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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1309427
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Two Enterprise Drive, Shelton, CT 06484
(Address of Principal Executive Offices) (Zip Code)
(203) 925-3040
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of September 30, 2002, there were 17,784,185 shares of FlexiInternational
Software, Inc. Common Stock outstanding.
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FLEXIINTERNATIONAL SOFTWARE, INC.
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets...............................3
Condensed Consolidated Statements of Operations.....................4
Condensed Consolidated Statements of Cash Flows.....................5
Condensed Consolidated Statements of Stockholders' Deficit..........6
Notes to Condensed Consolidated Financial Statements................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........13
Item 4. Controls and Procedures..............................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signature....................................................................14
Certifications...............................................................15
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except number of shares)
SEPTEMBER 30, DECEMBER 31,
2002 2001
ASSETS (unaudited) (audited)
- ------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,171 $ 637
Accounts receivable, net of allowance for
doubtful accounts of $165 and $22, respectively 1,299 1,954
Prepaid expenses and other current assets 196 126
------------ ------------
TOTAL CURRENT ASSETS 2,666 2,717
Property and equipment at cost, net of accumulated
depreciation of $4,704 and $4,569, respectively 304 418
Other assets 418 276
------------ ------------
$ 3,388 $ 3,411
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,564 $ 1,739
Deferred revenue 2,874 3,478
Current portion of long-term debt 336 148
------------ ------------
TOTAL CURRENT LIABILITIES 4,774 5,365
------------ ------------
LONG-TERM DEBT LESS PRINCIPAL DUE WITHIN
ONE YEAR 619 933
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.01 per share,
5,000,000 shares authorized, no shares
issued and outstanding 0 0
Common stock, par value $.01 per share,
50,000,000 shares authorized, 17,784,185
issued and outstanding 178 178
Additional paid-in-capital 56,117 56,117
Accumulated deficit (58,578) (59,477)
Other accumulated comprehensive income 278 295
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (2,005) (2,887)
------------ ------------
$ 3,388 $ 3,411
============ ============
See accompanying notes to condensed consolidated financial statements.
3
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except number of shares)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------------------- -----------------------------
REVENUE
- -------
Software license $ 167 $ 368 $ 634 $ 2,275
Other operating revenue 0 0 500 0
Service and maintenance 1,556 1,490 4,722 5,016
-------- -------- -------- --------
TOTAL REVENUE 1,723 1,858 5,856 7,291
-------- -------- -------- --------
COST OF REVENUE
- ---------------
Software license 63 291 145 444
Service and maintenance 465 571 1,541 1,807
-------- -------- -------- --------
TOTAL COST OF REVENUE 528 862 1,686 2,251
-------- -------- -------- --------
GROSS PROFIT 1,195 996 4,170 5,040
-------- -------- -------- --------
OPERATING EXPENSES
- ------------------
Sales and marketing 400 602 1,138 2,123
Product development 405 270 1,125 1,335
General and administrative 258 940 984 2,257
Goodwill impairment 0 862 0 862
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 1,063 2,674 3,247 6,577
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 132 (1,678) 923 (1,537)
OTHER DEDUCTIONS
- ----------------
Net interest expense (10) (9) (24) (24)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 122 (1,687) 899 (1,561)
INCOME TAXES 0 0 0 0
- ------------ - - - -
-------- -------- -------- --------
NET INCOME (LOSS) $ 122 $ (1,687) $ 899 $ (1,561)
======== ======== ======== ========
INCOME (LOSS) PER SHARE
- -----------------------
Basic $ 0.01 $ (0.10) $ 0.05 $ (0.09)
======== ======== ======== ========
Diluted $ 0.01 $ (0.10) $ 0.05 $ (0.09)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES
- -----------------------
Basic 17,784 17,705 17,784 17,676
======== ======== ======== ========
Diluted 17,784 17,705 17,784 17,676
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 899 $ (1,561)
Non-cash items:
Depreciation and amortization 135 780
Provision for doubtful accounts 143 862
Loss on disposal of assets 0 (4)
Change in operating accounts:
Accounts receivable 512 (780)
Prepaid expenses and other current assets (212) 58
Accounts payable and accrued expenses (175) (47)
Accrued restructuring 0 (27)
Deferred revenue (604) 153
---------- ----------
Net cash provided by (used in) operating activities 698 (566)
---------- ----------
Cash flows from investing activities:
Sales of marketable securities 0 71
Proceeds from sale of property and equipment 0 1
Purchases of property and equipment (24) (32)
---------- ----------
Net cash (used in) provided by investing activities (24) 40
---------- ----------
Cash flows from financing activities:
Repayments of debt (45) (151)
Proceeds from employee stock purchase plan 0 9
Payments of capital lease obligations (81) (402)
---------- ----------
Net cash used in financing activities (126) (544)
---------- ----------
Effect of exchange rate changes on cash (14) (5)
---------- ----------
Increase (decrease) in cash and cash equivalents 534 (1,075)
Cash and cash equivalents at beginning of year 637 1,389
---------- ----------
Cash and cash equivalents at end of year $ 1,171 $ 314
========== ==========
Supplemental disclosures:
Interest paid in cash $ 37 $ 30
Conversion of accounts payable into notes payable $ 0 $ 142
See accompanying notes to condensed consolidated financial statements.
