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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2014

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 0-25259

 

 

BOTTOMLINE TECHNOLOGIES (de), INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   02-0433294

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

325 Corporate Drive

Portsmouth, New Hampshire

  03801
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (603) 436-0700

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, $.001 par value per share   The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large Accelerated Filer  x    Accelerated Filer  ¨
  Non-Accelerated Filer  ¨    Smaller Reporting Company  ¨

(Do not check if a smaller reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price of the registrant’s common stock at the close of business on December 31, 2013 was $1,371,652,398 (reference is made to Part II, Item 5 herein for a statement of assumptions upon which this calculation is based). The registrant has no non-voting stock.

There were 39,522,245 shares of common stock, $.001 par value per share, of the registrant outstanding as of August 20, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III (except for information required with respect to our executive officers, which is set forth under “Part I—Executive Officers and Other Key Employees of the Registrant”) have been omitted from this report, as we expect to file with the Securities and Exchange Commission, not later than 120 days after the close of our fiscal year ended June 30, 2014, a definitive proxy statement for our 2014 annual meeting of stockholders. The information required by Items 10, 11, 12, 13 and 14 of Part III of this report, which will appear in our definitive proxy statement, is incorporated by reference into this report.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item

        Page  
PART I   

1.

   Business      3   

1A.

   Risk Factors      11   

1B.

   Unresolved Staff Comments      21   

2.

   Properties      22   

3.

   Legal Proceedings      22   

4.

   Mine Safety Disclosures      22   
   Executive Officers and Other Key Employees of the Registrant      23   
PART II   

5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      25   

6.

   Selected Financial Data      28   

7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

7A.

   Quantitative and Qualitative Disclosures About Market Risk      48   

8.

   Financial Statements and Supplementary Data      50   

9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      50   

9A.

   Controls and Procedures      50   

9B.

   Other Information      50   
PART III   

10.

   Directors, Executive Officers and Corporate Governance      51   

11.

   Executive Compensation      51   

12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      51   

13.

   Certain Relationships and Related Transactions, and Director Independence      51   

14.

   Principal Accountant Fees and Services      51   
PART IV   

15.

   Exhibits and Financial Statement Schedules      52   
   Signatures      98   

 

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PART I

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Any statements (including statements to the effect that we believe, expect, anticipate, plan and similar expressions) that are not statements relating to historical matters should be considered forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements as a result of numerous important factors, including those discussed in Item 1A. Risk Factors.

 

Item 1. Business.

Our Company

We provide cloud-based payment, invoice and digital banking solutions to banks, corporations, insurance companies and financial institutions around the world. Our solutions are used to streamline, automate and manage processes and transactions involving global payments, cash management, invoice receipt and approval, collections, risk mitigation, document management, reporting and document archive. We offer hosted or Software as a Service (SaaS) solutions, as well as software designed to run on-site at the customer’s location. We regularly look for opportunities to expand our product set and enter new markets. A substantial portion of our offerings, and almost all of our newer offerings, are being sold as SaaS-based solutions and paid for on a subscription and transaction basis.

We offer hosted and on-premise solutions that banks use to provide cash management and treasury capabilities to their business customers, as well as solutions that banks and credit unions use to facilitate online account opening. We offer financial messaging solutions for banks and corporations around the world, via solutions that leverage the SWIFT global messaging network. We offer legal spend management solutions that automate receipt and review of legal invoices for insurance companies and other large corporate consumers of outside legal services. We operate a cloud-based network that facilitates the exchange of electronic payments and invoices between businesses and their suppliers. Our corporate customers rely on our solutions to automate their payment and accounts payable processes and to streamline and manage the production and retention of electronic documents, while our healthcare customers use our solutions to streamline patient, revenue and financial processes. Our document automation solutions are used by organizations of all types to automate paper-intensive processes for the generation of transactional and supply chain documents.

Our solutions are designed to complement, leverage and extend our customers’ existing information systems, accounting applications and banking relationships so that they can be deployed quickly and efficiently. To help our customers receive the maximum value from our products and meet their specific business requirements, we also provide professional services for installation, training, consulting and product enhancement.

Bottomline was originally organized as a New Hampshire corporation in 1989 and was reincorporated as a Delaware corporation in August 1997. We maintain our corporate headquarters in Portsmouth, New Hampshire and our international headquarters in Reading, England. We maintain a website at www.bottomline.com. Our website includes links to our Code of Business Conduct and Ethics, and the charters of our Audit Committee, Leadership Development and Compensation Committee, and Nominations and Corporate Governance Committee. We are not including the information contained in our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge, through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practical after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).

Unless the context requires otherwise, references to we, us, our, Bottomline and the Company refer to Bottomline Technologies (de), Inc. and its subsidiaries.

 

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Our Strategy

Our objective is to be the leading global provider of business-to-business payment, invoice and document automation software solutions and services. Key elements of our strategy include the following:

 

   

developing innovative new technologies that will allow us to broaden our market footprint, enhance our competitive position in our current markets and capitalize on new market opportunities;

 

   

delivering an increasingly broad set of solutions via the ‘cloud’ to provide ease of deployment and efficiency for our customers and increased recurring revenue to us;

 

   

providing solutions which enable banks of all sizes to offer their business customers leading cash management and treasury capabilities;

 

   

continuing to add customers and functionality to our growing Paymode-X and legal spend management networks;

 

   

attracting and retaining exceptional technical, industry and management talent who have experience in our markets and the capability to grow our business;

 

   

continuing to develop and broaden strategic relationships that enhance our global position; and

 

   

pursuing strategic acquisitions that expand our geographical footprint, market share or extend our product functionality.

Our Products and Services

Digital Banking

We offer payments, cash management and online banking solutions to financial institutions, including banks and credit unions. Our hosted and on-premise digital banking solutions enable banks of all sizes to offer their customers a host of capabilities including ACH and BACS payments, wires, international payments, check production, online account opening and onboarding, balance and information reporting and other features that facilitate enterprise-wide cash management and interaction with their business customers. Our solutions, which we continue to develop and enhance, allow our bank customers to compete across a full range of client segments from small business to multi-nationals. These solutions feature an intuitive user interface designed to simplify all aspects of cash management for customers of all sizes and sophistication, through both browser-based and mobile channels.

Legal Spend Management

Our hosted legal spend management solutions integrate with claims management and time and billing systems to automate legal invoice management processes and to provide insight into all areas of a company’s outside legal spend. The combination of automated invoice routing and a sophisticated rules engine allows corporate legal and insurance claims departments to create more efficient processes for managing invoices generated by outside law firms and other service providers, while offering insight into important legal spend factors including expense monitoring and outside counsel performance. We are continuing to expand the capabilities of these offerings to facilitate the retention, management and budgeting of business litigation.

Settlement Network Solution

Paymode-X is a leading business-to-business electronic settlement network. This hosted solution accelerates corporations’ transition from paper to electronic transactions, helping them streamline processes, reduce costs and optimize working capital. With more than 270,000 enrolled vendors, new Paymode-X customers normally gain immediate benefits because many of their suppliers are already part of the Paymode-X network. Paymode-X functionality, which we continue to enhance, includes electronic payments, online access to purchase orders, invoices, remittance detail, comprehensive workflow, and turnkey vendor enrollment and support.

 

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Financial Messaging Solutions

Our financial messaging solutions leverage the SWIFT global messaging network to allow corporations to exchange financial information including payment instructions, cash reporting and other messages related to financial transactions with their banks and counterparties around the world. Our market position was enhanced in fiscal year 2014 with our acquisitions of Sterci and Simplex, and we continue to develop enhancements to our solutions to further grow our market share. Our cloud-based financial messaging solutions allow banks and corporations to achieve lower costs, rapid implementation, greater security and improved risk management while avoiding costly internal infrastructure.

Payment and Document Automation

The payments automation capabilities inherent in our WebSeries and C-Series solutions can generate a wide variety of domestic and international payment instructions along with consolidated bank reporting of cash activity. Our solutions can reduce administrative expenses and strengthen compliance and anti-fraud controls. Users are able to gather and access data via the Web on payment and bank account information, including account totals and detailed transaction data, providing improved workflow, financial reporting and bank communications.

To help augment financial document workflow and delivery, we also offer a number of solutions built on our Transform platform for automating a wide variety of business documents and supply chain processes as well as related Web-based delivery and document archive. Our products offer advanced design, output formatting and delivery capabilities to replace paper-based forms.

Healthcare Solutions

Our solutions for advanced forms management (Transform for Healthcare and MedEx), mobile documentation (Logical Ink) and payments allow healthcare organizations to improve business efficiencies, reduce costs and improve care quality. Leveraging our extensive experience optimizing document-driven processes, our solutions are increasingly being applied across the acute care hospital enterprise, accelerating the paper-to-electronic transition while helping our customers streamline data flows and, ultimately, capture more revenue. Our products integrate with a customer’s other critical information systems helping to fill process gaps between financial, clinical and administrative systems.

Professional Services

Our teams of service professionals draw on extensive experience to provide consulting, project implementation and training services to our clients. By easing the implementation of our products, these services help our customers accelerate the time to value. By improving the overall customer experience, these services help us retain customers and drive future revenue generating arrangements from existing customers.

Our Customers

Our customers are in diverse industries including financial services, insurance, healthcare, technology, retail, communications, education, media, manufacturing and government. We provide our products and services to approximately 60 of the Fortune 100 companies and approximately 85 of the FTSE (Financial Times) 100 companies. Our customers include leading organizations such as Bank of America Merrill Lynch, BBVA Compass, British Airways, Cigna Corporation, Franklin Templeton, Fidelity, Lloyds Bank, Capital One, Deere and Company, Target Corporation, Johnson Controls, Inc., State Farm Insurance, Vodafone and Zurich American Insurance Company.

 

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Our Competition

The markets in which we participate are highly competitive. We believe our ability to compete depends on factors within and beyond our control, including:

 

   

our ability to develop new, innovative technology solutions that meet the evolving needs of our customers and the shifting dynamics of the markets we participate in;

 

   

our ability to attract and retain employees with the requisite domain knowledge and technical skill set necessary to develop and support our products;

 

   

the performance, reliability, features, ease of use and price of our offerings as compared to competitor alternatives;

 

   

our industry knowledge and expertise;

 

   

the execution of our sales and services organizations; and

 

   

the timing and market acceptance of new products as well as enhancements to existing products, by us and by our current and future competitors.

For digital banking solutions, we primarily compete with companies such as ACI Worldwide, Clear2Pay, Fiserv, FIS, SAP AG, Fundtech, Q2, Inc., Infosys Technologies, MeridianLink, NCR and Polaris Software that offer a wide range of financial services, including electronic banking applications. We also encounter competition to a lesser degree from Dovetail Software, CoCoNet and Oracle Financial Services Software (i-flex), as well as companies that provide traditional treasury workstation solutions.

For our legal spend management solutions, we compete with a number of companies, including Serengeti Law, DataCert, CT TyMetrix, LexisNexis CounselLink, Mitratech, Legal Solutions Group and Computer Sciences Corporation (CSC).

For our Paymode-X solution, our competitors include SunGard and AvidXchange in addition to ACH capabilities offered by banks.

For our financial messaging solutions, we compete with Fundtech, Eastnets, SunGard and SWIFT.

For our healthcare solutions, we compete with FormFast, Standard Register, iMedConsent and Access.

Our payment and document automation products compete primarily with companies that provide solutions to create, publish, manage and archive electronic documents, such as Adobe, AP Technologies and companies that offer electronic payment and laser check printing software and services, such as PaySpan, Inc., MHC Software, and ACOM Solutions in the US and Microgen and Experian in Europe. Our products also compete with companies that provide a diverse array of accounts payable automation and workflow capabilities, such as Oracle, JP Morgan’s Business Settlement Network, BasWare, Kofax, Open Text, ReadSoft, IonTrading, KnowledgeLake, Inc. and Image Information Systems, Inc. (DocuSphere). We also compete with providers of enterprise resource planning (ERP) solutions and providers of traditional payment products, including check stock and check printing software and services. In addition, some financial institutions compete with us as outsourced check printing and electronic payment service providers.

Although we believe that we compete favorably in each of the markets in which we participate, the markets for our products and services are intensely competitive and characterized by rapid technological change and a number of factors could adversely affect our ability to compete in the future, including those discussed in Item 1A. Risk Factors.

Our Operating Segments

Operating segments are the components of our business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in

 

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assessing performance. Our chief operating decision maker is our chief executive officer. Our operating segments are generally organized by the type of product or service offered and by geography.

In recent years, we changed the internal reporting classification of certain operating lines. To ensure a consistent presentation, these changes are reflected for all periods presented.

Similar operating segments have been aggregated into three reportable segments as follows:

Payments and Transactional Documents. Our Payments and Transactional Documents segment is a supplier of software products that provide a range of financial business process management solutions including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also incorporates our healthcare products and our payments automation software for direct debit and receivables management and provides a range of standard professional services and equipment and supplies that complement and enhance our core software products. Revenue associated with the aforementioned products and services is typically recorded upon delivery. This segment also incorporates our check printing solutions in Europe as well as certain other solutions that are licensed on a subscription basis, revenue for which is typically recorded on a subscription or transaction basis or ratably over the expected life of the customer relationship.

Hosted Solutions. Our Hosted Solutions segment provides customers predominately with SaaS technology offerings that facilitate electronic payment, electronic invoicing, and spend management. Our legal spend management solutions, which enable customers to create more efficient processes for managing invoices generated by outside law firms while offering insight into important legal spend factors such as expense monitoring and outside counsel performance, are included within this segment. This segment incorporates our global financial messaging solutions, including the operating results of our recent acquisitions of Sterci and Simplex. While a portion of Sterci’s legacy product was sold as an on-premise solution, our focus going forward is predominately on promoting our SaaS offerings. This segment also includes our Paymode-X solution. Revenue within this segment is generally recognized on a subscription or transaction basis or ratably over the estimated life of the customer relationship.

Digital Banking. Our Digital Banking segment provides solutions that are specifically designed for banking and financial institution customers. Our cloud-based commercial banking products, including our online account opening solutions that we acquired through our acquisition of Andera, are focused predominantly on medium-sized and small banks and financial institutions, and revenue for these products is typically recognized on a subscription or transaction basis or ratably over the estimated life of the customer relationship. Our customized banking solutions typically involve longer implementation periods and a significant level of professional services. Due to the customized nature of these products, revenue is generally recognized over the period of project performance on a percentage of completion basis. Periodically, we license these solutions on a subscription basis which has the effect of contributing to recurring revenue and the revenue predictability of future periods, but which also delays revenue recognition over a period that is longer than the period of project performance.

Periodically a sales person in one operating segment will sell products and services that are typically sold within a different operating segment. In such cases, the transaction is generally recorded by the operating segment to which the sales person is assigned. Accordingly, segment results can include the results of transactions that have been allocated to a specific segment based on the contributing sales resources, rather than the nature of the product or service. Conversely, a transaction can be recorded by the operating segment primarily responsible for delivery to the customer, even if the sales person is assigned to a different operating segment.

Our chief operating decision maker assesses segment performance based on a variety of factors that normally include segment revenue and a segment measure of profit or loss. Each segment’s measure of profit or loss is on a pre-tax basis and excludes stock compensation expense, acquisition and integration related expenses

 

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(including acquisition related contingent consideration), amortization of intangible assets, impairment losses on equity investments, restructuring related charges, non-cash pension expenses and certain non-cash items related to our convertible notes. There are no inter-segment sales; accordingly, the measure of segment revenue and profit or loss reflects only revenues from external customers. The costs of certain corporate level expenses, primarily general and administrative expenses, are allocated to our operating segments at predetermined rates that are established as a percentage of the segment’s budgeted revenues.

We do not track or assign our assets by operating segment.

The following represents a summary of our reportable segments.

 

     Fiscal Year Ended June 30,  
     2014      2013      2012  
     (in thousands)  

Segment revenue:

        

Payments and Transactional Documents

   $ 125,456       $ 120,590       $ 108,248   

Hosted Solutions

     107,360         67,504         58,548   

Digital Banking

     67,769         66,680         57,488   
  

 

 

    

 

 

    

 

 

 
   $ 300,585       $ 254,774       $ 224,284   
  

 

 

    

 

 

    

 

 

 

Segment measure of profit:

        

Payments and Transactional Documents

   $ 36,249       $ 31,569       $ 26,097   

Hosted Solutions

     9,829         7,282         6,073   

Digital Banking

     6,772         3,799         8,207   
  

 

 

    

 

 

    

 

 

 

Total measure of segment profit

   $ 52,850       $ 42,650       $ 40,377   
  

 

 

    

 

 

    

 

 

 

A reconciliation of the measure of segment profit to our GAAP operating (loss) income before income taxes is as follows:

 

     Fiscal Year Ended June 30,  
     2014     2013     2012  
     (in thousands)  

Total measure of segment profit

   $ 52,850      $ 42,650      $ 40,377   

Less:

      

Amortization of intangible assets

     (26,242     (19,549     (15,753

Stock-based compensation expense

     (22,821     (18,031     (13,768

Acquisition and integration related expenses

     (4,563     (10,827     (1,987

Restructuring expense

     (1,371     (1,179     (1,609

Non-cash pension expense

     (331     —         —    

Loss on derivative instruments, net

     —         (4,435     —    

Other income (expense), net

     (14,544     (6,922     41   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

   $ (17,022   $ (18,293   $ 7,301   
  

 

 

   

 

 

   

 

 

 

 

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Financial Information About Geographic Areas

We have presented geographic information about our revenues below. This presentation allocates revenue based on the point of sale, not the location of the customer. Accordingly, we derive revenues from geographic locations based on the location of the customer that would vary from the geographic areas listed here; particularly in respect of financial institution customers located in Australia and Canada for which the point of sale was the United States.

