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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, 1997
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 OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 March 11, 1998 as reported on the Nasdaq National Market, was
approximately $79.5 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 March 11, 1998, there were 16,497,378 shares of FlexiInternational
Software, Inc. Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders to be held April 30, 1998 are incorporated by reference in Items
10, 11, and 12 of Part III of this Annual Report on Form 10-K.
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FLEXIINTERNATIONAL SOFTWARE, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I. PAGE
----
Item 1. Business.........................................................................1
Item 2. Properties.......................................................................6
Item 3. Legal Proceedings................................................................7
Item 4. Submission of Matters to a Vote of Security Holders..............................7
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............9
Item 6. Selected Financial Data..........................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk........................24
Item 8. Financial Statements and Supplementary Data......................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................24
PART III.
Item 10. Directors and Executive Officers of the Registrant...............................25
Item 11. Executive Compensation...........................................................25
Item 12 Security Ownership of Certain Beneficial Owners and Management...................25
Item 13. Certain Relationships and Related Transactions...................................25
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................25
Signatures.......................................................................26
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 and FlexiWorkFlow 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 family of financial and accounting
software applications and related tools. The Flexi solution -FlexiFinancials,
FlexiInfoSuite and FlexiTools -- is designed to address the needs of users with
sophisticated financial accounting 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.
SOFTWARE PRODUCT ARCHITECTURE
The Flexi solution provides easy access to critical financial information
through a suite of open, distributed financial accounting applications and tools
based on an object-oriented, component-based architecture. The business
advantages of the Flexi solution include:
* DEPLOYMENT OF EMERGING TECHNOLOGIES. The Flexi solution is designed to
support new technologies as they develop. For example, the Company was
one of the first client/server financial accounting software vendors
to offer Internet enhancements for its products in 1996. It was also
one of the first to introduce a broad range of ActiveX components in
1997, allowing the Company's products to support Internet or intranet
communications and permitting its users to draw on the Internet for
flexible and cost-effective communications across dispersed locations
without significant code reconfiguration. This greatly increases the
flexibility and breadth of access to the Flexi solution without
significant additional customer investment.
* ABILITY TO ADAPT TO CHANGING BUSINESS PROCESSES. The Company's
object-oriented, component-based architecture allows the Flexi
solution to be modified quickly and efficiently by users. In addition,
users can seamlessly integrate the Flexi solution with new
applications to support business processes and to address new business
strategies as they evolve. As a result, the Flexi solution can
facilitate the implementation by organizations of new and more
efficient ways to conduct their businesses.
* HIGH PERFORMANCE WITH SOPHISTICATED FUNCTIONALITY. By offering native
support of multiple databases and server-based processing, the Flexi
solution provides enhanced data and transaction throughput and greater
scalability in comparison with traditional financial accounting
solutions. The Company believes that the Flexi solution is also among
the few client/server solutions offering the functionality and
scalability required by organizations with sophisticated accounting
requirements, especially multinational and rapidly growing
organizations. For example, the Company's FlexiLedger system can
support multi-company consolidations, full currency translation, a
high level of user-defined data security and broad capacity to
implement allocations-critical functions for sophisticated users that
are not otherwise available on a comprehensive basis in legacy
client/server systems. The performance and functionality of the Flexi
solution allows organizations to rapidly and efficiently process
financial data and close their books, providing managers with quicker
access to critical business information.
* REDUCED COST OF OWNERSHIP. The Flexi solution can significantly
reduce the overall cost of ownership for organizations with
sophisticated financial accounting requirements. The Company's
object-oriented, component-based solution is written in an
industry-standard language (C++) and can be quickly and easily
implemented, maintained and operated, and the time involved to add or
change features is far less than that required with legacy
client/server systems. The Flexi solution's ability to operate across
a broad range of hardware and database platforms reduces the need for
major technology investments to transition to the Company's solution,
while its data access layer reduces the need by customers to change or
reconfigure their installed databases. The Flexi solution further
reduces the need for hardware investment and reduces personnel costs
as its high performance allows users to satisfy their processing
requirements without the need for more powerful or additional
processing resources.
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TECHNOLOGY
To achieve high performance, full portability and scalability across
platforms, rich application functionality and easy access to information, the
Flexi solution incorporates the following key technical features:
* Object-oriented, component-based architecture assures that in addition
to high functionality, the Company's systems are highly flexible. The
use of leading CASE tools and coding in C++ facilitates customization
by users and maximizes reusable code for developers. Furthermore, the
use of the ANSI standards for the C++ language facilitates the
portability of the Company's products, as the code is supported over a
range of native C++ compilers available on a number of widely used
operating systems. Component-based architecture allows organizations
to create tailored business solutions by simplifying and shortening
the implementation of applications acquired from multiple sources. The
Company's object-oriented, component-based architecture also
facilitates the support of Internet functionality by the Company's
products.
* Distributed architecture to provide platform portability and optimize
performance. If an application's logic resides only on the client,
users are unable to efficiently process high-volume transactions,
while if it is resident only on the server, the interactive
performance of the application is degraded. The Company's multi-tier
distributed architecture allocates system functionality across tiers
to avoid these limitations and assures that the requirements of
sophisticated users needing high performance and immediate access,
coupled with ease of use, are met.
* Data abstraction layer that accesses multiple database systems
natively, enhancing the performance and portability of the Company's
solution, which currently supports Sybase, IBM's DB2, Microsoft's SQL
Server and Oracle.
* Support of open systems and industry standards enhances the
portability and scalability of the Company's products. The Company
supports a wide range of server operating systems (including Windows
NT, AIX, Solaris, HPUX and 0S/390), traditional client platforms such
as Windows (including Windows 3.x, 95 and NT) and emerging
technologies such as the Internet, facilitating ease of use, system
portability and smooth integration of packages from third-party
vendors as required to provide generic functionality.
PRODUCTS
The Flexi solution is an integrated set 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 following table provides selected information relating to the
Company's three core families of products, its FlexiFinancials financial
accounting systems, its FlexiInfoSuite family of reporting and workflow
applications and its FlexiTools development and customized tools. All of the
Company's products can operate on a fully integrated basis, or be licensed
separately for use on a stand-alone basis or for integration with products from
third-party vendors.
COMMERCIAL COMMERCIAL COMMERCIAL
FLEXIFINANCIALS INTRODUCTION FLEXIINFOSUITE INTRODUCTION FLEXITOOLS INTRODUCTION
--------------- ------------ -------------- ------------ ---------- ------------
FlexiLedger 1993 FlexiWriter 1993 FlexiControl 1993
FlexiPayables 1994 FlexiAnalysis 1994 FlexiDesigner 1994
FlexiReceivables 1995 FlexiWorkFlow 1996 FlexiDeveloper 1994
FlexiPurchasing 1996 FlexiNet 1996 FlexiDB 1996
FlexiAssets 1997 FlexiActiveX Controls 1997
FlexiOrders 1997
FlexiInventory 1997
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FlexiFinancials
* FLEXILEDGER. FlexiLedger, the general ledger module for
FlexiFinancials, provides the functionality required for users with
sophisticated financial accounting requirements, including the ability
to support an unlimited number of currencies, multicurrency accounts
and multicurrency sets of books; multi-company consolidations;
user-defined subledgers; flexible account validation; sophisticated
summarization and allocation structure, as well as other normal ledger
functions, with levels of security traditionally associated with
mainframes.
* FLEXIPAYABLES. FlexiPayables is an accounts payable module that
supports centralized and decentralized accounts payable processing
through sophisticated operation and accounting security controls,
while supporting the generation of invoices and payment authorizations
automatically routed for approval. Users have the flexibility to
establish payment rules, terms for payment, cash management, expense
control and vendor management.
* FLEXIRECEIVABLES. FlexiReceivables is an accounts receivable module
that supports automatic cash application, invoice aging and discounts,
as well as flexible rules for account group, payment schedule
commission and other terms. It can be easily configured to define
multiple account distribution or multiple-company accounting for
management of receivables across large organizations.
* FLEXIPURCHASING. FlexiPurchasing is a dynamic purchasing management
module that tracks purchases from requisition to purchase order to
invoicing, as well as delivery and storage, including data ranging
from discount levels to receipt and acceptance of goods. Users can
define, among other items, management approval levels, all relevant
report information and payment terms.
* FLEXIASSETS. FlexiAssets is a fixed-asset module for controlling and
tracking the physical location of all assets, while providing
depreciation calculations on a fully automated basis. The user can
maintain records on an unlimited number of assets. FlexiAssets permits
the user to choose depreciation methods, and to maintain records to
satisfy GAAP and federal, state and local property tax reporting
requirements.
* FLEXIORDERS. FlexiOrders handles a user's complete ordering cycle
online, from quotations and order processing to shipment and returns.
In addition, it generates all necessary forms and documentation for
processing and packaging orders and allows designation of multiple
scheduling and delivery dates.
* FLEXIINVENTORY. FlexiInventory is an inventory management module that
provides complete inventory control from receipt of stock through
inventory analysis and evaluation, while tracking parts through
multiple warehouses and bin locations. It can support an unlimited
number of parts and can define maximum, minimum and reorder points for
each part.
FlexiInfoSuite
The FlexiInfoSuite 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 to serve a broad range of management information and control
requirements, ranging from high-volume batch processing to interactive, on-line
analytical processing to workflow design and implementation. The FlexiInfoSuite
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 FlexiInfoSuite software includes: FlexiWriter, for high-volume general
ledger financial statements, either on-site or at remote locations;
FlexiAnalysis, which provides general ledger access directly from Excel without
leaving the Microsoft spreadsheet environment; and FlexiWorkFlow, which manages
accounting approval processes throughout the organization. To meet specific
customer requirements, the Company also offers imaging, reporting and workflow
solutions developed by third parties as part of its FlexiInfoSuite solution,
including reporting applications by Arbor Software Corporation, imaging
solutions by Filenet Corporation and reporting applications by Crystal Computer
Services Inc.