5
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)
(unaudited)
Other
Common Stock Additional accumulated Total
-------------------- Paid-in Accumulated comprehensive stockholders'
Shares Amount Capital Deficit income deficit
-------- -------- ---------- ----------- ------------- ------------
Balance at December 31, 2001 17,784,185 $ 178 $ 56,117 $ (59,477) $ 295 $ (2,887)
Net income 0 0 0 899 0 899
Currency translation
adjustment 0 0 0 0 (17) (17)
--------
Comprehensive income 0 0 0 0 0 882
---------- ------ -------- --------- ------ --------
Balance at September 30, 2002 17,784,185 $ 178 $ 56,117 $ (58,578) $ 278 $ (2,005)
========== ====== ======== ========= ====== ========
See accompanying notes to condensed consolidated financial statements.
6
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended September 30, 2002 and 2001
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The unaudited condensed consolidated financial statements include the accounts
of FlexiInternational Software, Inc. and its subsidiary and reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary to state fairly the results for the interim
periods. The results of operations are not necessarily indicative of the results
expected for the full year.
NOTE 2 - NEW ACCOUNTING STANDARDS
On July 5, 2001, the Financial Accounting Standards Board approved Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 includes requirements to test goodwill and indefinite lived
intangible assets for impairment rather than amortize them. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS 142 in the first quarter of 2002. This will not have a material
effect on the financial statements.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). This statement establishes accounting and reporting standards
for derivative instruments embedded in other contracts and hedging activities.
It requires that an entity recognize all derivatives as either other assets or
liabilities in the balance sheet and measure those instruments at fair value.
This statement did not have a material impact on the Company's financial
condition or results of operations.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
forward-looking statements relating to, among other things, our license revenue,
service revenue, our new outsourcing business, the length of our sales cycle and
future expenses. 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 foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents that we file from
time to time with the Securities and Exchange Commission, including our Annual
Report on Form 10-K for the year ended December 31, 2001.
OVERVIEW
FlexiInternational Software, Inc. designs, develops, markets and supports
the FlexiFinancial Enterprise Suite of financial and accounting software
applications and related tools. The Flexi solution - composed of
FlexiFinancials, FlexiFinancial Datawarehouse, or FlexiFDW, FlexilnfoAccess and
FlexiTools - is designed to address the needs of users with sophisticated
financial accounting and operational analysis requirements. We sell our software
for use in traditional in-house accounting operations as well as through our
accounting outsourcing service to companies desiring to outsource their back
office accounting processes.
