against us, any of which could harm our
business. If we do not develop, license or acquire new software products, or
deliver enhancements to existing products on a timely and cost-effective basis,
our business will be harmed.
WE HAVE RELIED ON AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR EPRISE
PARTICIPANT SERVER LINE FOR OUR REVENUES.
Since 1998, we have derived substantially all of our revenues from licenses
of, and services related to, Eprise Participant Server. We expect that revenues
from this product will continue to account for a significant portion of our
revenues for the foreseeable future. A decline in the price of Eprise
Participant Server or our inability to increase license sales of Eprise
Participant Server would seriously harm our business and operating results. In
addition, our future financial performance will depend upon the successful
development, introduction and customer acceptance of enhanced versions of Eprise
Participant Server and future products. Failure to deliver the enhancements or
products that customers want could have a material adverse effect on our
business, operating results and financial condition.
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OUR LENGTHY SALES CYCLES REQUIRE EXPENDITURE OF RESOURCES THAT WILL NOT
NECESSARILY RESULT IN A SALE.
We typically experience long sales cycles. These sales cycles generally
vary by customer from three to six months. Because the licensing of our products
generally involves a significant capital expenditure by the customer, our sales
process is subject to lengthy approval processes and delays. We often devote
significant time and resources to a prospective customer, including costs
associated with multiple site visits, product demonstrations and feasibility
studies, without any assurance that the prospective customer will decide to
license our products.
YEAR 2000 PROBLEMS MAY CAUSE PRODUCT ERRORS OR FAILURES THAT COULD DIVERT
PERSONNEL AND FINANCIAL RESOURCES.
We have designed Eprise Participant Server and its add-on modules to be
Year 2000 compliant and have not been advised of any Year 2000 issues related to
those products. One prototype product (a precursor of Eprise Participant
Server), which was licensed to one customer and may currently be in use, may not
be Year 2000 compliant and may need to be upgraded or its use discontinued. We
have not been advised of any Year 2000 problems by this customer to date.
Further, although we have not been made aware of any Year 2000 problem relating
to the hardware and software used by our customers in connection with our
products to date, these problems may exist. Should any of these problems
develop, they may have a material adverse effect on our business, operating
results and financial condition.
In addition, we utilize software, computer technology and other services
internally developed and provided by third party vendors that may have Year 2000
issues. Although we have not experienced any of these problems to date, the
failure of our internal computing systems or of systems provided by third party
vendors to be Year 2000 compliant could materially adversely affect our
business.
IF OUR PRODUCTS FAIL TO REMAIN COMPATIBLE WITH MAJOR COMMERCIAL OPERATING
PLATFORMS, OUR SALES WOULD DECREASE.
Our products currently operate on the Microsoft Windows NT and Sun Solaris
operating systems. In addition, our products are required to interoperate with
Web servers, browsers and database servers. We must, therefore, continually
modify and enhance our products to keep pace with changes in these operating
systems and servers. If our products are not compatible with new operating
systems, Web servers, browsers or database servers that achieve sufficient
market penetration, our business will be harmed. In addition, uncertainties
related to the timing and nature of new product announcements, or introductions
or modifications by vendors of operating systems or browsers, could also harm
our business.
POTENTIAL DEFECTS IN OUR PRODUCTS COULD CAUSE SALES TO DECREASE AND COULD
SUBJECT US TO FUTURE WARRANTY CLAIMS.
Our products are complex and might contain undetected software errors or
failures when new versions are released. We cannot guarantee that, despite
testing by us and by current and prospective customers, we will not find errors
in existing products, new products or product enhancements after commercial
release. These errors may result in loss or delay of market acceptance, which
could have a material adverse effect upon our business, operating results and
financial condition.
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IF WE LOSE ANY KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO CONTINUE EXPANDING OUR BUSINESS AND PRODUCT LINE.