During the fourth quarter of 1996, the Company released FlexiNet, an
Internet-enabled application extension. FlexiNet includes HTML-based queries for
key functions within the FlexiFinancials applications. These HTML-based queries
provide convenient access over the Internet to functional areas such as vendor
invoice status within FlexiPayables, purchase requisition input, customer
account inquiries within FlexiReceivables and dynamic balance analysis within
FlexiLedger. Full field-level security is maintained through the transparent,
yet secure, use of dual passwords between the browser, the Web server and the
FlexiFinancials database.
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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 and FlexiDB provide users with the flexibility to extend Flexi
applications and customize the interface and database definitions. With these
tools, customers may add additional fields to any table, modify the attributes
of a currently existing database or customize their graphical user interface.
Each customer has a high degree of flexibility regarding screen or menu
structure. Through the revision control feature, subsequent updates may be
easily applied without overriding customized modifications. By maintaining
customized applications throughout subsequent software releases, FlexiTools
reduce the risk of both subsequent system errors and overall system costs.
FlexiControl permits users to define and manage system-wide controls such
as security, while FlexiActiveX Controls allows customers to create interfaces
between any Windows-based applications supporting OLE (Object Linking and
Embedding) controls and FlexiFinancials modules. The Company believes that
FlexiTools increase the flexibility of its products and facilitate seamless
integration with customer applications.
FlexiCenter
FlexiCenter provides for installation of the Company's software and for
remote diagnostics of customer issues by the Company's support personnel. This
workstation has all the required Flexi software installed, as well as the
necessary communication software, and is shipped to all clients as part of the
installation process.
Pricing
The Company offers server and client licenses for each of its products.
Such licenses vary broadly based on modules, authorized sites, enabled platforms
and volume discounts, if any. A module with typical configurations ranges in
price from $40,000 to over $300,000.
Product Enhancements and Developments
The Company plans to continue to build on its object-oriented,
component-based expertise and believes that it is particularly well positioned
to take advantage of the adoption of the Internet and corporate intranets as
critical components of an organization's future system deployments. The
Company's technology facilitates the distribution of accounting functionality
across users and workgroups in an automated, "just-in-time" manner over the
Internet, as opposed to the significant implementation efforts required by
networks associated with legacy client/server systems. With the introduction of
FlexiNet in 1996, the Company established itself as one of the first accounting
software vendors to provide Internet/intranet access.
During the fourth quarter of 1997, the Company introduced, on a limited
basis, its distributed computing capability incorporating a
platform-independent, Java-based presentation layer and utilizing Microsoft
Transaction Server. Beginning in the second half of 1998, the Company plans to
release for general availability extended distributed computing capabilities
utilizing both Microsoft Transaction Server and multiple Common Object Request
Broker Architecture ("CORBA")-compliant network transaction monitors such as IBM
Component Broker. This will permit users to select a browser, spreadsheet or
other data access tool for accessing FlexiFinancials processes without
pre-installed Flexi software, which will allow full use of the Flexi solution as
the Internet increasingly becomes the common data exchange vehicle of choice for
users worldwide. The Company anticipates that it will continue to enhance the
Internet functionality of its products with the inclusion of additional features
on an ongoing basis. The Company will also continue over time to introduce
submodules to its products to meet specific requirements of key industry sectors
such as banking, insurance and other financial services.
SALES AND MARKETING
The Company sells its products through direct and indirect channels. The
Company believes there is a significant market for the advanced functionality of
its products and intends to supplement its direct sales force by expanding its
distribution network in selected foreign markets.
Direct Sales
The Company sells its products directly to end users through nine sales
offices in the United States and one office in the United Kingdom. The Company's
sales staff, which has extensive experience in financial accounting software and
computer technology, consists of account executives who develop leads and
coordinate sales activity,
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product representatives with extensive knowledge of the Company's product
offerings and support staff. The percentage of the Company's total revenues
attributable to direct sales in 1997, 1996 and 1995 was 88.1%, 96.3% and 99.2%,
respectively. As of December 31, 1997, the Company had 30 employees in sales,
and the Company plans to increase its sales organization in 1998.
Indirect Sales
The Company's indirect sales channel consists of Flexi Industry Partners
("FIPs") and an international distributor. The Company currently has
relationships with FIPs in the healthcare, real estate, retail and manufacturing
industries. By leveraging the sales organization and market expertise of its
FIPs, the Company can focus on the specific needs of vertical markets without
disproportionate investment. To date, the agreements between the Company and its
FIPs have required the payment of an initial technology fee by the FIPs and
additional royalty fees based on product sales by the FIPs.
The Company has an international distributor in Hong Kong and plans to
establish additional distributorships to complement its direct sales force and
FIPs and to provide penetration into additional geographic and vertical markets.
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, 1997, 1996
and 1995, two customers, one customer and one customer, respectively, each
represented 10% or more of the Company's total revenues, or an aggregate of
40.2%, 12.3% and 12.1% of total revenues, respectively. As of December 31, 1997,
the Company, directly and through its FIPs and distributors, had licensed its
financial accounting solutions to more than 160 customers at over 190 sites.
CLIENT SERVICES
The Company's client services organization provides professional services,
technical services, help-desk support and custom development for the Company's
customers. The Company believes that a high level of service and support is
critical to its success. Furthermore, the Company believes that a close and
active service and support relationship is both important to customer
satisfaction and provides the Company with important information regarding
evolving customer requirements. As of December 31, 1997, the Company had 37
employees and 12 consultants in its client services organization.
The Company's professional services staff assists customers in the
implementation of the Company's financial accounting software and provides
training, project management, gap analysis, migration planning and year 2000
strategies. The Company's technical services personnel install Flexi products
and provide customers with upgrade assistance, migration planning and
implementation, data analysis and database management systems assistance,
systems configuration, and management and integration services. The Company
believes that effective training and technical support are essential to provide
quality service and provides these services to its third-party channels and
customers. When purchasing the Company's products, customers generally purchase
an implementation consulting package, consisting of classroom and on-site
training, project planning and system review. Depending upon the complexity of
the customer's accounting and system requirements, the implementation process
can extend beyond 90 days.
In addition, the Company generally warrants that product performance will
comply with published specifications for one year after delivery and requires
customers to purchase an initial one-year maintenance contract that includes
updates, error corrections and new releases. The Company generally provides
technical support for the then current release and one prior release. The
Company's standard maintenance contract automatically renews each year, unless
the customer provides 30 days' notice. Annual maintenance fees are typically 17%
of the list price of the underlying products.
The Company's support personnel provide toll-free telephone support from
8:00 a.m. to 8:00 p.m., Eastern Time, with 24-hour/seven-day support available
for an additional fee. In addition, the Flexi support staff provides upgrade
assistance, premium support, migration assistance and FlexiCenter remote
management.
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The Company also leverages the expertise and personnel of a number of
third-party systems integrators and consultants, including Andersen Consulting,
Deloitte & Touche LLP and KPMG Peat Marwick LLP, in connection with the delivery
of sophisticated financial accounting solutions to certain customers.
COMPETITION
The market for the Company's financial accounting software products and
services is intensely competitive and characterized by rapid changes in
technology and the frequent introduction of new products. The Company's
principal competitors in the financial accounting software market include
PeopleSoft, Inc., SAP AG, Oracle Corporation, GEAC Computer Corporation Limited,
SQL Financials International, Inc. and Lawson Software. The Company also faces
competition from providers of industry-specific applications as well as indirect
competition from in-house, custom-developed financial management applications. 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 FIPs and its distributor. Moreover,
other than the need for financial and technical expertise, there are no
significant proprietary or other technological barriers to entry in the
financial accounting software market. The Company believes that the principal
factors affecting competition in the financial accounting software market
include product flexibility, performance, functionality and features, use of
standards-based technology, quality of support and service, company reputation,
price and overall cost of ownership.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in large part on its
ability to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an expanding range of customer
requirements. The Company plans to continue to enhance its products and develop
new products, including the development of additional functionality for its
financial accounting products. The Company has generally relied on internal
efforts and resources to develop its software, and, in some limited cases, the
Company has contracted with various firms to develop materials, processes,
software or portions of software for and on behalf of the Company.
As of December 31, 1997, the Company's research and development
organization consisted of 50 employees and 17 consultants. The Company's product
development expenses were $7.9 million, $5.7 million and $3.7 million, or 36.4%,
68.7% and 78.2% of total revenues, for the years ended December 31, 1997, 1996
and 1995, respectively.
EMPLOYEES
As of December 31, 1997, the Company employed 139 employees, including 50
in research and development, 38 in sales and marketing, 37 in client services
and 14 in administration, finance and corporate support, and retained the
service of 17 product development consultants and 12 consultants in client
services. The success of the Company depends on its continued ability to attract
and retain highly skilled and qualified personnel. Competition for such
personnel is intense in the software industry, particularly for talented
software developers, service consultants, and sales and marketing personnel.
There can be no assurance that the Company will be able to attract and retain
qualified personnel in the future.