Our Financial Management Services solution, or FMS, a business process
outsourcing (BPO) service, is designed to leverage our suite of accounting
products and our expertise in back office processing of accounting data. We
believe that many mid-sized and start-up fast growing companies would benefit
substantially from outsourcing their back office accounting processes to enable
them to better focus on financial analysis, cash management and the strategic
issues of their business. As part of our BPO sales strategy to expand regional
coverage rapidly, we recruit regional resellers of our FMS solution which will
pay us a percentage of the fee they collect for using our software and related
solutions. Some resellers will handle the complete BPO service while others will
handle the client relationship and Flexi will handle the hosting and accounting
aspects of the service. In 2001, we signed a BPO reseller agreement in which we
provided the reseller a convertible loan, in the aggregate principal amount of
$272,000, to help launch the reseller's BPO service. According to industry
analysts, the finance and accounting outsourcing segment of the BPO market is in
the early adoption phase and is expected to double in size over the next three
years. However, we believe the full acceptance of this solution is still several
years away.
We derive our revenue primarily from:
o noncancellable software license agreements entered into with respect
to our products;
o royalties paid to us from third parties that distribute our products;
o to a lesser extent, third-party products distributed by us; and
o annual software maintenance agreements entered into with our
customers.
Our revenues have been derived from both domestic sales and international
sales, with the international sales comprising 21.5% and 19.4% of total revenues
for the nine-month periods ending September 30, 2002 and 2001, respectively. The
international sales generally have the same revenue and cost structure as our
domestic sales. The majority of our international sales are transacted in
British pounds sterling, and an increase in the value of the British pound
relative to the currency of the country in which we are selling our product
could make our products more expensive and potentially less competitive in these
markets. In addition, our international business may be subject to a variety of
other risks, including difficulties in collecting international accounts
receivable or obtaining U.S. export licenses for certain countries, 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."
8
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------------------- --------------------------
REVENUE
- -------
Software license 9.7% 19.8% 10.8% 31.2%
Other operating revenue 0.0% 0.0% 8.5% 0.0%
Service and maintenance 90.3% 80.2% 80.7% 68.8%
---------- ---------- ---------- ----------
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------
COST OF REVENUE
- ---------------
Software license 3.7% 15.7% 2.5% 6.1%
Service and maintenance 27.0% 30.7% 26.3% 24.8%
---------- ---------- ---------- ----------
TOTAL COST OF REVENUE 30.7% 46.4% 28.8% 30.9%
---------- ---------- ---------- ----------
GROSS PROFIT 69.3% 53.6% 71.2% 69.1%
---------- ---------- ---------- ----------
OPERATING EXPENSES
- ------------------
Sales and marketing 23.2% 32.4% 19.4% 29.1%
Product development 23.5% 14.5% 19.2% 18.3%
General and administrative 15.0% 50.6% 16.8% 31.0%
Goodwill impairment 0.0% 46.4% 0.0% 11.8%
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 61.7% 143.9% 55.4% 90.2%
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 7.6% (90.3%) 15.8% (21.1%)
OTHER DEDUCTIONS
- ----------------
Net interest expense (0.6%) (0.5%) (0.4%) (0.3%)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 7.0% (90.8%) 15.4% (21.4%)
INCOME TAXES 0.0% 0.0% 0.0% 0.0%
- ------------ ---- ---- ---- ----
---------- ---------- ---------- ----------
NET INCOME (LOSS) 7.0% (90.8%) 15.4% (21.4%)
========== ========== ========== ==========
REVENUES. Total revenues, consisting of software license revenues and
service and maintenance revenues, decreased 7.3% from $1.9 million for the
quarter ended September 30, 2001 to $1.7 million for the quarter ended September
30, 2002. Total revenues for the nine-month period decreased 19.7% to $5.9
million. Software license revenues decreased 54.6% to $167,000 in the third
quarter of the current year from $368,000 in the comparable period of the prior
year. The prior year nine-month period included $1.0 million of one-time revenue
related to an arbitration settlement with a former reseller while the nine-month
period ended September 30, 2002 included a settlement with a client which
resulted in $215,000 in one-time revenue. Total software license revenue was
$167,000 for the third quarter (81% derived from one customer). Our license
revenue will remain low in the foreseeable future as we continue to focus on
building our BPO service revenue.
Service and maintenance revenues decreased 5.9%, from $5.0 million for the
nine-month period ended September 30, 2001 to $4.7 million for the nine-month
period ended September 30, 2002. This decrease is primarily attributable to a
decline in service revenue due to fewer active client implementations. We do not
expect this trend to be reversed until we begin to experience a higher level of
new product sales from new product licenses and BPO contracts.
