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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 SEPTEMBER 30, 2000
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from __________________ to _____________________
Commission file number: 0-29319
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 November 3, 2000, there
were 25,191,699 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 NINE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 2000 and
September 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and September 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 23
SIGNATURES 24
2
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
EPRISE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 74,909 $ 22,456
Accounts receivable (less allowance for doubtful
accounts of $324 and $189 at September 30, 2000 and
December 31, 1999, respectively) 5,535 2,045
Due from related parties 48 58
Prepaid expenses and other current assets 1,907 317
--------- --------
Total current assets 82,399 24,876
Property and equipment, net 3,177 613
Other assets, net 86 45
--------- --------
Total assets $ 85,662 $ 25,534
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of equipment line of credit $ 86 $ 86
Accounts payable 1,339 148
Accrued compensation and benefits 2,040 597
Other accrued expenses 1,906 495
Deferred revenue 2,421 572
--------- --------
Total current liabilities 7,792 1,898
Long-term equipment line of credit, less current portion 14 79
--------- --------
Total liabilities 7,806 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 September 30, 2000 and December 31, 1999,
respectively; 25,195 and 2,838 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively 25 3
Additional paid-in capital 125,588 24,332
Accumulated deficit (47,163) (36,025)
Notes receivable from officers (565) (69)
Other comprehensive loss (29) -
--------- --------
Total stockholders' equity (deficiency) 77,856 (11,759)
--------- --------
Total liabilities and stockholders' equity (deficiency) $ 85,662 $ 25,534
========= ========
</TABLE>
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 4,090 $ 524 $ 9,920 $ 855
Services 1,786 399 3,232 757
-------- -------- -------- --------
Total net revenues 5,876 923 13,152 1,612
Cost of revenues (includes compensation costs of $54 and
$4 for stock options for the three months ended
September 30, 2000 and 1999, respectively and $129
and $4 for the nine months ended September 30,
2000 and 1999, respectively) 1,987 415 4,630 702
-------- -------- -------- --------
Gross profit 3,889 508 8,522 910
Operating expenses:
Research and development (includes compensation costs
of $51 and $19 for stock options for the three
months ended September 30, 2000 and 1999,
respectively and $161 and $19 for the nine months
ended September 30, 2000 and 1999, respectively) 1,652 558 3,934 1,671
Selling and marketing (includes compensation costs
of $256 and $102 for stock options for the three
months ended September 30, 2000 and 1999,
respectively and $809 and $102 for the nine months
ended September 30, 2000 and 1999, respectively) 5,130 1,203 14,586 3,067
General and administrative (includes compensation
costs of $108 and $15 for stock options for the
three months ended September 30, 2000 and 1999,
respectively and $323 and $15 for the nine months
ended September 30, 2000 and 1999, respectively) 1,658 444 3,890 1,218
-------- -------- -------- --------
Total operating expenses 8,440 2,205 22,410 5,956
-------- -------- -------- --------
Operating loss (4,551) (1,697) (13,888) (5,046)
Other income (expense):
Interest income 1,304 23 2,927 126
Interest expense and other (15) (5) (36) (20)
-------- -------- -------- --------
Other income, net 1,289 18 2,891 106
-------- -------- -------- --------
Loss before income taxes (3,262) (1,679) (10,997) (4,940)
Income taxes (47) - (47) -
-------- -------- -------- --------
Net loss (3,309) (1,679) (11,044) (4,940)
Accretion of redeemable convertible preferred stock - (5) (94) (15)
-------- -------- -------- --------
Net loss to common stockholders $ (3,309) $ (1,684) $(11,138) $ (4,955)
======== ======== ======== ========
Net loss per share (Note 2) $ (0.13) $ (0.72) $ (0.60) $ (2.18)
======== ======== ======== ========
Weighted-average common shares outstanding (Note 2) 25,157 2,330 18,664 2,271
======== ======== ======== ========
Pro forma loss per share (Note 2) $ (0.13) $ (0.14) $ (0.47) $ (0.41)
======== ======== ======== ========
Pro forma weighted-average common shares outstanding
(Note 2) 25,157 12,069 23,502 12,011
======== ======== ======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
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EPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss $(11,044) $(4,940)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 396 130
Provision for doubtful accounts 345 49
Compensation cost for stock options 1,422 140
Loss on disposal of fixed assets - 4
Increase (decrease) in cash from:
Accounts receivable (3,835) (1,046)
