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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number: 000-23453
FLEXIINTERNATIONAL SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 06-1309427
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
Two Enterprise Drive, Shelton, CT 06484
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (203) 925-3040
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
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 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. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based upon the closing sales price of Common
Stock on February 22, 2000 as reported on the Nasdaq National Market, was
approximately $8.7 million. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 22, 2000, Registrant had 17,664,008 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders to be held April 24, 2000 are incorporated by reference in Items
10, 11, and 12 of Part III of this Report on Form 10-K.
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FLEXIINTERNATIONAL SOFTWARE, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I. PAGE
Item 1. Business..........................................................1
Item 2. Properties........................................................2
Item 3. Legal Proceedings.................................................2
Item 4. Submission of Matters to a Vote of Security Holders...............2
Item 4A. Executive Officers of the Registrant..............................2
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................3
Item 6. Selected Financial Data...........................................5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................7
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.........17
Item 8. Financial Statements and Supplementary Data..17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................18
PART III.
Item 10. Directors and Executive Officers of the Registrant................18
Item 11. Executive Compensation............................................18
Item 12 Security Ownership of Certain Beneficial Owners and
Management........................................................18
Item 13. Certain Relationships and Related Transactions....................18
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................19
Signatures........................................................19
Exhibit Index.....................................................20
This Annual Report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the forgoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The important factors discussed
below under the caption "Certain Factors that May Affect Future Operating
Results," among others, could cause actual results to differ materially from
those indicated by forward-looking statements made herein and presented
elsewhere by management from time to time.
FlexiFinancials, FlexiLedger, FlexiPayables and FlexiReceivables are registered
trademarks, and the Flexi logo, FlexiAnalysis, FlexiAssets, FlexiDB,
FlexiDesigner, FlexiDeveloper, FlexiInfoCenter, FlexiInfoSuite,
FlexiInternational, FlexiInventory, FlexiObjects, FlexiOrders, FlexiPurchasing,
FlexiSecure, FlexiTools, FlexiWorkFlow, FlexiFDW, FlexiFRE, FlexiFDE, FlexiXL,
FlexiOpenAccess, Flexi.Com, FlexiQuery, FlexiBatch, FlexiNet and FlexiDistribute
are trademarks, of FlexiInternational Software, Inc. All other trademarks or
trade names referred to in this Form 10-K are the property of their respective
owners.
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PART I
ITEM 1. BUSINESS
GENERAL
FlexiInternational Software, Inc. ("Flexi" or the "Company") designs,
develops, markets and supports the Flexi Financial Enterprise Suite of financial
and accounting software applications and related tools. The Flexi solution --
composed of FlexiFinancials, Flexi Financial Datawarehouse ("FlexiFDW"),
FlexilnfoAccess and FlexiTools -- is designed to address the needs of users with
sophisticated financial accounting and operational analysis requirements. The
Company believes that the solution's distributed, object-oriented,
component-based architecture provides significant advantages over traditional
financial accounting software, including greater transaction throughput and
scalability, ease of implementation, modification and use, and reduced cost of
ownership. Flexi products are designed to support new technologies as they
develop, including the Internet and corporate intranets, can be modified quickly
and efficiently by users to create tailored business solutions and can readily
be integrated with new applications to support evolving business processes.
The Company was organized as a Connecticut corporation in 1990 and
reincorporated in Delaware in 1993.
PRODUCTS
The Flexi solution, FlexiFinancial Enterprise Suite, is an integrated suite
of financial accounting applications, together with related information
applications and development tools, that address the needs of users with
sophisticated financial accounting requirements and is easily customized and
supports the latest technologies as they evolve. The FlexiFinancial Enterprise
Suite is composed of the Company's three core families of products, its
FlexiFinancials financial accounting systems, its FlexiInfoAccess family of
reporting and workflow applications and its FlexiTools development and
customized tools.
FlexiFinancials
FlexiFinancials is an enterprise-wide client/server accounting system for
capturing, synthesizing, and distributing financial and management information.
The Flexi suite of applications is designed to meet the sophisticated
information requirements of the modern enterprise, be it single site, multisite,
multicompany, or multinational. FlexiFinancials software includes: FlexiLedger,
FlexiFDW, FlexiPayables, FlexiReceivables, FlexiPurchasing, FlexiAssets,
FlexiInventory and FlexiProjects.
FlexilnfoAccess
The FlexilnfoAccess software takes advantage of the flexibility of the Company's
products and their ability to be integrated seamlessly with other technologies
to provide a "best-of-class" report development, report generation and workflow
system. FlexiInfoAccess serves a broad range of management information and
control requirements, including high-volume batch processing, interactive
on-line analytical processing, and workflow design and implementation. The
FlexiInfoAccess software has the flexibility to provide highly tailored reports
in industry-standard formats, with the functionality to support a high volume of
data across organizations, while providing customers freedom of choice in their
selection of GUI, security and presentation. The FlexiInfoAccess software
includes: FlexiWriter, FlexiAnalysis, FlexiWorkFlow, FlexiNet as well as imaging
and reporting solutions developed by third parties as part of its
FlexiInfoAccess solution. FlexiNet, an Internet-enabled application extension,
contains Java Script-based queries for key functions within the FlexiFinancials
applications.
FlexiTools
FlexiTools are development and customization tools based on the C++ language
that permit users to take advantage of the object-oriented, component-based
architecture of the Company's systems to accommodate their unique requirements
in a timely and cost-effective manner. FlexiDesigner, FlexiDeveloper, FlexiDB
and Flexi Financial Rules Engine (FlexiFRE) provide users with the flexibility
to extend Flexi applications and customize the interface and database
definitions.
The Company products which comprise FlexiFinancials and FlexiInfoAccess can
be linked to operate on an integrated basis, can be used on a stand-alone basis
or used in conjunction with products from third-party vendors.
During 1998 and 1999, the Company continued to enhance its suite of
products.
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ACQUISITION OF THE DODGE GROUP
The Company acquired The Dodge Group ("Dodge"), a company with its
principal offices in the United Kingdom that specialized in financial data
warehouse solutions, in June 1998. Dodge had a strong presence in the banking
and financial services operations, and had offices in the United Kingdom. The
Company's acquisition of Dodge allowed the Company to increase its international
presence.
INTERNATIONAL OPERATIONS
During the years ended December 31, 1999, 1998 and 1997, the Company's
international revenues were approximately 31.0%, 30.4% and 16.9% of total
revenues, respectively. The Company presently maintains customers in North and
South America, Europe, Asia, Africa and Australia.
CUSTOMERS
The Company's customers include a wide range of financial institutions and
other organizations that require a high level of functionality from their
financial accounting software, including banks, insurance companies and other
financial services firms, as well as organizations in other industries such as
healthcare and technology. In each of the years ended December 31, 1999, 1998
and 1997, two customers represented 10% or more of the Company's total revenues,
or an aggregate of 39.0%, 31.7% and 40.2% of total revenues, respectively. The
two customers who each made up greater than 10% of the Company's revenue for the
year ended December 31, 1999, were Citigroup and McKesson/HBOC.
EMPLOYEES
As of December 31, 1999, the Company had 58 employees, 45 domestically and
13 internationally.
ITEM 2. PROPERTIES
The Company is headquartered in Shelton, Connecticut, where it leases
approximately 12,424 square feet under a lease expiring in June 2003. In
addition, the Company maintains leased office space in New York, New York;
Oakland, California; Waltham and Concord, Massachusetts; Richmond Hill, Ontario,
Canada and London, United Kingdom. The Company believes that its leased space is
sufficient for its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various disputes and proceedings arising from the
ordinary course of general business activities. Depending on the amount and the
timing, an unfavorable resolution of some or all these matters could materially
adversely affect the Company's future results of operations or cash flows in a
particular period and its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
In January 2000, the Company implemented significant changes in its senior
management team. As a result, the current executive officers of the Company are
as follows:
NAME AGE POSITION
Stefan R. Bothe 51 Chairman of the Board, President and Chief
Executive Officer
Frank T. Grywalski 56 Executive Vice President, Chief Operating
Officer and President Applications Products
Division
Mr. Bothe has served as Chairman of the Board and Chief Executive Officer
of the Company since March 1993. From November 1991 to February 1993, Mr. Bothe
was president and Chief Executive Officer of DSI Group N.V., a Dutch-based
international software company. From 1989 to 1991, Mr. Bothe was President and
Chief Executive Officer of GEAC Computer Corporation Limited ("GEAC"), a
software company. Prior to joining GEAC, Mr. Bothe was President of the
Application Products Division of Computer Associates International, Inc.
("Computer Associates"), one of the largest software companies in the industry.
While at Computer Associates, Mr.
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Bothe held numerous senior management positions, including President of the
International Division, President of the Micro Products Division and Senior Vice
President of Marketing.
Mr. Grywalski has served as Executive Vice President, Chief Operating
Officer and President of the Applications Products Division since May 1999. From
April 1996 to May 1999, Mr. Grywalski was Vice President, Sales for Avio
International Corporation, a software company. From 1991 to 1996, Mr. Grywalski
was Vice President of North American Operations for Marcam Corporation
("Marcam"), an international software company. Prior to joining Marcam, Mr.
Grywalski was President/Senior Vice President of the U.S. Financial Division for
GEAC Computer Corporation Limited ("GEAC"), a software company. Prior to joining
GEAC, Mr. Grywalski was Senior Vice President, Sales for Computer Associates
International, Inc. ("Computer Associates"), one of the largest software
companies in the industry.
Each officer serves at the discretion of the Board of Directors and holds
office until his of her successor is elected and qualified or until his or her
earlier resignation or removal. With the exception of Mr. Bothe and Jennifer V.
Cheng, a director of the Company, who are husband and wife, there are no family
relationships among any of the executive officers, or directors, of the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock was traded on the Nasdaq National Market
under the symbol FLXI from December 12, 1997, the first trading day after the
Company's initial public offering was declared effective, through October 5,
1999, when, as a result of the Company's delisting from the Nasdaq National
Market, the stock began trading on the OTC Bulletin Board. The following table
lists the high and low sales price for the Company's common stock since the
Company's initial public offering:
High Low
---- ---
Fourth Quarter of 1997 $ 16.13 $ 11.00
First Quarter of 1998 $ 18.13 $ 11.50
Second Quarter of 1998 $ 14.50 $ 5.50
Third Quarter of 1998 $ 7.13 $ 2.81
Fourth Quarter of 1998 $ 4.00 $ 0.94
First Quarter of 1999 $ 2.81 $ 0.97
Second Quarter of 1999 $ 1.75 $ 1.00
Third Quarter of 1999 $ 1.44 $ 0.38
(a) Fourth Quarter of 1999 $ 0.84 $ 0.25
(a) The high and low price may include those transactions entered into
after October 5, 1999, the first day of trading on the OTC Bulletin Board, and
may represent over-the-counter market quotations that reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
As of January 31, 2000, the approximate number of holders of record of the
Company's Common Stock was 134. The number of holders of record of the Company's
Common Stock differs from the number of beneficial owners of such Common Stock
because a significant number of shares are held by depositories, brokers and
other nominees.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion. Under the terms of the Company's
credit agreement there are certain restrictions on the Company's ability to
declare and pay dividends.
(b) the Company is furnishing the following information with respect to the
use of proceeds of $22.2 million from its initial public offering of common
stock $.01 par value per share, which closed in December 1997.
(1) The Company's registration statement on Form S-1 under the
Securities Act of 1933, as amended, (File No. 333-38403) for the
Company's initial public offering, the use of proceeds from which
is herein reported, was declared effective as of December 11,
1997.
(4) (vii) The Company used approximately $21.2 million of the
proceeds from the initial public offering to fund the ongoing
operations of the Company ($18.3 million), for the purchase
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and installation of property and equipment ($1.5 million),
payments of convertible notes payable in connection with the
Dodge acquisition ($754,000), to purchase 135,000 shares
($463,000) of its common stock on the open market under the
Company's share repurchase program.
Payment of these expenses and costs were to persons other than
(a) directors or officers of the Company or their associates, (b)
persons owning 10% or more of the equity securities of the
Company or (c) affiliates of the Company.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
-------- -------- -------- -------- -------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license $ 3,385 $ 10,542 $ 13,901 $ 5,205 $ 3,166
Service and maintenance 12,169 13,754 7,723 3,142 1,517
-------- -------- -------- -------- -------
Total revenues 15,554 24,296 21,624 8,347 4,683
Cost of revenues:
Software license 586 1,757 828 311 88
Service and maintenance 7,491 10,584 5,450 2,181 1,708
-------- -------- -------- -------- -------
Total cost of revenues 8,077 12,341 6,278 2,492 1,796
Operating expenses:
Sales and marketing 5,919 11,233 7,820 4,978 4,350
Product development 6,887 10,752 7,880 5,733 3,660
General and administrative 7,153 6,191 2,316 2,453 1,316
Goodwill impairment 4,224 -- -- -- --
Restructuring charge 1,824 -- -- -- --
Acquired in-process research and development -- 1,890 -- -- --
-------- -------- -------- -------- -------
Total operating expenses 26,007 30,066 18,016 13,164 9,326
-------- -------- -------- -------- -------
Operating loss (18,530) (18,111) (2,670) (7,309) (6,439)
Net interest income (expense) 49 880 27 (138) (48)
-------- -------- -------- -------- -------
Loss before income taxes (18,481) (17,231) (2,643) (7,447) (6,487)
Income taxes -- -- -- -- --
-------- -------- -------- -------- -------
Net loss $ (18,481) $ (17,231) $ (2,643) $ (7,447) $ (6,487)
======== ======== ======== ======== =======
Loss per share:
Basic $ (1.06) $ (1.02) $ (0.42) $ (1.91) $ (1.72)
======== ======== ======== ======== =======
Diluted $ (1.06) $ (1.02) $ (0.42) $ (1.91) $ (1.72)
======== ======== ======== ======== =======
Weighted average shares:
Basic 17,414 16,938 6,332 3,891 3,770
Diluted 17,414 16,938 6,332 3,891 3,770
DECEMBER 31,
1999 1998 (1) 1997 1996 1995
-------- ------- ------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,874 $ 7,876 $24,622 $ 3,273 $ 15
Marketable securities -- 3,000 -- -- --
Working capital (deficit) (5,197) 7,497 26,676 1,480 (2,917)
Total assets 12,072 32,911 35,670 7,833 2,826
Redeemable convertible preferred stock -- -- -- 15,509 7,450
Stockholders' equity (deficit) (1,918) 16,614 27,706 (13,823) (10,521)
(1) Restated, see Note 14 to the consolidated financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company designs, develops, markets and supports the Flexi Financial
Enterprise Suite of financial and accounting software applications and related
tools. The Flexi solution -- composed of FlexiFinancials, Flexi Financial
Datawarehouse (FlexiFDW), FlexilnfoAccess and FlexiTools -- is designed to
address the needs of users with sophisticated financial accounting and
operational analysis requirements.