Other revenue for the nine months ended September 30, 2002 is $500,000 from
the sale of our rights to the URL dodge.com in the first quarter. This was a
one-time sale.
COST OF REVENUES. Our cost of revenues consists of cost of software license
revenues and cost of service and maintenance revenues. Cost of software license
revenues consists of the cost of third-party software products distributed by us
and the cost of product media, manuals and shipping. Cost of service and
maintenance revenues consists of the cost of providing consulting,
implementation and training to licensees of our products and the cost of
providing software maintenance to customers, technical support services and
periodic upgrades of software.
9
Cost of software license revenue decreased 78.4%, from $291,000 for the
quarter ended September 30, 2001 to $63,000 for the quarter ended September 30,
2002, and decreased 67.3% from $444,000 for the nine-month period ended
September 30, 2001 to $145,000 for the same nine-month period of 2002. Cost of
software license revenues as a percentage of software license revenues decreased
to 37.7% for the quarter ended September 30, 2002 from 79.1% for the quarter
ended September 30, 2001, but increased to 22.9% for the nine months ended
September 30, 2002 from 19.5% for the same period of 2001. While increases or
decreases of cost of software license revenue are directly related to increases
or decreases in new license revenue, this relationship is impacted by the
percentage of third-party revenue included in new license revenue since
third-party revenue has a higher cost component than our own software. Also,
one-time special revenue recognition and license revenue contract adjustments
will affect this relationship.
Cost of service and maintenance revenues decreased 18.6%, from $571,000 for
the quarter ended September 30, 2001 to $465,000 for the quarter ended September
30, 2002. Cost of service and maintenance revenue decreased 14.7% from $1.8
million for the nine-month period ended September 30, 2001 to $1.5 million for
the nine-month period ended September 30, 2002. This nine-month decrease is a
result of a reduction in staffing due to a lower level of client
implementations.
OPERATING EXPENSES. Aggregate operating expenses declined 60.2% in the
quarter ended September 30, 2002 to $1.1 million, from $2.7 million in the
quarter ended September 30, 2001. Operating expenses declined 50.6% for the
nine-month period ended September 30, 2002 to $3.2 million from $6.6 million for
the same nine-month period in 2001. Over the past three years we have focused
our efforts on reducing expenses to attain a level of profitability.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses, and facility and
communication costs for our sales staff. Sales and marketing expenses decreased
33.6% to $400,000 for the third quarter of 2002 from $602,000 in the comparable
period of last year and decreased 46.4% for the nine-month period as result of a
smaller, more focused sales force.
PRODUCT DEVELOPMENT. Product development expenses relate to new and
existing software development and consist primarily of engineering personnel
costs. Product development expenses increased 50% to $405,000 for the quarter
ended September 30, 2002 from $270,000 for the quarter ended September 30, 2001
due to one-time research costs related to outsourcing some development work. For
the nine-month period ended September 30, 2002, these expenses declined 15.7% or
$210,000 to $1.1 million from the same nine-month period in 2001. This decrease
in product development expense was due primarily to the decrease in development
personnel as a result of the completion of the development work on
FlexiFinancials Release 4.3 during 2001. The Company expects to continue to
enhance the functionality of its core financial accounting and reporting
applications and its BPO solutions but does not anticipate the need to
materially increase its development staff from its current level.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel, as
well as provisions for doubtful accounts, amortization of goodwill and outside
professional fees. General and administrative expenses declined 72.6% to
$258,000 for the quarter ended September 30, 2002 from $940,000 in the third
quarter of fiscal year 2001. For the nine-month period, these expenses declined
56.4% from $2.3 million in 2001 to $984,000 in the same period of 2002. This is
primarily due to a reduction of legal expenses and executive compensation.
IMPAIRMENT OF GOODWILL. During September of 2001 management conducted a
periodic impairment assessment of the intangible assets resulting from The Dodge
Group acquisition, which took place in June of 1998. As a result of that review,
management concluded that an impairment had occurred to the goodwill and
intangible assets and that the remaining balance of goodwill relating to the
Dodge acquisition in the amount of $862,000 should be written off in the third
quarter of 2001.