 

     Fiscal Year Ended June 30,  
     2014     2013     2012  
     (in thousands)  

United States

   $ 171,641         57.1   $ 167,368         65.7   $ 152,358         67.9

United Kingdom

     96,719         32.2     79,774         31.3     64,680         28.8

Continental Europe

     29,047         9.7     4,311         1.7     3,954         1.8

Asia-Pacific

     3,178         1.0     3,321         1.3     3,292         1.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues from unaffiliated customers

   $ 300,585         100.0   $ 254,774         100.0   $ 224,284         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Long-lived assets, excluding deferred tax assets and intangible assets, which are based on geographical location, were as follows:

 

     Fiscal Year Ended
June 30,
 
     2014      2013  
     (in thousands)  

Long-lived assets:

     

United States

   $ 36,856       $ 31,068   

United Kingdom

     6,611         3,602   

Continental Europe

     3,224         24   

Asia-Pacific

     157         119   
  

 

 

    

 

 

 

Total long-lived assets

   $ 46,848       $ 34,813   
  

 

 

    

 

 

 

A significant percentage of our revenues are generated by our international operations and our future growth rates and success are in part dependent on continued growth and success in international markets. As is the case with most international operations, the success and profitability of these operations is subject to numerous risks and uncertainties including exchange rate fluctuations. We do not currently hedge against exchange rate fluctuations. A number of other factors could also have a negative effect on our business and results from operations outside the US, including different regulatory and industry standards and certification requirements, reduced protection for intellectual property rights in some countries, import or export licensing requirements, the complexities of foreign tax jurisdictions and difficulties and costs of staffing and managing our foreign operations.

Sales and Marketing

We market and sell our products directly through our sales force and indirectly through a variety of channel partners and reseller relationships. We market and sell our products domestically and internationally, with an international focus on Europe and the Asia-Pacific region. We also maintain an inside sales group which provides a cost effective channel into maintaining existing customers and expanding our customer base.

Product Development and Engineering

Our product development and engineering organization includes employees as well as strategic development partners who provide a flexible supplement to our internal resources. We have three primary development

 

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groups: product design and user experience, software engineering, and quality assurance. We expensed $39.7 million, $33.0 million, and $28.7 million in product development and engineering costs in fiscal years 2014, 2013 and 2012, respectively.

Our product design and user experience team is extensively involved in the design of all of our products, driving the User-Centered Design process to ensure elegant, engaging, and easy to use products. Part of this process is user experience testing that is conducted to provide additional productivity gains for the end user. Members of this team continue to innovate and leverage contemporary design paradigms that allow our products to work on a variety of devices.

Our software engineers have substantial experience in advanced software development techniques as well as extensive knowledge of the complex processes involved in business document workflow, cash management, payment, and invoicing applications. Our engineers participate in the Microsoft Developer Network, IBM Partner World for Developers, and the Oracle Partner Developer Program. They maintain extensive knowledge of software development trends and best practices. Our technology focuses on providing business solutions utilizing industry standards, providing a path for extendibility and scalability of our products. Security, control and fraud prevention, as well as performance, data management and resource efficiencies are priorities in the technology we develop and deploy.

Our quality assurance engineers have extensive knowledge of our products and expertise in software quality assurance techniques. The quality assurance team participates in all phases of our product development processes. Members of the quality assurance group make use of both manual and automated software testing techniques to ensure high quality software is being delivered to our customers. The quality assurance group members participate in alpha and beta releases, testing of new product releases, and performance and security testing for our products.

Backlog

At the end of fiscal year 2014, our backlog was $147.2 million, including deferred revenues of $82.6 million. At the end of fiscal year 2013, our backlog was $121.3 million, including deferred revenues of $56.3 million. We do not believe that backlog is a meaningful indicator of sales that can be expected for any future period, and there can be no assurance that backlog at any point in time will translate into revenue in any specific subsequent period.

Proprietary Rights

We rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and maintain proprietary rights in our technology and products. During the fiscal year ended June 30, 2014, we added five newly issued patents to our portfolio. In total, we currently hold 27 US patents and, with more than 25 applications pending before the US Patent and Trademark Office, we expect to receive others. Two of our patents expire in 2015, after which the earliest year of expiration of any of our remaining patents is 2019.

We intend to continue to file patent applications as we identify patentable technology. There can be no assurance, however, that our existing patent applications, or any others that we may file in the future, will issue or will be of sufficient scope and strength to provide meaningful protection of our technology or any commercial advantage to us, or that the issued patents will not be challenged, invalidated or circumvented. In addition, we rely upon a combination of copyright and trademark laws and non-disclosure and other intellectual property contractual arrangements to protect our proprietary rights. Given the rapidly changing nature of the industry’s technology, the creative abilities of our development, marketing and service personnel may be as or more important to our competitive position as the legal protections and rights afforded by patents. We also enter into agreements with our employees and clients that seek to limit and protect our intellectual property and the distribution of proprietary information. However, there can be no assurance that the steps we have taken to protect our intellectual property will be adequate to deter misappropriation of proprietary information, and we may not be able to detect unauthorized use and take appropriate steps to enforce our proprietary rights.

 

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Government Regulation

Our US based banking and financial institution customers are typically regulated by the Federal Financial Institutions Examination Council (FFIEC) or one or more of their member agencies which include the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Association. Our non US based banking and financial institution customers are normally subject to a similar regulatory oversight in their country of domicile. We are subject to periodic examination by the FFIEC in our capacity as a technical service provider, during which our operating practices are risk-assessed and compared against applicable laws and regulations. If we, as part of such an examination, were to receive a sufficiently unfavorable review from the FFIEC, our customers may be advised by the regulators to reassess their commercial relationships with us, including the continued use of our products.

Each of our operating segments provides services or products that may be subject to various federal, state or foreign laws or regulations, particularly in the area of data security and privacy. These laws and regulations govern the collection, processing, storage, use and disclosure of personal information as well as notification requirements in the event of security breaches. The legal and regulatory framework in these areas is complex and continually evolving, particularly with respect to data security, payment technology and payment methodologies. We may become subject to new or increased regulation in the future, and the cost of complying with current or future regulatory requirements could exceed our estimates. Our products and services must be designed to work effectively within this legal framework.

Employees

As of June 30, 2014, we had approximately 1,300 full-time employees. None of our employees are represented by a labor union. We have not experienced any work stoppages and we believe that employee relationships are good. Our future success will depend in part on our continued ability to attract, retain and motivate highly qualified technical and managerial personnel in a highly competitive market.

 

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making an investment decision involving our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties may also impact our business operations.

If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock.

Risks Related To Owning Our Common Stock

Our common stock has experienced and may continue to undergo significant market price fluctuations

The market price of our common stock has experienced and may continue to experience significant fluctuations due to a variety of factors, including:

 

   

general and industry-specific business, economic and market conditions;

 

   

changes in or our failure to meet analysts’ or investors’ estimates or expectations;

 

   

actual or anticipated fluctuations in our operating results;

 

   

public announcements concerning us, our competitors or our industry;

 

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acquisitions, divestitures, strategic partnerships, joint ventures, or capital commitments by us or our competitors;

 

   

adverse developments in patent or other proprietary rights; and

 

   

announcements of technological innovations by our competitors.

If our operating results are below analyst or investor expectations or if our revenues are below anticipated levels, the market price of our common stock could be adversely affected

A significant percentage of our expenses, particularly personnel and facilities costs, are relatively fixed and based in part on anticipated revenue levels which can be difficult to predict. A decline in revenues without a corresponding and timely slowdown in expense growth could adversely affect our business. Significant revenue shortfalls in any quarter may cause significant declines in operating results since we may be unable to reduce spending in a timely manner.

Quarterly or annual operating results that are below the expectations of public market analysts could adversely affect the market price of our common stock. Factors that could cause fluctuations in our operating results include:

 

   

a change in customer demand for our products, which is highly dependent on our ability to continue to offer innovative technology solutions in very competitive markets;

 

   

overall economic conditions, which may affect our customers’ and potential customers’ budgets for information technology expenditures;

 

   

the timing of customer orders;

 

   

the timing of product implementations, which are highly dependent on customers’ resources and discretion;

 

   

the incurrence of costs relating to the integration of software products and operations in connection with acquisitions of technologies or businesses; and

 

   

the timing and market acceptance of new products or product enhancements by either us or our competitors.

Our mix of products and services could have a significant effect on our results of operations and the market price of our common stock

The gross margins for our products and services vary considerably. Our software revenues generally yield significantly higher gross margins than do our subscriptions and transactions, service and maintenance and other revenue streams. If software license revenues or our recurring revenues were to significantly decline in any future period, or if the mix of our products and services in any given period did not match our expectations, our results of operations and the market price of our common stock could be significantly adversely affected.

Risks Related To Our Business

The markets in which we compete are extremely competitive and we may not be able to compete effectively

The markets in which we compete are intensely competitive and characterized by rapid technological change. There is no assurance that we will be able to maintain our current market share or our customer base.

We compete with a wide range of companies ranging from small start-up enterprises with limited resources, which compete principally on the basis of technology features or specific customer relationships, to large companies which can leverage significantly larger customer bases and greater financial resources. Many of our competitors have longer operating histories, significantly greater financial, technical, and sales and marketing

 

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resources, greater brand recognition and a larger installed customer base than we do. We anticipate that the markets in which we compete will continue to attract new competitors and new technologies and we may not be able to compete successfully with them.

To compete successfully, we need to maintain a successful research and development function. If we fail to enhance our current products and develop new, innovative solutions or if we fail to bring new solutions to market quickly enough, our products could become less competitive or obsolete.

We continue to make significant investments in our existing products and our new product offerings, which may adversely affect our operating results; these investments may not be successful

Given the highly competitive and rapidly evolving technology environment we operate within, we believe that it is important to constantly enhance our existing product offerings as well as to develop new product offerings to meet strategic opportunities as they evolve. This includes developing and enhancing our products to include what we believe is necessary to meet the future needs of our customers.

Our operating results have recently been affected by increases in product development expenses as we have continued to make investments in a number of our products, particularly our SaaS platforms, and as we have funded new product development based on market opportunities. We expect to continue to make these investments and we may at any time, based on product need or marketplace demand, decide to significantly increase our product development expenditures in these or other products.

Investments in existing products and new product offerings can have a negative impact on our operating results and any new product enhancement or offering may not be accepted in the marketplace or generate material revenues for us.

Acquisitions could disrupt our business and harm our financial condition

An active acquisition program is an important element of our corporate strategy. We have been a highly acquisitive company and we expect to continue to make acquisitions in the future. Any acquisition or strategic investment we have made or may make in the future may entail numerous risks, including the following:

 

   

difficulties integrating acquired operations, personnel, technologies or products;

 

   

entrance into markets and operating geographies in which we have no or limited prior experience or knowledge;

 

   

failure to realize anticipated revenue increases for any number of reasons, including if a larger than expected number of acquired customers decline to renew software maintenance contracts or subscription based contracts, if we are unsuccessful in selling the acquired products to our customer base or if the acquired contract terms do not permit us to recognize revenue on a timely basis;

 

   

costs incurred to combine the operations of companies we acquire, such as transitional employee expenses and employee retention or relocation expenses may be higher than expected;

 

   

write offs related to existing or acquired assets such as deferred tax assets, goodwill or other intangible assets;

 

   

inability to retain key personnel of the acquired company;

 

   

inadequacy of existing operating, financial and management information systems to support the combined organization, including the difficulty in integrating an acquired company’s accounting, financial reporting and other administrative systems to permit effective management;

 

   

difficulties implementing controls, procedures and policies appropriate for a public company at companies that prior to the acquisition may have lacked such controls, policies and procedures;

 

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in the case of foreign acquisitions, challenges integrating operations across different cultures and languages and addressing the particular regulatory, economic, currency and political risks associated with different countries or regions;

 

   

diversion of management’s focus from our core business concerns;

 

   

dilution to existing stockholders and our earnings per share;

 

   

incurrence of substantial debt;

 

   

exposure to litigation from third parties, including claims related to intellectual property or other assets acquired or liabilities assumed; and

 

   

failure to realize anticipated benefits of the transaction due to the above factors or other factors.

Any such difficulties encountered as a result of any merger, acquisition or strategic investment could have a material adverse effect on our business, operating results and financial condition.

As a result of our acquisitions, we could be subject to significant future write-offs with respect to intangible assets, which may adversely affect our future operating results

The carrying value of our intangible assets, including goodwill, represents a significant portion of our total assets. While we reviewed our goodwill and our other intangible assets during the fourth quarter of fiscal year 2014 and concluded that there was no impairment, we could be subject to future impairment charges with respect to these assets or intangible assets arising as a result of acquisitions in future periods. Any such charges, to the extent occurring, would likely have a material adverse effect on our operating results.

Weakness or deterioration in domestic and global economic conditions could have a significant adverse impact on our business, financial condition and operating results

Our business, financial condition and operating results are significantly affected by general economic conditions. The US and global economies have experienced deterioration in the recent past and prospects for sustained economic recovery remain uncertain. Prolonged economic weakness or any further downturn in the US and global economies could result in a variety of risks to our business, including:

 

   

increased volatility in our stock price;

 

   

increased volatility in foreign currency exchange rates;

 

   

delays in, or curtailment of, purchasing decisions by our customers or potential customers either as a result of continuing economic uncertainty or as a result of their inability to access the liquidity necessary to engage in purchasing initiatives;

 

   

pricing pressures for our products and services, including reductions in the duration or renewal rates for our subscription contracts and software maintenance contracts;

 

   

increased credit risk associated with our customers or potential customers, particularly those that may operate in industries or geographic regions most affected by the economic downturn; and

 

   

impairment of our goodwill or other assets.

To the extent that economic conditions remain uncertain or deteriorate, or any of the above risks occur, our business and operating results could be significantly and adversely affected.

 

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We face risks associated with our international operations that could harm our financial condition and results of operations

A significant percentage of our revenues have been generated by our international operations and our future growth rates and success are in part dependent on our continued growth and success in international markets. As is the case with most international operations, the success and profitability of these operations are subject to numerous risks and uncertainties that include, in addition to the risks our business as a whole faces, the following:

 

   

currency exchange rate fluctuations, particularly with the British Pound Sterling, the Swiss Franc and the European Euro;

 

   

difficulties and costs of staffing and managing foreign operations;

 

   

differing regulatory and industry standards and certification requirements;

 

   

the complexities of tax laws in foreign jurisdictions;

 

   

reduced protection for intellectual property rights in some countries; and

 

   

import or export licensing requirements.

Our business and operating results are subject to fluctuations in foreign currency exchange rates

We conduct a substantial portion of our operations outside of the US, principally in the United Kingdom, continental Europe and the Asia-Pacific region. During the twelve months ended June 30, 2014, approximately 44% of our revenues and 38% of our operating expenses were attributable to customers or operations located outside of North America. During the twelve months ended June 30, 2014 as compared to the same period in the prior year, the foreign currency exchange rates of the British Pound Sterling to the US Dollar decreased slightly. Future appreciation of the US Dollar against the British Pound Sterling, Swiss Franc, European Euro or Australian Dollar will have the impact of reducing both our revenues and operating expenses.

We may have larger than anticipated tax liabilities

The determination of our provision for income taxes requires significant judgment and estimation and there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to tax in multiple US and foreign tax jurisdictions and the determination of our tax liability is always subject to audit and review by the applicable domestic or foreign taxing authority. In light of fiscal challenges in US federal and state governments and in many international locations, taxing authorities are increasingly focused on ways to increase revenues which may make resolving tax disputes more difficult. While we have established tax reserves using assumptions and estimates that we believe to be reasonable, these reserves may prove insufficient in the event that a taxing authority asserts a tax position that is contrary to our position.