The Company's revenues are derived from two sources: software license
revenues and service and maintenance revenues. Software license revenues had
generally grown as additional applications had been released for general
availability and the installed base of customers has increased. However, this
trend has reversed in recent years, due to a delay in customers buying
decisions, as a result of uncertainties surrounding year 2000. Service and
maintenance revenues have generally grown due to the increase in the Company's
installed base of customers and the growth in the Company's consulting services
practice.
Software license revenues include (i) revenues from noncancellable software
license agreements entered into between the Company and its customers with
respect to the Company's products, (ii) royalties due to the Company from third
parties that distribute the Company's products and, to a lesser extent, (iii)
third-party products distributed by the Company. Software license revenues
through the Company's direct sales channel are recognized when persuasive
evidence of an arrangement exists, the licensed products have been shipped, fees
are fixed and determinable and collectibility is considered probable. Customers
may elect to receive the licensed products pre-loaded and configured on a
hardware unit. In this case, revenue is recognized when the licensed products
are installed on the hardware unit, the unit is shipped and all other criteria
are met. Software license royalties earned through the Company's indirect sales
channel are recognized as such fees are reported to the Company. Revenues on all
software license transactions in which there are significant outstanding
obligations are not recognized until such obligations are fulfilled. Significant
obligations would include future promises of enhancements and/or modification
that are essential to the product. Revenues for maintaining, supporting and
providing periodic upgrading are deferred and recognized ratably over the
maintenance period, generally one year. Revenues from training and consulting
services are recognized as such services are performed. The Company does not
require collateral for its receivables, and reserves are maintained for
potential losses. See Note 2 of Notes to the Company's Financial Statements.
Historically, the Company's revenues have been derived from both domestic
sales and international sales, with the international sales comprising 31.0%,
30.4% and 16.9% of total revenues for the years ended December 31, 1999, 1998
and 1997, respectively. With the June 1998 acquisition of The Dodge Group, the
Company gained a larger international presence primarily in Europe and Asia. The
Company's international sales generally have the same cost structure as its
domestic sales. Historically, the Company's international sales were denominated
in U.S. dollars, however, as a result of the Dodge acquisition, a majority of
international sales are now denominated in British pounds. An increase in the
value of the British pound relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in foreign markets. In addition, the Company's international business may be
subject to a variety of risks, including difficulties in collecting
international accounts receivable or obtaining U.S. export licenses, the
introduction of non-tariff barriers and higher duty rates and fiscal and
monetary policies that adversely affect non-native firms. See "Certain Factors
that May Affect Future Operating Results."
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed, the Company during the software development phase evaluates the
technological feasibility of its various products. The time period during which
costs could be capitalized from the point of reaching technological feasibility
until the time of general product release is very short, and, consequently, the
amounts that could be capitalized are not material to the Company's financial
position or results of operations. Therefore, the Company charges all product
development expenses to operations in the period incurred.
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RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 (1) 1997
-------- -------- --------
Revenues:
Software license 21.8% 43.4% 64.3%
Service and maintenance 78.2% 56.6% 35.7%
-------- -------- --------
Total revenues 100.0% 100.0% 100.0%
Cost of revenues:
Software license 3.8% 7.2% 3.8%
Service and maintenance 48.1% 43.6% 25.2%
-------- -------- --------
Total cost of revenues 51.9% 50.8% 29.0%
Operating expenses:
Sales and marketing 38.0% 46.2% 36.2%
Product development 44.3% 44.3% 36.4%
General and administrative 46.0% 25.5% 10.7%
Goodwill impairment 27.2% -- --
Restructuring charge 11.7% -- --
Acquired in-process research and development -- 7.8% --
-------- -------- --------
Total operating expenses 167.2% 123.7% 83.3%
-------- -------- --------
Operating loss (119.1%) (74.5%) (12.3%)
Interest income (expense) 0.3% 3.6% 0.1%
-------- -------- --------
Loss before income taxes (118.8%) (70.9%) (12.2%)
Income taxes -- -- --
-------- -------- --------
Net loss (118.8%) (70.9%) (12.2%)
======== ======== ========
(1) Restated, see Note 14 to the consolidated financial statements.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Total revenues, consisting of software license revenues and
service and maintenance revenues, decreased 36.0%, from $24.3 million for the
year ended December 31, 1998 to $15.6 million for the year ended December 31,
1999. Domestic revenues, those derived from sales in the U.S. decreased 36.1%
from $16.9 million for the year ended December 31, 1998 to $10.8 million for the
year ended December 31, 1999. International revenues, those derived from sales
outside of the U.S., decreased 35.1% from $7.4 million for the year ended
December 31, 1998 to $4.8 million for the year ended December 31, 1999. The
revenue decline was primarily due to delays in potential customers' buying
decisions, as they began to prepare for the new millennium (Y2K).
Software license revenues decreased 67.9%, from $10.5 million for the year
ended December 31, 1998 to $3.4 million for the year ended December 31, 1999.
The decline was due primarily to delays in potential customers' buying
decisions, as they began to prepare for the new millennium (Y2K). Service and
maintenance revenues decreased 11.5%, from $13.8 million for the year ended
December 31, 1998 to $12.2 million for the year ended December 31, 1999. The
decrease was primarily attributable to lower service revenue due to fewer active
client implementations.
Cost of Revenues. The Company's cost of revenues consists of cost of
software license revenues and cost of service and maintenance revenues. Cost of
software license revenues consists primarily of the cost of third-party software
products distributed by the Company and the cost of product media, manuals and
shipping. Cost of service and maintenance revenues consists of the cost of
providing consulting, implementation and training to licensees of the Company's
products and the cost of providing software maintenance to customers, technical
support services and periodic upgrades of software.
Cost of software license revenues decreased 66.6%, from $1.8 million for
the year ended December 31, 1998 to $586,000 for the year ended December 31,
1999. Cost of software license revenues as a percentage of software license
revenues increased from 16.7% for the year ended December 31, 1998 to 17.3% for
the year ended December 31, 1999. The decrease in cost of revenues in dollars
was primarily due to an decrease in third-party software products distributed by
the Company, as a result of the overall decline in software license revenues.
The increase in cost of revenue as a percentage of software license revenues was
primarily due an increase in the proportion of third-party products sold as a
percentage of total license fees.
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Cost of service and maintenance revenues decreased 29.2%, from $10.6
million for the year ended December 31, 1998 to $7.5 million for the year ended
December 31, 1999. The decrease in the dollar amount of such costs resulted
primarily from reduced staffing levels in the consulting organization, as the
costs of this organization were reduced to a level consistent with anticipated
revenues. Cost of service and maintenance revenues as a percentage of service
and maintenance revenues decreased from 77.0% for the year ended December 31,
1998 to 61.6% for the year ended December 31, 1999, due to the aforementioned
alignment of costs to anticipated revenues (see Revenues above and Restructuring
below).
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses, and facility and
communication costs for direct sales offices. Sales and marketing expenses
decreased 47.3%, from $11.2 million for the year ended December 31, 1998 to $5.9
million for the year ended December 31, 1999. The decrease in dollar amount was
primarily attributable to reduced staffing levels in the sales and marketing
organization, as the costs of this organization were reduced to a level
consistent with anticipated revenues. Sales and marketing expenses as a
percentage of total revenues decreased from 46.2% for the year ended December
31, 1998 to 38.0% or the year ended December 31, 1999. This decrease was
primarily due to the decreased staffing in response to the revenue decline (see
Revenues above and Restructuring below).
Product Development. Product development expenses include software
development costs and consist primarily of engineering personnel costs. The
Company has made significant investments in product development in the past
several years to bring its suite of component-based, object-oriented financial
accounting products to market.
Product development expenses decreased 35.9%, from $10.8 million for the
year ended December 31, 1998 to $6.9 million for the year ended December 31,
1999. The decrease in product development expenses was due primarily to the
decrease in development personnel as a result of the completion of development
work on FlexiFinancials Release 4. Product development expenses as a percentage
of total revenues remained constant at 44.3% for the years ended December 31,
1999 and 1998. The Company expects to continue to enhance the functionality of
its core financial accounting and reporting and workflow applications, but does
not anticipate the need to increase its development staff greatly from its
current levels.
General and Administrative. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel, as
well as provisions for doubtful accounts, amortization of goodwill and outside
professional fees. General and administrative expenses increased 15.5%, from
$6.2 million for the year ended December 31, 1998 to $7.2 million for the year
ended December 31, 1999. General and administrative expenses as a percentage of
total revenues increased from 25.5% for the year ended December 31, 1998 to
46.0% for the year ended December 31, 1999. The increase in general and
administrative expenses was primarily due to an increase in legal and
professional fees as a result of the costs of restating the Company's financial
statements (See Restatement below), increased legal fees associated with both
the Dataworks and Swagelok cases, and a full year of amortization of acquired
software and goodwill associated with the June 24, 1998 acquisition of Dodge.
Goodwill Impairment. During June 1999 management conducted a periodic
impairment assessment of the intangible assets resulting from the Dodge
acquisition. As a result of that review, management concluded that an impairment
had occurred with the goodwill and a $4.2 million write down of goodwill to a
carrying value of $0.3 million was recorded in the second quarter of 1999 (see
Note 4 to the condensed consolidated financial statements.) The Company's
financial data warehouse products based on existing technologies are expected to
continue generating revenue through 2002, and thereafter, be substantially
replaced by more advanced technologies currently under development. However,
future research and development spending on follow-on technologies will be
dependent on management's prioritization of investments under conditions of
limited financial resources (see Liquidity and Capital Resources section). As a
result, expected future revenue and cash flows from the acquired Dodge business
have been revised downward significantly, causing the impairment of goodwill.
Prior to the reassessment, the unamortized balance of the intangible assets
was $6.2 million, consisting of $1.7 million of acquired software and $4.5
million of goodwill. After assessment of the acquired software asset, management
concluded that the carrying value approximated net realizable value for that
software. Management also assessed the related goodwill arising from the Dodge
acquisition in accordance with established policies. The economic factors
indicated above have caused management to revise downward its estimates of
future cash flows from current and future products associated with the Dodge
business as a whole. As a result of management's analysis, and using the best
information available, management recorded a goodwill impairment of $4.2 million
in the second quarter to reduce the carrying amount of the goodwill to $0.3
million.
In applying its policy for assessing the carrying amount of the goodwill
for impairment, management first estimated future cash flows from the acquired
Dodge business generated from existing and planned future product introductions
over the next four years (estimated remaining useful life), and assumed a
terminal value factor after the fourth year based on a range of EBITDA multiples
for a sample of comparable public financial software
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companies. That estimate was then compared to the carrying amount of the
underlying assets, and on that basis management concluded that an impairment
existed. In measuring the impairment, the estimated future cash flows were
discounted to a net present value at 25%, a rate consistent with that used in
the original purchase accounting for the Dodge business. The goodwill was then
reduced accordingly to reflect the difference between its carrying amount and
estimated fair value.
Management will continue, periodically, to conduct reassessments of the
value of the acquired software and goodwill. Because the estimates made in these
reassessments are inherently subjective, there can be no assurance that future
reassessments will not result in further reductions of the carrying value of
these assets.
Acquired In-Process Research and Development. As a result of the June 24,
1998 acquisition of The Dodge Group, there was a one-time charge of $1.9 million
for acquired in-process research and development in the year ended December 31,
1998.
Interest Income and Interest Expense. Interest income represents income
earned on the Company's cash, cash equivalents and marketable securities. Net
interest income decreased from $880,000 for the year ended December 31, 1998 to
$49,000 for the year ended December 31, 1999. This decrease was primarily due
the lower investable cash balances available to the Company during 1999.
Interest expense represents interest expense on capital equipment leases, and
borrowings under the Company's line of credit.
Income Taxes. No provision or benefit for federal, state or foreign income
taxes was made for the years ended December 31, 1999 or 1998 due to the
operating losses incurred in the respective periods. The Company has reported
only tax losses to date and consequently has approximately $44.9 million and
$9.2 million of U.S. and foreign net operating loss carryforwards, respectively,
which expire during the years 2005 through 2019, available to offset future
taxable income. The utilization of such net operating losses is subject to
limitations as a result of ownership changes. The annual limitation and the
timing of attaining profitability will result in the expiration of net operating
loss carryforwards before utilization. The Company's deferred tax assets at
December 31, 1999 were $22.6 million, consisting primarily of net operating loss
carryforwards. The Company's benefit of deferred tax assets has been fully
reserved as of December 31, 1999 as the realization of deferred taxes is
dependent on future events and earnings, if any, the timing and extent of which
are uncertain.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues, consisting of software license revenues and
service and maintenance revenues, increased 12.4%, from $21.6 million for the
year ended December 31, 1997 to $24.3 million for the year ended December 31,
1998. Domestic revenues, those derived from sales in the U.S. decreased 5.9%
from $18.0 million for the year ended December 31, 1997 to $16.9 million for the
year ended December 31, 1998. International revenues, those derived from sales
outside of the U.S. increased 102.2% from $3.7 million for the year ended
December 31, 1997 to $7.4 million for the year ended December 31, 1998. In the
first half of 1998, revenues grew 131.5%, as compared to the first half of 1997,
from $5.5 million to $12.8 million, while in the second half of 1998, revenues
declined 28.5% as compared to the second half of 1997, from $16.1 million to
$11.5 million. This revenue slowdown was primarily due to delays in potential
customers' buying decisions, as they began to prepare for the new millennium,
and slower than anticipated integration of the Dodge acquisition.