NET INTEREST EXPENSE. Interest income represents income earned on the
Company's cash, cash equivalents and marketable securities while interest
expense represents interest paid under our equipment leasing agreement. Net
interest expense was $10,000 for the quarter ended September 30, 2002 versus net
interest expense of $9,000 for the comparable period of last year. For the
nine-month periods of 2001 and 2002 the net interest expense remained the same
at $24,000.
INCOME TAXES. No provision or benefit for federal, state or foreign income
taxes was made for any of the periods reported upon due to current earnings
being offset by operating loss carryforwards. We have reported only tax losses
to date and consequently have approximately $40.3 million and $26.9 million of
U.S. and foreign net operating loss carryforwards, respectively, which expire
during the years 2005 through 2020, available to offset future taxable income.
The utilization of such net operating losses is subject to limitations as a
result of ownership changes. The annual limitation and the timing of attaining
profitability will result in the expiration of net operating loss carryforwards
before utilization and therefore a valuation reserve has been set up for any
deferred tax assets. The Company's deferred tax assets at December 31, 2001 were
approximately $24.5 million, consisting primarily of net operating loss
carryforwards. The Company's benefit of deferred tax assets has been fully
reserved as of December 31, 2001 and September 30, 2002 as the realization of
deferred taxes is dependent on future events and earnings, if any, the timing
and extent of which are uncertain.
10
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily financed its operations through
private placements of its capital stock, issuance of convertible promissory
notes and loans, equipment financing and other traditional borrowing
arrangements. In addition, in December 1997 Flexi consummated an initial public
offering of common stock.
For the past two years, however, Flexi has funded its operations primarily
through cash received from license and royalty revenues, annual maintenance
contracts, and consulting services provided to its clients. Given the critical
nature of software to our customers' business, most maintenance contracts are
renewed regularly and cancellations are usually due to circumstances such as
mergers and acquisitions of Flexi clients with companies that are using a
competing product.
As of September 30, 2002, we had cash and cash equivalents of $1.2 million,
an increase of $534,000 from December 31, 2001 including the $500,000 received
for the sale of the dodge.com URL and a $215,000 payment to us under one of our
insurance policies. The Company's working capital deficit at September 30, 2002
was $2.1 million, compared to a working capital deficit of $2.6 million at
December 31, 2001.
The Company's operating activities resulted in a net cash inflow of
$698,000 for the nine month period ended September 30, 2002 which was mainly the
result of an increase in accounts receivable collections, the cash received from
the sale of our rights to the URL dodge.com and the insurance payment. The
Company's investing activities resulted in a net cash outflow of $24,000 for the
period ended September 30, 2002 from the purchase of software licenses and
software upgrades. At September 30, 2002, the Company had no material
commitments for capital expenditures. During the nine-month period ended
September 30, 2002, the Company had net cash outflows from financial activities
of $126,000, which includes repayments of debts and payments of capital lease
obligations. The Company paid $37,000 in interest during the same nine-month
period.
Flexi's contractual cash obligations are outlined in the table below
including its equipment lease and office rental obligations, as well as payments
due under payment terms negotiated with companies for current debt and
settlements of payment disputes. These cash obligations were $290,000 for the
three-month period ended September 30, 2002 and are expected to amount to
approximately $91,000 per month for the balance of fiscal 2002. Flexi also has
an arbitration award of $331,000 against the Company for which collection
attempts have been made recently and payment terms are expected to be
negotiated. Where appropriate, Flexi will seek to negotiate extended payment
terms with respect to its financial obligations.