The loss of the services of one or more of our key personnel could have a
material adverse effect on our business, operating results and financial
condition. We do not maintain key person life insurance on any executive
officers other than our Chief Executive Officer and Chief Technology Officer. We
cannot guarantee that we will be able to retain our key personnel. Our future
success also depends on our continuing ability to attract, assimilate and retain
highly qualified sales, technical and managerial personnel. Competition for
these individuals is intense, and there can be no assurance that we can attract,
assimilate or retain them in the future.
WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
OTHERS COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS AND
INFORMATION.
Our software is proprietary and is protected by trade secret, copyright and
trademark laws, license agreements, confidentiality agreements with employees
and nondisclosure and other contractual requirements imposed on our customers,
consulting partners and others. We cannot guarantee that these protections will
adequately protect our proprietary rights or that our competitors will not
independently develop products that are substantially equivalent or superior to
our products. In addition, the laws of countries in which our products may be
licensed in the future may not protect our products and intellectual property
rights to the same extent as the laws of the United States. Although we believe
that our products, trademarks and other proprietary rights do not infringe upon
the proprietary rights of third parties, we cannot guarantee that third parties
will not assert infringement claims against us. The cost of pursuing, enforcing
or defending infringement claims can be substantial and can also require
significant management attention.
RISKS RELATED TO THE INTERNET INDUSTRY
IF THE USE OF THE INTERNET DOES NOT EXPAND, THE DEMAND FOR OUR PRODUCTS MAY
STAGNATE OR DECLINE.
Our future success depends heavily on the Internet being accepted and
widely used. If Internet use does not continue to grow or grows more slowly than
expected, our business, operating results and financial condition would be
materially adversely affected. Consumers and businesses may reject the Internet
as a viable communications medium for a number of reasons, including potentially
inadequate network infrastructure, security concerns, slow development of
enabling technologies or insufficient commercial support. The Internet
infrastructure may not be able to support the demands placed on it by increased
Internet usage and bandwidth requirements. In addition, delays in the
development or adoption of new standards and protocols required to handle an
increased level of Internet activity or increased government regulation could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols or complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
WE CANNOT BE SURE THAT A SUSTAINABLE MARKET FOR OUR PRODUCTS WILL DEVELOP.
The market for Web content management software and services is new and
rapidly evolving, and the size and potential growth of this new market and the
direction of its development are uncertain. We have licensed our products to a
small number of customers. We expect that we will continue to need intensive
marketing and sales efforts to educate prospective clients about the uses and
benefits of our products and services. Enterprises that have invested
substantial resources in other methods of conducting business over the Internet
may be reluctant to adopt a new approach that may replace, limit or compete with
their existing systems. Any of these factors could inhibit the growth and market
acceptance of our
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products and services. Accordingly, we cannot be certain that a viable market
for our products will emerge, or if it does emerge, that it will be sustainable.
IF THE INTERNET OR E-COMMERCE BECOMES SUBJECT TO GOVERNMENTAL REGULATION OR
OTHER FUTURE LAWS, USE OF AND DEMAND FOR OUR PRODUCTS COULD DECLINE.
We are not currently required to comply with direct regulation by any
domestic or foreign governmental agency, other than regulations applicable to
businesses generally and any laws or regulations directly applicable to the
Internet. However, due to the increasing popularity of the Internet, it is
possible that laws may be adopted regarding the Internet, any of which could
materially harm our business. For example, because our products can be used for
the solicitation of personal data from individual consumers, our business could
be limited by laws regulating the solicitation, collection or processing of this
data. The Telecommunications Act of 1996 prohibits the transmission of some
types of information and content over the Internet. Legislation imposing
potential liability for information collected or disseminated through our
products could adversely affect our business. In addition, the increased
attention focused upon liability issues as a result of the Telecommunications
Act could limit the growth of Internet commerce, which could decrease demand for
our products.
Export regulations, either in their current form or as may be subsequently
enacted, may limit our ability to distribute our software outside the United
States. The unlawful export of our software could also harm our business.
Although we take precautions against unlawful export of our software, the global
nature of the Internet makes if difficult to effectively control the
distribution of software.