Software license revenues decreased 24.2%, from $13.9 million for the year
ended December 31, 1997 to $10.5 million for the year ended December 31, 1998.
The decline was due primarily to delays in potential customers' buying
decisions, as they began to prepare for the new millennium partially offset by
growth in international sales, primarily as a result of the Dodge acquisition.
Service and maintenance revenues increased 78.1%, from $7.7 million for the year
ended December 31, 1997 to $13.8 million for the year ended December 31, 1998.
The increase was primarily attributable to the growth of the installed base of
customers that resulted in an increase in maintenance revenues.
Cost of Revenues. The Company's cost of revenues consists of cost of
software license revenues and cost of service and maintenance revenues. Cost of
software license revenues consists primarily of the cost of third-party software
products distributed by the Company and the cost of product media, manuals and
shipping. Cost of service and maintenance revenues consists of the cost of
providing consulting, implementation and training to licensees of the Company's
products and the cost of providing software maintenance to customers, technical
support services and periodic upgrades of software.
Cost of software license revenues increased 112.2%, from $828,000 for the
year ended December 31, 1997 to $1.8 million for the year ended December 31,
1998. Cost of software license revenues as a percentage of software license
revenues increased from 6.0% for the year ended December 31, 1997 to 16.7% for
the year ended December 31, 1998. The increase in cost of revenues in dollars
was primarily due to an increase in third-party software products distributed by
the Company, the acquisition of Dodge, as well as costs associated with
increased sales
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volume. The increase in cost of revenue as a percentage of software license
revenues was primarily due an increase in the proportion of third-party products
sold as a percentage of total license fees.
Cost of service and maintenance revenues increased 94.2%, from $5.5 million
for the year ended December 31, 1997 to $10.6 million for the year ended
December 31, 1998. The increase in the dollar amount of such costs resulted
primarily from the addition of service consultants and customer support
personnel to provide services to a larger customer base and additional costs
related to Dodge personnel subsequent to the acquisition. Cost of service and
maintenance revenues as a percentage of service and maintenance revenues
increased from 70.6% for the year ended December 31, 1997 to 77.0% for the year
ended December 31, 1998, due to lower utilization rates of our client services
staff, which resulted from increased staffing in anticipation of continued
revenue growth (see Revenues above and Restructuring below).
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses, and facility and
communication costs for direct sales offices. Sales and marketing expenses
increased 43.6%, from $7.8 million for the year ended December 31, 1997 to $11.2
million for the year ended December 31, 1998. The increase in dollar amount was
primarily attributable to increased staffing in the direct sales force and sales
and marketing organizations, primarily as a result of the Dodge acquisition.
Sales and marketing expenses as a percentage of total revenues increased from
36.2% for the year ended December 31, 1997 to 46.2% or the year ended December
31, 1998. This increase was primarily due to increased staffing in anticipation
of continued revenue growth (see Revenues above and Restructuring below).
Product Development. Product development expenses include software
development costs and consist primarily of engineering personnel costs. The
Company has made significant investments in product development in the past
several years to bring its suite of component-based, object-oriented financial
accounting products to market.
Product development expenses increased 36.4%, from $7.9 million for the
year ended December 31, 1997 to $10.8 million for the year ended December 31,
1998. The increase in product development expenses was due primarily to the
increase in software specialists, primarily as a result of the Dodge
acquisition, as well as salary increases required to attract and retain skilled
personnel in a highly competitive labor market. The Company continued to hire
software specialists, in 1998, in anticipation of continued revenue growth (see
Revenues above and Restructuring below). Product development expenses as a
percentage of total revenues increased from 36.4% for the year ended December
31, 1997 to 44.3% for the year ended December 31, 1998. The Company will
continue to enhance the functionality of its core financial accounting and
reporting and workflow applications.
General and Administrative. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel, as
well as provisions for doubtful accounts, amortization of goodwill and outside
professional fees. General and administrative expenses increased 167.3%, from
$2.3 million for the year ended December 31, 1997 to $6.2 million for the year
ended December 31, 1998. General and administrative expenses as a percentage of
total revenues increased from 10.7% for the year ended December 31, 1997 to
25.5% for the year ended December 31, 1998. The increase in general and
administrative expenses was primarily due to an increase in provisions for
doubtful accounts, increased legal and professional fees as a result of a full
year's effect of being a public company, costs of administrative personnel as a
result of the Dodge acquisition, and commencement of amortization of acquired
software and goodwill associated with the June 24, 1998 acquisition of Dodge.
Acquired In-Process Research and Development. During June 1998 the Company
completed its acquisition of Dodge. In connection with the allocation of the
purchase price of Dodge, the Company assigned $1.9 of the total purchase price
of $7.6 to certain acquired in-process research and development.
The acquired in-process research and development includes one significant
software product, Financial Data Warehouse Version 5.0 ("FDW"). The Company
estimated that this version was 20% complete at the date of acquisition based on
costs incurred through the date of acquisition as compared to total estimated
expenditures over the product's development cycle. The Company expects to have
FDW Version 5.0, and its related enhanced functionality, available for general
release during 1999 with estimated future development costs totaling $6.4
million at the time of acquisition. Once completed the Company intends to offer
Version 5.0 of the product to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process research and development into a commercially viable product, feature
or functionality within the Company's suite of existing products relates to the
completion of all planning, design and testing activities that are necessary to
establish that the product can be produced to meet design and performance
requirements. The Company currently expects that the product utilizing the
acquired in process research and development will be successful, but there can
be no assurance that commercial viability of any of these products will be
achieved. Further, future developments in the software industry, changes
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in the technology, changes in other products and offerings or other developments
may cause the Company to alter, or abandon, its product plans.
The fair value of in-process research and development acquired was based on
analyses of markets, projected cash flows and risks associated with achieving
such projected cash flows. In developing these cash flow projections, revenues
were estimated based on relevant factors, including aggregate revenue growth
rates for the business as a whole, individual service offering revenues,
characteristics of the potential market for the service offerings, and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were estimated based on the characteristics and cash flow
generating potential of the acquired in-process research and development, and
included assumptions that certain expenses would decline over time as operating
efficiencies were obtained. The Company assumed material cash inflow for FDW 5.0
would commence in 1999 and would continue through the year 2002 at which time
yet to be developed products would replace this product. Appropriate adjustments
were made to derive net cash flows, and the estimated net cash flows of the
in-process technology were then discounted to their net present value at a rate
of 30%, a rate of return that the Company believes reflects the specific
risk/return characteristics of the research and development project.
Interest Income and Interest Expense. Interest income represents income
earned on the Company's cash, cash equivalents and marketable securities. Net
interest income increased from $27,000 for the year ended December 31, 1997 to
$880,000 for the year ended December 31, 1998. This increase was primarily due
to the investment of the proceeds from the Company's initial public offering
completed in December 1997. Interest expense represents interest expense on
capital equipment leases, and borrowings under the Company's line of credit.
Income Taxes. No provision or benefit for federal, state or foreign income
taxes was made for the years ended December 31, 1998 or 1997 due to the
operating losses incurred in the respective periods. The Company has reported
only tax losses to date and consequently has approximately $32.6 million and
$7.3 million of U.S. and foreign net operating loss carryforwards, respectively,
which expire at various times through the year 2018, available to offset future
taxable income. The utilization of such net operating losses is subject to
limitations as a result of ownership changes. The annual limitation and the
timing of attaining profitability will result in the expiration of net operating
loss carryforwards before utilization. The Company's deferred tax assets at
December 31, 1998 were $17.5 million, consisting primarily of net operating loss
carryforwards. The Company's benefit of deferred tax assets has been fully
reserved as of December 31, 1998 as the realization of deferred taxes is
dependent on future events and earnings, if any, the timing and extent of which
are uncertain.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations
through private placements of its stock to private investors, issuances of
convertible promissory notes and loans, equipment financing and traditional
borrowing arrangements, and in December 1997, an initial public offering of its
Common Stock, resulting in net proceeds to the Company of approximately $22.2
million.
As of December 31, 1999, the Company had cash and cash equivalents of $1.9
million, a decrease of $6.0 million from December 31, 1998, the Company also had
$3.0 million in short-term marketable securities at December 31, 1998. The
Company's working capital deficit at December 31, 1999 was $(5.2) million,
compared to working capital of $7.5 million at December 31, 1998.
The Company's operating activities resulted in net cash outflows of $8.0
million, $11.0 million and $5.0 million for the years ended December 31, 1999,
1998 and 1997, respectively. The 1999 net cash outflows from operating
activities was mainly the result of the net operating loss offset by non-cash
items included in the net operating loss, principally the goodwill impairment
and depreciation and amortization expenses. The 1998 and 1997 net cash outflows
from operating activities were principally from the net operating losses and
increased accounts receivable, consistent with the growth in revenues in those
years. Investing activities, consisting of capital expenditures (primarily
computer equipment) and the Dodge acquisition, resulted in net cash outflow of
$542,000, $1.7 million and $559,000 for the years ended December 31, 1999, 1998
and 1997, respectively. At December 31, 1999, the Company had no material
commitments for capital expenditures. The Company's financing activities
resulted in net cash inflows for the years ended December 31, 1999 and 1997 of
$2.5 million and $26.9 million, respectively, and net cash outflow for the year
ended December 31, 1998 of $4.1 million. The 1999 cash inflow was primarily the
result of the sale of marketable securities, the 1998 cash outflow was primarily
the result of the purchase of marketable securities, and treasury shares,
payments for capital leases and the repayment of a debt acquired in the
acquisition of The Dodge Group, and the 1997 cash inflow was primarily the
result of the proceeds from the sale of common stock during the Company's
initial public offering (IPO).
The Company's Board of Directors has adopted a share repurchase program
authorizing the Company to
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purchase up to 1.0 million shares of its common stock on the open market. As of
February 22, 2000 the Company has purchased 135,000 common shares at a total
cost of $463,000. The Company did not make any additional purchases under this
program during 1999.
Late in the second quarter of 1999, management identified a number of
factors that cause them to believe that available cash resources may not be
sufficient to fund anticipated operating losses. These include: (1) the
continued general business slowdown, which resulted in revenue levels
significantly lower than expected in the first half of 1999; (2) payment
disputes that arose in the second quarter of 1999 related to two significant
contracts for licensing of software and provision of services (see Note 14 of
financial statements) and; (3) delays experienced in the second quarter of 1999
related to the release of the next version of the Company's general ledger
product. Management has taken actions to reduce costs in response to lower
revenues and is prepared to take further actions, if necessary, in order to
continue to respond to competitive and economic pressures in the marketplace.
However, there can be no assurance that the Company will be able to reduce costs
to a level to appropriately respond to competitive pressures or to obtain
additional funding. As a result of the foregoing, there exists substantial doubt
about the Company's ability to continue as a going concern. These financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amounts of liabilities that might
result from the outcome of this uncertainty.
RESTRUCTURING
In the first quarter and third quarter of 1999, management, with the
approval of the Board of Directors, took certain actions to reduce employee
headcount in order to align its sales, development and administrative
organization with the current overall organization structure, and to position
the Company for profitable growth in the future consistent with management's
long term objectives (see Note 13 of financial statements). These actions
primarily involved involuntary terminations of selected personnel. Severance
packages were granted to 84 employees. This reduction in headcount also led to
the Company having excess leased facility space. As a result of these actions,
the Company recorded a charge to operations during 1999 of approximately $1.8
million, consisting of $1.6 million related to severance costs, of which $1.4
million is payable in installments for up to two years, and $200,000 related to
costs of idle facility space. The Company believes these actions resulted in
sustainable cost savings, primarily through the elimination of redundant
functions in the product development organization, due to completion of
development work on FlexiFinancials Release 4, and to a lesser extent in the
support and sales organizations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Limited Operating History; Accumulated Deficit; Net Losses. The Company
began operations in 1991 and released its first products in 1993. Most of the
Company's revenues to date have been attributable to the licensing of its
financial accounting software products and the provision of related consulting,
training and software installation services. The Company's FlexiFinancials,
FlexilnfoAccess and FlexiTools financial accounting products, which the Company
anticipates will provide the principal source of new license revenues for the
foreseeable future, have a limited history of customer acceptance and use.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified management and
other employees, continue to upgrade its technologies and commercialize products
and services that incorporate such technologies and achieve market acceptance
for its products and services. There can be no assurance that the Company will
be successful in addressing such risks. The Company had an accumulated deficit
of $58.3 million at December 31, 1999 and incurred net losses of $18.5 million
and $17.2 million during 1999 and 1998, respectively. To date, the Company has
only been profitable during the last two quarters of 1997, and there can be no
assurance that the Company will regain its profitability on a quarterly basis.
As of December 31, 1999, management of the Company evaluated the positive and
negative evidence impacting the realizability of its deferred tax assets, which
consist principally of net operating loss carryforwards. Management has
considered the history of losses and concluded that, as of December 31, 1999, it
is more likely than not that the Company will not generate sufficient taxable
income prior to the expiration of the net operating losses during the years 2005
through 2019. Accordingly, the Company has recorded a full valuation allowance
for its deferred tax assets at December 31, 1999.
Potential Fluctuations in Quarterly Performance; Seasonality. The Company's
revenues and operating results have varied substantially from quarter to
quarter. The Company's quarterly operating results may continue to fluctuate due
to a number of factors, including the timing, size and nature of the Company's
licensing transactions; the market acceptance of new services, products or
product enhancements by the Company or its competitors;
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product and price competition; the relative proportions of revenues derived from
license fees, services and third-party channels; changes in the Company's
operating expenses; personnel changes; the timing of the introduction, and the
performance of, the Company's Flexi Industry Partners; foreign currency exchange
rates; and fluctuations in economic and financial market conditions.