A significant percentage of our revenues to date have come from our payment and document management offerings and our future performance will depend on continued market acceptance of these solutions

A significant percentage of our revenues to date have come from the license and maintenance of our payment and document management offerings and sales of associated products and services. Any significant reduction in demand for our payment and document management offerings could have a material adverse effect on our business, operating results and financial condition. Our future performance could depend on the following factors:

 

   

retaining and expanding our software maintenance and subscriptions and transactions customer bases, which are significant sources of our recurring revenue;

 

   

continued market acceptance of our payment and document management offerings;

 

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our ability to demonstrate the value of our solutions as compared to solutions from other vendors such as enterprise resource planning software vendors that offer a broader enterprise application solution, and

 

   

our ability to introduce enhancements to meet the market’s evolving needs for secure payments and cash management solutions.

Our future financial results will be affected by our success in selling our products in a subscription revenue model, which carries with it certain risks

A substantial portion of our revenues and profitability were historically generated from perpetual software license revenues; however, we are offering a growing number of our products under a subscription based revenue model. We believe a subscription based revenue model has certain advantages over a perpetual license model, including better predictability of revenue; however, it also presents a number of risks to us, including the following:

 

   

arrangements entered into on a subscription basis generally delay the timing of revenue recognition and often require the incurrence of up-front costs, which can be significant;

 

   

subscription based revenue arrangements often include specific performance requirements or service levels that we may be unable to consistently achieve, subjecting us to penalties or other costs. Further, a material breach by us, such as a persistent failure to achieve required service levels, might permit the customer to exit the contract prior to its expiration, without additional compensation to us;

 

   

customer retention is critical to our future growth rates. Customers in a subscription arrangement may elect not to renew their contract upon expiration, or they may attempt to renegotiate pricing or other contractual terms at the point of (or prior to) renewal on terms that are less favorable to us; and

 

   

there is no assurance that the solutions we offer on a subscription basis, including new revenue models that we may introduce, will receive broad marketplace acceptance.

Because we recognize subscription revenue from our customers over the term of their agreements, downturns or upturns in sales of our subscription based offerings will not be immediately reflected in our operating results and may adversely affect revenue in the future

We recognize subscription revenue over the term of our customer agreements. As a result, most of our subscription revenue arises from agreements entered into during previous periods. A shortfall in orders for our subscription based solutions in any one period would most likely not significantly reduce our subscription revenue for that period, but could adversely affect revenue in future periods. In addition, we may be unable to quickly reduce our cost structure in response to a decrease in these orders. Accordingly, the effect of downturns in sales of our subscription based solutions will not be fully reflected in our operating results until future periods. A subscription revenue model also makes it difficult for us to rapidly increase our revenue through additional subscription sales in any one period, as revenue is generally recognized over the applicable customer term.

Large and complex customer contracts, or contracts that involve the delivery of services over contractually committed periods, delay the timing of our revenue recognition and, in the short-term, may adversely affect our operating results, financial condition and the market price of our stock

Large and complex customer contracts, particularly in our Digital Banking segment, delay the timing of our revenue recognition. These arrangements require significant implementation work, product customization and modification, systems integration and user acceptance testing. This results in the recognition of revenue over the period of project completion which normally spans several quarters. Delays in revenue recognition on these contracts, including delays that result from customer decisions to halt or slow down a long-term project due to their own staffing or other challenges, could adversely affect our operating results, financial condition and the

 

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market price of our common stock. Large bank and financial institution customer opportunities are very competitive and take significant time and effort to consummate. When competing for these customer opportunities, we face greater sales costs, longer sales cycles and less predictability with respect to these orders than with orders in other areas of our business. If we are unable to continue to generate new large orders on a regular basis, our business operating results and financial condition could be adversely affected.

If our products and services do not comply with laws, regulations and industry standards to which we and our customers are subject, our business could be adversely affected

Our software products and SaaS offerings facilitate the transmission of cash, business documents and confidential information including, in some cases, personally identifiable information related to individuals and corporations. Our software products and certain of our SaaS offerings store and transmit this data electronically, and therefore our products must operate within the laws, regulations and industry standards regarding security, data protection and electronic commerce. While we believe that our products comply with current regulatory requirements, the interpretation and application of these requirements continues to evolve and may evolve in ways that we cannot predict; so there can be no assurance that future legal or regulatory actions will not adversely impact us. To the extent that current or future regulatory or legal developments mandate a change in any of our products or services, require us or our customers to comply with any industry specific licensing or compliance requirements, alter the demand for or the competitive environment of our products and services or require us to make material changes to how we operate our business, including any changes to our internal operating, financial or management information systems, we might not be able to respond to such requirements in a timely or cost effective manner. If this were to occur, our business, operating results and financial condition could be materially adversely affected.

Security or data breaches could have an adverse effect on our business

In the course of providing services to our customers, we collect, store, process and transmit highly sensitive and confidential information. Certain of our solutions also facilitate the actual transfer of cash or transmit instructions that initiate cash transfer. Our products and services, particularly our SaaS and Web-based offerings, may be vulnerable to unauthorized access, computer viruses, cyber-attacks, distributed denial of service attacks and other disruptive problems which could result in the theft, destruction or misappropriation of confidential information. Security risks in recent years have increased significantly given the increased sophistication and activities of hackers, organized crime and other external parties. We may need to spend significant capital or allocate significant resources to ensure effective ongoing protection against the threat of security breaches or to address security related concerns. Despite our efforts, a security breach or computer virus could still occur which could have a significant negative impact on our business including reputational harm, the loss of customers and material financial liability to us.

Defects or disruptions in our products or services could diminish demand for our solutions and have a material adverse effect on our future financial results

Despite testing prior to their release and throughout the lifecycle of a product or service, software and SaaS offerings can contain errors or defects that can impact their function, performance and security. Any unanticipated performance problems or defects could result in additional development costs, diversion of technical and other resources from our other development efforts, service disruptions for our SaaS offerings, negative publicity and reputational harm to us and our products and exposure to potential liability claims. As a result, any error or defect in our products or services could adversely affect our future financial results.

We rely on certain third-party hardware and software which could cause errors, interruptions or failures to our solutions or be difficult to replace

We rely on third party hardware and software to deliver certain of our solutions. These third party products may not continue to be available to us on commercially reasonable terms, or at all. The loss of the right to use

 

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any of these products could result in delays in our ability to provide our solutions until equivalent technology is either developed by us or acquired from another third party, if available, which may not be possible on a cost effective basis. In addition, errors or defects in third-party products used in conjunction with our solutions could adversely affect the operation of our products.

Catastrophic events may disrupt our business, including our third party data centers

We are a highly automated business and we rely on our network infrastructure, various software applications and many internal technology systems and data networks for our customer support, development, sales and marketing and accounting and finance functions. Further, our SaaS offerings provide services to our customers from third party data center facilities in different US and international locations over which we have no control. A disruption or failure of these systems or data centers in the event of a natural disaster, telecommunications failure, power outage, cyber-attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in product development, breaches of data security and loss of critical data. Such an event could also prevent us from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of our SaaS and hosted offerings. While we have developed certain disaster recovery plans and maintain backup systems to reduce the potentially adverse effect of such events, a catastrophic event that resulted in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our business, operating results and financial condition could be adversely affected.

We could incur substantial costs resulting from warranty claims or product liability claims

Our product agreements typically contain provisions that afford customers a degree of warranty protection in the event that our products fail to conform to written specifications. These agreements normally contain provisions intended to limit the nature and extent of our risk of warranty and product liability claims. A court, however, might interpret these terms in a limited way or conclude that part or all of these terms are unenforceable. Furthermore, some of our agreements are governed by non-US law and there is a risk that foreign law might provide us less or different protection. While we maintain general liability insurance, including coverage for errors and omissions, we cannot be sure that our existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims.

Although we have not experienced any material warranty or product liability claims to date, a warranty or product liability claim, whether or not meritorious, could harm our reputation, result in substantial financial costs or divert management’s attention, which could have an adverse effect on our business, operating results and financial condition.

We could be adversely affected if we are unable to protect our proprietary technology and could be subject to litigation regarding intellectual property rights, which could cause serious harm to our business

We rely upon a combination of patent, copyright and trademark laws and non-disclosure and other intellectual property contractual arrangements to protect our proprietary rights. However, we cannot assure that our patents, pending applications for patents that may issue in the future, or other intellectual property will be of sufficient scope and strength to provide meaningful protection to our technology or any commercial advantage to us, or that the patents will not be challenged, invalidated or circumvented. We enter into agreements with our employees and customers that seek to limit and protect the distribution of proprietary information. Despite our efforts to safeguard and maintain our proprietary rights, there can be no assurance that such rights will remain protected or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.

Litigation involving patents and other intellectual property rights is common in the United States and in other countries where we operate. We may be a party to litigation in the future to protect our intellectual property rights or as a result of an alleged infringement of the intellectual property rights of others. Any such claims,

 

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whether or not meritorious, could result in reputational harm to us, require us to spend significant sums in litigation, pay damages, delay product implementations, develop non-infringing intellectual property or acquire licenses to intellectual property that is the subject of the infringement claim. In addition, under many of our customer contracts, we are required to indemnify our customers for third-party intellectual property infringement claims, which would increase the costs to us of any such claims. These claims could have a material adverse effect on our business, operating results and financial condition.

Our ability to attract and retain qualified employees is critical to the success of our business and failure to do so could adversely affect our operating results

Our success depends upon the efforts and abilities of our executive officers and technical and sales employees who are skilled in e-commerce, payment methodology and regulation, business banking technologies, and web, database and network technologies. Our current key employees and employees whom we seek to hire in order to support our growth are in high demand within the marketplace and many competitors, customers and industry organizations are able to offer considerably higher compensation packages than we currently provide, including base salary, bonus and equity incentives. The loss of one or more of our key employees or our failure to consistently attract and retain sufficient qualified employees to grow our operations could have a material adverse effect on our business. We do not maintain key man life insurance policies on any of our employees and our employees are generally free to terminate their employment with us at any time. The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business, operating results and financial condition.

We engage off-shore development resources which may not be successful and which may put our intellectual property at risk

In order to optimize our research and development capabilities and to meet development timeframes, we contract with off-shore third-party vendors for certain development activities. While our experience to date with these resources has been positive, there are a number of risks associated with off-shore development activities including:

 

   

less efficient and less accurate communication and information flow as a consequence of time, distance and language barriers between our primary development organization and the off-shore resources, resulting in delays or deficiencies in development efforts;

 

   

disruption due to political or military conflicts;

 

   

misappropriation of intellectual property, which we may not readily detect; and

 

   

currency exchange rate fluctuations that could adversely impact the cost advantages intended from these agreements.

To the extent that these or unforeseen risks occur, our operating results and financial condition could be adversely impacted.

Certain anti-takeover provisions contained in our charter and under Delaware law could hinder a takeover attempt

We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short term, to the interests of our stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.

 

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Our certificate of incorporation and bylaws contain provisions relating to the limitation of liability and indemnification of our directors and officers, dividing our board of directors into three classes of directors serving three-year terms and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders.

Risks Related to our Indebtedness

In December 2012, we issued, at par value, $189.8 million aggregate principal amount of 1.50% convertible senior notes (the Notes) due in December 2017. In connection with the pricing of the notes, we purchased convertible note hedge transactions with a strike price equal to the initial conversion price of the notes and we sold warrants with a strike price of $40.04 per share with certain counterparties. The note hedges and the warrants each cover approximately 6.3 million shares of our common stock.

Servicing the notes will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations under the notes

Our ability to make scheduled payments of interest and, upon maturity or early conversion, the principal balance of the notes, depends on our future performance which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt or equity financing on terms that may not be favorable to us or available to us at all. Our ability to refinance the notes will depend on the capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations or future indebtedness.

Our level of indebtedness may limit our financial flexibility

Our level of indebtedness affects our operations in several ways, including:

 

   

a portion of our cash flows from operating activities must be used to service our indebtedness and is not available for other purposes;

 

   

we may be at a competitive disadvantage as compared to similar companies that have less debt; and

 

   

additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may have higher costs and contain restrictive covenants, or may not be available to us.

The factors that will affect our ability to obtain additional financing may be beyond our control and include financial market conditions, the value of our assets and our performance at the time we need financing.

The accounting for the notes will result in our having to recognize interest expense significantly more than the stated interest rate of the notes and may result in volatility to our consolidated statement of operations

Upon issuance of the notes we were required to establish a separate initial value for the conversion option and to bifurcate this value from the value attributable to the balance of the notes, or the debt component. As a result, for accounting purposes, we were required to treat the notes as having been issued with a discount to their face principal amount, which is referred to as an original issue discount. We are accreting the original issue discount to interest expense ratably over the term of the notes, which results in an effective interest rate in our consolidated statement of operations that is in excess of the stated coupon rate of the notes. This will reduce our earnings and could adversely affect the price at which our common stock trades, but will have no effect on the amount of cash interest paid to holders or on our cash flows.

 

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Certain derivative instruments issued in connection with the Notes were classified within stockholders’ equity at June 30, 2014. However, if we do not continue to satisfy all of the criteria required for equity classification, these instruments would be reclassified out of equity and be subject to re-measurement at fair value. Changes in fair value resulting from any such re-measurement would be reflected in earnings which could have a material impact on our financial statements.

The conditional conversion feature of the notes, if triggered, and the requirement to repurchase the notes upon a fundamental change may adversely affect our financial condition and operating results

In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at their option during specified periods. If one or more holders elect to convert their notes, we would be required to settle the principal portion of the notes in cash. Additionally, if we undergo a fundamental change, (as described in the Indenture), subject to certain conditions, holders of the notes may require us to repurchase for cash all or part of their notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest. Either of these events could adversely affect our liquidity. Even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal balance of the notes to a current rather than long-term liability, which would result in a material reduction of our working capital.

We may be subject to significant future write-offs with respect to intangible assets or deferred tax assets

Certain of our assets, such as intangible assets and deferred tax assets, are subject to periodic tests of recoverability based on a variety of factors. Those factors typically include, at a minimum, projections of future income levels and cash flows. The accounting for the notes will result in the recognition of a significant level of interest expense, particularly non-cash interest expense, as the carrying value of debt is accreted to par and as we amortize our debt issue costs, including the underwriters’ discount. If our cash flows or income levels were to meaningfully decline, we could be subject to impairment charges with respect to these assets which would have a material adverse effect on our consolidated statement of operations.

The convertible note hedge and warrant transactions may affect the value of the notes and our common stock

The outstanding warrants could have a dilutive effect on our earnings per share to the extent that the market price per share of our common stock exceeds the applicable strike price of the warrants. However, subject to certain conditions, we may elect to settle the warrants in cash.

From time to time, the counterparties to the convertible note hedge transactions or their affiliates may modify their respective hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions (and are likely to do so during any observation period related to a conversion of notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock or the notes.

 

Item 1B. Unresolved Staff Comments.

None.

 

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Item 2. Properties.

The following table sets forth the location, operating segment(s) and approximate square footage of each of the principal properties used by us during fiscal year 2014. Our Portsmouth, New Hampshire facility serves as our corporate headquarters and is used by employees associated with all of our operating segments in addition to our management, administrative, sales and marketing and customer support teams. All properties, except as noted below, are leased under operating leases.

 

Location

  

Operating Segment(s)

   Approximate
Square Feet
 

North America:

     

Alpharetta, Georgia

  

Payments and Transactional Documents and Digital Banking

     26,000   

Great Neck, New York

  

All operating segments

     13,000   

Portland, Maine

  

Hosted Solutions

     27,000   

Portsmouth, New Hampshire

  

All operating segments

     85,000   

Providence, Rhode Island

  

Digital Banking

     15,000   

Wilton, Connecticut

  

Hosted Solutions

     13,000   

Europe:

     

Geneva, Switzerland

  

Hosted Solutions

     16,000   

London, England

  

All operating segments

     10,000   

Reading, England(1)

  

All operating segments

     28,000   

Asia-Pacific:

     

Melbourne, Australia

  

Payments and Transactional Documents and Digital Banking

     2,000   

Sydney, Australia

  

Payments and Transactional Documents

     2,000   

 

(1) We own 16,000 square feet in Reading, England currently used as our European headquarters.

 

Item 3. Legal Proceedings.

We are, from time to time, a party to legal proceedings and claims that arise in the ordinary course of our business. We do not believe that there are claims or proceedings pending against us for which the ultimate resolution would have a material effect on, or require disclosure in, our financial statements.

 

Item 4. Mine Safety Disclosures.