The Company's employees are not represented by any labor unions. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company is headquartered in Shelton, Connecticut, where it leases
approximately 28,630 square feet under a lease expiring in June 2003. In
addition, the Company maintains leased office space in Atlanta, Georgia; Dallas,
Texas; Edmonds, Washington; Oakland and San Diego, California; Melbourne,
Florida; Minneapolis, Minnesota; Norwood and Wellesley, Massachusetts;
Schaumburg, Illinois; and London, United Kingdom.
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ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's year ended December 31, 1997,
the Company submitted certain matters to a vote of its security holders through
the solicitation of written consents under Section 228 of the General
Corporation Law of the State of Delaware. Information with respect to such
matters is set forth below.
(a) Written consents were received from security holders dated on or about
October 24, 1997 and November 7, 1997 (the "October Vote" and
"November Vote," respectively).
(b) In the October Vote, effective as of such date, security holders
approved an increase in the size of the Board of Directors from nine
to ten persons and elected A. David Tory as a director. The other
continuing directors of the Company after the October Vote were Stefan
R. Bothe, Jennifer V. Cheng, James W. Schenck, Thomas H. Bredt, Ellen
Carnahan, Jonathan E. Dick, Tarek Kettaneh, John B. Landry and James
L. Luikart. Also in the October Vote, effective upon the closing of
the initial public offering of the Company's Common stock (the "IPO"),
which closed on December 17, 1997, security holders approved a
decrease in the size of the Board of Directors from ten to five
persons and elected Stefan R. Bothe, Thomas H. Bredt, Jennifer V.
Cheng, John B. Landry and A. David Tory as directors.
(c) In addition to the election of the directors described above, in the
October Vote, security holders approved:
i. the filing of the Company's Amended and Restated Certificate of
Incorporation upon the closing of the IPO;
ii. the adoption of the Company's Amended and Restated By-Laws
effective upon the closing of the IPO;
iii. an amendment of a Stockholders' Voting Agreement among the
Company and certain security holders;
iv. the establishment of a classified Board of Directors, effective
upon the closing of the IPO, with each of three classes of
directors serving for overlapping three-year terms;
v. the initial designation of Stefan R. Bothe and Thomas H. Bredt as
Class I Directors (with terms expiring at the Annual Meeting of
Stockholders in 1998), Jennifer V. Cheng as the Class II Director
(with a term expiring at the Annual Meeting of Stockholders in
1999), and John B. Landry and A. David Tory as Class III
Directors (with terms expiring at the Annual Meeting of
Stockholders in 2000); and
vi. the adoption of the Company's 1997 Stock Incentive Plan, 1997
Director Stock Option Plan and 1997 Employee Stock Purchase Plan.
The results of the October Vote are set forth below (such numbers do not
reflect the three-for-four reverse split of common stock approved in the
November Vote):
CLASS OF VOTING STOCK FOR WITHHELD ABSTAIN BROKER NONVOTES
- --------------------- --- -------- ------- ---------------
Common Stock 6,982,700 N/A N/A N/A
Series A Preferred Stock 2,784,483 N/A N/A N/A
Series B Preferred Stock 2,688,000 N/A N/A N/A
Series C Preferred Stock 4,884,327 N/A N/A N/A
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In the November Vote, security holders approved a three-for-four reverse
split of the Company's common stock through the filing of a Certificate of
Amendment (the "Amendment") of the Company's then effective Certificate of
Incorporation, as amended. The Amendment was filed on November 7, 1997 with the
Secretary of State of the State of Delaware.
The results of the November Vote are set forth below (such numbers do not
reflect the three-for-four reverse split of common stock approved):
CLASS OF VOTING STOCK FOR WITHHELD ABSTAIN BROKER NONVOTES
- --------------------- --- -------- ------- ---------------
Common Stock 5,642,507 N/A N/A N/A
Series A Preferred Stock 2,612,069 N/A N/A N/A
Series B Preferred Stock 2,688,000 N/A N/A N/A
Series C Preferred Stock 4,838,872 N/A N/A N/A
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Stefan R. Bothe 49 Chairman of the Board and Chief Executive Officer
Jennifer V. Cheng 48 President and Chief Operating Officer
James W. Schenck 49 Executive Vice President, Research and Development
Richard P. Horner 50 Vice President, Finance
Maureen M. Okerstrom 36 Vice President, Sales
Mark Berlingeri 41 Vice President, Client Services
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. Bothe held numerous senior management
positions, including President of the International Division, President of the
Micro Products Division and Senior Vice President of Marketing.
Ms. Cheng has served as President of the Company and as a director of the
Company since the Company's inception in 1990. Since 1984, Ms. Cheng has been
General Partner and owner of Cheng Management Company, an investment partnership
specializing in investments in emerging growth companies, including many
technology companies. Prior to forming Cheng Management Company, Ms. Cheng
served with several major financial organizations, including Morgan Stanley &
Co. Inc., as an emerging growth stock analyst, Mutual Life Insurance Company of
New York, as Director of Equity Investments, and Donaldson, Lufkin & Jenrette
Securities Corporation, as a Research Analyst.
Mr. Schenck has served as Executive Vice President, Research and
Development of the Company since the Company's inception in 1990 and has been a
director of the Company since May 1996. Previously, Mr. Schenck was Senior Vice
President for Technology of GEAC, responsible for setting technical direction
and evaluating potential acquisition. Prior to serving with GEAC, Mr. Schenck
was Senior Vice President of Computer Associates in charge of its application
software development group.
Mr. Horner has served as Vice President, Finance of the Company since
February 1997. From October 1995 to November 1996, Mr. Horner was Chief
Financial Officer and Vice President, Operations of Marco International, a
computer memory manufacturer. From February 1991 to March 1995, he was Vice
President, Finance of CSK Software (then known as Micrognosis, Inc.), a provider
of computer systems integration services. Prior to 1990, Mr. Horner held various
management positions with Control Data Corporation and IBM Corporation.
8
11
Ms. Okerstrom has served as Vice President, Sales of the Company since
August 1997. From August 1994 to July 1997, Ms. Okerstrom served in various
managerial-level sales and marketing positions with the Company. Prior to
joining the Company, Ms. Okerstrom was Vice President, Strategic Operations from
August 1993 to July 1994, and Vice President, Product Representation from
January 1991 to July 1993, with Platinum Software, Inc., a provider of
information management software products and services.
Mr. Berlingeri has served as Vice President, Client Services of the Company
since February 1997. From August 1996 to January 1997, he was President of Blaze
Consulting, a provider of business consulting services. From February 1996 to
August 1996, he was Chief Operating Officer of ATRE Associates, a management
consulting firm. From October 1992 to January 1996, he served as Regional
Director of Professional Services for Sybase, Inc., a provider of distributed,
open computing solutions. Mr. Berlingeri was Consulting Business Manager for
Oracle Corporation, a supplier of information management software, from October
1989 to September 1992.
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 Ms. Cheng,
who are husband and wife, there are no family relationships among any of the
executive officers of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock has been traded on the Nasdaq National
Market under the symbol FLXI since December 12, 1997, the first
trading day after the Company's initial public offering was declared
effective. The high and low sales prices of the Company's common
stock, as reported by the Nasdaq National Market, during the period
beginning December 12, 1997 and ended December 31, 1997 were $16.125
and $11.00, respectively.
As of March 11, 1998, the approximate number of stockholders of record
of the Company's common stock was 68. The number of stockholders 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 from its initial public offering of common stock,
$.01 par value per share, which closed in December 1997.
(1) The effective date of the Registration Statement on Form S-1 for
the offering was December 11, 1997, and the commission file
number of the Registration Statement is 333-38403.
(2) The offering commenced on December 12, 1997.
(3) Not applicable.
(4) (i) The offering terminated on December 23, 1997, the date of
the exercise of the underwriters' over-allotment option.
All of the shares of common stock registered for the
account of the Company were sold prior to the termination
of the offering.
(ii) The managing underwriters for the offering were BT Alex.
Brown Incorporated, Hambrecht & Quist LLC and Wessels,
Arnold & Henderson, L.L.C.
9
12
(iii) The Company registered shares of its common stock, $.01
par value per share, in the offering.
(iv) Of the 3,450,000 shares of common stock registered in the
offering, 2,250,000 shares were registered and sold for
the account of the Company and 1,200,000 shares were
registered and sold for the accounts of certain selling
stockholders. The aggregate offering prices of the shares
registered and sold for the accounts of the Company and
the selling stockholders were $24,750,000 and $13,200,000,
respectively.
(v) The actual expenses incurred for the account of the
Company in connection with the offering were as follows:
Underwriting discount $1,732,500
SEC registration fee 12,546
NASD filing fee 4,640
Nasdaq National Market listing fee 50,000
Transfer Agent and Registrar fees 3,500
Accounting fees and expenses 206,000
Legal fees and expenses 337,041
Printing and mailing expenses 112,837
Other 73,436
----------
Total $2,532,500
==========
Payment of expenses were to persons other than directors,
officers, general partners of the Company or their
associates, persons owning 10% or more of the equity
securities of the Company or affiliates of the Company.
(vi) The net offering proceeds to the Company after expenses
were approximately $22.2 million.
(vii) From December 11, 1997, the effective date of the
Registration Statement, to December 31, 1997, the Company
did not use any of the net offering proceeds.
(viii) Not applicable.