The timing, size and nature of individual licensing transactions are
important factors in the Company's quarterly results of operations. Many such
transactions involve large dollar amounts, and the sales cycles for these
transactions are often lengthy and unpredictable. In addition, the sales cycles
associated with these transactions are subject to a number of uncertainties,
including customers' budgetary constraints, the timing of customers' budget
cycles and customers' internal approval processes. There can be no assurance
that the Company will be successful in closing such large transactions on a
timely basis or at all. Software license revenues under the Company's license
agreements are recognized upon delivery and installation of the product and when
all significant contractual obligations have been satisfied. Significant
obligations would include future promises of enhancements and/or modification
that are essential to the product. Delays in the installation of the Company's
software, including potential delays associated with contractual enhancements to
the Company's software products, could materially adversely affect the Company's
quarterly results of operations. In addition, as the Company derives a
significant proportion of total revenues from license revenues, the Company may
realize a disproportionate amount of its revenues and income in the last month
of each quarter and, as a result, the magnitude of quarterly fluctuations may
not become evident until late in, or at the end of, a given quarter.
Accordingly, delays in product delivery and installation or in the closing of
sales near the end of a quarter could cause quarterly revenues and, to a greater
degree, results of operations to fall substantially short of anticipated levels.
The Company's expense levels are based, in significant part, on its
expectations as to future revenues and are largely fixed in the short term. As a
result, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenues. Accordingly, any
significant shortfall of revenues in relation to the Company's expectations
would have an immediate and material adverse effect on the Company's business,
financial condition and results of operations.
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's financial condition or results of
operations may be affected by such trends in the future. In past years, the
Company had greater demand for its products in its fourth quarter and has
experienced lower revenues in its succeeding first quarter. These fluctuations
were caused primarily by the Company's quota-based compensation arrangements,
typical of those used in software companies, and year-end budgetary pressures on
the Company's customers. In the second half of 1998 and throughout 1999, the
Company experienced a general slow down of business due primarily to delays in
potential customers' buying decisions, as they began to prepare for the new
millennium. The Company believes this trend should ease during 2000, as buying
patterns and decisions change given the limited impact of Y2K on businesses
overall, and its effects on customers' ability to make commitments to new
software products.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. There can be no assurance that future revenues and results
of operations will not vary substantially. It is also possible that in some
future quarter the Company's results of operations will be below the
expectations of public market analysts and investors. In either case, the price
of the Company's Common Stock could be materially adversely affected.
Dependence on Key Personnel. The Company's performance depends
substantially on the performance of its executive officers and key employees,
including the Company's sales force and software professionals, particularly
project managers, software engineers and other senior technical personnel. The
Company is dependent on its ability to attract, retain and motivate high-quality
personnel, especially its management, sales staff and highly skilled development
team. The Company does not have employment contracts with any of its key
personnel. The loss of the services of any of the Company's executive officers
or other key employees could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company maintains a
key person insurance policy on Stefan R. Bothe.
Lengthy Sales Cycle. The Company's software is often used for
business-critical purposes, and its implementation involves significant capital
commitments by customers. Potential customers generally commit significant
resources to an evaluation of available software and require the Company to
expend substantial time, effort and money educating potential customers about
the value of the Company's solutions. Sales of the Company's software products
required an extensive education and marketing effort throughout a customer's
organization because decisions to license such software generally involve the
evaluation of the software by a significant number of customer personnel in
various functional and geographic areas, each having specific and often
conflicting requirements. A variety of factors, including factors over which the
Company has little or no control, may cause potential customers to favor a
competing vendor or to delay or forego a purchase. As a result of these or
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other factors, the sales cycle for the Company's products is long, typically
ranging between three and nine months. Due to the length of the sales cycle for
its software products, including delays in implementing the Company's software
across several functional and geographic areas of an organization, the Company's
ability to forecast the timing and amount of specific sales is limited, and the
delay or failure to complete one or more large license transactions could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Product Concentration. To date, substantially all of the Company's revenues
have been attributable to the licensing of its FlexiFinancials, FlexilnfoAccess
and FlexiTools financial accounting products and the provision of consulting,
training and software installation services in connection therewith. The Company
currently expects that the licensing of its financial accounting software, and
the provision of related services, will account for a substantial portion of its
revenues for the foreseeable future. As a result, factors adversely affecting
the pricing of or demand for such products and services, such as competition or
technological change, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's future
financial performance will depend, in significant part, on the continued market
acceptance of the Company's existing products and the successful development,
introduction and customer acceptance of new and enhanced versions of its
software products and services. There can be no assurance that the Company will
be successful in developing and marketing its financial accounting products.
Rapid Technological Change and Evolving Market. The market for the
Company's products and services is characterized by rapidly changing technology,
evolving industry standards and new product introductions and enhancements that
may render existing products obsolete or less competitive. As a result, the
Company's position in the financial applications software market could erode
rapidly due to unforeseen changes in the features and functionality of competing
products, as well as the pricing models for such products. The Company's future
success will depend in part upon the widespread adoption of object-oriented,
component-based standards and the development of the Internet as a viable
commercial marketplace, as well as the Company's ability to enhance its existing
products and services and to develop and introduce new products and services to
meet changing customer requirements. The process of developing products and
services such as those offered by the Company is extremely complex and is
expected to become increasingly complex and expensive in the future with the
introduction of new platforms and technologies. In addition, the Company has on
occasion experienced delays in the scheduled release of software products or the
porting of such products to specific platforms or configurations. There can be
no assurance that an object-oriented, component-based standards will be adopted,
or that the Company will successfully complete the development of new products
in a timely fashion or that the Company's current or future products will
satisfy the needs of potential customers.
Concentration of Customers. Historically, a limited number of customers
have accounted for a significant percentage of the Company's revenues in each
year. During the years ended December 31, 1999, 1998 and 1997, two customers
each represented 10% or more of the Company's total revenues (or an aggregate of
39.0%, 31.7% and 40.2% of total revenues, respectively). The Company anticipates
that its results of operations in any given period will continue to depend to a
significant extent upon revenues from a small number of customers. The failure
of the Company to enter into a sufficient number of licensing agreements during
a particular period could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. The market for the Company's products and services is
intensely competitive and is characterized by rapid change in technology and
user needs and the frequent introduction of new products. In recent quarters,
the Company has been observing increasingly aggressive pricing practices and/or
unusual terms and conditions offered to customers by its competitors, and
increasing competition in the middle market from competitors which previously
focused principally on larger corporations. A number of the Company's
competitors are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than the
Company and its partners and distributors. In addition, the Company's partners
may develop or offer products and services that compete with the Company's
products and services. There can be no assurance that the Company's partners
will not give higher priority to the sales of these or other competitive
products and services. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
Potential for Product Liability. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective under the laws of certain jurisdictions. The sale and
support of products by the Company and its partners may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. The Company attempts to limit contractually its
liability for damages arising from negligent acts, errors, mistakes or omissions
in rendering its products and services. Despite this precaution, there can be no
assurance that the limitations of liability set forth in its contracts would be
enforceable or would otherwise protect the Company from
14
17
liability for damages. The Company maintains general liability insurance
coverage, including coverage for errors or omissions. However, there can be no
assurance that such coverage will continue to be available on acceptable terms,
or will be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the Company that exceed
available insurance coverage or changes in the Company's insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, litigation
with respect to liability claims, regardless of its outcome, could result in
substantial cost to the Company and divert management's attention from the
Company's operations. Any product liability claim or litigation against the
Company could, therefore, have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has included security features in its products that are
intended to protect the privacy and integrity of customer data. Despite the
existence of these security features, the Company's software products may be
vulnerable to break-ins and similar disruptive problems. Such computer break-ins
and other disruptions may jeopardize the security of information stored in and
transmitted through the computer systems of the Company's customers, which may
result in loss of or delay in market acceptance of the Company's products.
Addressing these evolving security issues may require significant expenditures
of capital and resources by the Company, which may have a material adverse
effect on the Company's business, financial condition or results of operations.
Software Errors or Bugs. The Company's software products are highly complex
and sophisticated and could from time to time contain design defects or software
errors that could be difficult to detect and correct. Although the Company has
not experienced material adverse effects resulting from any software errors,
bugs or viruses, there can be no assurance that, despite testing by the Company
and its customers, errors will not be found in new or existing products, which
errors could result in a delay in or inability to achieve market acceptance and
thus could have a material adverse impact upon the Company's business, financial
condition and results of operations.
Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary technology. The Company relies on a combination
of copyright, trademark and trade secret laws and license agreements to
establish and protect its rights in its software products and other proprietary
technology. In addition, the Company currently requires its employees and
consultants to enter into nondisclosure agreements to limit use of, access to
and distribution of its proprietary information. There can be no assurance that
the Company's means of protecting its proprietary rights in the United States or
abroad will be adequate to prevent misappropriation. Also, despite the steps
taken by the Company to protect its proprietary rights, it may be possible for
unauthorized third parties to copy aspects of the Company's products, reverse
engineer such products, develop similar technology independently or obtain and
use information that the Company regards as proprietary
In the future, the Company may receive notice of claims of infringement of
other parties' proprietary rights. Although the Company does not believe that
its products infringe the proprietary rights of third parties, there can be no
assurance that infringement or invalidity claims (or claims for indemnification
resulting from infringement claims) will not be asserted or prosecuted against
the Company or that any such assertions or prosecutions will not materially
adversely affect the Company's business, financial condition or results of
operations.
Dependence on Third-Party Technology. The Company's proprietary software is
currently designed, and may in the future be designed, to work on or in
conjunction with certain third-party hardware and/or software products. If any
of these current or future third-party vendors were to discontinue making their
products available to the Company or to licensees of the Company's software or
to increase materially the cost for the Company or its licensees to acquire,
license or purchase the third-party vendors' products, or if a material problem
were to arise in connection with the ability of the Company to design its
software to properly use or operate with any third-party hardware and/or
software products, the Company may be required to identify additional sources
for such products. In such an event, interruptions in the availability or
functioning of the Company's software and delays in the introduction of new
products and services may occur until equivalent technology is obtained. There
can be no assurance that an alternative source of suitable technology would be
available or that the Company would be able to develop an alternative product in
sufficient time or at a reasonable cost. The failure of the Company to obtain or
develop alternative technologies or products on a timely basis and at a
reasonable cost could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated with Third-Party Channels. The Company addresses certain
vertical and geographic markets through its partners. The Company relies on its
third-party channels to provide sales and marketing presence and name
recognition, as well as the resources necessary to offer industry-specific
financial accounting solutions. Although the Company expects to dedicate
significant resources to develop its partners, there can be no assurance that
the Company will be able to attract and retain qualified firms in its targeted
vertical markets. The failure of the Company to maintain its current third-party
channels or find other third-party channels, the Company's inability to
adequately support such channels, the development of competitive products and
services by the Company's third-party channels or the entry by such firms into
alliances with competitors of the Company would substantially limit the
Company's ability to provide its products and services and, accordingly, have a
material adverse effect on
15
18
the Company's business, financial condition and results of operations. Although
the Company has attempted to seek partners in distinct vertical markets and
distributors in distinct geographic markets, and to manage them in a manner to
avoid potential channel conflicts, there can be no assurance that channel
conflicts may not develop. Any such conflicts may adversely affect the Company's
relationship with third-party channels or adversely affect its ability to
develop new channels.
Risks Associated with International Operations. The Company's international
sales represented approximately 31.0%, 30.4% and 16.9% of total revenues during
1999, 1998 and 1997, respectively. The Company's international presence
increased by virtue of its acquisition of Dodge. As a result of the acquisition
the Company now has an office in London and distributors in Hong Kong and Japan.
There can be no assurance that the Company will be able to maintain or increase
international market demand for the Company's products and services. The
Company's international sales are generally denominated in British pounds. An
increase in the value of the British pound relative to foreign currencies could
make the Company's products more expensive and, therefore, potentially less
competitive in those markets. Currently, the Company does not employ currency
hedging strategies to reduce this risk. In addition, the Company's international
business may be subject to a variety of risks, including difficulties in
collecting international accounts receivable or obtaining U.S. export licenses,
potentially longer payment cycles, increased costs associated with maintaining
international marketing efforts, the introduction of non-tariff barriers and
higher duty rates and difficulties in enforcement of contractual obligations and
intellectual property rights. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international sales
and, consequently, on the Company's business, financial condition or results of
operations.
Risks Associated with Dataworks Accounts Receivable. On December 31, 1998,
Platinum Software, Inc. a competitor of Flexi, acquired Dataworks, a Flexi FIP.
Under the terms of Flexi's contract with Dataworks, if Dataworks were acquired
by a competitor of Flexi on or before December 31, 1998, the relationship with
Dataworks would terminate and $800,000 of guaranteed royalty payments still to
be paid would no longer be due to Flexi. However, the remaining guaranteed
royalty payments of $950,000 would become due under the contract terms. Also due
is $83,000 for services performed by Flexi under the contract. The Company
continues to vigorously pursue the collection of all amounts owed and believes
that the contract provisions governing payments of these remaining amounts are
clear and that, despite the termination of the FIP relationship, the amounts
will be realized, but there can be no assurance that such will be the case. The
Company believes that the outcome of this dispute will not have a material
impact on the Company's financial position.
RISKS ASSOCIATED WITH SWAGELOK ACCOUNTS RECEIVABLE. During the second
quarter of 1999, Swagelok, a customer of Flexi, informed the Company that they
wish to terminate their contract with the Company. The Company believes that it
has performed all of its obligations under the contract, and is therefore
entitled to the outstanding accounts receivable due of $1,750,000. The Company
continues to vigorously pursue the collection of all amounts owed and believes
that the contract provisions governing payments of these remaining amounts are
clear and that, despite the termination of the relationship, the amounts will be
realized, but there can be no assurance that such will be the case. The Company
believes that the outcome of this dispute will not have a material impact on the
Company's financial position.
YEAR 2000 COMPLIANCE
The year 2000 issue related to computer programs and systems that recognize
dates using two-digit year data rather than four-digit year data. These programs
and systems could have failed or may have provided incorrect information when
using dates after December 31, 1999.
The year 2000 issue affected three areas of our business: (1) the design of
our products, (2) our internal computer systems, and (3) the computer systems of
our significant suppliers or customers. Each area is addressed below.
1. YEAR 2000 COMPLIANCE OF OUR PRODUCTS. In as much as no test of year 2000
compliance could have simulated the actual change of the millennium, we were
confident that our products would be unaffected by the year 2000 changeover.