Due from related parties 10 -
Prepaid expenses and other current assets (1,590) (117)
Other assets (41) (7)
Accounts payable 1,191 121
Accrued expenses 2,825 331
Deferred revenue 1,849 274
-------- -------
Net cash used for operating activities (8,472) (5,061)
-------- -------
Net cash used for investing activities - purchases of
property and equipment (2,960) (288)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs 63,120 -
Payments on notes payable (64) (58)
Proceeds from exercise of stock options 336 14
Proceeds from exercise of warrants 113 -
Repayments of stock holder notes 77 -
Payments for repurchase of unvested common stock (59) -
Proceeds from purchase of ESPP stock 362 -
-------- -------
Net cash provided by (used for)
financing activities 63,885 (44)
-------- -------
Net increase (decrease) in cash 52,453 (5,393)
Cash and cash equivalents, beginning of period 22,456 6,357
-------- -------
Cash and cash equivalents, end of period $ 74,909 $ 964
======== =======
Supplemental disclosures of cash flow
information - cash paid for interest $ 37 $ 14
======== =======
Summary of noncash investing and financing activities
Issuance of stock for notes receivable $ 573 $ 30
======== =======
</TABLE>
See notes to the condensed consolidated financial statements.
5
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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 non-employees is measured using the fair-value method.
6
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EPRISE CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
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 1,809,133 shares in the nine months ended
September 30, 2000.
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.
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 periods ended September 30, 2000 and 1999, one customer
accounted for 13% and five customers accounted for 72% of the Company's revenue,
respectively. For the nine-month period ended September 30, 2000, there were no
customers who individually accounted for more than 10% of the Company's revenue.
For the nine-month period ended September 30, 1999, one customer accounted for
23% of the Company's revenue.
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. The Company will adopt this accounting standard on January 1,
2001. The Company does not expect the adoption of SFAS No. 133 to have a
material impact on its financial position or results of operations.
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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.
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 periods ended September 30,
2000 and 1999, one customer accounted for 13% of our total revenues and five
customers accounted for 72%, respectively. In the nine-month period ended
September 30, 2000 no customer accounted for more than 10% of the Company's
revenue. In the nine-month period ended September 30, 1999, one customer
represented 23% of our total revenues.
As our revenue generated from license sales has increased, our gross profit
margins have improved. License revenue represented 75% of total revenue in the
first nine 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
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of September 30, 2000, there have been 101 customers who have entered into
maintenance agreements with Eprise. Of the 101 contracts, to date 12 have
expired, and 4 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Software licenses .............. 70% 57% 75% 53%
Services ....................... 30 43 25 47
---- ---- ---- ----
Total revenues ............ 100 100 100 100
---- ---- ---- ----
Cost of revenues .................. 34 45 35 43
---- ---- ---- ----
Gross profit ...................... 66 55 65 57
Operating expenses:
Research and development ....... 28 61 30 104
Selling and marketing .......... 87 130 111 190
General and administrative ..... 28 48 30 76
---- ---- ---- ----
Total operating expenses .. 143 239 171 370
---- ---- ---- ----
Operating loss .................... (77) (184) (106) (313)
Other income (expense), net ....... 22 2 22 7
---- ---- ---- ----
Loss before income taxes .......... (55) (182) (84) (306)
Income taxes ...................... (1) 0 0 0
---- ---- ---- ----
Net loss .......................... (56)% (182)% (84)% (306)%
==== ==== ==== ====
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenues increased by 536.6% to approximately $5.9 million for the
three months ended September 30, 2000 compared to $923,000 for the three months
ended September 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 680.5% to
approximately $4.1 million for the three months ended September 30, 2000
compared to $524,000 for the three months ended September 30, 1999. Software
license revenues represented 70% and 57% of total revenues for the three months
ended September 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 continued resulting increases in
licenses delivered, in addition to follow-on orders received from our existing
customers.