10
13
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Revenues
Software license $ 13,901 $ 5,205 $ 3,166 $ 562 $ 141
Service and maintenance 7,723 3,142 1,517 291 14
-------- -------- ------- ------- -------
Total revenues 21,624 8,347 4,683 853 155
Cost of revenues:
Software license 828 311 88 4 --
Service and maintenance 5,450 2,181 1,708 324 49
-------- -------- ------- ------- -------
Total cost of revenues 6,278 2,492 1,796 328 49
Operating expenses:
Sales and marketing 7,820 4,978 4,350 1,927 309
Product development 7,880 5,733 3,660 2,019 587
General and administrative 2,316 2,453 1,316 679 395
-------- -------- ------- ------- -------
Total operating expenses 18,016 13,164 9,326 4,625 1,291
-------- -------- ------- ------- -------
Operating loss (2,670) (7,309) (6,439) (4,100) (1,185)
Interest income 168 59 58 41 3
Interest expense (141) (197) (106) (28) --
-------- -------- ------- ------- -------
Loss before provision for income taxes (2,643) (7,447) (6,487) (4,087) (1,182)
Provision for income taxes -- -- -- -- --
-------- -------- ------- ------- -------
Net loss $ (2,643) $ (7,447) $(6,487) $(4,087) $(1,182)
======== ======== ======= ======= =======
Basic and diluted loss per share:
Net loss per share $ (0.42) $ (1.91) $ (1.72) $ (1.08) $ (0.31)
Unaudited pro forma net loss per share(1) $ (0.19)
Weighted average shares 6,332 3,891 3,770 3,795 3,807
Weighted average shares - pro forma (1) 13,894
DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
(in thousands)
Cash and cash equivalents $24,622 $ 3,273 $ 15 $ 870 $ 189
Working capital (deficit) 26,676 1,480 (2,917) (1,138) (195)
Total assets 35,670 7,833 2,826 2,456 326
Redeemable convertible preferred stock -- 15,509 7,450 3,230 --
Stockholders' equity (deficit) 27,706 (13,823) (10,521) (4,045) 162
(1) See Note 2 of Notes to the Company's Financial Statements.
11
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, markets and supports the Flexi family of
financial and accounting software applications and related tools. The Flexi
solution -- FlexiFinancials, FlexiInfoSuite and FlexiTools -- is designed to
address the needs of users with sophisticated financial accounting 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's revenues are derived from two sources: software license
revenues and service and maintenance revenues. Software license revenues have
grown as additional applications have been released for general availability and
the installed base of customers has increased. Service and maintenance revenues
have 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 noncancelable 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. All of the Company's products
can operate on a fully integrated basis, or be licensed separately by a user to
meet that user's specific requirements. 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. Software license revenues under agreements with Flexi Industry
Partners ("FIPs") are recognized upon execution of an agreement between the end
user and the FIP, as such revenues are reported to the Company. Service revenues
include consulting, implementation and training, and are recognized as services
are performed and delivered. Maintenance revenues for maintaining, supporting
and providing periodic upgrading are recognized ratably over the service period,
generally one year. The Company maintains reserves for potential losses and such
losses to date have been within management's expectations. See Note 2 of Notes
to the Company's Financial Statements. The Company has adopted SOP 97-2
effective January 1, 1998. Management believes that the adoption of SOP 97-2
will not have a material impact on the Company's financial statements.
Historically, the Company's revenues have been derived from domestic sales
and export sales, with the export sales component comprising 16.9%, 15.2% and
16.6% of total revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. Such export sales have been derived primarily from customers based
in Europe and South America, and the Company intends to focus its resources to
further develop sales and support channels in these geographic regions. The
Company's export sales generally have the same cost structure as its domestic
sales. To date, the Company's export sales have been primarily denominated in
U.S. dollars. An increase in the value of the U.S. dollar 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 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 product development expenses to operations in the period
incurred.
The Company continues to evaluate and address business and operational
issues related to Year 2000 compliance, and believes that its installed computer
systems and software products are in compliance. The total cost to remediate its
Year 2000 issues is not expected to be material.
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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,
1997 1996 1995
---- ---- ----
Revenues:
Software license 64.3% 62.4% 67.6%
Service and maintenance 35.7 37.6 32.4
----- ----- ------
Total revenues 100.0 100.0 100.0
Cost of revenues:
Software license 3.8 3.7 1.9
Service and maintenance 25.2 26.1 36.5
----- ----- ------
Total cost of revenues 29.0 29.8 38.4
Operating expenses:
Sales and marketing 36.2 59.6 92.9
Product development 36.4 68.7 78.1
General and administrative 10.7 29.4 28.1
----- ----- ------
Total operating expenses 83.3 157.7 199.1
----- ----- ------
Operating loss (12.3) (87.5) (137.5)
Interest income 0.8 0.7 1.2
Interest expense (0.7) (2.4) (2.3)
----- ----- ------
Loss before provision for income taxes (12.2) (89.2) (138.6)
Provision for income taxes -- -- --
----- ----- ------
Net loss (12.2%) (89.2%) (138.6%)
===== ===== ======
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Total revenues, consisting of software license revenues and
service and maintenance revenues, increased 159.1%, from $8.3 million for the
year ended December 31, 1996 to $21.6 million for the year ended December 31,
1997.
Software license revenues increased 167.1%, from $5.2 million for the year
ended December 31, 1996 to $13.9 million for the year ended December 31, 1997.
The growth was due primarily to the addition of new customers as well as
additional product licenses to existing customers and growth in export sales,
primarily in Europe. Service and maintenance revenues increased 145.8%, from
$3.1 million for the year ended December 31, 1996 to $7.7 million for the year
ended December 31, 1997. The increase was primarily attributable to the growth
of the installed base of customers and the increasing complexity of user
requirements, which resulted in an increase in consulting service 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 costs to provide
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 166.2%, from $311,000 for the
year ended December 31, 1996 to $828,000 for the year ended December 31, 1997.
Cost of software license revenues as a percentage of software license revenues
was 6.0% for each of the years ended December 31, 1997 and 1996. The increase in
cost of software license revenues in dollar amount was primarily due to an
increase in third-party software products distributed by the Company, as well as
costs associated with increased sales volume.
Cost of service and maintenance revenues increased 149.9%, from $2.2
million for the year ended December 31, 1996 to $5.5 million for the year ended
December 31, 1997. Cost of service and maintenance revenues as a percentage of
service and maintenance revenues increased from 69.4% for the year ended
December 31, 1996 to 70.6% for the year ended December 31, 1997. The increase
resulted primarily from the addition of service consultants and customer support
personnel to provide services to a larger customer base.
13
16
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 57.1%, from $5.0 million for the year ended December 31, 1996 to $7.8
million for the year ended December 31, 1997. The increase in dollar amount was
primarily attributable to increased staffing in the direct sales force and sales
and marketing organizations (approximately $1,841,000 in compensation-related
expenses, including an increase in commission expense due to increased revenue
from software license fees and $463,000 in travel-related expenses) and to an
increase in advertising-related expenses ($476,000). Sales and marketing
expenses as a percentage of total revenues decreased from 59.6% for the year
ended December 31, 1996 to 36.2% for the year ended December 31, 1997 due to an
increasing revenue base. The Company is in the process of expanding its
distribution channels, both domestically and internationally and, accordingly,
sales and marketing expenses are expected to increase in dollar amount in the
future.
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 37.4%, from $5.7 million for the
year ended December 31, 1996 to $7.9 million for the year ended December 31,
1997. The increase in product development expenses was due primarily to the
continued hiring of software specialists, principally in the quality assurance,
product engineering and distributed computing development areas, as well as
normal salary increases. Product development expenses as a percentage of total
revenues decreased from 68.7% for the year ended December 31, 1996 to 36.4% for
the year ended December 31, 1997 due to an increasing revenue base. The Company
anticipates that product development expenses will increase in dollar amount in
future periods as the Company continues to enhance the functionality of its core
financial accounting and reporting and workflow applications and as it continues
development work on the next releases of its suite of application modules.
General and Administrative. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel, as
well as provisions for doubtful accounts and outside professional fees. General
and administrative expenses decreased 5.6%, from $2.5 million for the year ended
December 31, 1996 to $2.3 million for the year ended December 31, 1997. General
and administrative expenses as a percentage of total revenues decreased from
29.4% for the year ended December 31, 1996 to 10.7% for the year ended December
31, 1997 due to an increasing revenue base. The decrease in general and
administrative expenses was primarily due to a nonrecurring charge of $492,000
in executive compensation in the second quarter of 1996 attributable to stock
options granted at less than market value and a decrease in provisions for
doubtful accounts in 1997 ($165,000), partially offset by increased
compensation-related costs ($287,000) and increased outside professional fees
($132,000). The Company expects general and administrative expenses to increase
in dollar amount in future periods due to the Company's growth as well as the
additional expense of being a public company.
Provision for Income Taxes. No provision or benefit for federal, state or
foreign income taxes was made for the years ended December 31, 1997 and 1996 due
to the operating losses incurred in the respective periods. The Company has
reported only tax losses to date and consequently has approximately $18.0
million of net operating loss carryforwards, which expire at various times
through the year 2012, available to offset future taxable income. The
utilization of such net operating losses is subject to limitations as a result
of an ownership change. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss carryforwards
before utilization. The Company's deferred tax assets at December 31, 1997 were
$8.3 million, consisting primarily of net operating loss carryforwards. The
Company's benefit of deferred tax assets has been fully reserved as of December
31, 1997 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, 1996 Compared to Year Ended December 31, 1995
Revenues. Total revenues increased 78.2%, from $4.7 million for the year
ended December 31, 1995 to $8.3 million for the year ended December 31, 1996.
The increase was attributable to growth in all aspects of the Company's revenues
as outlined below.
Software license revenues increased 64.4%, from $3.2 million for the year
ended December 31, 1995 to $5.2 million for the year ended December 31, 1996.