From the beginning, our products have been designed and tested to be year 2000
compliant, and we design new products, and any updates of existing products, to
be year 2000 compliant. To date the Company has not been made aware of any
material year 2000 issues related to the Company's products from any of its
customers.
2. YEAR 2000 COMPLIANCE OF OUR INTERNAL SYSTEMS. Our internal computer
programs and operating systems relate to virtually all segments of our business,
including:
* merchandising
* customer database management
* marketing
16
19
* order processing
* order fulfillment
* contract management
* customer service
* financial reporting
We had requested compliance statements from any parties that service or supply
these applications. To date we have not found any major problems associated with
these applications.
3. YEAR 2000 COMPLIANCE OF THIRD-PARTY SYSTEMS. The computer programs and
operating systems used by entities with whom we have commercial relationships
posed potential problems relating to the year 2000 issue, which may have
affected our operations in a variety of ways. These risks were more difficult to
assess than those posed by internal programs and systems. We rely on third
parties for some of the software code or programs that are embedded in, or work
with, our products. To date the Company is not aware of any material year 2000
issues related to the use of third-party software code or programs embedded in
our product.
The Company did not incur significant expenditures related to its year 2000
remediation efforts, nor does it expect to incur any significant future year
2000 remediation expenditures.
EUROPEAN MONETARY UNION ("EMU")
The Company's internal business information systems are comprised of the
same commercial application software products generally offered for license by
the Company to end user customers. The Company's latest software release
contains EMU functionality that allows for dual currency reporting and
information management. The Company is not aware of any material operational
issues or costs associated with preparing internal systems for the EMU. However,
the Company utilizes other third party software products that may or may not be
EMU compliant. Although the Company is currently taking steps to address the
impact, if any, of EMU compliance for such third party products, failure of any
critical technology components to operate properly post EMU may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on Company's financial results and conditions,
primarily foreign currency exchange rates and interest rates on marketable
securities. The Company does not utilize derivative instruments in managing its
exposure to such changes. The Company does not believe that near-term changes in
foreign currency exchange rates or interest rates will have a material effect on
its future earnings, fair values or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and the accompanying financial
statements, notes and schedules which are filed as part of this 10-K following
the signature page.
17
20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 13, 1999, with the approval of the Audit Committee and the
concurrence of the Board of Directors, the Company engaged Deloitte & Touche LLP
as its independent auditors and dismissed its former independent auditors,
PricewaterhouseCoopers LLP, effective as of that date. Prior to the engagement
of Deloitte & Touche LLP, PricewaterhouseCoopers LLP had served as the
independent auditors of the Company since 1994. There were no disagreements
between the Company and PricewaterhouseCoopers LLP in connection with the audit
of the Company's financial statements for fiscal years ended December 31, 1998
and 1997, and in the subsequent interim period through December 13, 1999. Prior
to the engagement there were no consultations between Deloitte & Touche LLP and
the Company regarding the treatment of accounting, auditing or financial
reporting issues.
PART III
Certain information required by Part III is omitted from this report
because the registrant [has filed] a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement"), and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's officers required by this Item is
included in the section in Part I hereof entitled "Executive Officers of the
Registrant." The information concerning the Company's directors required by this
Item is included in the Company's Proxy Statement under the heading "Election of
Directors." Information concerning compliance by the Company's officers,
directors and 10% stockholders with the reporting requirements of Section 16(a)
of the Securities Exchange Act of 1934 is included in the Company's Proxy
Statement under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's Proxy
Statement under the headings "Directors' Compensation," "Executive
Compensation," "Compensation Interlocks and Insider Participation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of the June 24, 1998 acquisition of The Dodge Group, Mr. Alan
Hambrook, President of International Operations, was granted options to purchase
25,000 shares of common stock of the Company's at $0.01 each. In connection with
these option grants, the Company loaned Mr. Hambrook $180,000, secured by a
pledge of the options as collateral. As of December 31, 1998, no amounts were
repaid with respect to the above loan. The loan is included within the prepaid
expenses and other current assets section of the Company's Consolidated Balance
Sheet (see financial statements attached). Subsequently, Mr. Hambrook resigned
his position in February 1999. As a result of his resignation, Mr. Hambrook
surrendered his options and pursuant to his loan agreement the loan was
forgiven.
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21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS. The financial statements listed in the
Index to Financial Statements are filed as part of this Annual
Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE. Valuation and Qualifying Accounts.
3. EXHIBITS. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report
on Form 10-K
(b) REPORTS ON FORM 8-K
The registrant filed a report on Form 8-K on December 20, 1999 reporting
the engagement of Deloitte & Touche LLP as its independent auditors and the
dismissal of its former independent auditors, PricewaterhouseCoopers LLP,
effective as of December 13, 1999. In addition, on the Form 8-K filed on
December 20, 1999, the Company reported the resignation of Brian P.
Friedman and Thomas C. Theobald from the Company's Board of Directors
effective December 30, 1999 and the resignation of David P. Sommers as the
Company's Senior Vice President, Finance and Chief Financial Officer,
effective December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment of report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FLEXIINTERNATIONAL SOFTWARE, INC.
By: /s/ Stefan R. Bothe
----------------------------
Stefan R. Bothe
Date: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Stefan R. Bothe Chairman of the Board, President March 15, 2000
--------------------- and Chief Executive Officer
Stefan R. Bothe (Principal Executive Officer)
/s/ Mark F. Smith Vice President, Finance (Principal March 15, 2000
--------------------- Accounting Officer)
Mark F. Smith
/s/ Jennifer V. Cheng Director March 15, 2000
---------------------
Jennifer V. Cheng
/s/ A. David Tory Director March 15, 2000
---------------------
A. David Tory
/s/ Robert A. Degan Director March 15, 2000
---------------------
Robert A. Degan
19
22
EXHIBIT NO. EXHIBIT INDEX DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, as amended (File No 333-38403)
(the "Form S-1").
3.2 Amended and Restated By-Laws of the Registrant is incorporated herein
by reference to Exhibit 3.4 to the Form S-1. 4 Specimen certificate
for shares of Common Stock is incorporated herein by reference to
Exhibit 4 to the Form S-1.
10.1 1992 Stock Option Plan, as amended is incorporated herein by reference
to Exhibit 10.1 to the Form S-1.
10.2 1997 Stock Incentive Plan, including forms of incentive and
nonstatutory stock option agreements is incorporated herein by
reference to Exhibit 10.2 to the Form S-1.
10.3 1997 Director Stock Option Plan, including form of option agreement is
incorporated herein by reference to Exhibit 10.3 to the Form S-1.
10.4 1997 Employee Stock Purchase Plan is incorporated herein by reference
to Exhibit 10.4 to the Form S-1.
10.5 Registration Rights Agreement dated May 7, 1996, as amended, among the
Registrant and the Purchasers (as defined therein) is incorporated
herein by reference to Exhibit 10.5 to the Form S-1.
10.6 Series C Preferred Stock Purchase Agreement dated May 7, 1996 among
the Registrant and the Purchasers (as defined therein) is incorporated
herein by reference to Exhibit 10.8 to the Form S-1.
10.7 Warrant Agreement dated June 28, 1994 held by CDC Realty, Inc. is
incorporated herein by reference to Exhibit 10.10 to the Form S-1.
10.8 Warrant Agreement dated July 25, 1995 issued to Comdisco, Inc.
(exercisable for 45,000 shares) is incorporated herein by reference to
Exhibit 10.11 to the Form S-1.
10.9 Warrant Agreement dated July 25, 1995 issued to Comdisco, Inc.
(exercisable for 12,600 shares) is incorporated herein by reference to
Exhibit 10.12 to the Form S-1.
10.10 Master Lease Agreement dated June 28, 1994 between the Registrant and
Comdisco, Inc. is incorporated herein by reference to Exhibit 10.13 to
the Form S-1.
10.11 Letter Agreement dated April 30, 1997 between the Registrant and Fleet
National Bank ("Fleet") is incorporated herein by reference to Exhibit
10.15 to the Form S-1.
10.12 Accounts Receivable Security Agreement dated April 30, 1997 between
the Registrant and Fleet is incorporated herein by reference to
Exhibit 10.16 to the Form S-1.
10.13 Promissory Note of the Registrant dated January 30, 1998 to Fleet in
the principal amount of $5,000,000 is incorporated herein by reference
to Exhibit 10.13 to the Registrant's Annual Report on form 10-K (File
No 000-23453) for the fiscal year ended December 31, 1997 (the "1997
10-K").
10.14 Subordination Agreement dated April 30, 1997 between the Registrant
and the Connecticut Development Authority is incorporated herein by
reference to Exhibit 10.18 to the Form S-1.
10.15 Standard Sublease Agreement dated February 7, 1996 between the
Registrant and Symantec Corporation is incorporated herein by
reference to Exhibit 10.19 to the Form S-1.
10.16 Warrant Agreement dated December 10, 1996 issued to Comdisco, Inc. is
incorporated herein by reference to Exhibit 10.20 to the Form S-1.
10.17 Stockholders' Voting Agreement dated May 7, 1996 among the Registrant
and the Stockholders (as defined therein) is incorporated herein by
reference to Exhibit 10.21 to the Form S-1.
10.18 Participation Agreement dated May 7, 1996 among the Registrant and the
Purchasers (as defined therein) is incorporated herein by reference to
Exhibit 10.22 to the Form S-1.
10.19 Loan modification agreement dated January 30, 1998 between the
Registrant and Fleet is incorporated herein by reference to Exhibit
10.19 to the 1997 10-K.
10.20 Agreement and Plan of Merger dated June 24, 1998 among the Registrant,
Princess Acquisition Corporation and The Dodge Group, Inc. is
incorporated by reference to Exhibit 2 to Current Report on Form 8-K,
dated June 29, 1998 (File No 000-23453), as amended.
10.21 Severance and Settlement Agreement and Release dated February 2, 1999
between the Registrant and Jennifer V. Cheng is incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K, dated May 14,
1999 (File No 000-23453).
20
23
10.22 Severance and Settlement Agreement and Release dated February 2, 1999
between the Registrant and James W. Schenck is incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K, dated May 14,
1999 (File No 000-23453).
10.23 Amendment of Options dated May 12, 1999 between the Registrant and
Jennifer V. Cheng is incorporated by reference to Exhibit 10.3 to
Current Report on Form 8-K, dated May 14, 1999 (File No 000-23453).
10.24 Amendment of Options dated May 12, 1999 between the Registrant and
James W. Schenck is incorporated by reference to Exhibit 10.4 to
Current Report on Form 8-K, dated May 14, 1999 (File No 000-23453).
21 Subsidiary.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
21
24
FlexiInternational Software, Inc.
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors' F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 - F-20
Report of Independent Auditors' on Financial Statement Schedule F-21
Report of Independent Accountants on Financial Statement Schedule F-22
Schedule II - Valuation and Qualifying Accounts F-23
F-1
25
REPORT OF INDEPENDENT AUDITORS'
Board of Directors and Stockholders of FlexiInternational Software, Inc.
Shelton, Connecticut
We have audited the accompanying consolidated balance sheet of
FlexiInternational Software, Inc. as of December 31, 1999, and the related
consolidated statement of operations, stockholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the FlexiInternational Software, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of FlexiInternational Software, Inc.
at December 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that FlexiInternational Software, Inc. will continue as a going concern. As
discussed in Note 15 to the consolidated financial statements,
FlexiInternational Software, Inc.'s recurring losses from operations and
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 15. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Hartford, Connecticut
January 29, 2000
F-2
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FlexiInternational Software, Inc.
In our opinion, the accompanying consolidated balance sheet as of December 31,
1998 and the related consolidated statements of operations, of stockholders'
equity (deficit) and of cash flows for each of the two years in the period ended
December 31, 1998 present fairly, in all material respects, the financial
position, results of operations and cash flows of FlexiInternational Software,
Inc. and its subsidiaries at December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of FlexiInternational Software,
Inc for any period subsequent to December 31, 1998.
As discussed in Note14, the accompanying financial statements as of December 31,
1998 and for the year then ended have been restated with respect to the revenue
recognition of certain contracts.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
consolidated financial statements, the Company has suffered recurring losses and
net cash outflows from operations that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 26, 1999, except as
to Note 13 which is as of
February 26, 1999 and
to Notes 14 and 15 which
are as of
August 11, 1999
F-3
27
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
------------
1999 1998
---- ----
(Restated,
Note 14)
ASSETS
Current assets:
Cash and cash equivalents $ 1,874 $ 7,876
Marketable securities -- 3,000
Accounts receivable, net of allowance for doubtful
accounts of $843 and $812, respectively 6,155 11,041
Prepaid expenses and other current assets 477 999
-------- --------
Total current assets 8,506 22,916
Property and equipment at cost, net of accumulated depreciation
and amortization of $3,714 and $3,121, respectively 1,663 2,732
Acquired software, net of accumulated amortization of $648 and $216, respectively (Note 4) 1,512 1,944
Goodwill, net of accumulated amortization of $5,430 and $566, respectively (Note 4) 237 5,101
Other assets, net of accumulated amortization of $217 and $217, respectively 154 218
-------- --------
Total assets $ 12,072 $ 32,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,657 $ 3,199
Accrued commissions 387 725
Accrued restructuring costs (Note 13) 401 --
Accrued expenses 2,272 3,483
Current portion of capital lease obligations (Note 6) 578 586
Deferred revenues 8,408 7,426
-------- --------
Total current liabilities 13,703 15,419
Long-term portion of capital lease obligations (Note 6) 287 878
-------- --------
Total liabilities 13,990 16,297
-------- --------
Commitments and contingencies (Note 12) -- --
Stockholders' equity (deficit):
Common stock: $.01 par value; 50,000,000 shares authorized;
issued shares - 17,683,133 and 17,383,133, respectively and
outstanding shares - 17,664,008 and 17,293,622, respectively 177 174
Additional paid-in capital 56,128 56,308
Accumulated deficit (58,251) (39,656)
Other accumulated comprehensive income 63 2
Common stock in treasury at cost - 19,125 and 89,511 shares, respectively (35) (214)
-------- --------
Total stockholders' equity (deficit) (1,918) 16,614
-------- --------
Total liabilities and stockholders' equity $ 12,072 $ 32,911
======== ========
See accompanying notes to consolidated financial statements.