Not applicable

 

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Executive Officers and Other Key Employees of the Registrant

Our executive officers and other key employees and their respective ages as of August 28, 2014, are as follows:

 

Name

   Age     

Positions

Robert A. Eberle

     53       President, Chief Executive Officer and Director

Kevin M. Donovan

     44       Chief Financial Officer and Treasurer

Nigel K. Savory

     47       Managing Director, Europe

Karen S. Brieger

     42       Vice President, Human Resources

Eric A. Campbell

     57       Senior Vice President, Strategic Accounts

Peter L. Cousins

     44       Chief Technology Officer

Norman J. Deluca

     53       Managing Director, Digital Banking

Paul J. Fannon

     46       Group Sales Director, Europe

Thomas D. Gaillard

     51       Senior Vice President and General Manager, Cloud Payment Solutions

John F. Kelly

     56       General Manager, Legal Solutions

John J. Mason

     44       Chief Information Officer

Andrew J. Mintzer

     52       Executive Vice President, Product Strategy and Customer Delivery

Jessica Pincomb Moran

     40       Vice President, Client Services

Eric K. Morgan

     44       Senior Vice President, Global Controller

David G. Sweet

     51       Executive Vice President, Strategy and Corporate Development

Robert A. Eberle has served as a director since September 2000, as President since August 2004 and as Chief Executive Officer since November 2006.

Kevin M. Donovan has served as Chief Financial Officer since August 2004 and as Treasurer since May 2001.

Nigel K. Savory has served as Managing Director, Europe since December 2003.

Karen S. Brieger has served as Vice President, Human Resources since August 2010 and as Director, Human Resources from February 2008 through July 2010.

Eric A. Campbell has served as Senior Vice President, Strategic Accounts since November 2013 and as Chief Technology Officer from May 2000 through October 2013.

Peter L. Cousins has served as Chief Technology Officer since November 2013. From October 2012 until October 2013, he served as Chief Technology Officer at Operative Media, Inc. From October 2010 until October 2012, Mr. Cousins served as Chief Technology Officer Enterprise Marketing Management for IBM and from November 2007 through October 2010, when Unica Corporation was acquired by IBM, he served as Chief Technology Officer at Unica.

Norman J. DeLuca has served as Managing Director, Digital Banking since November 2011. From October 2009 through October 2011, Mr. DeLuca served as Managing Partner at NMD Investments. From January 2008 through October 2009, Mr. DeLuca served as Chief Executive of RBS Global Transaction Services, Americas. From January 2007 through January 2008, Mr. DeLuca served as Vice Chairman, RBS Citizens Financial Group.

Paul J. Fannon has served as Group Sales Director, Europe since October 2008. From December 2003 through October 2008, Mr. Fannon served as Managing Director, Transactional Services Europe.

Thomas D. Gaillard has served as Senior Vice President and General Manager, Cloud Payment Solutions since July 2003.

 

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John F. Kelly has served as General Manager, Legal Solutions since April 2011. From January 2006 through April 2011, Mr. Kelly served as Chief Executive Officer of Allegient Systems, Inc.

John J. Mason has served as Chief Information Officer since June 2010. From March 2009 through June 2010, Mr. Mason served as Vice President of Information Technology at Anacomp, Inc. From March 2007 through March 2009, Mr. Mason served as Director of Systems Engineering at Anacomp, Inc.

Andrew J. Mintzer has served as Executive Vice President, Product Strategy and Delivery since July 2013 and as Senior Vice President, Product Strategy and Delivery from November 2007 through June 2013.

Jessica Pincomb Moran has served as Vice President, Client Services since June 2011. From February 2008 through May 2011, Ms. Moran served as Vice President, Corporate Services.

Eric K. Morgan has served as Controller since September 2000.

David G. Sweet has served as Executive Vice President, Strategy and Corporate Development since March 2013. From October 2010 through October 2012, Mr. Sweet served as a strategy and business development executive for IBM’s Enterprise Marketing Management group. From April 2005 through October 2010, Mr. Sweet served as Senior Vice President of Corporate Development at Unica Corporation.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on The NASDAQ Global Select Market under the symbol EPAY. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as quoted on The NASDAQ Global Select Market.

 

Period

   High      Low  

Fiscal 2013

     

First quarter

   $ 25.67       $ 17.75   

Second quarter

   $ 27.06       $ 22.17   

Third quarter

   $ 29.82       $ 25.85   

Fourth quarter

   $ 29.18       $ 24.62   

Fiscal 2014

     

First quarter

   $ 31.30       $ 25.33   

Second quarter

   $ 36.66       $ 26.70   

Third quarter

   $ 37.41       $ 30.68   

Fourth quarter

   $ 36.32       $ 27.31   

As of August 20, 2014, there were approximately 438 holders of record of our common stock. Because many of the shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of individual stockholders represented by these holders of record.

The closing price for our common stock on August 20, 2014 was $28.68. For purposes of calculating the aggregate market value of the shares of our common stock held by non-affiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by non-affiliates except for the shares beneficially held by our directors and executive officers. However, there may be other persons who may be deemed to be affiliates of ours.

We have never paid dividends on our common stock. We intend to retain our earnings for use in our business and, therefore, do not anticipate paying any cash dividends on our common stock for the foreseeable future.

The following table provides information about purchases by us of our common stock during the quarter ended June 30, 2014:

 

Period

   Total Number of
Shares Purchased
     Average Price Paid
Per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under The Plans
or Programs (1)
 

April 1, 2014 – April 30, 2014

     —        $ —          —        $ 16,562,000   

May 1, 2014 – May 31, 2014

     —        $ —          —        $ 16,562,000   

June 1, 2014 – June 30, 2014

     —        $ —          —        $ 16,562,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —        $ —          —        $ 16,562,000   

 

(1) In May 2012, our board of directors authorized a repurchase program for up to $20 million of our common stock. This repurchase program replaced the program that had been in place since April 2008.

Stock Performance Graph

The stock performance graph below compares the percentage change in cumulative stockholder return on our common stock for the period from June 30, 2009 through June 30, 2014, with the cumulative total return on The NASDAQ Stock Market (U.S.) and the NASDAQ Computer & Data Processing Index.

 

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This graph assumes the investment of $100.00 in our common stock (at the closing price of our common stock on June 30, 2009), the NASDAQ Stock Market (U.S.) and the NASDAQ Computer & Data Processing Index on June 30, 2009, and assumes dividends, if any, are reinvested.

The stock price performance shown on the following graph is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Bottomline Technologies (de), Inc., the NASDAQ Composite Index,

and the NASDAQ Computer & Data Processing Index

 

LOGO

 

* $100 invested on 6/30/09 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

 

     6/09      6/10      6/11      6/12      6/13      6/14  

Bottomline Technologies (de), Inc.

     100.00         144.62         274.25         200.33         280.69         332.08   

NASDAQ Composite

     100.00         117.06         154.79         167.05         197.48         259.41   

NASDAQ Computer & Data Processing

     100.00         107.16         139.51         148.60         178.27         240.30   

The information included under the heading Stock Performance Graph in Item 5 of this Annual Report on Form 10-K is furnished and not filed and shall not be deemed to be soliciting material or subject to Regulation 14A, shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the Securities Act).

 

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Recent Sales of Unregistered Securities

On January 29, 2014, we issued an aggregate of 205,882 shares of our common stock, of which 92,151 shares were subject to future vesting, to certain of the former stockholders of Rationalwave Analytics, Inc. (Rationalwave), in connection with our purchase of all of the outstanding equity of Rationalwave. These shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act. No underwriters were involved in any such issuances.

On April 3, 2014, we issued 102,158 shares of our common stock, all of which were subject to future vesting, to certain of the former stockholders of Andera, Inc. (Andera), in connection with our purchase of all of the outstanding equity of Andera. These shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act. No underwriters were involved in any such issuances.

 

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Item 6. Selected Financial Data.

You should read the following consolidated financial data in conjunction with the Financial Statements, including the related notes, and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations. The results shown herein are not necessarily indicative of the results to be expected for any future periods.

SELECTED CONSOLIDATED FINANCIAL DATA

 

     Fiscal Year Ended June 30,  
     2014     2013     2012     2011     2010  
     (in thousands, except per share data)  

Statements of Operations Data:

          

Revenues:

          

Subscriptions and transactions

   $ 141,103      $ 118,016      $ 85,005      $ 55,133      $ 41,421   

Software licenses

     20,769        22,546        17,562        16,547        13,607   

Service and maintenance

     131,531        106,389        113,832        108,930        94,379   

Other

     7,182        7,823        7,885        8,771        8,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     300,585        254,774        224,284        189,381        157,990   

Cost of revenues:

          

Subscriptions and transactions

     69,220        64,101        41,266        29,478        20,237   

Software licenses

     1,602        2,399        2,082        1,352        1,082   

Service and maintenance

     54,463        46,788        51,559        47,975        40,772   

Other

     5,383        5,998        6,280        6,880        6,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     130,668        119,286        101,187        85,685        68,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     169,917        135,488        123,097        103,696        89,384   

Operating expenses:

          

Sales and marketing

     72,707        62,825        49,902        39,802        34,328   

Product development and engineering

     39,725        32,974        28,687        21,862        18,858   

General and administrative

     33,721        27,076        21,495        19,502        16,383   

Amortization of intangible assets

     26,242        19,549        15,753        12,662        13,214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     172,395        142,424        115,837        93,828        82,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (2,478     (6,936     7,260        9,868        6,601   

Other income (expense), net

     (14,544     (11,357     41        558        (93
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (17,022     (18,293     7,301        10,426        6,508   

Income tax provision (benefit)

     2,082        (3,898     5,596        (25,467     2,554   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (19,104   $ (14,395   $ 1,705      $ 35,893      $ 3,954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share

   $ (0.52   $ (0.41   $ 0.05      $ 1.13      $ 0.15   

Diluted net income (loss) per common share

   $ (0.52   $ (0.41   $ 0.05      $ 1.07      $ 0.15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic net income (loss) per share

     36,834        35,444        34,268        31,660        25,552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing diluted net income (loss) per share

     36,834        35,444        35,244        33,453        26,696   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP presentation:

          

Income (loss) before provision for income taxes

   $ (17,022   $ (18,293   $ 7,301      $ 10,426      $ 6,508   

Amortization of intangible assets

     26,242        19,549        15,753        12,662        13,214   

Stock-based compensation expense

     22,821        18,031        13,768        11,467        8,956   

Acquisition and integration related expenses

     5,367        10,827        1,987        1,677        585   

Restructuring expense

     1,371        1,179        1,609        1,111        (52

Non-cash pension expense

     331        —          —          —          —     

Loss on derivative instruments, net

     —          4,435        —          —          —     

Non-cash interest expense

     11,397        5,980        —          —          —     

Income tax (provision) benefit

     (2,082     3,898        (5,596     25,467        (2,554

Release of US tax valuation allowance

     —          —          —          (27,394     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net income

   $ 48,425      $ 45,606      $ 34,822      $ 35,416      $ 26,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The non-GAAP presentation above consists of a reconciliation of our net income or loss before income taxes to a measure of non-GAAP net income or loss. We present this supplemental information in the form of non-GAAP financial measures, which exclude certain items—specifically amortization of intangible assets, impairment losses on equity investments, equity-based compensation, acquisition and integration-related expenses (including acquisition-related earn-outs), restructuring related costs, non-cash pension expenses, non-core charges associated with our convertible notes and other non-core or non-recurring gains or losses that arise from time to time. Non-core charges associated with our convertible notes consist of non-cash interest expense as well as gains or losses on derivative instruments issued in conjunction with the notes. Acquisition and integration-related expenses include legal and professional fees and other direct transaction costs associated with our business and asset acquisitions, costs associated with integrating acquired businesses, including costs for transitional employees or services, integration related professional services costs and other charges we incur as a direct result of our acquisition and integration efforts. We believe that these supplemental non-GAAP financial measures are useful to investors because they allow for an evaluation of the Company with a focus on the performance of its core operations, including more meaningful comparisons of financial results to historical periods and to the financial results of less acquisitive peer and competitor companies. Our executive management team uses these same non-GAAP financial measures internally to assess the ongoing performance of the Company. Additionally, the same non-GAAP information is used for planning purposes, including the preparation of operating budgets and in communications with our board of directors with respect to our core financial performance.

Since the presentation above is not a GAAP measurement of financial performance there are material limitations to its usefulness on a stand alone basis, including the lack of comparability of this presentation to the GAAP financial results of other companies. Accordingly the non-GAAP information should not be used in isolation from, or as a substitute for, our GAAP results.

 

     Fiscal Year Ended June 30,  
     2014      2013      2012      2011      2010  
     (in thousands)  

Balance Sheet Data:

              

Cash and cash equivalents

   $ 167,673       $ 283,552       $ 124,801       $ 111,953       $ 122,758   

Marketable securities

     23,805         9,525         61         64         51   

Working capital

     172,384         280,563         118,356         100,673         104,705   

Total assets

     700,343         585,522         392,371         363,334         269,382   

Long-term debt (including capital leases) (1)

     148,795         138,582         —           96         20   

Total stockholders’ equity

     387,426         356,749         314,186         285,674         210,391   

 

(1) Our long-term debt as of June 30, 2014 and 2013 consists of our convertible notes. The convertible notes are shown on our Consolidated Balance Sheet at their carrying value which represents the principal balance of $189.8 million less unamortized discount.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Selected Consolidated Financial Data and the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Annual Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Without limiting the foregoing, the words may, will, should, could, expects, plans, intends, anticipates, believes, estimates, predicts, potential and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us up to and including the date of this report, and we assume no obligation to update any such forward-looking

 

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statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors and elsewhere in this Form 10-K. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the Securities and Exchange Commission.

In the management discussion that follows we have highlighted those changes and operating factors that were the primary factors affecting period to period fluctuations. The remainder of the change in period to period fluctuations from that which is specifically discussed is arising from various individually insignificant items.

Overview

We provide cloud-based payment, invoice and digital banking solutions to banks, corporations, insurance companies and financial institutions around the world. Our solutions are used to streamline, automate and manage processes and transactions involving global payments, cash management, invoice receipt and approval, collections, risk mitigation, document management, reporting and document archive. We offer hosted or Software as a Service (SaaS) solutions, as well as software designed to run on-site at the customer’s location. A growing portion of our offerings are being sold as SaaS-based solutions and paid for on a subscription and transaction basis.

We offer hosted and on-premise solutions that banks use to provide cash management and treasury capabilities to their business customers, as well as solutions that banks and credit unions use to facilitate online account opening. We offer financial messaging solutions for banks and corporations around the world, via solutions that leverage the SWIFT global messaging network. We offer legal spend management solutions that automate receipt and review of legal invoices for insurance companies and other large corporate consumers of outside legal services. We operate a cloud-based network that facilitates the exchange of electronic payments and invoices between buyers and their suppliers. Our corporate customers rely on our solutions to automate their payment and accounts payable processes and to streamline and manage the production and retention of electronic documents, while our healthcare customers use our solutions to streamline patient revenue and financial processes. Our document automation solutions are used by organizations to automate paper-intensive processes for the generation of transactional and supply chain documents.

Our solutions are designed to complement, leverage and extend our customers’ existing information systems, accounting applications and banking relationships so that they can be deployed quickly and efficiently. To help our customers receive the maximum value from our products and meet their specific business requirements, we also provide professional services for installation, training, consulting and product enhancement.

Recent Acquisitions

On April 3, 2014, we acquired Andera, Inc., (Andera) a Delaware corporation. Andera is a provider of innovative customer acquisition solutions, helping over 500 bank and credit union customers process new account applications online. The Andera acquisition extends our portfolio of payments and digital banking solutions. As purchase consideration we paid approximately $42.8 million in cash ($4.5 million of which will be held in escrow for 12 months from the date of the acquisition as a source for the satisfaction of indemnification obligations owed to us). We also issued 102,158 shares of our common stock to certain equity holders of Andera. These shares of stock have vesting conditions tied to continuing employment and, as such, the shares are compensatory and we will recognize share based payment expense over the underlying stock vesting period. The accounting purchase price also includes $0.2 million related to unvested Andera stock options that we assumed in the acquisition. This amount reflects the fair value of the underlying awards that relate to pre-acquisition service periods.

 

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On January 29, 2014, we acquired Rationalwave Analytics, Inc. (Rationalwave), an early stage predictive analytics technology company, for a cash payment of $1.2 million and 113,731 shares of our common stock which was valued at approximately $3.7 million as of the acquisition date. We also issued 92,151 shares of our common stock to key Rationalwave stockholders joining us as employees. These shares of stock have vesting conditions tied to continuing employment and, as such, these shares are compensatory and we will recognize share based payment over the underlying stock vesting period.

On August 20, 2013, we acquired SF2I SA (Sterci), a Swiss corporation, for a cash payment of 111.0 million Swiss Francs (approximately $121.0 million based on exchange rates in effect at the acquisition date). On September 4, 2013, we acquired all of the remaining equity of Simplex GTP Limited (Simplex), a UK-based corporation, for a cash payment of £3.4 million (approximately $5.4 million based on exchange rates in effect at the acquisition date). Sterci and Simplex are leading providers of financial messaging solutions utilizing the SWIFT global messaging network on behalf of more than 350 customers across 20 different countries. The Sterci and Simplex acquisitions, combined with our existing financial messaging business, create a new global center of excellence in financial messaging, providing solutions for banks, financial institutions and corporations around the world.