Services. Revenues from services increased by 347.6% to approximately $1.8
million for the three months ended September 30, 2000 compared to $399,000 for
the three months ended September 30, 1999. Services revenues represented 30% and
43% of total revenues for the three months ended September 30, 2000 and 1999,
respectively. Approximately 74% of the increase in absolute dollars is
attributable to consulting, 9% to training and 17% to maintenance revenue
generated by new software license sales. The decrease as a percentage of total
revenues is attributable to the fact that significant implementation services
were provided to the first customers of the initial commercial release of
Participant Server in the three month period ended September 30, 1999.
Cost of revenues. Cost of revenues, which primarily relate to services
because costs of licenses are insignificant, increased by 378.8% to
approximately $2.0 million for the three months ended September 30, 2000
compared to $415,000 for the three months ended September 30, 1999. Cost of
revenues represented 34% and 45% of total revenues for the three months ended
September 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 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 three month period ended September 30, 2000
compared to the three month period ended September 30, 1999.
Research and development. Research and development expenses increased by
196.1% to approximately $1.7 million for the three months ended September 30,
2000 compared to $558,000 for the three months ended September 30, 1999.
Research and development expenses represented 28% and 61% of total revenues for
the three months ended September 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 326.4%
to approximately $5.1 million for the three months ended September 30, 2000
compared to approximately $1.2 million for the three months ended September 30,
1999. Selling and marketing expenses represented 87% and 130% of total revenues
for the three months ended September 30, 2000 and 1999, respectively.
Approximately 71% 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 20% of
the increase was attributable to increases in marketing programs and public
relations activities as we expanded our presence in the market and further
developed our brand.
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General and administrative. General and administrative expenses increased
by 273.4% to approximately $1.7 million for the three months ended September 30,
2000 compared to $444,000 for the three months ended September 30, 1999. General
and administrative expenses represented 28% and 48% of total revenues for the
three months ended September 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 September 30, 2000 and 1999, compensation expense
recorded related to these grants aggregated $469,000 and $140,000, respectively.
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 September 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. The income tax expense
of $47,000 for the three months ended September 30, 2000 represents taxes paid
on income earned on assets held by Eprise Securities Corporation.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Total revenues increased by 715.9% to approximately $13.2 million for the
nine months ended September 30, 2000 compared to approximately $1.6 million for
the nine months ended September 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 1,060.2% to
approximately $9.9 million for the nine months ended September 30, 2000 compared
to $855,000 for the nine months ended September 30, 1999. Software license
revenues represented 75% and 53% of total revenues for the nine months ended
September 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 both domestically and globally.
Services. Revenues from services increased by 326.9% to approximately $3.2
million for the nine months ended September 30, 2000 compared to $757,000 for
the nine months ended September 30, 1999. Services revenues represented 25% and
47% of total revenues for the nine months ended September 30, 2000 and 1999,
respectively. Approximately 68% of the increase in absolute dollars is
attributable to consulting, 17% to training and 15% 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 559.5% to
approximately $4.6 million for the nine months ended September
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30, 2000 compared to $702,000 for the nine months ended September 30, 1999. Cost
of revenues represented 35% and 43% of total revenues for the nine months ended
September 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 nine months ended September 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 nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999.
Research and development. Research and development expenses increased by
135.4% to approximately $3.9 million for the nine months ended September 30,
2000 compared to approximately $1.7 million for the nine months ended September
30, 1999. Research and development expenses represented 30% and 104% of total
revenues for the nine months ended September 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 nine months ended
September 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 375.6%
to approximately $14.6 million for the nine months ended September 30, 2000
compared to approximately $3.1 million for the nine months ended September 30,
1999. Selling and marketing expenses represented 111% and 190% of total revenues
for the nine months ended September 30, 2000 and 1999, respectively.
Approximately 64% 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 26% 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 219.4% to approximately $3.9 million for the nine months ended September 30,
2000 compared to approximately $1.2 million for the nine months ended September
30, 1999. General and administrative expenses represented 30% and 76% of total
revenues for the nine months ended September 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 nine months ended September
30, 2000 and 1999, compensation expense recorded related to stock option grants
aggregated approximately $1.4 million and $140,000, respectively.