F-4
28
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(Restated,
Note 14)
Software license $ 3,385 $ 10,542 $ 13,901
Service and maintenance 12,169 13,754 7,723
-------- -------- --------
Total revenues 15,554 24,296 21,624
Cost of revenues:
Software license 586 1,757 828
Service and maintenance 7,491 10,584 5,450
-------- -------- --------
Total cost of revenues 8,077 12,341 6,278
Operating expenses:
Sales and marketing 5,919 11,233 7,820
Product development 6,887 10,752 7,880
General and administrative 7,153 6,191 2,316
Goodwill impairment (Note 4) 4,224 -- --
Restructuring charge (Note 13) 1,824 -- --
Acquired in-process research and development (Note 4) 1,890 --
-------- -------- --------
Total operating expenses 26,007 30,066 18,016
-------- -------- --------
Operating loss (18,530) (18,111) (2,670)
Net interest income 49 880 27
-------- -------- --------
Loss before income taxes (18,481) (17,231) (2,643)
Income taxes -- -- --
-------- -------- --------
Net loss $(18,481) $(17,231) $ (2,643)
======== ======== ========
Loss per share:
Basic $ (1.06) $ (1.02) $ (0.42)
======== ======== ========
Diluted $ (1.06) $ (1.02) $ (0.42)
======== ======== ========
Weighted average shares:
Basic 17,414 16,938 6,332
Diluted 17,414 16,938 6,332
See accompanying notes to consolidated financial statements.
F-5
29
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
Other Total
Additional Accumu- compre- stockholders' Comprehensive
Common stock Paid-in lated hensive Treasury equity income/
Shares Amount Capital deficit income stock (deficit) (loss)
------ ------ ------- ------- ------ ----- --------- ------
Balance at January 1, 1997 4,744,144 $ 48 $ 5,694 $(19,565) $-- $ -- $(13,823)
Issuance of common stock, net of stock issue costs 3,324,998 33 26,484 -- -- -- 26,517
Conversion of preferred shares to common stock 7,861,350 79 15,433 -- -- -- 15,512
Issuance of common stock to vendor 47,938 -- 289 -- -- -- 289
Exchange of debt for common stock 275,003 3 1,097 -- -- -- 1,100
Exercise of stock options and warrants 238,575 2 752 -- -- -- 754
Net loss -- -- -- (2,643) -- -- (2,643) $ (2,643)
--------
Comprehensive income (loss) -- -- -- -- -- -- -- $ (2,643)
---------- ---- ------- -------- --- -------- -------- ========
Balance at December 31, 1997 16,492,008 165 49,749 (22,208) -- -- 27,706
Stock issued in conjunction with the acquisition of
The Dodge Group 863,500 9 6,512 -- -- -- 6,521
Treasury stock acquired -- -- -- -- -- (463) (463)
Shares issued for stock purchase plan -- -- -- (13) -- 45 32
Exercise of stock options 27,625 -- 47 (204) -- 204 47
Net loss (Restated, Note 14) -- -- -- (17,231) -- -- (17,231) $(17,231)
Currency translation adjustment -- -- -- -- 2 -- 2 2
--------
Comprehensive income (loss) (Restated, Note 14) -- -- -- -- -- -- -- $(17,229)
---------- ---- ------- -------- --- -------- -------- ========
Balance at December 31, 1998 (Restated, Note 14) 17,383,133 174 56,308 (39,656) 2 (214) 16,614
Shares issued for stock purchase plan -- -- -- (88) -- 150 62
Exercise of stock options 300,000 3 -- (26) -- 29 6
Cancellation of options issued in conjunction
Net loss -- -- 180 (18,481) -- -- (18,481) $(18,481)
Currency translation adjustment -- -- -- -- 61 -- 61 61
--------
Comprehensive income (loss) -- -- -- -- -- -- -- $(18,420)
---------- ---- ------- -------- --- -------- -------- ========
Balance at December 31, 1999 17,683,133 $177 $56,128 $(58,251) $63 $ (35) $ (1,918)
========== ==== ======= ======== === ======== ========
See accompanying notes to consolidated financial statements.
F-6
30
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(Restated,
Note 14)
Cash flows from operating activities:
Net loss $(18,481) $(17,231) $ (2,643)
Non-cash items included in net loss:
Depreciation and amortization 2,518 2,018 572
Acquired in-process research and development -- 1,890 --
Provision for doubtful accounts 1,643 1,450 500
Goodwill impairment 4,224 -- --
Loss on disposal of assets 198 -- --
Expense related to stock options -- -- 141
Change in operating accounts:
Accounts receivable 3,223 (3,137) (5,950)
Prepaid expenses and other assets 404 (19) (548)
Accounts payable and accrued expenses (3,115) 704 1,837
Accrued restructuring 401 -- --
Deferred revenue 988 3,297 1,110
-------- -------- --------
Net cash used in operating activities (7,997) (11,028) (4,981)
Cash flows from investing activities:
Acquisition of subsidiary, less cash acquired -- (774) --
Proceeds from sales of property and equipment 33 33 --
Purchases of property and equipment (610) (921) (559)
-------- -------- --------
Net cash used in investing activities (577) (1,662) (559)
Cash flows from financing activities:
Purchases of marketable securities -- (6,448) --
Sales of marketable securities 3,000 3,448 --
Proceeds from sales of common stock, net of stock issue costs -- -- 26,517
Proceeds from exercise of stock options and warrants 6 47 754
Repayments of line of credit (2,000) (1,450) --
Proceeds from line of credit 2,000 1,450 --
Repayments of convertible note payable -- -- (106)
Repayments of debt -- (392) --
Proceeds from employee stock purchase plan 62 32 --
Purchase of treasury stock -- (463) --
Payments of capital lease obligations (599) (278) (276)
-------- -------- --------
Net cash (used in) provided by financing activities 2,469 (4,054) 26,889
Effect of exchange rate changes on cash 103 (2) --
-------- -------- --------
(Decrease) increase in cash and cash equivalents (6,002) (16,746) 21,349
-------- -------- --------
Cash and cash equivalents at beginning of year 7,876 24,622 3,273
-------- -------- --------
Cash and cash equivalents at end of year $ 1,874 $ 7,876 $ 24,622
======== ======== ========
Supplemental disclosures:
Interest paid in cash $ 107 $ 108 $ 139
Assets acquired through capital lease obligations -- $ 1,232 $ 503
Exchange of loan for common stock -- -- $ 1,100
Shares issued in connection with the acquisition of The Dodge Group -- $ 6,521 --
See accompanying notes to consolidated financial statements.
F-7
31
FLEXIINTERNATIONAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - THE COMPANY:
FlexiInternational Software, Inc. (the "Company") began operations in 1991. The
Company designs, develops, markets and supports the Flexi Financial Enterprise
Suite of financial and accounting software applications and related tools. The
Flexi solution -- composed of FlexiFinancials, Flexi Financial Datawarehouse
(FlexiFDW), FlexilnfoAccess and FlexiTools -- is designed to address the needs
of users with sophisticated financial accounting and operational analysis
requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of FlexiInternational
Software, Inc. and its wholly owned subsidiaries since its acquisition of The
Dodge Group ("Dodge") in June 1998 (Note 4). Intercompany profits, transactions
and balances have been eliminated in consolidation.
REVENUE RECOGNITION:
The Company licenses software under noncancellable license agreements through
direct and indirect channels, and provides services including maintenance,
training and consulting. Effective January 1, 1998, the Company has adopted SOP
97-2 "Software Revenue Recognition". Software license revenues through the
Company's direct sales channel are recognized when persuasive evidence of an
arrangement exists, the licensed products have been shipped, fees are fixed and
determinable and collectibility is considered probable. Customers may elect to
receive the licensed products pre-loaded and configured on a hardware unit. In
this case, revenue is recognized when the licensed products are installed on the
hardware unit, the unit is shipped and all other criteria are met. Other
software license royalties earned through the Company's indirect sales channel
are recognized as such fees are reported to the Company. Revenues on all
software license transactions in which there are significant outstanding
obligations are not recognized until such obligations are fulfilled. Significant
obligations would include future promises of enhancements and/or modification
that are essential to the product. For multiple element arrangements and
arrangements with extended payment terms, or where a significant portion of the
payment is due after inception of the license agreement, all revenue is deferred
until the final portion of the license fee becomes due and payable, and all
other criteria are met at that time. Maintenance revenues for maintaining,
supporting and providing periodic upgrading are deferred and recognized ratably
over the maintenance period, generally one year. Revenues from training and
consulting services are recognized as such services are performed. The Company
does not require collateral for its receivables, and reserves are maintained for
potential losses.
FOREIGN CURRENCY TRANSLATION:
The assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at exchange rates in effect at the balance sheet date. Revenue
and expense items are translated into U.S. dollars at the average exchange rate
for the year. Resulting unrealized translation adjustments are included in
stockholders' equity.
Gains and (losses) on foreign currency exchange transactions are reflected in
the Statement of Operations. Net transaction gains and (losses) charged to
income for the years ended December 31, 1999, 1998 and 1997 were $2, ($21) and
$0, respectively.
PRODUCT DEVELOPMENT COSTS:
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," the Company has evaluated the establishment of technological
feasibility of its various products during the development phase. The time
period during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short, and consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations. Therefore, the
Company charges all the product development expenses to operations in the period
incurred.
F-8
32
CASH AND CASH EQUIVALENTS:
The Company considers all interest-bearing securities having original maturities
of three months or less to be cash equivalents.
MARKETABLE SECURITIES:
Marketable securities consist of U.S. Government obligations, and all are
interest-bearing having original maturities of between three months and one
year.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company
controls this risk through credit approvals, customer limits and monitoring
procedures. The Company can, however, limit the amount of support provided to
its customers in the event of non-performance. Two customers represented 10% or
more of the Company's total revenues, or an aggregate of 39.0%, 31.7% and 40.2%
of total revenues for each of the years ended December 31, 1999, 1998 and 1997,
respectively. Three customers and one customer represented approximately 50.2%
and 30.0% of the Company's net accounts receivable at December 31, 1999 and
1998, respectively.
PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consist primarily of prepaid expenses,
deferred commissions and other assets. Certain other assets are being amortized
over periods not exceeding five years. Amortization expense for the years ended
December 31, 1999, 1998 and 1997 was $0, $220 and $85, respectively.
PROPERTY AND EQUIPMENT:
Property and equipment is composed of furniture and equipment and is stated at
cost less accumulated depreciation and amortization. Depreciation is calculated
using an accelerated method over the estimated useful lives of the assets
ranging from three to seven years. Depreciation expense for the years ended
December 31, 1999, 1998 and 1997 amounted to $1,446, $1,016 and $487,
respectively, and includes amortization of assets recorded under capital lease
obligations. Property and equipment are periodically reviewed for impairment
based upon anticipated cash flows generated from such underlying assets.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets are stated on the basis of cost and
amortized on a straight-line basis, over the estimated future periods to be
benefited (5 years). Goodwill and other intangible assets are periodically
reviewed for impairment based upon anticipated cash flows generated from such
underlying assets.
INCOME TAXES:
Deferred taxes are determined under the asset and liability approach. Deferred
tax assets and liabilities are recognized on differences between the book and
tax bases of assets and liabilities using presently enacted tax rates.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash, accounts receivable,
capital lease obligations, accounts payable and other short-term borrowings. The
current carrying amount of these instruments approximates fair market value.
ACCOUNTING FOR STOCK BASED COMPENSATION:
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation." As permitted by this statement, the
Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for its stock-based
employee compensation arrangements.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board has issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which is effective for fiscal
quarters beginning after June 15, 2000. The Company does not expect this
standard to be material to its financial statements.
USE OF ESTIMATES:
The accompanying financial statements reflect estimates and assumptions made in
the application of generally accepted accounting principles. Actual results may
vary from those estimates.
F-9
33
GEOGRAPHIC INFORMATION:
Geographic information for the Company, for the years ended December 31, 1999,
1998 and 1997 is summarized in the table below. The Company's international
revenues were derived primarily from the United Kingdom, Sweden and South
America for the years ended December 31, 1999, 1998 and 1997, and the Company's
international long lived assets at December 31, 1999 and 1998, resided primarily
in the United Kingdom.
REVENUES:
1999 1998 1997
------- ------- -------
United States $10,800 $16,907 $17,970
International:
United Kingdom $ 3,314 $ 2,459 $ 103
Sweden $ 983 $ 2,446 $ 2,209
Other $ 457 $ 2,484 $ 1,342
------- ------- -------
Total International $ 4,754 $ 7,389 $ 3,654
======= ======= =======
LONG LIVED ASSETS:
1999 1998 1997
------- ------- -------
United States $ 3,285 $ 9,459 $ 1,222
International $ 127 $ 318 --
NOTE 3 - INCOME TAXES:
Significant components of the Company's deferred tax asset at December 31 are as
follows:
December 31,
1999 1998
-------- --------
Net operating loss carryforwards $ 20,799 $ 15,318
Other 1,802 2,228
-------- --------
Subtotal 22,601 17,546
Valuation allowance (22,601) (17,546)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
No provision or benefit for federal, state or foreign income taxes has been made
for the years ended December 31, 1999, 1998 and 1997 given the Company's loss
position. At December 31, 1999, the Company had U.S. and foreign net operating
loss carryforwards of approximately $44,898 and $9,161, respectively, which
expire during the years 2005 through 2019. The deferred tax assets at December
31, 1999 and 1998 have been fully reserved due to the uncertainty of their
realization, primarily attributed to the Company's historical losses.
For tax purposes, there is an annual limitation on the utilization of the U.S.
net operating loss carryforwards resulting from an ownership change as defined
by Internal Revenue Code Section 382. Due to this annual limitation, a portion
of the U.S. net operating loss carryforward will expire prior to when otherwise
utilizable.