Financial Highlights

For fiscal year 2014, our revenue increased to $300.6 million from $254.8 million in the prior year. This revenue increase was attributable to revenue increases in our Hosted Solutions segment ($39.9 million), Payments and Transactional Documents segment ($4.9 million) and our Digital Banking segment ($1.1 million). The revenue increase in our Hosted Solutions segment was primarily due to increased revenue from our financial messaging solutions as the result of our Sterci acquisition and, to a lesser extent, increased revenue from our legal spend management and Paymode-X solutions. The revenue increase in our Payments and Transactional Documents segment was related to higher European revenue in our payment and document automation products. The Digital Banking segment’s revenue increase was primarily due to increased subscription and transaction revenue from our acquisition of Andera.

We had net loss of $19.1 million in the fiscal year ended June 30, 2014 compared to net loss of $14.4 million in the prior year. Our fiscal year 2014 net loss includes the impact of $14.2 million of net interest expense related to our convertible debt. The 2014 net loss also reflects the impact of increased operating expenses of $30.0 million, offset in part by increased gross margins of $34.4 million. The increases in our operating expenses were due primarily to increased employee related costs as we continued to grow our business and the operating impact of our recent acquisitions, including an increase of $6.7 million in intangible asset amortization expense. The increase in our gross margin was driven primarily by revenue increases across all operating segments.

In fiscal year 2014, we derived approximately 44% of our revenue from customers located outside of North America, principally in the United Kingdom, continental Europe and the Asia-Pacific region.

We expect future revenue growth to be driven by our digital banking, legal spend management, financial messaging and Paymode-X solutions.

Our customers operate in many different industries, a diversification that we believe helps us in a challenging economic climate. Additionally, we believe that our recurring and subscription revenue base helps position us defensively against any short term economic downturn. While we believe that we continue to compete favorably in all of the markets we serve, ongoing or worsening economic stresses could negatively impact our business in the future.

Revenue Sources

Our revenues are derived from multiple sources and are reported under the following classifications:

 

   

Subscriptions and Transactions Fees. We derive subscriptions and transactions fees from a number of sources, principally our SaaS offerings. Subscription revenues are typically recognized on a ratable basis over the subscription period. Transaction revenues are typically recorded at the time transactions

 

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are processed. Some of our SaaS products require customers to pay non-refundable set up or installation fees. In these cases, since the up-front fees do not represent a separate revenue earnings process, these fees are deferred and recognized as revenue over the estimated life of the customer relationship, which is generally between five and ten years. A significant part of our focus remains on growing the revenue contribution from our SaaS offerings and subscriptions and transactions based revenue streams.

 

   

Software License Fees. Software license revenues, which we derive from our software applications, are generally based on the number of software applications and user licenses purchased. Fees from the sale of perpetual software licenses are generally recognized upon delivery of the software to the customer, assuming that payment from the customer is probable and there are no extended payment terms. However, certain of our software arrangements, particularly those related to financial institution customers, are recognized on a percentage of completion basis over the life of the project because they require significant customization and modification and involve extended implementation periods.

 

   

Service and Maintenance Fees. Our service and maintenance revenues consist of professional services fees and customer support and maintenance fees. Revenues relating to professional services not associated with highly customized software solutions are normally recognized at the time services are rendered. Professional services revenues associated with software license arrangements that include significant customization and modification are generally recognized on a percentage of completion basis over the life of the project. Software maintenance fees are recognized as revenue ratably over the respective maintenance period, which is typically one year.

 

   

Other Revenues. We derive other revenues from the sale of printers, check paper and magnetic ink character recognition toners. These revenues are normally recognized at the time of delivery.

Critical Accounting Policies and Significant Judgments and Estimates

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. These critical accounting policies and estimates relate to revenue recognition, the valuation of goodwill and intangible assets, the valuation of acquired deferred revenue and income taxes. These critical policies and our procedures related to these policies are discussed below. In addition, refer to Note 2 to the accompanying consolidated financial statements for a discussion of all of our significant accounting policies.

Revenue Recognition

Software Arrangements

We recognize revenue on our software license arrangements when four basic criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable and collectability is probable. We consider a fully executed agreement or a customer purchase order to be persuasive evidence of an arrangement. Delivery is deemed to have occurred upon transfer of the product to the customer or the completion of services rendered. We consider the arrangement fee to be fixed and determinable if it is not subject to adjustment and if the customer has not been granted extended payment terms. Excluding our long term contract arrangements for which revenue is recorded on a percentage of completion basis, extended payment terms are deemed to be present when any portion of the software license fee is due in excess of 90 days after the date of product delivery. In arrangements that contain extended payment terms, software revenue is recorded as customer payments become contractually due, assuming all other revenue recognition criteria have been met. We consider the arrangement fee to be probable of collection if our internal credit analysis indicates that the customer will be able to pay contractual amounts as they become due.

 

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Our software arrangements often contain multiple revenue elements, such as software licenses, professional services, hardware and post-contract customer support. For multiple element software arrangements which qualify for separate element treatment, revenue is recognized for each element when each of the four basic criteria is met which, excluding post-contract customer support, is typically upon delivery. Revenue for post-contract customer support agreements is recognized ratably over the term of the agreement, which is generally one year. Revenue is allocated to each element, excluding the software license, based on vendor specific objective evidence (VSOE). VSOE is limited to the price charged when the element is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority. We do not have VSOE for our software licenses since they are seldom sold separately. Accordingly, revenue is allocated to the software license using the residual value method. Under the residual value method, revenue equal to VSOE of each undelivered element is recognized upon delivery of that element. Any remaining arrangement fee is then allocated to the software license. This has the effect of allocating any sales discount inherent in the arrangement to the software license fee.

Certain of our software arrangements require significant customization and modification and involve extended implementation periods. These arrangements do not qualify for separate element revenue recognition treatment as described above, and instead must be accounted for under contract accounting. Under contract accounting, companies must select from two generally accepted methods of accounting: the completed contract method and the percentage of completion method. The completed contract method recognizes revenue and costs upon contract completion, and all project costs and revenues are reported as deferred items in the balance sheet until that time. The percentage of completion method recognizes revenue and costs on a contract over time, as the work progresses.

We use the percentage of completion method of accounting for our long-term contracts, as we believe that we can make reasonably reliable estimates of progress toward completion. Progress is measured based on labor hours, as measured at the end of each reporting period, as a percentage of total expected labor hours. Accordingly, the revenue we record in any reporting period for arrangements accounted for on a percentage of completion basis is dependent upon our estimates of the remaining labor hours that will be incurred in fulfilling our contractual obligations. Our estimates at the end of any reporting period could prove to be materially different from final project results, as determined only at subsequent stages of project completion. To mitigate this risk, we solicit the input of our project professional staff on a monthly basis, as well as at the end of each financial reporting period, for purposes of evaluating cumulative labor hours incurred and verifying the estimated remaining effort to completion; this ensures that our estimates are always based on the most current projections available.

Non-Software Arrangements

For arrangements governed by general revenue recognition literature, such as with our SaaS offerings or equipment and supplies only sales, we recognize revenue when four basic criteria are met. These criteria are similar to those governing software transactions: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable and collectability is reasonably assured. For our SaaS offerings, revenue is generally recognized on a subscription or transaction basis over the period of performance.

For arrangements consisting of multiple elements, revenue is allocated to each element based on a selling price hierarchy. The selling price of each element is based on VSOE if available, third-party evidence (TPE) if VSOE is not available or estimated selling price (ESP) if neither VSOE nor TPE are available. The residual method of allocation in a non-software arrangement is not permitted and, instead, arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable based on the proportion of each deliverable’s selling price to the total arrangement fee. We are typically unable to establish TPE, which is based on the selling price charged by unrelated third-party vendors for similar

 

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deliverables when they are sold separately, as we are generally unable to obtain sufficient information on actual vendor selling prices to substantiate TPE. The objective of ESP is to estimate the price at which we would transact if the deliverable were sold separately rather than as part of a multiple element arrangement. Our determination of ESP considers several factors including actual selling prices for similar transactions, gross margin expectations and our ongoing pricing strategy. We formally analyze our ESP determinations on at least an annual basis.

Goodwill and Intangible Assets

Acquired goodwill and intangible assets are initially recorded at fair value and measured periodically for impairment. We performed our annual impairment test of the carrying value of our goodwill for fiscal 2014 during our fourth quarter, which is consistent with the historic timing of our annual goodwill impairment review. Based on this review, we concluded that there was no goodwill impairment. Our analysis was performed at the reporting unit level, which requires an estimate of the fair value of each reporting unit. Based on the results of this review, we concluded that none of our reporting units were impaired. However, there can be no assurance that there will not be impairment charges in subsequent periods as a result of our future impairment reviews. To the extent that future impairment charges occur, it would likely have a material impact on our financial results. At June 30, 2014, the carrying value of goodwill for all of our reporting units was approximately $209.0 million.

In addition to our annual goodwill impairment review, we also perform periodic reviews of the carrying value and amortization periods of our other intangible assets. These intangible assets consist primarily of acquired customer related assets and acquired core technology. In evaluating potential impairment of these assets we specifically consider whether any indicators of impairment are present, including:

 

   

whether there has been a significant adverse change in the business climate that affects the value of an asset;

 

   

whether there has been a significant change in the extent or manner in which an asset is used; and

 

   

whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.

If indicators of impairment are present, an estimate of the undiscounted cash flows that the specific asset is expected to generate must be made to ensure that the carrying value of the asset can be recovered. These estimates involve significant subjectivity. At June 30, 2014, the carrying value of our intangible assets, excluding goodwill, was approximately $163.5 million. As a result of our fiscal 2014 impairment review, we concluded that none of these assets were impaired.

Valuation of Acquired Intangible Assets and Acquired Deferred Revenue

In connection with our acquisitions, we have recorded intangible assets relating principally to customer related assets, acquired technology and acquired contractual rights that include favorable economic terms as compared to overall market rates at the date of acquisition. The valuation process used to calculate the values assigned to these acquired intangible assets is complex and involves significant estimation relative to our financial projections. The principal component of the valuation process is the determination of discounted future cash flows, and there are a number of variables that we consider for purposes of projecting these future cash flows. There is inherent uncertainty involved with this estimation process and, while our estimates are consistent with our internal planning assumptions, the ultimate accuracy of these estimates is only verifiable over time. Further, the projections required for the valuation process generally utilize at least a ten-year forecast, which exceeds our normal internal planning and forecasting timeline. The particularly sensitive components of these estimates include, but are not limited to:

 

   

the selection of an appropriate discount rate;

 

   

the required return on all assets employed by the valued asset to generate future income streams;

 

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our projected overall revenue growth and mix of revenue;

 

   

our gross margin estimates (which are highly dependent on our mix of revenue);

 

   

our technology and product life cycles;

 

   

the attrition rate of our customers, particularly those who contribute to our recurring revenue streams, such as software maintenance;

 

   

the determination of third party market rates for leases or other contractual rights we acquire, for purposes of assessing whether we have acquired a favorable, unfavorable or at-market contract;

 

   

our planned level of operating expenses; and

 

   

our effective tax rate.

Additionally, we are required to estimate the acquisition date fair value of acquired deferred revenue that we assume as part of any acquisition. The acquisition date fair value of deferred revenue is estimated based on the costs we expect to incur in fulfilling the obligations, plus a normal profit margin. These cost estimates exclude amounts relating to any selling effort, since those costs would have been incurred by the predecessor company rather than by us. In the case of acquired software maintenance contracts, the cost estimates also exclude any ongoing research and development expenses associated with product upgrades since these amounts typically do not represent a legal obligation that we assume at the time of acquisition.

Income Taxes

We are subject to the income tax laws of the United States (including its states and municipalities) as well as the tax laws of the foreign jurisdictions in which we operate. Our annual tax rate is determined based on our income, statutory tax rates and the tax impact of items treated differently for tax purposes than for financial statement purposes. The income tax expense we record in any interim period is based on our estimated tax rate for the full fiscal year, which requires us to estimate our annual pretax income and tax expense by jurisdiction. This process is inherently subjective and requires us to make estimates relative to our business plans, tax planning opportunities and operating results. An interim tax rate is subject to adjustment if, in later periods, there are changes to our estimate of total tax expense or pretax income, including income by jurisdiction. We update these estimates on a quarterly basis, so that our interim financial statements reflect our most current projections for the full fiscal year.

Our income tax expense consists of two components: current and deferred. Current tax expense represents our estimate of taxes to be paid for the current period, including income tax expense arising from uncertain tax positions. Deferred tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets and liabilities arise due to differences between when certain transactions are reflected in our financial statements and when those same items are included in a tax return. Deferred tax assets generally reflect the impact of a tax deduction, tax credit or operating loss carryforward that we have available for use in future year tax returns. Deferred tax liabilities generally reflect the impact of a deduction or expenditure that we have already taken in a tax return but that we have not yet reflected in our financial statements.

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income and the availability of tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. The particularly sensitive component of this evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

 

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In making our assessment of US deferred tax asset recoverability at June 30, 2014, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities and the impact of a specific tax planning action that we implemented during fiscal year 2014 that will provide a significant future source of US taxable income. Based on our analysis, we concluded that it was more likely than not that our deferred tax assets will be recovered. However, if we are ultimately unable to generate sufficient future US taxable income all or a portion of our US deferred tax assets might become impaired which would give rise to the recognition of significant deferred tax expense in the period in which that determination was made.

We establish reserves to remove some or all of the tax benefit we would have otherwise recorded if a tax position is uncertain. In evaluating whether a tax position is uncertain, we base our assessment on existing tax legislation, case law and legal statute. We also presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize tax benefits related to uncertain tax positions at the largest amount deemed more likely than not will be realized upon tax examination. We review our tax positions quarterly and adjust the balances as necessary.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Consolidated Financial Statements.

Results of Operations

Fiscal Year Ended June 30, 2014 Compared to Fiscal Year Ended June 30, 2013

Segment Information

Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

Our operating segments are organized principally by the type of product or service offered and by geography. Similar operating segments have been aggregated into three reportable segments: Payments and Transactional Documents, Hosted Solutions and Digital Banking.

In recent years, we changed the internal reporting classification of certain operating lines. To ensure a consistent presentation, these changes are reflected for all periods presented.

The following tables represent our segment revenues and our segment measure of profit:

 

     Fiscal Year Ended
June 30,
     Increase
Between Periods
 
     2014      2013      2014 Compared to 2013  
     (in thousands)      (in thousands)      %  

Segment revenue:

           

Payments and Transactional Documents

   $ 125,456       $ 120,590       $ 4,866         4.0   

Hosted Solutions

     107,360         67,504         39,856         59.0   

Digital Banking

     67,769         66,680         1,089         1.6   
  

 

 

    

 

 

    

 

 

    
   $ 300,585       $ 254,774       $ 45,811         18.0   
  

 

 

    

 

 

    

 

 

    

Segment measure of profit:

           

Payments and Transactional Documents

   $ 36,249       $ 31,569       $ 4,680         14.8   

Hosted Solutions

     9,829         7,282         2,547         35.0   

Digital Banking

     6,772         3,799         2,973         78.3   
  

 

 

    

 

 

    

 

 

    

Total measure of segment profit

   $ 52,850       $ 42,650       $ 10,200         23.9   
  

 

 

    

 

 

    

 

 

    

 

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A reconciliation of the measure of segment profit to our GAAP loss before the provision for income taxes is as follows:

 

     Fiscal Year Ended
June 30,
 
     2014     2013  
     (in thousands)  

Total measure of segment profit

   $ 52,850      $ 42,650   

Less:

    

Amortization of intangible assets

     (26,242     (19,549

Stock-based compensation expense

     (22,821     (18,031

Acquisition and integration related expenses

     (4,563     (10,827

Restructuring expense

     (1,371     (1,179

Non-cash pension expense

     (331     —     

Loss on derivative instruments, net

     —          (4,435

Other expense, net

     (14,544     (6,922
  

 

 

   

 

 

 

Loss before income taxes

   $ (17,022   $ (18,293
  

 

 

   

 

 

 

Payments and Transactional Documents. The revenue increase for the fiscal year ended June 30, 2014 compared to the prior fiscal year was primarily attributable to increases in maintenance revenue of $5.1 million and subscription and transactions revenue of $1.5 million, partially offset by decreased software license revenue of $1.1 million and other revenue of $0.6 million. The revenue increases were primarily attributable to increased European service and maintenance revenue in our payment and document automation products. The increased revenue also includes the favorable effect of foreign exchange rates of approximately $1.4 million primarily associated with the British Pound Sterling which appreciated against the US Dollar when compared to the prior fiscal year. The decrease was primarily the result of lower software license revenue in European payment and document automation products. The segment profit increase of $4.7 million for the fiscal year ended June 30, 2014 compared to the prior fiscal year was due to the overall increase in revenue as well as improved subscriptions and transactions gross margins in North America, offset in part by increased operating expenses primarily related to increased sales and marketing costs. We expect revenue and profit for the Payments and Transactional Documents segment to increase in fiscal year 2015 as a result of increased sales of our payment and document automation solutions and continued improvement of gross margins.