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 nine months ended September 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. The income tax expense
of $47,000 for the three months ended September 30, 2000 represents taxes paid
on income earned on assets held by Eprise Securities Corporation.
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 September 30, 2000, our primary source of liquidity consisted of cash
totaling approximately $74.9 million as well as accounts receivable of
approximately $5.5 million. On March 24, 2000, we completed the initial public
offering of our common stock and raised net cash proceeds of approximately
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$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 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 September 30,
2000, there was a term note outstanding relating to a previous equipment line of
credit with Silicon Valley Bank totaling $100,236.
Cash used in operating activities was approximately $8.5 million and $5.1
million in the nine months ended September 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 $3.0 million and
$288,000 in the nine months ended September 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 our increase in personnel.
Cash provided by financing activities was approximately $63.9 million in
the nine months ended September 30, 2000. Cash used in financing activities was
$44,000 in the nine months ended September 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. Eprise will adopt this accounting standard on
January 1, 2001. The Company does not expect the adoption of SFAS No. 133 to
have a material impact on its financial position or results of operations.
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.
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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 $11.0 million for the nine months ended September
30, 2000 and $6.6 million for the year ended December 31, 1999. As of September
30, 2000, we had an accumulated deficit of $47.2 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. Accordingly, we base our
expenses in part on future projections. Most of our expenses are fixed in the
short term and we may not be able to quickly reduce spending if our revenues are
lower than we had projected. 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. It is possible that in some future period our results of
operations may not meet or exceed the expectations of the public market analysts
and investors. If this occurs the price of our common stock is likely to
decline. A number of factors are likely to cause variations in revenues and
operating results, 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 have recently and plan to continue 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 approximately one
hundred customers have licensed Eprise Participant Server. 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
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revenues for the year ended December 31, 1999. One of our customers accounted
for 13% of our revenues for the three-month period ended September 30, 2000.
There were no customers who individually accounted for greater than 10% of our
revenues for the nine-month period ended September 30, 2000.
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 and the nine months ended
September 30, 2000, we licensed substantially all of our products through our
direct sales organization. As of September 30, 2000, we had 26 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. Although we provide compensation packages that include stock
options, cash incentives, and other employee benefits, the volatility and
current market price of our common stock may make it difficult for us to attract
and retain highly qualified employees. 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 September 30, 2000, our customer service and support
organization included 34 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 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 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.
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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.
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. Several of these
companies can also leverage extensive customer bases and adopt aggressive
pricing policies to gain market share. Potential competitors may bundle their
products in a manner that discourages users from purchasing 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
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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.
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.
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.
OUR INTERNATIONAL EFFORTS WILL EXPOSE US TO NUMEROUS RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
We are expanding and are planning to continue expanding our operations
internationally. As a result, we are subject to the risks associated with
international operations, including:
- costs of customizing products for foreign countries;
- compliance with multiple, conflicting and changing governmental laws and
regulations;
- dependence on local vendors;
- longer sales cycles; and
- foreign currency exchange rate fluctuations.
As a result of these competitive factors, we cannot assure that we will be
able to market, sell and deliver our products and services successfully in
international markets.
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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 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.
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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.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has been highly volatile and has fluctuated
significantly in the past. We believe that it may continue to fluctuate
significantly in the future in response to the following factors, some of which
are beyond our control:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of Internet software companies;
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- loss of a major client or failure to complete significant license
transactions;
- additions or departures of key personnel;
- sales of common stock in the future; and
- fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet and software companies.
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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
September 30, 2000, there was a term note outstanding relating to a previous
equipment line of credit with Silicon Valley Bank totaling $100,236. 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 September 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
(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. 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 primarily being used for working capital and general
corporate purposes, including increased sales and marketing expenditures,
increased research and development expenditures and capital expenditures.
Pending these uses, the net proceeds are being invested in short-term,
investment-grade, interest-bearing instruments.
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 September
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: November 13, 2000 /s/ Joseph A. Forgione
---------------------------------------
Joseph A. Forgione
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 2000 /s/ Milton A. Alpern
---------------------------------------
Milton A. Alpern
Senior Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
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