The following reconciles from the statutory income tax rate to the effective tax
rate:
1999 1998
------ ------
Statutory rate 34.0% 34.0%
Goodwill (9.7%) (1.1%)
State taxes 4.2% 5.3%
Credit and loss carryovers 6.5% 2.8%
Valuation allowance (34.9%) (41.2%)
Other (0.1%) 0.2%
------ ------
Effective tax rate 0.0% 0.0%
====== ======
F-10
34
NOTE 4 - ACQUISITION:
On June 24, 1998, the Company completed the acquisition of The Dodge Group, Inc.
("Dodge"), a software developer that specializes in financial data warehouse
solutions. As a result of the acquisition, the company wrote off $1.9 million
for acquired in-process research and development in the June 1998 quarter.
Following executive and staff cutbacks in connection with a first quarter 1999
restructuring program (Note 13), management revised its plans for the existing
Dodge financial data warehouse business acquired in 1998. As a result, expected
revenues and cash flows from these software products have been revised
significantly downward. Additionally, competitive pressures and a continuation
of the general business slowdown previously disclosed have caused management to
reassess the long term potential of the Dodge business and to reprioritize its
investments.
During June 1999 the Company reassessed the value of the intangible assets
recorded by the Company as a result of the acquisition. Prior to that
reassessment, the unamortized balance of the intangible assets was $6,263,
consisting of $1,728 of acquired software and $4,535 of goodwill. After
assessment of the acquired software asset, management concluded that the
carrying value approximated net realizable value for that software. Management
also assessed the related goodwill arising from the Dodge acquisition in
accordance with established policies. The economic factors indicated above have
caused management to revise downward its estimates of future cash flows from
current and future products associated with the Dodge business as a whole. As a
result of management's analysis, and using the best information available,
management recorded a goodwill impairment charge of $4,224 in the second quarter
of 1999.
In applying its policy for assessing the carrying amount of the goodwill for
impairment, management first estimated future cash flows from the acquired Dodge
business generated from existing and planned future product introductions over
the next four years (estimated remaining useful life), and assumed a terminal
value factor after the fourth year based on a range of EBITDA multiples for a
sample of comparable public financial software companies. That estimate was then
compared to the carrying amount of the underlying assets, and on that basis
management concluded that an impairment existed. In measuring the impairment,
the estimated future cash flows were discounted to a net present value at 25%, a
rate consistent with that used in the original purchase accounting for the Dodge
business. The goodwill was then reduced accordingly to reflect the difference
between its carrying amount and estimated fair value.
The following table reflects pro forma combined results of operations
(unaudited) of the Company and Dodge, giving effect to the acquisition of Dodge
at the beginning of the fiscal year 1997, for all periods presented, and
excludes the one-time in-process research and development charge of $1,890 for
the periods presented:
1998 1997
-------- --------
(unaudited)
Revenue $ 28,742 $ 30,342
Net loss $(18,174) $ (7,034)
Net loss per diluted common share $ (1.05) $ (0.98)
Shares used in computation 17,356 7,196
Management will continue, periodically, to conduct reassessments of the value of
the acquired software and goodwill. Because the estimates made in these
reassessments are inherently subjective, there can be no assurance that future
reassessments will not result in further reductions of the carrying value of
these assets.
NOTE 5 - BORROWINGS:
CONVERTIBLE NOTE PAYABLE:
In August 1995, the Company executed a note agreement which provided financing
totaling $750. The note bore interest at the LIBOR rate, adjusted annually. The
note was convertible, subsequent to August 1, 1996 at the option of the holder,
into common stock at a price of $4.00 per share and was secured by certain
assets of the Company. In August 1997, the remaining principal balance of the
note of $600 was converted, pursuant to its terms, into 150,000 shares of the
Company's common stock.
F-11
35
ACCOUNTS RECEIVABLE LINE OF CREDIT:
In April 1997, the Company entered into a revolving credit agreement with a
financial institution. This agreement, as modified, allowed the Company to
borrow up to $5,000, with maximum borrowings not to exceed 80% of eligible
receivables as defined by the agreement. Interest on borrowings is set at the
lender's prime rate. Among other provisions, the Company was required to
maintain certain financial covenants. On May 17, 1999 the financial institution
chose not to renew this revolving credit agreement (Note 15)
CONVERTIBLE LOAN:
In November 1996, the Company issued a convertible loan totaling $500 to a
private investor. In January 1997, the loan was converted into 125,002 shares of
common stock at a price of $4.00 per share.
NOTE 6 - CAPITAL LEASE OBLIGATIONS:
Certain fixed asset acquisitions during the year ended December 31, 1998, were
financed through capital lease arrangements. Total property and equipment
acquired under these capitalized leases, which consisted primarily of computer
equipment, amounted to $1,795, at December 31, 1998. Accumulated depreciation on
these assets at December 31, 1999 and 1998 amounted to $1,184 and $775,
respectively. The annual interest rates on such obligations range from 7.5% to
10.1%.
Approximate maturities of such capital lease obligations are as follows at
December 31, 1999:
2000 $626
2001 296
----
Total 922
Less amounts representing interest 57
----
Total capital lease obligations 865
Less amounts due within one year 578
----
Long-term portion capital lease obligations $287
====
NOTE 7 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company had authorized 13,027,874 shares of preferred stock, $0.01 par value
per share and had designated the following series, all of which have been
converted to common stock effective with the initial public offering in December
1997:
SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In February 1994, the Company sold 1,750,000 shares of Series A convertible
preferred stock ("Series A Preferred Stock") to a private investor group for
$1.16 per share and sold 862,069 shares for $1.16 per share in March 1994 to
another private investor group. In addition, in July 1994, the board of
directors approved the exchange by a stockholder of 107,137 shares of common
stock for 172,414 shares of Series A preferred stock. Each share of Series A
preferred stock was convertible at any time into .75 shares of common stock, as
adjusted in the event of future dilution, and had full voting rights. The total
number of Series A preferred shares authorized was 2,840,517, with a par value
of $.01. In the event of involuntary liquidation or some other event as
described in the Company's certificate of incorporation, a holder of such Series
A preferred stock was entitled to receive up to $3.30 per share (for a total of
$9,189). The right to receive dividends was noncumulative. Dividends were
payable when and as declared by the Company's board of directors at the rate of
$0.0812 per share per annum. The Series A preferred shares were mandatorily
converted upon the closing of the Company's initial public offering of shares of
common stock pursuant to an effective registration statement under the
Securities Act of 1933.
SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In January 1995, the Company sold 2,007,645 shares of Series B convertible
preferred stock ("Series B Preferred Stock") to a private investor group for
$1.50 per share. In addition, in July 1995, the Company sold 125,000 shares of
Series B
F-12
36
preferred stock to a private investor group for $2.00 per share. In
connection with the sale, the convertible promissory note issued in November
1994 totaling $1,010 and related accrued interest were converted into 680,355
shares of Series B convertible preferred stock and such note was canceled. Each
share of Series B preferred stock is convertible at any time into .75 shares of
common stock, as adjusted in the event of future dilution, and has full voting
rights. The total number of Series B preferred shares authorized is 5,000,000
with a par value of $.01. In the event of involuntary liquidation or some other
event as described in the Company's certificate of incorporation, a holder of
such Series B preferred stock is entitled to receive up to $3.30 per share (for
a total of $9,283). The right to receive dividends is noncumulative. Dividends
are payable when and as declared by the Company's board of directors at the rate
of $0.105 per share per annum. The Series B preferred shares were mandatorily
converted upon the closing of the Company's initial public offering of shares of
common stock pursuant to an effective registration statement under the
Securities Act of 1933.
SERIES C MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In May 1996, the Company sold 3,030,303 shares of Series C convertible preferred
stock ("Series C Preferred Stock") to a private investor group for $1.65 per
share. In connection with the sale, the convertible promissory notes issued in
October 1995, January 1996 and February 1996 totaling $3,000 and related accrued
interest were converted into 1,854,024 shares of Series C preferred stock and
such notes were canceled. Each share of Series C preferred stock is convertible
at any time into .75 shares of common stock, as adjusted in the event of future
dilution, and has full voting rights. The total number of Series C preferred
shares authorized is 5,187,357 with a par value of $.01. In the event of
involuntary liquidation or some other event as described in the Company's
certificate of incorporation, a holder of such Series C preferred stock is
entitled to receive up to $3.30 per share (for a total of $16,118). The right to
receive dividends is noncumulative. Dividends are payable when and as declared
by the Company's board of directors at the rate of $0.1155 per share per annum.
The Series C preferred shares were mandatorily converted upon the closing of the
Company's initial public offering of shares of common stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended.
NOTE 8 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
After the completion of an initial public offering of shares of common stock
(described below), the Company filed a Restated Certificate of Incorporation
which provides that its authorized capital stock will include 5,000,000 shares
of preferred stock, $.01 par value.
The Company's board of directors is authorized, subject to any limitations
prescribed by law, without stockholder approval, to issue such shares of
preferred stock in one or more series. Each such series of preferred stock shall
have such rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences, as shall be determined by the board of directors.
The purpose of authorizing the board of directors to issue preferred stock and
determine its rights and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of preferred stock.
COMMON STOCK:
In December 1997, the Company completed an initial public offering of shares its
common stock. The Company sold 2,250,000 shares (and selling stockholders sold
1,200,000 shares) of common stock to the public. Net proceeds to the Company
were $22,218, after underwriting discounts and commissions and deducting
expenses of the offering aggregating $800.
On January 10, 1997, January 15, 1997, February 28, 1997 and March 25, 1997, the
Company sold 500,000, 75,000, 249,998 and 250,000 shares of the Company's common
stock, respectively. The shares were sold for $4.00 per share and the total
proceeds were $4,300.
On November 6, 1997, the Company effected a three-for-four reverse split of the
Company's common stock. All references to common stock amounts, shares, per
share data, and preferred stock conversion rights included in the financial
statements and notes have been adjusted to give retroactive effect to the stock
split.
F-13
37
STOCK WARRANTS:
In conjunction with the issuance of a note payable in August 1995, the Company
issued a warrant for the purchase of 75,000 shares of its common stock at a
price of $8.00 per share, subject to adjustment, exercisable at the holder's
election at any time after August 1, 1997. This warrant was exercised in
December 1997.
In connection with the Company's 1995 financing arrangements, a warrant was
issued for the purchase of 5,129 shares of Series C preferred stock for $1.65
per share. Such warrant allows the holder to acquire 3,846 shares of common
stock for $2.20 per share. This warrant expires in December 2006.
In connection with the Company's 1995 financing arrangements, a warrant was
issued for the purchase of 76,800 shares of Series B preferred stock for $1.50
per share. This warrant allows the holder to acquire 57,600 shares of common
stock for $2.00 per share and the warrant expires in July 2005.
In connection with the Company's capital lease obligations in 1994, a warrant
was issued for the purchase of 43,103 shares of Series A preferred stock for
$1.16 per share. This warrant allows the holder to acquire 32,327 shares of
common stock for $1.546 per share, and the warrant expires in June 2004.
All warrants issued by the Company were accounted for in accordance with APB
Opinion No. 14.
NOTE 9 - EMPLOYEE STOCK PLANS:
EMPLOYEE STOCK PURCHASE PLAN:
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the board of directors in September 1997 and was approved by the
stockholders in October 1997. The Purchase Plan authorizes the issuance of up to
a total of 300,000 shares of common stock to participating employees. Under the
terms of the Purchase Plan, the option price is an amount equal to 85% of the
average market price (as defined) per share of the common stock on either the
first day or the last day of the offering period, whichever is lower. Under the
Purchase Plan the Company issued 54,178 and 7,989 shares to participants during
1999 and 1998, respectively.
OPTION EXCHANGE PROGRAM:
In November 1998, the Company's Board of Directors approved an option exchange
program, which allowed certain employees to exchange their existing options for
new options with a lower exercise price and a longer vesting period. Employee
options with exercise prices ranging from $2.00 to $16.50, to purchase 512,160
shares of common stock were exchanged for 470,640 shares ranging in price from
$1.88 to $2.44, which was at or above the fair market value at the time of the
exchange. The tables below have been adjusted to reflect these reduced exercise
prices, and the extension of the options' life.
STOCK OPTION PLANS:
The Company's 1992 Stock Option Plan (the "1992 Plan") provided for the issuance
of up to 1,362,000 shares of common stock through the granting of stock options
to employees, officers, directors, consultants and advisors. The board of
directors has authority to determine awards and establish the exercise price.
Such options vest over various periods up to five years and expire on various
dates through 2007. No additional option grants will be made under the 1992
Plan.
Options to purchase 47,938 shares of common stock were granted to a vendor for
services rendered in 1996 and 1997. Such options vested after six months, and
were exercisable at $.01 per share. All of such options we exercised in 1997.
The Company's 1997 Stock Incentive Plan (the "Incentive Plan") was adopted by
the board of directors in September 1997 and was approved by the stockholders in
October 1997. The Incentive Plan is intended to replace the Company's 1992 Plan.
Up to 1,875,000 shares of Common Stock (subject to adjustment in the event of
stock splits and other similar events) may be issued pursuant to awards granted
under the Incentive Plan. Options may be granted at an exercise price which may
be less than, equal to or greater than the fair market value of the common stock
on the date of grant. Officers, employees, directors, consultants and advisors
of the Company and its subsidiaries are eligible to receive awards under the
Incentive Plan. During 1999 and 1998, 1,303,482 and 1,446,090 options under the
Incentive Plan were granted, respectively.
The Company's 1997 Director Stock Option Plan (the "Director Plan) was adopted
by the board of directors in September 1997 and was approved by the stockholders
in October 1997. Under the terms of the Director Plan, directors of the Company
who are not employees of the Company or any subsidiary of the Company are
eligible to receive nonstatutory
F-14
38
options to purchase shares of Common Stock. A total of 150,000 shares of Common
Stock may be issued upon exercise of options granted under the Director Plan.
The exercise price per share, for shares granted initially, was equal to the
initial public offering price ($11.00). The exercise price per share for all
shares thereafter will be the closing price per share of Common Stock on the
date of grant. All options granted under the Director Plan vest one year from
the date of grant so long as the optionee remains a director of the Company.