This growth was due to the availability of the Company's new products and an
increase in new customers.
14
17
Service and maintenance revenues increased 107.1%, from $1.5 million for
the year ended December 31, 1995 to $3.1 million for the year ended December 31,
1996. The increase in service and maintenance revenues was primarily
attributable to increases in consulting services and training revenues and an
increase in the installed base of customers.
Cost of Revenues. Cost of software license revenues increased 253.4%, from
$88,000 for the year ended December 31, 1995 to $311,000 for the year ended
December 31, 1996. Cost of software license revenues as a percentage of software
license revenues increased from 2.8% for the year ended December 31, 1995 to
6.0% for the year ended December 31, 1996. The increase in dollar amount and as
a percentage of revenues was primarily due to an increase in third-party
products distributed by the Company, as well as costs associated with increased
sales volume.
Cost of service and maintenance revenues increased 27.7%, from $ 1.7
million for the year ended December 31, 1995 to $2.2 million for the year ended
December 31, 1996. The increase in dollar amount of such costs resulted
primarily from increased staffing in the consulting and support organizations in
response to increased demand for consulting services and continued growth in the
customer base. Cost of service and maintenance revenues as a percentage of
service and maintenance revenues decreased from 112.6% for the year ended
December 31, 1995 to 69.4% for the year ended December 31, 1996 due to an
increasing revenue base.
Sales and Marketing. Sales and marketing expenses increased 14.4%, from
$4.4 million for the year ended December 31, 1995 to $5.0 million for the year
ended December 31, 1996. The increase in dollar amount of such expenses was
primarily attributable to an increase of approximately $400,000 in commission
expense due to increased software license fees. Sales and marketing expenses as
a percentage of total revenues decreased from 92.9% for the year ended December
31, 1995 to 59.6% for the year ended December 31, 1996, due to an increasing
revenue base.
Product Development. Product development expenses increased 56.6%, from
$3.7 million for the year ended December 31, 1995 to $5.7 million for the year
ended December 31, 1996. The increase was primarily attributable to the
additional engineers retained for development of new product modules as well as
enhancements to existing products. Product development expenses as a percentage
of total revenues were 78.2% for the year ended December 31, 1995 and 68.7% for
the year ended December 31, 1996. The decrease as a percentage of total revenues
was due to an increasing revenue base.
General and Administrative. General and administrative expenses increased
86.4%, from $1.3 million for the year ended December 31, 1995 to $2.5 million
for the year ended December 31, 1996. General and administrative expenses as a
percentage of total revenues increased from 28.1% for the year ended December
31, 1995 to 29.4% for the year ended December 31, 1996. The increases in dollar
amount and as a percentage of revenues resulted primarily from additional costs
associated with the Company's growth, including an increase in executive
compensation ($492,000) attributable to non-qualified stock options granted in
the second quarter of 1996, an increase in the provision for doubtful accounts
due to continued growth in the customer base ($190,000) and an increase in
employment recruiting fees ($122,000) related to an increase in staffing.
Provision for Income Taxes. No provision or benefit for federal, state or
foreign income taxes was made for the years ended December 31, 1995 or December
31, 1996 due to the operating losses incurred in the respective periods and the
availability of net operating loss carryforwards.
15
18
SELECTED QUARTERLY OPERATING RESULTS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. Such fluctuations may result in volatility in the price
of the Company's Common stock. Quarterly revenues and operating results may
fluctuate as a result of a variety of factors, including the Company's lengthy
sales cycle, the proportion of revenues attributable to software license
revenues versus service and maintenance revenues, changes in the level of
operating expenses, demand for the Company's products, the introduction of new
products and product enhancements by the Company or its competitors, changes in
customer budgets, competitive conditions in the industry and general economic
conditions. Furthermore, the purchase of the Company's products often involves a
significant commitment of capital by its customers with the attendant delays
frequently associated with large capital expenditures and authorization
procedures within an organization. For these and other reasons, the sales cycles
for the Company's products are typically lengthy and subject to a number of
significant risks over which the Company has little or no control. The Company
has often recognized a substantial portion of its revenues in the last month of
a quarter. As a result, software license revenues in any quarter are
substantially dependent on installations performed in the last month of that
quarter. Accordingly, a small variation in the timing of recognition of revenues
for specific transactions is likely to adversely and disproportionately affect
the Company's operating results for a quarter because the Company establishes
its expenditure levels on the basis of its expected future revenues and only a
small portion of the Company's expenses vary with its revenues. Accordingly, the
Company believes that period to period comparisons of results of operations are
not necessarily meaningful and should not be relied upon as indicative of future
performance.
The Company has only been profitable during the two most recent quarters
ended September 30, 1997 and December 31, 1997, and there can be no assurance
that the Company will remain profitable on a quarterly basis. The Company's
software license revenues during the quarter ended December 31, 1997 were
significantly higher than software license revenues from previous quarters due
primarily to a significant number of software installations during the quarter.
Service and maintenance revenues during the quarter primarily reflected a
significant demand, continued from the quarter ended September 30, 1997, for
services from new customers. Cost of software license revenues remained
relatively low due to increased sales of proprietary products relative to
third-party products. Cost of service and maintenance revenues reflected greater
utilization of in-house support staff and less reliance on third-party
consultants.
The Company's business has experienced and is expected to continue to
experience significant seasonality with respect to software license fees. In
recent years, the Company has had greater demand for its products in its fourth
quarter and has experienced lower revenues in its succeeding first quarter.
These fluctuations are 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. The Company believes
that seasonal trends may continue for the foreseeable future.
The following table sets forth unaudited quarterly results of operations of
the Company for each of the quarters in the years ended December 31, 1997 and
1996. In management's opinion, this unaudited information has been prepared on
the same basis as the audited Financial Statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the Company's Financial Statements and Notes thereto included
elsewhere in this Form 10-K. The results of operations for any quarter are not
necessarily indicative of future results of operations.
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19
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1997 1997 1997 1997 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Software license $ 6,539 $ 4,541 $ 1,510 $ 1,311 $ 2,113 $ 1,658 $ 775 $ 659
Service and maintenance 2,625 2,397 1,465 1,236 1,098 894 839 311
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 9,164 6,938 2,975 2,547 3,211 2,552 1,614 970
Cost of revenues:
Software license 209 160 163 296 141 36 73 61
Service and maintenance 1,951 1,622 1,100 777 598 482 616 485
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues 2,160 1,782 1,263 1,073 739 518 689 546
Operating expenses:
Sales and marketing 2,514 1,992 1,753 1,561 1,573 1,422 1,055 928
Product development 1,908 1,906 1,914 2,152 1,708 1,561 1,546 918
General and administrative 617 597 507 595 655 511 884 403
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 5,039 4,495 4,174 4,308 3,936 3,494 3,485 2,249
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 1,965 661 (2,462) (2,834) (1,464) (1,460) (2,560) (1,825)
Interest income 70 32 53 13 9 22 27 1
Interest expense (38) (57) (20) (26) (36) (36) (35) (90)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision 1,997 636 (2,429) (2,847) (1,491) (1,474) (2,568) (1,914)
for income taxes
Provision for income taxes -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,997 $ 636 $(2,429) $(2,847) $(1,491) $(1,474) $(2,568) $(1,914)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic $ 0.26 $ 0.10 $ (0.41) $ (0.52) $ (0.36) $ (0.39) $ (0.67) $ (0.51)
Diluted $ 0.23 $ 0.09 $ (0.41) $ (0.52) $ (0.36) $ (0.39) $ (0.67) $ (0.51)
Weighted average shares:
Basic 7,781 6,090 5,971 5,484 4,144 3,827 3,806 3,785
Diluted 8,612 6,776 5,971 5,484 4,144 3,827 3,806 3,785
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The following table sets forth unaudited quarterly results of operations as
a percentage of revenues for each of the quarters in the years ended December
31, 1997 and 1996.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1997 1997 1997 1997 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
Revenues:
Software license 71.4% 65.5% 50.8% 51.5% 65.8% 65.0% 48.0% 67.9%
Service and maintenance 28.6 34.5 49.2 48.5 34.2 35.0 52.0 32.1
----- ----- ----- ------ ----- ----- ------ ------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software license 2.3 2.3 5.5 11.6 4.4 1.4 4.5 6.3
Service and maintenance 21.3 23.4 37.0 30.5 18.6 18.9 38.2 50.0
----- ----- ----- ------ ----- ----- ------ ------
Total cost of revenues 23.6 25.7 42.5 42.1 23.0 20.3 42.7 56.3
Operating expenses:
Sales and marketing 27.4 28.7 58.9 61.3 49.0 55.7 65.4 95.7
Product development 20.9 27.5 64.3 84.5 53.2 61.2 95.7 94.6
General and administrative 6.7 8.6 17.0 23.4 20.4 20.0 54.8 41.5
----- ----- ----- ------ ----- ----- ------ ------
Total operating expenses 55.0 64.8 140.2 169.2 122.6 136.9 215.9 231.8
----- ----- ----- ------ ----- ----- ------ ------
Operating income (loss) 21.4 9.5 (82.7) (111.3) (45.6) (57.2) (158.6) (188.1)
Interest income 0.8 0.5 1.8 0.5 0.3 0.9 1.7 0.1
Interest expense (0.4) (0.8) (0.7) (1.0) (1.1) (1.4) (2.2) (9.3)
----- ----- ----- ------ ----- ----- ------ ------
Income (loss) before provision 21.8 9.2 (81.6) (111.8) (46.4) (57.7) (159.1) (197.3)
for income taxes
Provision for income taxes
----- ----- ----- ------ ----- ----- ------ ------
Net income (loss) 21.8% 9.2% (81.6)% (111.8)% (46.4)% (57.7)% (159.1)% (197.3)%
===== ===== ===== ====== ===== ===== ====== ======
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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 and, to a lesser extent, equipment
financing and traditional financing arrangements. In December 1997, the Company
completed an initial public offering of its common stock, resulting in net
proceeds to the Company of approximately $22.2 million.