Hosted Solutions. The revenue increase in our Hosted Solutions segment for the fiscal year ended June 30, 2014 compared to the prior fiscal year was due to increased financial messaging revenue of $32.6 million, primarily from our Sterci acquisition and, to a lesser extent, from revenue increases in our legal spend management and Paymode-X solutions. The segment profit increase of $2.5 million for the fiscal year ended June 30, 2014 compared to the prior fiscal year arose from improved gross margins of $21.5 million as a result of the increased financial messaging revenue and improved subscriptions and transactions gross margins from our legal spend management and Paymode-X solutions, offset by increased operating expenses of $19.0 million primarily associated with the operating costs of Sterci. We expect revenue for the Hosted Solutions segment to increase in fiscal year 2015 as a result of increased revenue from our legal spend management, financial messaging and Paymode-X solutions. We expect profit to remain relatively consistent during fiscal year 2015 as we leverage the increase in revenue to further invest in these offerings.

Digital Banking. The revenue increase in our Digital Banking segment for the fiscal year ended June 30, 2014 compared to the prior fiscal year was primarily due to an increase of $1.6 million in subscriptions and transactions revenue and a $0.4 million increase in maintenance revenue, partially offset by a decrease of $0.7 million in software license revenue and $0.2 million in professional services revenue. The increased subscriptions and transactions revenue was attributable to our acquisition of Andera. The segment profit increase of $3.0 million for the fiscal year ended June 30, 2014 compared to the prior fiscal year was primarily attributable to the increased revenue, improved professional services gross margins and decreased operating

 

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expenses of $0.5 million, partly from a decrease in sales and marketing expenses. We expect revenue for the Digital Banking segment to increase in fiscal year 2015 as a result of the contribution of revenue from our digital banking products including the full year impact of our acquisition of Andera. We expect profit to remain relatively consistent as a result of our continued investment in our digital banking solutions.

Revenues by Category

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
 
     2014      2013      2014 Compared
to 2013
 
     (in thousands)     %  

Revenues:

          

Subscriptions and transactions

   $ 141,103       $ 118,016       $ 23,087        19.6   

Software licenses

     20,769         22,546         (1,777     (7.9

Service and maintenance

     131,531         106,389         25,142        23.6   

Other

     7,182         7,823         (641     (8.2
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 300,585       $ 254,774       $ 45,811        18.0   
  

 

 

    

 

 

    

 

 

   

Subscriptions and Transactions. The increase in subscriptions and transactions revenues was due to increases in the revenue contribution from our Hosted Solutions segment of $20.0 million, our Digital Banking segment of $1.6 million and our Payments and Transactional Documents segment of $1.5 million. The Hosted Solutions segment revenue increase was driven primarily by our financial messaging solutions as a result of our Sterci and Simplex acquisitions and, to a lesser extent, from our legal spend management and Paymode-X solutions. We expect subscriptions and transactions revenues to increase in fiscal year 2015 primarily as a result of the revenue contribution from our financial messaging, legal spend management and Paymode-X solutions, as well as from a full year’s impact of our acquisition of Andera.

Software Licenses. The decrease in software license revenues was attributable to decreases in European revenues within our Payments and Transactional Documents segment and our Digital Banking segment as a result of lower third party software sold with our solutions. We expect software license revenues to increase slightly in fiscal year 2015.

Service and Maintenance. The increase in service and maintenance revenues was primarily the result of revenue increases arising from our Sterci acquisition as well as increased service and maintenance revenue from our European Payments and Transactional Documents solutions. We expect that service and maintenance revenues will increase slightly in fiscal year 2015.

Other. Other revenues decreased slightly in fiscal year 2014 as compared to fiscal year 2013 and we expect that other revenues will remain relatively consistent in fiscal year 2015.

Cost of Revenues

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
   Between Periods   
 
     2014      2013      2014 Compared
to 2013
 
     (in thousands)         %      

Cost of revenues:

          

Subscriptions and transactions

   $ 69,220       $ 64,101       $ 5,119        8.0   

Software licenses

     1,602         2,399         (797     (33.2

Service and maintenance

     54,463         46,788         7,675        16.4   

Other

     5,383         5,998         (615     (10.3
  

 

 

    

 

 

    

 

 

   

Total cost of revenues

   $ 130,668       $ 119,286       $ 11,382        9.5   
  

 

 

    

 

 

    

 

 

   

Gross profit

   $ 169,917       $ 135,488       $ 34,429        25.4   

 

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Subscriptions and Transactions. Subscriptions and transactions costs decreased to 49% of subscriptions and transactions revenues for the fiscal year ended June 30, 2014 as compared to 54% of subscriptions and transactions revenues in the fiscal year ended June 30, 2013. The decrease in subscriptions and transactions costs as a percentage of revenue was due to improved gross margins in our Hosted Solutions segment primarily due to increased revenue from our acquisitions of Sterci and Simplex and due to a decrease in acquisition and integration related expenses during 2014. We expect that subscriptions and transactions costs will continue to decrease as a percentage of subscriptions and transactions revenue in fiscal year 2015.

Software Licenses. Software license costs decreased to 8% of software license revenues for the fiscal year ended June 30, 2014 as compared to 11% of software license revenues in the fiscal year ended June 30, 2013 primarily due to an increase in gross margins in our Digital Banking segment as a result of a decrease in third party software costs in fiscal year 2014. We expect that software license costs will remain relatively consistent as a percentage of software license revenues in fiscal year 2015.

Service and Maintenance. Service and maintenance costs decreased to 41% of service and maintenance revenues for the fiscal year ended June 30, 2014 as compared to 44% of service and maintenance revenues for the fiscal year ended June 30, 2013. The decrease was the result of improved gross margins as a result of our Sterci acquisition and improved gross margins in our Digital Banking segment. We expect that service and maintenance costs will remain relatively consistent as a percentage of service and maintenance revenues in fiscal year 2015.

Other. Other costs remained largely consistent at 75% of other revenues for the fiscal year ended June 30, 2014 as compared to 77% of other revenues for the prior fiscal year and we expect that other costs will remain relatively consistent as a percentage of other revenues in fiscal year 2015.

Operating Expenses

 

     Fiscal Year Ended
June 30,
     Increase
Between Periods
 
     2014      2013      2014 Compared
to 2013
 
     (in thousands)      %  

Operating expenses:

           

Sales and marketing

   $ 72,707       $ 62,825       $ 9,882         15.7   

Product development and engineering

     39,725         32,974         6,751         20.5   

General and administrative

     33,721         27,076         6,645         24.5   

Amortization of intangible assets

     26,242         19,549         6,693         34.2   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 172,395       $ 142,424       $ 29,971         21.0   
  

 

 

    

 

 

    

 

 

    

Sales and Marketing. Sales and marketing expenses increased $9.9 million in the fiscal year ended June 30, 2014 as compared to the fiscal year ended June 30, 2013 principally due to an increase in headcount related costs of $7.6 million, contract employee costs of $0.5 million, advertising expenses of $0.4 million and travel related costs of $0.2 million. The increases were generally due to the operating costs of our fiscal year 2014 acquisitions and the impact of resources we hired to sell and promote our newer products primarily in our Hosted Solutions segment. We expect sales and marketing expenses will increase in fiscal year 2015 as we continue to promote our new and existing products and as a result of our acquisition of Andera.

Product Development and Engineering. The increase in product development and engineering expenses of $6.8 million in the fiscal year ended June 30, 2014 as compared to the fiscal year ended June 30, 2013 was primarily attributable to increased costs related to our financial messaging solutions associated with our Sterci acquisition. We expect product development and engineering expenses will increase in fiscal year 2015 as we continue to invest in our SaaS-based solutions that we believe will drive future revenue growth such as our digital banking, Financial Messaging, Paymode-X and legal spend management solutions and as a result of our acquisition of Andera.

 

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General and Administrative. The increase in general and administrative expenses of $6.6 million in the fiscal year ended June 30, 2014 as compared to the fiscal year ended June 30, 2013 was principally attributable to an increase in employee related costs of $5.4 million, partially attributable to our recent acquisitions and an increase of $0.5 million in acquisition and integration related expenses. We expect general and administrative expenses will remain relatively consistent during fiscal year 2015.

Amortization of Intangible Assets. We amortize our intangible assets in proportion to the estimated rate at which the asset provides economic benefit to us. Accordingly, amortization expense rates are often higher in the earlier periods of an asset’s estimated life. The increase in amortization expense for the fiscal year ended June 30, 2014 as compared to the prior fiscal year occurred as a result of increased expense from intangible assets associated with our recent acquisitions. We expect amortization expense to be approximately $29.0 million for fiscal year 2015.

Loss on Derivative Instruments, Net

 

     Fiscal Year Ended
June 30,
    Increase
Between Periods
 
        2014        2013     2014 Compared
to 2013
 
     (in thousands)      %  

Loss on derivative instruments, net

   $ —         $ (4,435   $ 4,435         100.0  
  

 

 

    

 

 

   

 

 

    

Loss on Derivative Instruments, net. During the fiscal year ended June 30, 2013 we recorded a net loss of $4.4 million related to the change in fair value of derivative instruments associated with our Notes. As of June 30, 2014 all of our derivative instruments met the classification requirements for inclusion within stockholders’ equity and as such are not subject to on-going fair value re-measurement. Accordingly, we do not anticipate recognizing additional gains or losses related to changes in the fair value of these instruments. We are required, for the remaining term of the Notes, to assess whether we continue to meet the stockholders’ equity classification requirements. If in any future period we fail to satisfy those requirements we would need to reclassify the derivative instruments out of stockholders’ equity, to either assets or liabilities depending on their nature, and record those instruments at fair value with changes in fair value reflected in earnings.

Other Income (Expense), Net

 

     Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
 
     2014     2013     2014 Compared
to 2013
 
     (in thousands)     %  

Interest income

   $ 667      $ 629      $ 38        6.0   

Interest expense

     (14,222     (7,550     (6,672     (88.4

Other income (expense), net

     (989     (1     (988     (98800.0
  

 

 

   

 

 

   

 

 

   

Other income (expense), net

   $ (14,544   $ (6,922   $ (7,622     (110.1
  

 

 

   

 

 

   

 

 

   

Other Income (Expense), Net. For the fiscal year ended June 30, 2014 as compared to the prior fiscal year, interest income remained relatively unchanged. Interest expense increased significantly as a result of a full year impact of interest expense related to our Notes and consisted of cash interest expense of $2.8 million, amortization of debt discount of $10.2 million and amortization of debt issuance costs of $1.2 million. Other expense in fiscal 2014 was primarily the result of foreign exchange losses associated with the Swiss Franc and, to a lesser extent, certain realized foreign exchange losses associated with both the British Pound Sterling and the European Euro. We expect that interest expense related to our convertible debt offering will remain relatively consistent during fiscal year 2015.

 

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Provision for Income Taxes

We recorded income tax expense of $2.1 million for the fiscal year ended June 30, 2014 compared to an income tax benefit of $3.9 million for the fiscal year ended June 30, 2013. The tax expense in fiscal year 2014 is predominantly due to expense associated with our US, UK, and Asia Pacific operations, offset in part by an income tax benefit associated with our Swiss operations. The income tax benefit in fiscal 2013 is predominantly due to a tax benefit associated with our US operations, offset in part by tax expense associated with our UK, Australian and New Zealand operations. The excess of our effective tax rate over statutory tax rates was primarily due to our inability to utilize certain foreign tax credits as a reduction to foreign income that is included in our US tax return. This has the effect of taxing certain income twice, resulting in a higher overall tax rate (or a decrease in the overall US tax benefit).

Fiscal Year Ended June 30, 2013 Compared to Fiscal Year Ended June 30, 2012

Segment Information

In recent years, we changed the internal reporting classification of certain operating lines. To ensure a consistent presentation, these changes are reflected for all periods presented.

The following tables represent our segment revenues and our segment measure of profit:

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
 
     2013      2012      2013 Compared to 2012  
     (in thousands)        (in thousands)         %    

Segment revenue:

          

Payments and Transactional Documents

   $ 120,590       $ 108,248       $ 12,342        11.4   

Hosted Solutions

     67,504         58,548         8,956        15.3   

Digital Banking

     66,680         57,488         9,192        16.0   
  

 

 

    

 

 

    

 

 

   
   $ 254,774       $ 224,284       $ 30,490        13.6   
  

 

 

    

 

 

    

 

 

   

Segment measure of profit:

          

Payments and Transactional Documents

   $ 31,569       $ 26,097       $ 5,472        21.0   

Hosted Solutions

     7,282         6,073         1,209        19.9   

Digital Banking

     3,799         8,207         (4,408     (53.7
  

 

 

    

 

 

    

 

 

   

Total measure of segment profit

   $ 42,650       $ 40,377       $ 2,273        5.6   
  

 

 

    

 

 

    

 

 

   

A reconciliation of the measure of segment profit to our GAAP income (loss) before the provision for income taxes is as follows:

 

     Fiscal Year Ended
June 30,
 
     2013     2012  
     (in thousands)  

Total measure of segment profit

   $ 42,650      $ 40,377   

Less:

    

Amortization of intangible assets

     (19,549     (15,753

Stock-based compensation expense

     (18,031     (13,768

Acquisition and integration related expenses

     (10,827     (1,987

Restructuring expense

     (1,179     (1,609

Loss on derivative instruments, net

     (4,435     —     

Other income (expense), net

     (6,922     41   
  

 

 

   

 

 

 

Income (loss) before income taxes

   $ (18,293   $ 7,301   
  

 

 

   

 

 

 

 

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Payments and Transactional Documents. The revenue increase for the fiscal year ended June 30, 2013 compared to the prior fiscal year was primarily attributable to increases in software licenses revenue of $5.0 million, increases in professional services revenue of $4.1 million, increases in maintenance revenue of $2.9 million and increases in subscriptions and transactions revenue of $0.9 million partially offset by a decrease of $0.1 million in equipment and supplies revenue. The increases were primarily attributable to increased European revenue in our payment and document automation products as a result of our acquisition of Albany. The increased revenue also includes the unfavorable effect of foreign exchange rates of approximately $0.6 million primarily associated with the British Pound Sterling which depreciated against the US Dollar when compared to the prior fiscal year. The segment profit increase of $5.5 million for the fiscal year ended June 30, 2013 compared to the prior fiscal year was primarily attributable to the overall increase in revenue as well as increased subscriptions and transactions gross margins in North America and increased service gross margins in payment and document automation products in Europe. The increased gross margin was offset in part by increased operating expenses primarily related to increased sales and marketing costs

Hosted Solutions. The revenue increase in our Hosted Solutions segment for the fiscal year ended June 30, 2013 compared to the prior fiscal year was primarily due to increased revenue from our legal spend management solutions, our financial messaging solution and our Paymode-X solution. The segment profit increased $1.2 million for the fiscal year ended June 30, 2013 compared to the prior fiscal year due primarily to improved subscriptions and transactions gross margins in Europe. The gross margin improvement was partially offset by increased operating expenses associated with increased sales and marketing and product development headcount related expenses as we continued to develop and promote our newer products.

Digital Banking. The revenue increase in our Digital Banking segment for the fiscal year ended June 30, 2013 compared to the prior fiscal year was primarily due to an increase of $22.4 million in subscriptions and transactions revenue and a $1.1 million increase in maintenance revenue, partially offset by a decrease of $14.4 million in professional services revenue. The increased subscriptions and transactions revenue was due primarily to the revenue from our commercial banking business, which we acquired in March 2012. The decrease in professional services revenue was primarily the result of a change in our strategic direction away from highly customized banking platforms. The segment profit decrease of $4.4 million for the fiscal year ended June 30, 2013 compared to the prior fiscal year was primarily attributable to increased operating expenses of $9.8 million due to headcount related expenses largely associated with our commercial banking acquisition and increased product development initiatives, partially offset by improved gross margins driven by the increase in revenue.

Revenues by Category

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
 
     2013      2012      2013 Compared
to 2012
 
     (in thousands)         %      

Revenues:

          

Subscriptions and transactions

   $ 118,016       $ 85,005       $ 33,011        38.8   

Software licenses

     22,546         17,562         4,984        28.4   

Service and maintenance

     106,389         113,832         (7,443     (6.5

Other

     7,823         7,885         (62     (0.8
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 254,774       $ 224,284       $ 30,490        13.6   
  

 

 

    

 

 

    

 

 

   

Subscriptions and Transactions. The increase in subscriptions and transactions revenues was due to increases in the revenue contribution from our Digital Banking segment of $22.4 million, our Hosted Solutions segment of $10.1 million and our Payments and Transactional Documents segment of $0.5 million. The Hosted Solutions segment revenue increase was driven primarily by our legal spend management, Paymode-X and financial messaging solutions. The Digital Banking segment revenue increase was driven primarily by our commercial banking acquisition.