Furthermore, the growth and development of the Internet may lead to more
stringent consumer protection laws that may impose additional burdens on
companies conducting business online. The adoption of any additional laws may
decrease Internet use or impede the growth of Internet use, which may lead to a
decrease in the demand for our products and services or an increase in the cost
of doing business. Further, the imposition of new sales or other taxes could
limit the growth of Internet commerce generally and, as a result, the demand for
our products. Although recent federal legislation limits the imposition of state
and local taxes on Internet-related sales, there is a possibility that Congress
may not renew this legislation, in which case state and local governments would
be free to impose taxes on goods and services purchased on the Internet.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Eprise invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of one year or less. At June
30, 2000, there was a term note outstanding relating to a previous equipment
line of credit with Silicon Valley Bank totaling $121,716. We believe that the
effect, if any, of reasonably possible near-term changes in interest rates on
our financial position, results of operations and cash flows should not be
material.
Market risk is the potential change in a financial instrument's value
caused by fluctuations in interest and currency exchange rates and equity and
commodity prices. At June 30, 2000, we were not a party to any derivative
arrangement and we do not engage in trading, market-making or other speculative
activities in the derivatives markets. We do not engage in regular hedging
activities to minimize the impact of any foreign currency fluctuations.
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Recent Sales of Unregistered Securities
From April 1, 2000 through June 30, 2000, the Company issued and sold an
aggregate of 47,242 shares of its common stock to a warrant holder for aggregate
consideration of approximately $38,173 pursuant to exercises of warrants granted
prior to January 1, 2000. The consideration paid for exercise of the warrants
was in the form of 2,078 warrant shares, with a value equal to $18.38 per share
based on the closing price of the Company's common stock on the day prior to the
warrant exercises, that would otherwise have been issuable to the warrant holder
upon exercise of the warrants, as permitted by a net exercise feature of the
warrants. No underwriters were involved in the foregoing sales of securities.
Such sales of unregistered securities were made in reliance upon an exemption
from the registration provisions of the Securities Act set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering or the
rules and regulations thereunder. All of the foregoing securities are deemed
restricted securities for the purposes of the Securities Act.
(b) Use of Proceeds from Sales of Registered Securities
On March 29, 2000 the Company closed the initial public offering of its
common stock. The shares of common stock sold in the offering were registered
under the Securities Act on a Registration Statement on Form S-1 (the
"Registration Statement") (Registration No. 333-94777) that was declared
effective by the Securities and Exchange Commission on March 23, 2000. The
4,000,000 shares offered by the Company under the Registration Statement were
sold to the public at a price of $15.00 per share. Deutsche Bank Securities
Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Wit
SoundView, as representatives of the several underwriters of the offering, also
exercised an overallotment option on March 29, 2000 for 600,000 shares. The
overallotment shares were sold to the public at a price of $15.00 per share. The
aggregate proceeds from the offering were $69.0 million. In connection with the
offering the Company paid an aggregate of $4.8 million in underwriting discounts
and commission to the underwriters. In addition, the expenses incurred in
connection with the offering were approximately $1.0 million, including $300,000
legal costs, $230,000 accounting costs, $300,000 printing costs, and $130,000
registration, filing and related costs.
After deducting the underwriting discounts and commission and the offering
expenses described above, the Company received net proceeds from the offering of
approximately $63.2 million. None of the net proceeds of the offering were paid
by the Company, directly or indirectly, to any director or officer of the
Company or any of their associates, or to any persons owning ten percent or more
of any class of the Company's equity securities, or any affiliates of the
Company.
The proceeds are being used for working capital and general corporate
purposes. Pending these uses, the net proceeds are being invested in short-term,
investment-grade, interest-bearing instruments.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule
(b) The Company filed no reports on Form 8-K for the quarter ended June 30,
2000.
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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.
EPRISE CORPORATION
Dated: August 10, 2000 /s/ Joseph A. Forgione
-------------------------------------------
Joseph A. Forgione
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 10, 2000 /s/ Milton A. Alpern
--------------------------------------------
Milton A. Alpern
Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
25