As of December 31, 1997, the Company had cash and cash equivalents of $24.6
million, an increase of $21.3 million from December 31, 1996. The Company's
working capital at December 31, 1997 was $26.7 million, compared to $1.5 million
at December 31, 1996.
The Company's operating activities resulted in net cash outflow of $5.0
million, $6.2 million and $6.4 million for the years ended December 31, 1997,
1996 and 1995, respectively, principally for product development and sales and
marketing. Investing activities, consisting of capital expenditures (primarily
computer equipment), resulted in net cash outflow of $559,000, $425,000 and
$223,000 for the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997, the Company had no material commitments for capital
expenditures. The Company's financing activities generated net cash of $26.9
million, $9.9 million and $5.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. Such cash was primarily attributable to proceeds
from the Company's initial public offering of its common stock, private
placements of the Company's stock and from borrowings.
The Company has a working capital revolving line of credit with a bank,
which is secured by the Company's accounts receivable. The amount available
under this facility is limited to the lesser of 80% of the Company's eligible
accounts receivable, as defined, or $5.0 million. The facility will expire on
April 1, 1999. The agreement under which the line of credit was established
contains certain covenants, including provisions requiring the Company to
maintain specified financial ratios. The Company was in compliance with these
covenants at December 31, 1997. At December 31, 1997, no borrowings were
outstanding under this line of credit.
The Company believes that cash and cash equivalents, cash generated
internally by operations, and available borrowings under the line of credit will
be sufficient to meet the Company's working capital requirements for at least
the next twelve months.
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,
FlexiInfoSuite 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 $22.2 million at December 31, 1997 and incurred net losses of $2.6 million
and $7.4 million during 1997 and 1996, respectively. To date, the quarters ended
September 30, 1997 and December 31, 1997 have been the Company's only profitable
quarters, and there can be no assurance that the Company will sustain
profitability. As of December 31, 1997, 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, 1997, it is more likely than not that the Company will not generate
sufficient taxable income prior to the expiration of the net operating losses in
2012. Accordingly, the Company has recorded a full valuation allowance for its
deferred tax assets at December 31, 1997.
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. 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. In addition, a limited number of the
Company's client services are performed on a fixed price basis and, therefore,
the Company bears the risk of cost overruns and inflation. The Company's results
of operations may be adversely affected by inaccurate estimates of completion
costs for such services.
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. In addition, the Company plans to
increase operating expenses to expand its research and development, client
services, sales and marketing and administrative organizations. The timing of
such expansion and the rate at which new personnel become productive could cause
material fluctuations in quarterly and annual 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. Revenues have
historically increased at higher rates in the fourth quarter of the year and at
lower rates in the next succeeding quarter, which the Company believes is due to
the Company's quota-based compensation arrangements, typical of those used in
software companies, and year-end budgetary pressures on the Company's customers.
The Company believes that this seasonal trend may continue for the foreseeable
future.
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.
Management of Growth. The Company is currently experiencing a period of
rapid growth that could place a significant strain on its management and other
resources. The Company's business has grown significantly in size and complexity
over the past three years. Total revenues increased from $4.7 million in 1995 to
$8.3 million in 1996 and to $21.6 in 1997. In addition, the number of employees
increased from 60 in 1995 to 139 as of December 31, 1997, and the Company
expects to hire additional personnel during 1998. The growth in the size and
complexity of the Company's business as well as its customer base has placed and
is expected to continue to place a significant strain on the Company's
management and operations. Certain members of the Company's senior management
team have been with the Company for less than a year, and the Company's senior
management has had limited experience in managing publicly traded companies. In
addition, more than half of the Company's sales and marketing professionals have
been with the Company for less than a year. The Company anticipates that
continued growth, if any, will require it to recruit and hire a substantial
number of new research and development, consulting, sales and marketing and
administrative personnel. There can be no assurance that the Company will be
successful in hiring or retaining such personnel. The Company's ability to
compete effectively and to manage future growth, if any, will
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23
depend on its ability to continue to implement and improve operational,
financial and management information systems on a timely basis and to expand,
train, motivate and manage its work force. There can be no assurance that the
Company's personnel, systems, procedures and controls will be adequate to
support the Company's operations. In addition, one element of the Company's
business strategy is to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. There can be no
assurance that the Company will be able to identify and acquire such businesses
on reasonable terms, integrate fully any such acquired businesses with the
Company's existing operations, operate any such businesses profitably or
otherwise implement its growth strategy. If the Company's management is unable
to manage growth effectively, the quality of the Company's products and its
business, financial condition and results of operations could be materially
adversely affected.
Dependence on Key Personnel. The Company's performance depends
substantially on the performance of its senior management team 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 maintains employment agreements
with certain key personnel. The loss of the services 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 key person insurance policies on Stefan R. Bothe and James W. Schenck.
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
require 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 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, FlexiInfoSuite
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 the financial services and other industries will adopt
object-oriented, component-based standards, that
21
24
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, 1997, 1996 and 1995, two customers,
one customer and one customer, respectively, each represented 10% or more of the
Company's total revenues (or an aggregate of 40.2%, 12.3% and 12.1% of total
revenues, respectively). Although the Company's largest customers have varied
from period to period, 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 large 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. 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 FIPs and its distributor. In addition, the
Company's FIPs 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
FIPs 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.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the Year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. Although the Company currently offers software products that
are designed to be Year 2000 compliant, there can be no assurance that the
Company's software products contain all necessary date code changes. In
addition, the Company has warranted, and may in the future warrant, to certain
customers that its products will be Year 2000 compliant, and the failure of such
products to be Year 2000 compliant could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Many potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary; this
may result in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including current Company customers, to
reevaluate their current financial accounting system needs, and, as a result,
consider switching to other systems or suppliers. Any of the foregoing could
result in a material adverse effect on the Company's business, financial
condition or results of operations.
Euro Conversion Compliance. The euro is expected to be the new common
currency for Europe effective January 1, 1999. The Company's products are
designed to comply with this new requirement, with full functionality expected
shortly after the European Commission finalizes the euro conversion definition.
The failure to be euro compliant could have a material adverse effect on the
Company's business, financial condition or 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 FIPs 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 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
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25
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 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 FIPs and its distributor. 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 FIPs, 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
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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, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has attempted to seek FIPs and distributors 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 16.9% and 15.2% of total revenues during 1997and
1996, respectively. The Company has an office in London and a distributor in
Hong Kong and intends to expand its international sales activity as part of its
business strategy. In order to expand international sales in subsequent periods,
the Company must establish additional foreign operations, hire additional
personnel and establish relationships with additional FIPs and distributors.
This will require significant management attention and financial resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, 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 U.S. dollars. An increase in the value of the U.S.
dollar 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and the accompanying financial
statements, notes and schedule which are filed as part of this Annual Report on
Form 10-K following the signature page and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the registrant will file a definitive Proxy Statement
pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after
the end of the fiscal year covered by this report, 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 under the heading "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 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 "Director Compensation," "Compensation of Executive
Officers" and "Compensation Interlocks and Insider Participation" and
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 incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 SCHEDULES. 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
No Current Reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year covered by this Annual Report on
Form 10-K.
25
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FLEXIINTERNATIONAL SOFTWARE, INC.
By: /s/ Stefan R. Bothe
---------------------------------
Stefan R. Bothe, Chairman & CEO
Date: March 30, 1998
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 and Chief March 30, 1998
---------------------- Executive Officer (Principal
Stefan R. Bothe Executive Officer)
/s/ Richard P. Horner Vice President, Finance (Principal March 30, 1998
---------------------- Financial and Accounting Officer)
Richard P. Horner
/s/ Thomas H. Bredt Director March 30, 1998
----------------------
Thomas H. Bredt
/s/ Jennifer V. Cheng Director March 30, 1998
----------------------
Jennifer V. Cheng
Director _____, 1998
----------------------
John B. Landry
/s/ A. David Tory Director March 25, 1998
----------------------
A. David Tory
26
29
FLEXIINTERNATIONAL SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants F-2
Balance Sheet as of December 31, 1997 and 1996 F-3
Statement of Operations for the years ended December 31, 1997,
1996 and 1995 F-4
Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1996 and 1995 F-5
Statement of Cash Flows for the years ended December 31, 1997,
1996 and 1995 F-6
Notes to Financial Statements F-7 - F-16
F-1
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FlexiInternational Software, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of FlexiInternational Software,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, 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.