 

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Software Licenses. The increase in software license revenues was primarily attributable to an increase of $5.0 million in our Payments and Transactional Documents segment driven primarily by our acquisition of Albany Software in Europe.

Service and Maintenance. The decrease in service and maintenance revenues was primarily the result of a decrease in professional services revenues of $14.4 million within our Digital Banking segment as the result of a change in our strategic direction away from highly customized banking platforms, partially offset by an increase in service and maintenance revenue from our European operations of $4.7 million.

Other. Other revenues remained consistent in fiscal year 2013 as compared to fiscal year 2012.

Cost of Revenues

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
 
     2013      2012      2013 Compared
to 2012
 
     (in thousands)     %  

Cost of revenues:

          

Subscriptions and transactions

   $ 64,101       $ 41,266       $ 22,835        55.3   

Software licenses

     2,399         2,082         317        15.2   

Service and maintenance

     46,788         51,559         (4,771     (9.3

Other

     5,998         6,280         (282     (4.5
  

 

 

    

 

 

    

 

 

   

Total cost of revenues

   $ 119,286       $ 101,187       $ 18,099        17.9   
  

 

 

    

 

 

    

 

 

   

Gross profit

   $ 135,488       $ 123,097       $ 12,391        10.1   

Subscriptions and Transactions. Subscriptions and transactions costs increased to 54% of subscriptions and transactions revenues for the fiscal year ended June 30, 2013 as compared to 49% of subscriptions and transactions revenues in the fiscal year ended June 30, 2012. The increase in subscriptions and transactions costs as a percentage of revenue was due to gross margin deterioration within our Digital Banking segment, primarily related to the impact of the commercial banking acquisition, partially offset by improved margins in our financial messaging solutions within our Hosted Solutions segment.

Software Licenses. Software license costs remained consistent at 11% of software license revenues for the fiscal year ended June 30, 2013 as compared to 12% of software license revenues in the fiscal year ended June 30, 2012.

Service and Maintenance. Service and maintenance costs remained consistent at 44% of service and maintenance revenues for the fiscal year ended June 30, 2013 as compared to 45% for the prior fiscal year.

Other. Other costs decreased slightly to 77% of other revenues for the fiscal year ended June 30, 2013 as compared to 80% of other revenues for the prior fiscal year. The slight decrease in costs as a percentage of revenue was due to a larger mix of higher margin transactions within North America and Europe.

 

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Operating Expenses

 

     Fiscal Year Ended
June 30,
     Increase
Between Periods
 
     2013      2012      2013 Compared
to 2012
 
     (in thousands)      %  

Operating expenses:

           

Sales and marketing

   $ 62,825       $ 49,902       $ 12,923         25.9   

Product development and engineering

     32,974         28,687         4,287         14.9   

General and administrative

     27,076         21,495         5,581         26.0   

Amortization of intangible assets

     19,549         15,753         3,796         24.1   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 142,424       $ 115,837       $ 26,587         23.0   
  

 

 

    

 

 

    

 

 

    

Sales and Marketing. Sales and marketing expenses increased $12.9 million in the fiscal year ended June 30, 2013 as compared to the fiscal year ended June 30, 2012 principally due to an increase in headcount related costs of $10.4 million, travel related costs of $0.9 million and professional services and contract employees of $0.4 million due to the impact of our recent acquisitions and the impact of additional resources we hired to sell and promote our newer products, particularly within our Digital Banking segment. In addition, we recognized approximately $0.5 million of sales and marketing related acquisition and integration expenses during fiscal year 2013 compared to $0.3 million in fiscal year 2012.

Product Development and Engineering. The increase in product development and engineering expenses of $4.3 million in the fiscal year ended June 30, 2013 as compared to the fiscal year ended June 30, 2012 was primarily attributable to increased employee related costs of $4.0 million. These costs were incurred principally as we developed and enhanced our legal spend management, Paymode-X and digital banking products.

General and Administrative. The increase in general and administrative expenses of $5.6 million in the fiscal year ended June 30, 2013 as compared to the fiscal year ended June 30, 2012 was principally attributable to an increase in employee related costs of $3.2 million, partially attributable to our recent acquisitions. In addition, we recognized approximately $3.7 million of general and administrative related acquisition and integration expense during fiscal year 2013 compared to $1.5 million in fiscal year 2012.

Amortization of Intangible Assets. The increase in amortization expense for the fiscal year ended June 30, 2013 as compared to the prior fiscal year occurred as a result of increased expense from intangible assets associated with our recent acquisitions.

Loss on Derivative Instruments, Net

 

     Fiscal Year Ended
June 30,
     (Decrease)
Between Periods
 
     2013     2012      2013 Compared
to 2012
 
     (in thousands)         %      

Loss on derivative instruments, net

   $ (4,435   $ —         $ (4,435     —    
  

 

 

   

 

 

    

 

 

   

Loss on Derivative Instruments, net. During the fiscal year ended June 30, 2013 we recorded a net loss of $4.4 million related to changes in fair value of derivative instruments associated with our Notes; there were no similar derivative instruments during the fiscal year ended June 30, 2012. As of June 30, 2013 all of our derivative instruments met the classification requirements for inclusion within stockholders’ equity and as such are not subject to on-going fair value re-measurement.

 

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Other Income (Expense), Net

 

     Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
 
     2013     2012     2013 Compared
to 2012
 
     (in thousands)     %  

Interest income

   $ 629      $ 453      $ 176        38.9   

Interest expense

     (7,550     (23     (7,527     (32726.1

Other income (expense), net

     (1     (389     388        99.7   
  

 

 

   

 

 

   

 

 

   

Other income (expense), net

   $ (6,922   $ 41      $ (6,963     (16982.9
  

 

 

   

 

 

   

 

 

   

Other Income (Expense), Net. For the fiscal year ended June 30, 2013 as compared to the prior fiscal year, interest income increased as a result of higher average cash balances in the fiscal year ended June 30, 2013. Interest expense increased significantly as a result of interest expense related to our Notes and consisted of cash interest expense of $1.6 million, amortization of debt discount of $5.3 million and amortization of debt issuance costs of $0.7 million. Other expense in fiscal 2013 arose from certain realized foreign exchange losses associated with both the British Pound Sterling and the European Euro.

Provision for Income Taxes

We recorded an income tax benefit of $3.9 million for the fiscal year ended June 30, 2013 compared to income tax expense of $5.6 million for the fiscal year ended June 30, 2012. The income tax benefit in fiscal 2013 is predominantly due to a tax benefit associated with our US operations, offset in part by tax expense attributable to our UK, Australian and New Zealand operations. Tax expense in fiscal 2012 is predominantly due to expense associated with our UK, US and Australian operations. The excess of our effective tax rate over statutory tax rates was primarily due to our inability to utilize certain foreign tax credits as a reduction to foreign income that is included in our US tax return. This has the effect of taxing certain income twice, resulting in a higher overall tax rate (or a decrease in the overall US tax benefit).

Liquidity and Capital Resources

We have financed our operations primarily from cash provided by operating activities and the sale of our common stock and, with the issuance of the Notes in December 2012, with debt proceeds. We have generated positive operating cash flows in each of our last thirteen completed fiscal years. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating requirements for the foreseeable future.

In addition to our operating cash requirements, we will require cash to pay interest on the Notes and to make principal payments on the Notes at maturity or upon conversion. While the principal balance of the Notes must be satisfied in cash, we are permitted to settle any conversion obligation under the Notes in excess of the principal balance in either cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. We intend to satisfy any conversion premium by issuing shares of our common stock. We believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our future obligations. If our existing cash resources along with cash generated from operations is insufficient to satisfy our funding requirements we may need to sell additional equity or debt securities or seek other financing arrangements. Although we believe based on our operations today that we would be successful in obtaining additional financing, we cannot be certain that financing alternatives will be available in amounts or at terms that are acceptable to us, or available to us at all.

In fiscal year 2014 we spent $153.5 million on acquisitions and investments in businesses, net of cash acquired.

 

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One of our goals is to maintain and improve our capital structure. The key metrics we focus on in assessing the strength of our liquidity and a summary of our cash activity for the years ended June 30, 2014 and 2013 are summarized in the tables below:

 

     June 30,      June 30,  
     2014      2013  
     (in thousands)  

Cash and cash equivalents

   $ 167,673       $ 283,552   

Marketable securities

   $ 23,805       $ 9,525   

Long-term debt(1)

   $ 148,795       $ 138,582   

 

(1) Our long-term debt consists of our convertible notes. The convertible notes are shown on our Consolidated Balance Sheet at their carrying value, which represents the principal balance of $189.8 million less unamortized discount.

 

     Fiscal Year Ended
June 30,
 
     2014     2013  
     (in thousands)  

Cash provided by operating activities

   $ 52,221      $ 41,576   

Cash used in investing activities

     (180,633     (52,850

Cash provided by financing activities

     5,665        171,981   

Effect of exchange rates on cash

     6,868        (1,956

Cash, cash equivalents and marketable securities. At June 30, 2014 our cash and cash equivalents of $167.7 million consisted primarily of cash deposits held at major banks and money market funds. The $115.9 million decrease in cash and cash equivalents at June 30, 2014 from June 30, 2013 was primarily due to cash used to fund acquisitions of $153.5 million (net of cash acquired), to purchase available-for-sale securities of $14.6 million (net of proceeds from sales of available-for-sale securities) and to purchase property and equipment of $12.7 million. These outflows were offset in part by $52.2 million of operating cash inflows, the favorable effect of exchange rates of $6.9 million and cash generated from the exercise of employee stock options of $5.1 million.

At June 30, 2014 our marketable securities of $23.8 million consisted primarily of US treasury notes, residential mortgage-backed securities, and U.S. corporate debt securities.

At June 30, 2014, approximately $60.7 million of our cash and cash equivalents was held by our foreign subsidiaries. Our current intention is to reinvest these amounts in the growth of our foreign operations. If our reinvestment plans change based on future events and we decide to repatriate these amounts to fund our domestic operations, the amounts would generally become subject to tax in the US to the extent there were cumulative profits in the foreign subsidiary from which the distribution to the US was made.

Operating Activities. Cash generated from operating activities primarily relates to our net loss less the impact of non-cash expenses and changes in working capital. Cash generated from operations increased by $10.6 million in the fiscal year ended June 30, 2014 versus the prior fiscal year. The increase in cash generated from operations was primarily due to an increase in cash provided by deferred revenue of $7.4 million, a decrease in cash used in accounts payable of $1.6 million and an increase in cash provided by other liabilities of $1.8 million, offset by a decrease in cash generated by accounts receivable of $7.9 million.

At June 30, 2014, we had US net operating loss carryforwards of $79.9 million, which expire at various times through fiscal year 2033 and foreign net operating loss carryforwards of $14.3 million, primarily in Europe, which have no statutory expiration date. We also have approximately $4.0 million of research and development tax credit carryforwards available which expire at various points through fiscal year 2034. Our operating losses and tax credit carryforwards may be subject to limitations under provisions of the Internal Revenue Code.

 

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At June 30, 2014, a portion of the deferred tax assets associated with our US, European and Asian operations have been reserved since, given the available evidence, it was deemed more likely than not that these deferred tax assets would not be realized.

During the year ended June 30, 2014, we contributed approximately $1.7 million to our Swiss defined benefit pension plan.

Investing Activities. During the year ended June 30, 2014, we completed several business and asset acquisitions using cash (net of cash acquired) of $153.5 million. The increase in net cash used in investing activities for the fiscal year ended June 30, 2014 versus the prior fiscal year was primarily due to the $153.5 million in cash used to fund current year acquisitions as compared to the $33.3 million of cash we used during the prior fiscal year. In fiscal 2014 we also used cash to purchase marketable securities of $14.6 million, net of proceeds received on the sale of securities. The cash we used to fund acquisitions during fiscal 2014 and 2013 was as follows:

2014 Acquisition Activity

 

   

In August 2013, we acquired Sterci for cash of 95.6 million Swiss francs (approximately $104.1 million (net of cash acquired) based on exchange rates in effect at the acquisition date).

 

   

In September 2013, we completed the acquisition of Simplex for a cash payment of £3.0 million (approximately $4.8 million (net of cash acquired) based on exchange rates in effect at the acquisition date).

 

   

In January 2014, we acquired Rationalwave Analytics, Inc. for a cash payment of $1.2 million and 113,731 shares of our common stock which was valued at approximately $3.7 million as of the acquisition date.

 

   

In April 2014, we acquired Andera, Inc. for a cash payment of approximately $42.2 million (net of cash acquired).

2013 Acquisition Activity

 

   

In September 2012, we completed the acquisition of Albany Software Ltd for a cash payment of $28.3 million (net of cash acquired).

 

   

In October 2012, we acquired certain assets and assumed certain liabilities of 5280 Dynamic Solutions LLC for a cash payment of $1.6 million.

 

   

In February 2013, we acquired Prilos AG for cash of $0.4 million (net of cash acquired).

 

   

In March 2013, we made an investment of $3.0 million in a privately held technology company

Financing Activities. The decrease in cash provided by financing activities for the fiscal year ended June 30, 2014 was predominantly due to the absence in 2014 of the net proceeds received from our issuance of the Notes during fiscal year 2013.

 

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Contractual Obligations

Following is a summary of future payments that we are required to make under existing contractual obligations as of June 30, 2014:

 

     Payment Due by Period  
     2015      2016-2017      2018-2019      Thereafter      Total  
     (in thousands)  

Long-term debt:

              

Principal payment

   $ —        $ —        $ 189,750       $ —        $ 189,750   

Interest payments

     2,846         5,693         1,423         —          9,962   

Operating leases

     4,698         8,887         7,641         14,487         35,713   

Purchase commitments

     5,989         5,037         175         —          11,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 13,533       $ 19,617       $ 198,989       $ 14,487       $ 246,626   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual obligation amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contract that we can cancel without a significant penalty are not included in the table above.

Our estimate of unrecognized tax benefits for which cash settlement may be required, in the amount of $2.6 million, has been excluded from the table above. These amounts have been excluded because, as of June 30, 2014, we are unable to estimate the timing of future cash outflows, if any, associated with these liabilities as we do not currently anticipate settling any of these tax positions with cash payment in the foreseeable future.

The contractual obligations table above also excludes our estimate of the contributions we will make to our Swiss defined benefit pension plan in fiscal year 2015 which is $1.9 million. We are unable to estimate contribution amounts for periods after fiscal year 2015.

Off-Balance Sheet Arrangements

During the fiscal year ended June 30, 2014 we did not have any off-balance sheet arrangements.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Interest rate risk

Our exposure to financial risk, including changes in interest rates, relates primarily to our cash and cash equivalents and marketable securities. We have not entered into any interest rate swap agreements or other instruments to minimize our exposure to interest rate fluctuations. Our cash and cash equivalents typically consist of demand deposit accounts, money market mutual funds and U.S. Treasury securities. Based on our current average balances of cash and cash equivalents, a significant change in interest rates could have a material effect on our operating results. Based on our average cash and cash equivalents balance, average actual interest rates and actual interest income during the respective annual periods, a 100 basis point increase in interest rates would result in a hypothetical increase of approximately $1.8 million, $2.2 million, and $1.3 million for the fiscal years ended 2014, 2013 and 2012, respectively, in our results of operations and cash flows. A 100 basis point decrease in interest rates would reduce our interest income to zero.

Our marketable securities are held in government and US corporate debt securities with maturities of less than three years. A 100 basis point change in interest rates would not have had a significant impact on our income from marketable securities for the fiscal years ended June 30, 2014, 2013 and 2012.

Our convertible notes are at a fixed rate of interest.

 

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Foreign currency exchange rate risk

We have significant operations located in the United Kingdom, where the functional currency is British Pound Sterling and in Switzerland, where the functional currency is the Swiss Franc. We also have operations in Australia, where the functional currency is the Australian dollar, in Germany and France, where the functional currency is the European Euro and in New Zealand and Canada, where the functional currencies are the New Zealand Dollar and the Canadian Dollar, respectively. We have not entered into any foreign currency hedging transactions or other instruments to minimize our exposure to foreign currency exchange rate fluctuations nor do we presently plan to in the future.