During 1999 and 1998, 63,439 and 15,750 options under the Director Plan were
granted, respectively.
The following table describes the Company's stock option activity under its all
of its Option Plans:
Weighted average
Number of exercise price
options per share
---------- -------------------------
(priced at date of grant)
Outstanding at January 1, 1997 915,944 $ 0.96
Granted 488,720 $ 4.89
Exercised (211,514) $ 0.73
Canceled (296,250) $ 1.93
---------
Outstanding at December 31, 1997 896,900 $ 2.92
Granted 1,476,220 $ 3.89
Exercised (65,125) $ 0.73
Canceled (1,009,552) $ 6.01
---------
Granted 1,366,921 $ 1.09
Exercised (316,209) $ 0.01
Canceled (926,266) $ 1.97
---------
Exercisable at December 31, 1997 468,030 $ 0.43
Exercisable at December 31, 1998 497,004 $ 1.03
Exercisable at December 31, 1999 306,915 $ 2.02
Options available for grant at December 31, 1999 662,627 --
The following table summarizes information regarding stock options granted
during 1996, 1997 and 1998 under the Company's Option Plans:
Weighted Weighted
Number of average average
options exercise fair
granted Price value
------- ----- -----
1997:
- -----
Options granted at less than market value 144,194 $ 1.24 $ 3.04
Options granted at market value 344,526 $ 6.52 $ 2.03
1998:
- -----
Options granted at less than market value 50,000 $ 0.01 $ 6.87
Options granted at market value 1,248,940 $ 4.26 $ 3.93
Options granted above market value 162,900 $ 2.44 $ 0.22
1999:
- -----
Options granted at market value 1,366,921 $ 1.09 $ 1.01
The following table summarizes information regarding stock options outstanding
at December 31, 1999 under all of the Company's Option Plans:
F-15
39
Options outstanding Options exercisable
----------------------------------------- ----------------------------
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise outstanding contractual life exercise price exercisable exercise
prices at 12/31/99 in years per share at 12/31/99 price
------------ ----------- ---------------- -------------- ----------- ---------
$0.38-$0.59 523,164 9.83 $ 0.39 22,189 $ 0.38
$0.97-$1.44 530,955 9.03 $ 1.30 207,905 $ 1.39
$1.63-$2.44 331,070 8.77 $ 2.09 53,381 $ 1.98
$2.67-$4.00 9,950 6.85 $ 3.76 4,690 $ 3.59
$8.67-$12.63 27,750 7.90 $ 10.05 18,750 $ 10.71
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"), on January 1, 1996.
The Company continues to apply Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," in accounting for its stock based
compensation plans. If the Company had recorded compensation cost based upon the
fair value at the grant date for awards under these plans, consistent with SFAS
No. 123, the Company's net loss would have increased to the pro forma amounts
indicated below:
Year ended December 31,
1999 1998 1997
---- ---- ----
Net loss as reported $ (18,481) $ (17,231) $ (2,643)
Net loss pro forma $ (19,063) $ (18,027) $ (2,690)
Loss per share as reported $ (1.06) $ (1.02) $ (0.42)
Loss per share pro forma $ (1.09) $ (1.06) $ (0.42)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 5.59%, 4.92% and 6.31% for the years
ended December 31, 1999, 1998 and 1997, respectively, an option life of 5 years
and a 0% dividend rate for all the years presented, and a volatility of 1.61,
1.52 and .65 for the years ended December 31, 1999, 1998 and 1997, respectively.
In accordance with SFAS No. 123, the fair value method of accounting has not
been applied to options granted prior to January 1, 1995. Therefore, the
resulting pro forma impact may not be representative of that to be expected in
future years.
The Company has reserved 1,422,889 shares of common stock for options
outstanding under its 1992 Plan, Incentive Plan and Director Plan, and 93,773
shares of common stock for exercisable warrants. In addition to the outstanding
options, the Company has reserved 662,627 shares of common stock for future
grants under its Incentive Plan and Director Plan.
NOTE 10 - RELATED PARTY TRANSACTIONS:
As a result of the June 24, 1998 acquisition of Dodge, the President of
International Operations, was granted options to purchase 25,000 shares of
common stock of the Company at $0.01 each. In connection with these option
grants, the Company loaned him $180, secured by a pledge of the options as
collateral. As of December 31, 1998, no amounts were repaid with respect to the
above loan. The loan is included within the prepaid expenses and other current
assets section of the Company's Consolidated Balance Sheet. Subsequently, he
resigned his position in February 1999. As a result of his resignation, he
surrendered his options and pursuant to his loan agreement the loan was
forgiven.
NOTE 11 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) Savings Plan (the "Plan"). Employees are eligible
to participate in the Plan upon completion of one month of service with the
Company. Eligible employees may contribute up to 15% of their annual
compensation to the Plan on a pre-tax basis. Participant contributions to the
Plan are immediately vested. In addition, under the terms of the Plan, the
Company, at its discretion, may match all or a portion of a participant's
contribution to the Plan up to 6% of the participant's compensation. The
Company's matching contribution is made on a monthly basis. Participants become
vested in Company matching contributions to the Plan over a five year period.
The expense under this Plan was $57, $209 and $0 for 1999, 1998, and 1997
respectively.
F-16
40
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
The Company leases space in several buildings which it uses for offices and
development facilities as well as various equipment and vehicles, all subject to
operating leases. As of December 31, 1999, the minimum annual rental payments
under the terms of such noncancellable leases which expire at various dates
through 2006 are as follows:
2000 395
2001 387
2002 396
2003 341
2004 210
Thereafter 136
------
Total minimum lease payments $1,865
======
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
$1,017, $991 and $531, respectively.
The Company is party to contracts for licensing of software and provision of
services with two customers for a total of approximately $4,000. These amounts
have been recorded as deferred revenue and can be used to offset related
receivables. The revenue recognition for those contracts has been restated as a
result of payment disputes and discovery of certain performance commitments,
that arose with these customers in the second quarter of 1999 (Note 14). The
Company believes that the amounts in dispute are appropriately due under terms
of the contracts and expects the amounts to be realized. The Company is
vigorously pursuing collection of these amounts through all available means
under the contract terms, including arbitration. However, there can be no
assurance that the carrying amounts of these receivables will be realized.
From time to time, the Company is a party to various disputes and proceedings
arising from the ordinary course of general business activities. In the opinion
of management, resolution of these matters is not expected to have a material
adverse effect on the results of operations of the Company. However, depending
on the amount and the timing, an unfavorable resolution of some or all these
matters could materially affect the Company's future results of operations or
cash flows in a particular period.
NOTE 13- RESTRUCTURING
On February 26, 1999, management, with the approval of the Board of Directors,
took certain actions to reduce employee headcount in order to align its sales,
development and administrative organization with the current overall
organization structure, and to position the Company for profitable growth in the
future consistent with management's long term objectives. In this regard, the
primary actions taken included involuntary terminations of selected personnel.
Severance packages were offered to 66 employees. This reduction in headcount
also led to the Company having excess leased facility space. In addition, during
the third quarter of 1999, the Company took additional actions to reduce
employee headcount. This action also included involuntary terminations of
selected personnel. Severance packages were offered to 18 employees.
As a result of both of these actions, the Company recorded a charge to
operations during the three month periods ended March 31, 1999 and September 30,
1999 of $1,896 and $125, respectively. Of the total amount of these charges,
$1,855 was related to severance costs, of which $1,258 was paid prior to
December 31, 1999, and $166 related to costs of idle facility space, of which
all of these amounts were paid during the year ended December 31, 1999.
Additionally, during the third quarter of 1999, one of the Company's former
employees, who was terminated earlier in the year, obtained employment
elsewhere, and the Company is no longer obligated to make payments totaling
$196. As such, the Company reversed this accrued liability during the three
months ended September 30, 1999. The remaining $401 of the severance costs, will
be payable in installments for up to 14 months. The Company believes that these
actions resulted in sustainable cost savings, primarily through the elimination
of redundant functions in product development, due to completion of development
work on FlexiFinancials Release 4, and to a lesser extent in the support and
sales organizations.
Detail of the restructuring charge is as follows:
F-17
41
SEVERANCE EXCESS
& BENEFITS FACILITIES TOTAL
---------- ------------ -----------
Reserve balances,
February 26, 1999 $ 1,730 $ 166 $ 1,896
Additional charge
September 30, 1999 125 -- 125
Change in estimate of
severance costs (196) -- (196)
Cash payments (1,258) (166) (1,424)
---------- ----------- ----------
Reserve balances,
December 31, 1999 $ 401 $ -- $ 401
========== =========== ==========
NOTE 14 - RESTATEMENT
As a result of the Company's regular quarterly financial statement review with
its independent accountants in the second quarter of 1999, the Company
determined that it would restate the prior year amounts originally reported for
1998 and the first quarter of 1999, to reflect a change in the revenue
recognition for several software license contracts. Most of the restated amounts
relate to two contracts that the Company believes were appropriately due and
payable under their contractual terms but payments with respect to which, in the
second quarter of 1999 became subject to dispute as a result of certain
performance commitments, by the contracting parties. For revenue which has been
restated in 1998, all amounts billed are included in accounts receivable as of
December 31, 1998 with a corresponding offset included in deferred revenues. Any
amounts stipulated in contracts which have not been invoiced have not been
recognized in the financial statements. A summary of the effects of the
restatement follows:
YEAR ENDED DECEMBER 31, 1998
------------------------------------------
AS REPORTED RESTATED
--------------- ---------------
OPERATING STATEMENT:
Software license revenue $ 16,113 $ 10,542
Service and maintenance revenue 14,078 13,754
-------- --------
Total revenues 30,191 24,296
General and administrative 6,991 6,191
Total operating expenses 30,866 30,066
Operating loss (13,016) (18,111)
Loss before income taxes (12,136) (17,231)
Net loss (12,136) (17,231)
Loss per share:
Basic $ (0.72) $ (1.02)
Diluted $ (0.72) $ (1.02)
F-18
42
AS OF DECEMBER 31, 1998
---------------------------------------
AS REPORTED RESTATED
--------------- ---------------
BALANCE SHEET:
Accounts receivable, net of allowance for doubtful accounts $ 13,051 $ 11,041
Total current assets 24,926 22,916
Total Assets 34,921 32,911
Deferred revenues 4,341 7,426
Total current liabilities 12,334 15,419
Total liabilities 13,212 16,297
Accumulated deficit (34,561) (39,656)
Total stockholders' equity 21,709 16,614
Total liabilities and stockholders' equity 34,921 32,911
NOTE 15 -BUSINESS PLANS
Late in the second quarter of 1999, management identified a number of factors
that cause them to believe that available cash resources may not be sufficient
to fund anticipated operating losses. These include: (1) the continued general
business slowdown, which resulted in revenue levels significantly lower than
expected in the first half of 1999; (2) payment disputes that arose in the
second quarter of 1999 related to two significant contracts for licensing of
software and provision of services (Note 14); (3) delays experienced in the
second quarter of 1999 related to the release of the next version of the
Company's general ledger product and (4) nonrenewal of a revolving credit
agreement (Note 5). Management has taken actions to reduce costs in response to
lower revenues and is prepared to take further actions, if necessary, in order
to continue to respond to competitive and economic pressures in the marketplace.
Management is also seeking to obtain additional equity capital. However, there
can be no assurance that the Company will be able to reduce costs to a level to
appropriately respond to competitive pressures or to obtain additional funding.
As a result of the foregoing, there exists substantial doubt about the Company's
ability to continue as a going concern. These financial statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amounts of liabilities that might result from the outcome
of this uncertainty.
NOTE 16 - SELECTED QUARTERLY INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
1999
Total revenues $ 3,988 $ 3,936 $ 3,575 $ 4,056
Gross profit 1,319 1,868 1,915 2,376
Net loss (7,899) (7,952) (2,023) (606)
Loss per share (0.46) (0.46) (0.12) (0.03)
1998 (RESTATED, NOTE 14)
Total revenues $ 5,508 $ 7,273 $ 5,782 $ 5,733
Gross profit 3,288 4,503 2,331 1,833
Net loss (1,216) (2,846) (6,108) (7,061)
Loss per share (0.07) (0.17) (0.35) (0.41)
F-19
43
REPORT OF INDEPENDENT AUDITORS' ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors of
FlexiInternational Software, Inc.
We have audited the consolidated financial statements of FlexiInternational
Software, Inc. as of December 31, 1999 and the year then ended December 31,
1999, and have issued our report thereon dated January 29, 2000, which report
includes a qualification for a going concern; such financial statements and
report are included in your 1999 Annual Report to Stockholders and are included
herein, Our audit also included the financial statement schedule of
FlexiInternational Software, Inc. listed in Item 14. This financial statement
schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audit. In our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Hartford, Connecticut
January 29, 2000
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44
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
FlexiInternational Software, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1999, except as to Note 13 which is as of February 26, 1999
and to Notes 14 and 15 which are as of August 11, 1999, appearing on page F-3 of
the 1999 Annual Report on Form 10-K of FlexiInternational Software, Inc. also
included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 26, 1999, except as
to Note 13 which is as of
February 26, 1999 and
to Notes 14 and 15 which are as of
August 11, 1999
F-21
45
FLEXIINTERNATIONAL SOFTWARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1998 EXPENSES DEDUCTIONS DECEMBER 31, 1999
----------- ----------------- -------- ---------- -----------------
Allowance for doubtful accounts $ 812 $1,643 $(1,612) $ 843
Valuation allowance for deferred tax asset $16,156 $6,445 $22,601
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1997 EXPENSES DEDUCTIONS DECEMBER 31, 1998
----------- ----------------- -------- ---------- -----------------
(Restated, Note 14)
Allowance for doubtful accounts $ 672 $1,450 $(1,310) $ 812
Valuation allowance for deferred tax asset $8,296 $7,860 $16,156
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1996 EXPENSES DEDUCTIONS DECEMBER 31, 1997
----------- ----------------- -------- ---------- -----------------
Allowance for doubtful accounts $ 405 $ 500 $ (233) $ 672
Valuation allowance for deferred tax asset $7,254 $1,042 $ 8,296
F-22