Price Waterhouse LLP
Stamford, Connecticut
January 26, 1998, except
as to Note 2 which is as of
February 3, 1998
F-2
31
FLEXIINTERNATIONAL SOFTWARE, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 24,622 $ 3,273
Accounts receivable, net of allowance for doubtful
accounts of $672 and $405, respectively 8,571 3,061
Prepaid expenses and other current assets 1,143 617
-------- --------
Total current assets 34,336 6,951
Property and equipment at cost, net of accumulated depreciation
and amortization of $1,392 and $905, respectively 1,222 647
Accounts receivable -- 60
Other assets, net of accumulated amortization of $197 and $112, respectively 112 175
-------- --------
Total assets $ 35,670 $ 7,833
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
-----------------------------------------------
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,409 $ 2,723
Convertible loan -- 500
Current portion of convertible note payable -- 135
Current portion of capital lease obligations 206 238
Deferred revenues 3,045 1,875
-------- --------
Total current liabilities 7,660 5,471
Long-term portion of convertible note payable -- 571
Long-term portion of capital lease obligations 304 45
Deferred revenues -- 60
-------- --------
Total liabilities 7,964 6,147
-------- --------
Commitments and contingencies (Note 8)
Mandatorily redeemable convertible preferred stock (Note 6) -- 15,509
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock; $.01 par value; 50,000,000 shares authorized;
issued and outstanding shares - 16,492,008 and 4,744,144, respectively 165 48
Additional paid-in capital 49,749 5,694
Accumulated deficit (22,208) (19,565)
-------- --------
Total stockholders' equity (deficit) 27,706 (13,823)
-------- --------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity (deficit) $ 35,670 $ 7,833
======== ========
See accompanying notes to financial statements.
F-3
32
FLEXIINTERNATIONAL SOFTWARE, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Software license $ 13,901 $ 5,205 $ 3,166
Service and maintenance 7,723 3,142 1,517
-------- -------- --------
Total revenues 21,624 8,347 4,683
Cost of revenues:
Software license 828 311 88
Service and maintenance 5,450 2,181 1,708
-------- -------- --------
Total cost of revenues 6,278 2,492 1,796
Operating expenses:
Sales and marketing 7,820 4,978 4,350
Product development 7,880 5,733 3,660
General and administrative 2,316 2,453 1,316
-------- -------- --------
Total operating expenses 18,016 13,164 9,326
-------- -------- --------
Operating loss (2,670) (7,309) (6,439)
Interest income 168 59 58
Interest expense (141) (197) (106)
-------- -------- --------
Loss before provision for income taxes (2,643) (7,447) (6,487)
Provision for income taxes -- -- --
-------- -------- --------
Net loss $ (2,643) $ (7,447) $ (6,487)
======== ======== ========
Basic and diluted loss per share:
Net loss per share $ (0.42) $ (1.91) $ (1.72)
Unaudited pro forma net loss per share (Note 2) $ (0.19)
Weighted average shares 6,332 3,891 3,770
Weighted average shares - pro forma (Note 2) 13,894
See accompanying notes to financial statements.
F-4
33
FLEXIINTERNATIONAL SOFTWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Additional Total
----------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------ ------ ------- ------- ----------------
Balance at January 1, 1995 3,765,747 $ 38 $ 1,548 $ (5,631) $ (4,045)
Exercise of stock options 8,775 -- 11 -- 11
Net loss -- -- -- (6,487) (6,487)
---------- ---- ------- -------- --------
Balance at December 31, 1995 3,774,522 38 1,559 (12,118) (10,521)
Issuance of common stock 885,000 9 3,531 -- 3,540
Compensation expense related to stock options granted and vested -- -- 492 -- 492
Exercise of stock options 84,622 1 112 -- 113
Net loss -- -- -- (7,447) (7,447)
---------- ---- ------- -------- --------
Balance at December 31, 1996 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)
---------- ---- ------- -------- --------
Balance at December 31, 1997 16,492,008 $165 $49,749 $(22,208) $ 27,706
========== ==== ======= ======== ========
See accompanying notes to financial statements.
F-5
34
FLEXIINTERNATIONAL SOFTWARE, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss $ (2,643) $(7,447) $(6,487)
Non-cash items included in net loss:
Depreciation and amortization 572 466 393
Provision for doubtful accounts 500 665 476
Conversion of accrued interest to preferred stock -- 59 11
Expense related to stock options 141 640 --
Change in operating accounts:
Accounts receivable (5,950) (2,097) (1,160)
Prepaid expenses and other assets (548) (117) (259)
Accounts payable and accrued expenses 1,837 738 817
Deferred revenue 1,110 877 (172)
-------- ------- -------
Net cash used in operating activities (4,981) (6,216) (6,381)
Cash flows from investing activities:
Proceeds from sale of property and equipment -- -- 113
Purchase of property and equipment (559) (425) (336)
-------- ------- -------
Net cash used in investing activities (559) (425) (223)
Cash flows from financing activities:
Proceeds from sales of preferred stock -- 5,000 3,262
Proceeds from sales of common stock, net of stock issue costs 26,517 3,540 --
Proceeds from exercise of stock options and warrants 754 113 11
Proceeds from convertible loan and promissory notes -- 2,000 1,500
(Repayments of) proceeds from line of credit, net -- (453) 453
(Repayments of) proceeds from convertible note payable (106) (45) 750
Payments of capital lease obligations (276) (256) (227)
-------- ------- -------
Net cash provided by financing activities 26,889 9,899 5,749
-------- ------- -------
Increase (decrease) in cash and cash equivalents 21,349 3,258 (855)
-------- ------- -------
Cash and cash equivalents at beginning of year 3,273 15 870
-------- ------- -------
Cash and cash equivalents at end of year $ 24,622 $ 3,273 $ 15
======== ======= =======
Supplemental disclosures:
Interest paid in cash $ 139 $ 197 $ 105
Assets acquired through capital lease obligations $ 503 $ -- $ 423
Exchange of loan and accrued interest for preferred stock $ -- $ 3,059 $ 1,021
Exchange of loans for common stock $ 1,100 $ -- $ --
See accompanying notes to financial statements.
F-6
35
FLEXIINTERNATIONAL SOFTWARE, INC.
NOTES TO 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 offers an integrated suite of object-oriented, component-based financial
accounting applications, reporting and workflow applications, and development
and customization tools based upon a client/server, multi-tier architecture and
rule-driven design to address the needs of users with sophisticated financial
accounting requirements, including high functionality, high adaptability and
scalability, low cost of implementation and capacity to support new and emerging
technologies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION:
The Company licenses software under noncancellable license agreements through
direct and indirect channels, and provides services including maintenance,
training and consulting. Software license revenues through the Company's direct
sales channel are recognized when a noncancellable license agreement has been
signed, the product has been delivered and installed, collection is considered
probable by management and all significant contractual obligations have been
satisfied. Software license revenues 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. 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.
EXPORT SALES:
Export sales for the years ended December 31, 1997, 1996 and 1995 were
approximately 17%, 15% and 17%, respectively. Export sales are generally
denominated in U.S. dollars.
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.
CASH AND CASH EQUIVALENTS:
The Company considers all interest-bearing securities having original maturities
of three months or less to be cash equivalents.
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, one customer and
one customer, respectively, each represented 10% or more of the Company's total
revenues, or an aggregate of 40.2%, 12.3%, 12.1% of total revenues for the years
F-7
36
ended December 31, 1997, 1996 and 1995, respectively. One customer represented
approximately 18.7% of the Company's net accounts receivable at December 31,
1997.
PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consist primarily of prepaid expenses,
organizational costs and other intangible assets. Organizational costs and other
intangible assets are being amortized over periods not exceeding five years.
Amortization expense for the years ended December 31, 1997, 1996 and 1995 was
$85, $71 and $45, respectively. The Company periodically reviews the
recoverability of intangible and other long-lived assets based upon anticipated
cash flows generated from such underlying assets.
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, 1997, 1996 and 1995 amounted to $487, $395 and $348, respectively,
and includes amortization of assets recorded under capital lease obligations.
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.
UNAUDITED PRO FORMA LOSS PER SHARE:
Pro forma loss per share is based on the pro forma weighted average number of
shares of common stock and common equivalent shares outstanding for the period.
The pro forma weighted average number of shares includes an additional 7,562,000
shares assuming the conversion of the Company's mandatorily redeemable
convertible preferred stock as of January 1, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The adoption of this standard had no material effect on the Company's financial
statements. In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. Management has adopted this standard effective
January 1, 1996 by means of disclosure of the pro forma effect of the
compensation components of stock-based compensation in Note 7.
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 applies to entities
with publicly held common stock or potential common stock and is effective for
financial statements issued for periods ending after December 15, 1997. Under
SFAS No. 128, the presentation of primary earnings per share is replaced with a
presentation of basic earnings per share. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share for entities with complex
capital structures. Basic earnings per share includes no dilution and is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
The Company has presented basic and diluted loss per share for all periods.
F-8
37
The Company has included 299,000 weighted average shares representing the
conversion of 7,861,350 of the Company's mandatorily redeemable convertible
preferred stock on December 17, 1997. The Company has excluded 968,000,
1,085,000 and 937,000 outstanding options and warrants for the years ended
December 31, 1997, 1996 and 1995, respectively, from the diluted share number
because they are antidilutive.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 applies to all
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("SFAS
No. 131"). SFAS No. 131 applies to all public companies and is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 requires that
business segment financial information be reported in the financial statements
utilizing the management approach. The management approach is defined as the
manner in which management organizes the segments within the enterprise for
making operating decisions and assessing performance. Management believes the
adoption of SFAS No. 131 will not have a material impact on the financial
statements.
In December 1997, the AICPA issued SOP 97-2 "Software Revenue Recognition" to be
effective for fiscal years beginning after December 15, 1997. The Company has
adopted SOP 97-2 effective January 1, 1998. Management believes that the
adoption of SOP 97-2 will not have a material impact on the financial
statements.
In February 1998, the SEC issued Staff Accounting Bulletin No. 98 ("SAB No.
98"). SAB No. 98 requires the disclosure of historical earnings per share
information for all pre initial public offering periods in accordance with SFAS
No. 128. As a result, the Company has included historical earnings (loss) per
share for all periods presented.