Foreign currency translation risk

The following sensitivity analysis is based on a hypothetical 10 percent increase or decrease in foreign currency exchange rates and presents the impact that such an increase or decrease would have had on our cash balances as of June 30, 2014 and 2013:

 

     Effect of a 10% Increase or Decrease
in Exchange Rates
 
     Cash and cash equivalents  
             2014                       2013          
     (in thousands)  

Between US Dollar and:

  

Swiss Franc (+/-)

   $ 3,716       $ —     

British Pounds Sterling (+/-)

   $ 2,094       $ 6,026   

European Euro (+/-)

   $ 216       $ 199   

Australian Dollar (+/-)

   $ 330       $ 329   

A 10% increase or decrease in the exchange rate between the New Zealand Dollar and the US Dollar or the Canadian Dollar and the US Dollar would not have had a significant impact on our cash and cash equivalents at June 30, 2014 or June 30, 2013.

The following sensitivity analysis is based on a hypothetical 10 percent increase or decrease in foreign currency exchange rates and presents the impact that such an increase or decrease would have had on our revenue and net income (loss) for the years ended June 30, 2014, 2013 and 2012:

 

     Effect of a 10% Increase or Decrease in Average Exchange  Rates  
     Revenue      Net income (loss)  
         2014              2013              2012              2014              2013              2012      
     (in thousands)  

Between US Dollar and:

  

British Pounds Sterling (+/-)

   $ 9,672       $ 7,977       $ 6,468       $ 1,165       $ 557       $ 396   

Swiss Franc (+/-)

   $ 2,537       $ —         $ —         $ 815       $ —         $ —     

European Euro (+/-)

   $ 481       $ 431       $ 395       $ 32       $ 21       $ 50   

Australian Dollar (+/-)

   $ 293       $ 275       $ 277       $ 4       $ 17       $ 24   

A 10% increase or decrease in the average exchange rate between the New Zealand Dollar and the US Dollar or the Canadian Dollar and the US Dollar would not have had a significant impact on our revenue or net income for the years ended June 30, 2014, 2013 or 2012.

Foreign currency transaction risk

Foreign currency transaction gains and losses are generally not significant and our financial results would not be significantly impacted in the event of a 10% increase or decrease in the average exchange rates between the US dollar and the respective functional currencies of our international subsidiaries.

 

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Derivative instruments risk

We are party to various derivative instruments related to the issuance of our Notes. At June 30, 2014, all of our derivative instruments qualified for classification within stockholders’ equity. We are required, however, for the remaining term of the Notes, to assess whether we continue to meet the stockholders’ equity classification requirements and if in any future period we fail to satisfy those requirements we would need to reclassify these instruments out of stockholders’ equity and back into a derivative asset or liability; at which point we would again be required to record any changes in fair value through earnings.

 

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements, Financial Statements and Supplementary Data appear within Item 15 of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As allowed by SEC guidance, management excluded from its assessment the operations of Andera, Inc. which was acquired in April 2014 and which represented approximately 8 percent of total assets and less than 1 percent of total revenues as of and for the year ended June 30, 2014.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s report on internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and the independent registered public accounting firm’s related audit report are included in Item 8 of this Form 10-K and are incorporated herein by reference.

No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

Not applicable.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

See Executive Officers and Other Key Employees of the Registrant in Part I of this Annual Report on Form 10-K. We will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the Proxy Statement) not later than 120 days after the close of the fiscal year ended June 30, 2014. The information required by this item is incorporated herein by reference to the information contained under the captions Proposal I—Election of Class I Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance of the Proxy Statement.

We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of our Code of Business Conduct and Ethics is posted in the Corporate Governance section of our website, www.bottomline.com. We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.

 

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the information contained under the captions Executive Compensation, Director Compensation, Compensation Committee Interlocks and Insider Participation, Compensation Committee Report, and Employment and Other Agreements and Potential Payments Upon Termination or Change in Control of the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated herein by reference to the information contained under the captions Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information of the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is incorporated herein by reference to the information contained under the captions Employment and Other Agreements and Potential Payments Upon Termination or Change in Control, Proposal I—Election of Class I Directors, Corporate Governance and Certain Relationships and Related Transactions of the Proxy Statement.

 

Item 14. Principal Accountant Fees and Services.

The information required to be disclosed by this item is incorporated herein by reference to the information contained under the caption Principal Accountant Fees and Services and Pre-Approval Policies and Procedures of the Proxy Statement.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements, Financial Statement Schedule and Exhibits

 

          Page  

(1)

   Financial Statements—see Index to Consolidated Financial Statements      54   

(2)

  

Financial Statement Schedule for the Years Ended June 30, 2014, 2013 and 2012:

 

Schedule II—Valuation and Qualifying Accounts

     53   
   Financial statement schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements or notes.   

(3)

   Exhibits:   
   Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference      99   

 

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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Years Ended June 30, 2014, 2013 and 2012

 

     Activity  

Year Ended

   Balance at
Beginning
of Year
     (Charged to
Revenue,
Costs and
Expenses)
     Additions and
Recoveries (1)
     Deductions (2)      Balance at
End of
Year
 
     (in thousands)  

June 30, 2014

   $ 769         214         53         174       $ 862   

June 30, 2013

   $ 586         300         62         179       $ 769   

June 30, 2012

   $ 429         239         —          82       $ 586   

 

(1) Additions primarily represent increases to the allowance for doubtful accounts balance as a result of the impact of increases in foreign currency exchange rates.
(2) Deductions are principally write-offs as well as the impact of decreases in foreign currency exchange rates.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Management’s Annual Report on Internal Control Over Financial Reporting

     55   

Report of Independent Registered Public Accounting Firm

     56   

Consolidated Balance Sheets as of June 30, 2014 and 2013

     58   

Consolidated Statements of Comprehensive Income (Loss) for the years ended June  30, 2014, 2013 and 2012

     59   

Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2014, 2013 and 2012

     60   

Consolidated Statements of Cash Flows for the years ended June 30, 2014, 2013 and 2012

     61   

Notes to Consolidated Financial Statements

     62   

 

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Management’s Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

   

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

   

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

   

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2014. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992 framework).

As allowed by the SEC guidance, management excluded from its assessment the operations of Andera, Inc. which was acquired in April 2014 and which represented approximately 8 percent of total assets and less than 1 percent of total revenues as of and for the year ended June 30, 2014.

Based on our assessment, management concluded that, as of June 30, 2014, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm has issued an audit report on the Company’s internal control over financial reporting. This report appears on page 50.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Bottomline Technologies (de), Inc.

We have audited Bottomline Technologies (de), Inc.’s internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Bottomline Technologies (de), Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Andera, Inc., which is included in the June 30, 2014 consolidated financial statements of Bottomline Technologies (de), Inc. and constituted approximately 8 percent of total assets as of June 30, 2014 and less than 1 percent of revenues for the year then ended. Our audit of internal control over financial reporting of Bottomline Technologies (de), Inc. also did not include an evaluation of the internal control over financial reporting of Andera, Inc.

In our opinion, Bottomline Technologies (de), Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bottomline Technologies (de), Inc. as of June 30, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2014 of Bottomline Technologies (de), Inc. and our report dated August 28, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

August 28, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Bottomline Technologies (de), Inc.

We have audited the accompanying consolidated balance sheets of Bottomline Technologies (de), Inc. as of June 30, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2014. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bottomline Technologies (de), Inc. at June 30, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bottomline Technologies (de), Inc.’s internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated August 28, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

August 28, 2014

 

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CONSOLIDATED BALANCE SHEETS

 

     June 30,  
     2014     2013  
     (in thousands)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 167,673      $ 283,552   

Marketable securities

     23,805        9,525   

Accounts receivable, net of allowances for doubtful accounts of $862 at June 30, 2014 and $769 at June 30, 2013

     61,064        44,430   

Deferred tax assets

     13,904        6,764   

Prepaid expenses and other current assets

     14,334        8,479   
  

 

 

   

 

 

 

Total current assets

     280,780        352,750   

Property and equipment, net

     35,901        23,631   

Customer related intangible assets, net

     118,110        61,455   

Core technology intangible assets, net

     33,439        14,811   

Other intangible assets, net

     11,955        6,606   

Goodwill

     208,991        109,196   

Other assets

     11,167        17,073   
  

 

 

   

 

 

 

Total assets

   $ 700,343      $ 585,522   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 16,283      $ 8,933   

Accrued expenses

     25,542        16,070   

Deferred revenue

     66,571        47,184   
  

 

 

   

 

 

 

Total current liabilities

     108,396        72,187   

Convertible senior notes

     148,795        138,582   

Deferred revenue, non current

     15,997        9,104   

Deferred income taxes

     23,537        5,457   

Other liabilities

     16,192        3,443   
  

 

 

   

 

 

 

Total liabilities

     312,917        228,773   

Stockholders’ equity:

    

Preferred Stock, $.001 par value:

    

Authorized shares—4,000; issued and outstanding shares—none

     —         —    

Common Stock, $.001 par value:

    

Authorized shares—100,000 at June 30, 2014 and June 30, 2013; issued shares—39,224 at June 30, 2014 and 37,903 at June 30, 2013; outstanding shares—37,477 at June 30, 2014 and 36,045 at June 30, 2013

     39        38   

Additional paid-in-capital

     530,377        499,182   

Accumulated other comprehensive income (loss)

     6,816        (10,460

Treasury stock: 1,747 at June 30, 2014 and 1,858 shares at June 30, 2013, at cost

     (20,579     (21,888

Accumulated deficit

     (129,227     (110,123
  

 

 

   

 

 

 

Total stockholders’ equity

     387,426        356,749   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 700,343      $ 585,522   
  

 

 

   

 

 

 

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

     Year ended June 30,  
     2014     2013     2012  
     (in thousands, except per share data)  

Revenues:

      

Subscriptions and transactions

   $ 141,103      $ 118,016      $ 85,005   

Software licenses

     20,769        22,546        17,562   

Service and maintenance

     131,531        106,389        113,832   

Other

     7,182        7,823        7,885   
  

 

 

   

 

 

   

 

 

 

Total revenues

     300,585        254,774        224,284   

Cost of revenues:

      

Subscriptions and transactions

     69,220        64,101        41,266   

Software licenses

     1,602        2,399        2,082   

Service and maintenance

     54,463        46,788        51,559   

Other

     5,383        5,998        6,280   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     130,668        119,286        101,187   
  

 

 

   

 

 

   

 

 

 

Gross profit

     169,917        135,488        123,097   

Operating expenses:

      

Sales and marketing

     72,707        62,825        49,902   

Product development and engineering

     39,725        32,974        28,687   

General and administrative

     33,721        27,076        21,495   

Amortization of intangible assets

     26,242        19,549        15,753   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     172,395        142,424        115,837   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (2,478     (6,936     7,260   

Loss on derivative instruments, net

     —          (4,435     —     

Interest income

     667        629        453   

Interest expense

     (14,222     (7,550     (23

Other expense, net

     (989     (1     (389
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (14,544     (11,357     41   
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (17,022     (18,293     7,301   

Income tax provision (benefit)

     2,082        (3,898     5,596   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (19,104   $ (14,395   $ 1,705   
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share

   $ (0.52   $ (0.41   $ 0.05   
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per common share

   $ (0.52   $ (0.41   $ 0.05   
  

 

 

   

 

 

   

 

 

 

Shares used in computing basic net income (loss) per common share

     36,834        35,444        34,268   
  

 

 

   

 

 

   

 

 

 

Shares used in computing diluted net income (loss) per common share

     36,834        35,444        35,244   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

      

Unrealized gain (loss) on available for sale securities, net of tax

     24        (3     —     

Minimum pension liability adjustments, net of tax

     272        —          —     

Foreign currency translation adjustments

     16,980        (3,893     (2,040
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     17,276        (3,896     (2,040
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (1,828     (18,291     (335
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   

 

Common Stock

    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
   

 

Treasury Stock

    Accumulated
Deficit
    Total
Stockholders’
Equity
 
  Shares     Amount         Shares     Amount      

Balances at June 30, 2011

    34,625      $ 35      $ 408,375      $ (4,524     1,881      $ (20,779   $ (97,433   $ 285,674   

Issuance of common stock for employee stock purchase plan and upon exercise of stock options

    519        —          5,717        —          (90     992        —          6,709   

Issuance of common stock in connection with warrant exercise, net of costs

    1,000        1        8,452        —          —          —          —          8,453   

Vesting of restricted stock awards

    528        1        (1     —          —          —          —          —     

Stock compensation expense

    —          —          13,768        —          —          —          —          13,768   

Repurchase of common stock to be held in treasury

            140        (2,504       (2,504

Tax benefit associated with non qualified stock option exercises and forfeitures

    —          —          2,421        —          —          —          —          2,421   

Net income

    —          —          —          —          —          —          1,705        1,705   

Foreign currency translation adjustment

    —          —          —          (2,040     —          —          —          (2,040
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2012

    36,672      $ 37      $ 438,732      $ (6,564     1,931      $ (22,291   $ (95,728   $ 314,186   

Issuance of common stock for employee stock purchase plan and upon exercise of stock options

    361        —          4,320        —          (113     1,337        —          5,657   

Vesting of restricted stock awards

    870        1        (1     —          —          —          —          —     

Stock compensation expense

    —          —          18,031        —          —          —          —          18,031   

Repurchase of common stock to be held in treasury

            40        (934       (934

Tax benefit associated with non qualified stock option exercises and forfeitures

    —          —          50        —          —          —          —          50   

Derivative settlement, net of tax

        9,445                9,445   

Sale of warrants

        28,730                28,730   

Equity issuance costs

        (125             (125

Net income

    —          —          —          —          —          —          (14,395     (14,395

Unrealized loss on available for sale securities, net of tax

        —          (3           (3

Foreign currency translation adjustment

    —          —          —          (3,893     —          —          —          (3,893
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2013

    37,903      $ 38      $ 499,182      $ (10,460     1,858      $ (21,888   $ (110,123   $ 356,749   

Issuance of common stock for employee stock purchase plan and upon exercise of stock options

    255        —          3,796        —          (111     1,309        —          5,105   

Vesting of restricted stock awards

    952        1        (1     —          —          —          —          —     

Stock compensation expense

    —          —          22,821        —          —          —          —          22,821   

Capitalized stock compensation expense

        48                48   

Issuance of common stock in connection with acquisition

    114          3,746                3,746   

Tax benefit associated with non qualified stock option exercises and forfeitures

    —          —          560        —          —          —          —          560   

Fair value of equity awards assumed in acquisition

        225                225   

Minimum pension liability adjustments, net of tax

        —          272              272   

Net income

    —          —          —          —          —          —          (19,104     (19,104

Unrealized gain on available for sale securities, net of tax

        —          24              24   

Foreign currency translation adjustment

    —          —          —          16,980        —          —          —          16,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2014

    39,224      $ 39      $ 530,377      $ 6,816        1,747      $ (20,579   $ (129,227   $ 387,426   

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year ended June 30,  
    2014     2013     2012  
    (in thousands)  

Operating activities

     

Net income (loss)

  $ (19,104   $ (14,395   $ 1,705   

Adjustments to reconcile net income to net cash provided by operating activities:

     

Amortization of intangible assets

    26,242        19,549        15,753   

Stock compensation expense

    22,821        18,031        13,768   

Depreciation and amortization of property and equipment

    8,250        6,861        5,724   

Deferred income tax benefit

    (5,781     (8,729     (724

Provision for allowances on accounts receivable

    214        300        239   

Excess tax benefits associated with stock compensation

    (560     (99     (2,434

Amortization of debt issuance costs

    1,184        654        —     

Amortization of debt discount

    10,213        5,326        —     

Amortization of premium on investments

    366        —          —     

Loss on derivative instruments, net

    —          4,435        —     

Loss on disposal of equipment

    54        87        —     

Loss (gain) on foreign exchange

    35        21        38   

Changes in operating assets and liabilities:

     

Accounts receivable

    (5,690     2,195        (4,024

Prepaid expenses and other current assets

    (1,853     471        1,259   

Other assets

    (898     930        (2,305

Accounts payable

    1,535        (93     (52

Accrued expenses

    (2,253     (2,290     3,587   

Deferred revenue

    14,915        7,541        2,459   

Other liabilities

    2,531        781        422   
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    52,221        41,576        35,415   

Investing activities

     

Acquisition of businesses and assets, net of cash acquired

    (153,491     (30,323     (27,375

Purchase of cost-method investment

    —          (3,000     —     

Purchases of available-for-sale securities

    (28,453     (9,477     —     

Proceeds from sales of available-for-sale securities

    13,873       —          —     

Purchases of held-to-maturity securities

    (78     (62     (63

Proceeds from held-to-maturity securities

    55        62        63   

Purchases of property and equipment, net

    (12,652     (10,106     (9,128

Proceeds from disposal of fixed assets

    113        56        —     
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (180,633     (52,850     (36,503

Financing activities

     

Proceeds from issuance of convertible senior notes

    —          189,750        —     

Debt issuance costs

    —          (5,882     —     

Proceeds from issuance of warrants, net of issue costs

    —          25,776        —     

Purchase of convertible note hedges

    —