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.
NOTE 3 - INCOME TAXES:
Significant components of the Company's deferred tax asset at December 31, 1997
and 1996 are as follows:
December 31,
1997 1996
---- ----
Net operating loss carryforwards $ 7,195 $ 6,436
Other 1,101 818
------- -------
Subtotal 8,296 7,254
Valuation allowance (8,296) (7,254)
------- -------
Net deferred tax asset $ -- $ --
======= =======
No provision or benefit for federal or state income taxes has been made for the
years ended December 31, 1997, 1996 and 1995 given the Company's loss position.
At December 31, 1997, the Company had domestic net operating loss carryforwards
of approximately $18,000 which expire through the year 2012. The deferred tax
assets at December 31, 1997 and 1996 have been fully reserved due to the
uncertainty of their realization, primarily attributed to the Company's
historical losses.
F-9
38
For tax purposes, there is an annual limitation on the utilization of the net
operating loss carryforwards resulting from an ownership change as defined by
Internal Revenue Code Section 382. Due to this annual limitation, the net
operating loss carryforwards may expire prior to when otherwise utilizable.
NOTE 4 - 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.
ACCOUNTS RECEIVABLE LINE OF CREDIT:
In April 1997, the Company entered into a revolving credit agreement with a
financial institution. The agreement, as modified in January 1998, allows 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 is required to
maintain certain financial covenants. In addition, payment of cash dividends is
prohibited without the lender's consent. The line of credit agreement expires
April 1, 1999. At December 31, 1997, no borrowings were outstanding under this
credit facility.
The Company maintained a line of credit facility with a holder of shares of the
Company's Series B convertible preferred stock which allowed for borrowings of
the lesser of 75% of eligible receivables, as defined by the agreement, or
$1,500. This line of credit was extended through December 31, 1996 and then
canceled.
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.
CONVERTIBLE PROMISSORY NOTES:
In February 1996, the Company issued convertible promissory notes payable
totaling $900 to certain of its Series B preferred stockholders. The notes bore
interest at a rate of 5.33% and were canceled in connection with the issuance of
shares of Series C convertible preferred stock in May 1996 (Note 6).
In January 1996, the Company issued convertible promissory notes payable
totaling $600 to certain of its Series B preferred stockholders. The notes bore
interest at a rate of 5.33% and were converted into Series C convertible
preferred stock in May 1996 (Note 6).
In October 1995, the Company issued a convertible promissory note payable
totaling $1,500 to certain of its Series B preferred stockholders. The note bore
interest at a rate of 5.33% and was converted into Series C convertible
preferred stock in May 1996 (Note 6).
In November 1994, the Company issued a convertible promissory note payable
totaling $1,010 to certain of its Series A preferred stockholders. The note bore
interest at a rate of 6.24% and was converted into Series B preferred stock in
January 1995 (Note 6).
NOTE 5 - CAPITAL LEASE OBLIGATIONS:
In June 1995, the Company financed, under a sale leaseback arrangement, all
property and equipment it purchased from September 1994 to June 1995 and
received $113 in cash. The transaction was accounted for as a capital lease
wherein the property and equipment remained an asset of the Company and
continued to be depreciated. In addition, all purchases of property and
equipment made between June 1995 and December 1995, as well as certain fixed
asset acquisitions during the year ended December 31, 1997, were financed
through a capital lease arrangement. Total property and equipment acquired under
these capitalized leases, which consisted primarily of
F-10
39
computer equipment, at December 31, 1997 and 1996 amounted to $1,363 and $782,
respectively. Accumulated depreciation on these assets at December 31, 1997 and
December 31, 1996 amounted to $775 and $561, respectively. The annual interest
rates on such obligations range from 8.5% to 11.5%.
Approximate maturities of such capital lease obligations are as follows at
December 31, 1997:
1998 $241
1999 196
2000 143
----
Total 580
Less amounts representing interest 70
---
Total capital lease obligation 510
Less amounts due within one year 206
----
Long-term portion capital lease obligations $304
====
NOTE 6 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company had authorized 13,027,874 shares of preferred stock, $.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 in December 1997 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 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 was 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 was 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 was entitled to receive up to $3.30 per share (for
a total of $9,283). 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 $0.105 per share per annum. The Series B preferred shares were
mandatorily converted in December 1997 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.
F-11
40
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 was 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 was 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 was
entitled to receive up to $3.30 per share (for a total of $16,118). 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 $0.1155 per share per annum.
The Series C preferred shares were mandatorily converted in December 1997 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.
NOTE 7 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
After the completion of the Company's 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 of
its common stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended. 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.
In December 1996, the Company sold 885,000 shares of the Company's common stock
to a private investor group. The shares were sold for $4.00 per share and the
total proceeds were $3,540.
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-12
41
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.
STOCK PLANS:
The Company's 1992 Stock Option Plan (the "1992 Plan") provides 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 these 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. At December 31, 1997, no options under the Incentive Plan had
been granted.
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.
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 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 will be equivalent 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. At
F-13
42
December 31, 1997, 22,500 options under the Director Plan were outstanding at an
exercise price of $11.00 per share.
The following table describes the Company's stock option activity under its 1992
Plan:
Weighted average
Number of exercise price
options per share
------- ---------
(priced at date of grant)
Outstanding at January 1, 1995 745,650 $1.12
Granted 328,725 $1.68
Exercised (8,775) $1.33
Canceled (297,600) $1.41
--------
Outstanding at December 31, 1995 768,000 $1.24
Granted 425,144 $0.92
Exercised (84,622) $1.33
Canceled (192,578) $1.81
--------
Outstanding at December 31, 1996 915,944 $0.96
Granted 466,220 $4.60
Exercised (211,514) $0.73
Canceled (296,250) $1.93
--------
Outstanding at December 31, 1997 874,400 $2.71
Exercisable at December 31, 1995 361,642 $0.73
Exercisable at December 31, 1996 636,854 $0.52
Exercisable at December 31, 1997 468,030 $0.43
Options available for grant at December 31, 1997 -- --
The following table summarizes information regarding stock options granted
during 1995, 1996 and 1997 under the Company's 1992 Plan:
Weighted Weighted
Number of average average
options exercise fair
granted price value
------- ----- -----
1995:
- -----
Options granted at less than market value 121,875 $0.93 $1.89
Options granted at market value 170,625 $2.00 $0.57
Options granted above market value 36,225 $2.67 $0.03
1996:
- -----
Options granted at less than market value 256,619 $0.01 $2.19
Options granted at market value 168,525 $2.09 $0.53
1997:
- -----
Options granted at less than market value 144,194 $1.24 $3.04
Options granted at market value 322,026 $6.21 $1.93
F-14
43
The following table summarizes information regarding stock options outstanding
at December 31, 1997 under the Company's 1992 Plan:
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 12/31/97 in years per share at 12/31/97 price
------ ----------- -------- --------- ----------- -----
$0.00027-$0.0133 338,250 7.36 $0.0104 337,500 $0.0104
$1.33-$2.00 192,600 6.71 $ 1.47 116,610 $ 1.40
$2.20-$2.67 56,550 8.46 $ 2.41 13,545 $ 2.46
$4.00 123,150 9.18 $ 4.00 300 $ 4.00
$8.67-$10.00 163,850 9.62 $ 8.89 75 $ 10.00
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,
1997 1996 1995
---- ---- ----
Net loss as reported $ (2,643) $ (7,447) $ (6,487)
Net loss pro forma $ (2,690) $ (7,452) $ (6,495)
Diluted loss per share as reported $ (0.42) $ (1.91) $ (1.72)
Diluted loss per share pro forma $ (0.42) $ (1.92) $ (1.72)
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 6.31% for the year ended December 31,
1997 and 6.48% for the years ended December 31, 1996 and 1995, an expected
option life of 5 years and volatility of .65 for the year ended December 31,
1997. 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 874,400 shares of common stock for options outstanding
under the 1992 Plan and 93,773 shares of common stock for exercisable warrants.
In addition, the Company has reserved 2,325,000 shares of common stock for its
Incentive Plan, Purchase Plan and Director Plan.
F-15
44
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company leases space in several buildings which it uses for offices and
development facilities and rents various equipment and vehicles, all subject to
operating leases. As of December 31, 1997, the minimum annual rental payments
under the terms of such noncancellable leases which expire at various dates
through 2003 are as follows:
1998 $480
1999 370
2000 317
2001 296
2002 297
Thereafter 154
------
Total minimum lease payments $1,914
======
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to
$531, $317 and $251, respectively.
From time to time in the ordinary course of business, the Company is subject to
legal proceedings. While it is not possible to determine the ultimate outcome of
such matters, it is management's opinion that the resolution of any pending
issues will not have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
F-16
45
FLEXIINTERNATIONAL SOFTWARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
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
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1995 EXPENSES DEDUCTIONS DECEMBER 31, 1996
----------- ----------------- -------- ---------- -----------------
Allowance for doubtful accounts $ 422 $ 665 $ (682) $ 405
Valuation allowance for deferred tax asset $4,143 $3,111 $7,254
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1994 EXPENSES DEDUCTIONS DECEMBER 31, 1995
----------- ----------------- -------- ---------- -----------------
Allowance for doubtful accounts $ 75 $ 476 $ (129) $ 422
Valuation allowance for deferred tax asset $1,630 $2,513 $4,143
46
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
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.
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.
23 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule. (fiscal 1997)
27.2 Restated Financial Data Schedule. (fiscal 1996)
27.3 Restated Financial Data Schedule. (9-month period ended September
30, 1997)