Payments Due by Period
(in thousands)
--------------------------------------------------------------
Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
- ----------------------- ---------- ---------- ---------- ---------- ----------
Facilities Obligation................ $ 402.6 $ 297.8 $ 104.8 - -
Capital Lease Obligation............. 316.9 215.8 101.1 - -
Operating Leases..................... 56.2 43.2 13.0 - -
Other Obligations.................... 1,418.4 448.5 566.5 $ 120.0 $ 283.4
Insurance Obligations................ 14.5 14.5 - - -
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations... $ 2,208.6 $ 1,019.8 $ 785.4 $ 120.0 $ 283.4
========== ========== ========== ========== ==========
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
UNPROVEN MARKET ACCEPTANCE OF OUR BPO SOLUTION. If our BPO Solution does
not gain market acceptance, our business will be adversely affected. The growth
of our business will depend largely on the successful implementation of our
recently introduced BPO solution. This solution is an accounting business
processing outsource service or BPO, which we anticipate will allow us to
leverage our suite of accounting software products and our expertise in back
office processing of accounting data. We expect to derive a portion of our
revenues in the future from our BPO service in conjunction with our existing
software suites. If our BPO service does not gain market acceptance, our
revenues may decline and our business may be adversely affected. Factors that
may affect the market acceptance of our BPO service, some of which are beyond
our control, may include:
o the growth, acceptance and changing requirements in the BPO industry;
o the performance, quality and price of our new service and our existing
product suites; and
o the availability, price, quality and performance of competing products
and services.
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; product and price
competition; the
11
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
partners; foreign currency exchange rates; and fluctuations in economic and
financial market conditions.
The timing, size and nature of individual licensing transactions are
important factors in the Company's quarterly results of operations. Many such
transactions involve large dollar amounts, and the sales cycles for these
transactions are often lengthy and unpredictable. In addition, the sales cycles
associated with these transactions are subject to a number of uncertainties,
including customers' budgetary constraints, the timing of customers' budget
cycles and customers' internal approval processes. There can be no assurance
that the Company will be successful in closing such large transactions on a
timely basis or at all. Software license revenues under the Company's license
agreements are recognized upon delivery and installation of the product and when
all significant contractual obligations have been satisfied. Significant
obligations would include future promises of enhancements and/or modification
that are essential to the product. Delays in the installation of the Company's
software, including potential delays associated with contractual enhancements to
the Company's software products, could materially adversely affect the Company's
quarterly results of operations.
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.
DEPENDENCE ON KEY PERSONNEL. The Company's performance depends
substantially on the performance of its Chief Executive Officer, Stefan R.
Bothe. The Company has experienced significant turnover in its management and is
therefore operating with a limited group of executive officers and key
employees. In addition, the Company has experienced personnel turnover with
respect to its sales force and software professionals. 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
loss of the services of the Company's executive officer or other key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company maintains a key person
insurance policy on Stefan R. Bothe.
LENGTHY SALES CYCLE. The Company's software is often used for
business-critical purposes, and its implementation involves significant capital
commitments by customers. Potential customers generally commit significant
resources to an evaluation of available software and require the Company to
expend substantial time, effort and money educating potential customers about
the value of the Company's solutions. Sales of the Company's software products
requires 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.
COMPETITION. The market for the Company's products and services is
intensely competitive and is characterized by rapid change in technology and
user needs and the frequent introduction of new products. In recent quarters,
the Company has been observing increasingly aggressive pricing practices and/or
unusual terms and conditions offered to customers by its competitors and
increasing competition in the middle market from competitors which previously
focused principally on larger corporations. A number of the Company's
competitors are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than the
Company and its partners and distributors. In addition, the Company's partners
may develop or offer products and services that compete with the Company's
products and services. The Company's partners may give higher priority to the
sales of these or other competitive products and services. The Company may not
be able to compete successfully against current and future competitors or
competitive pressures faced by the Company would materially adversely affect the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH THIRD-PARTY CHANNELS. The Company addresses certain
vertical and geographic markets through its partners for its outsourcing and
software business. The Company relies on its third-party channels to provide
sales and marketing presence and name recognition, as well as the resources
necessary to offer industry-specific financial accounting solutions. Although
the Company expects to dedicate significant resources to develop its partners,
the Company may not be able to attract and retain qualified firms in its
targeted vertical or regional markets. The failure of the Company to maintain
12
its current third-party channels or find other third-party channels, the
Company's inability to adequately support such channels, the development of
competitive products and services by the Company's third-party channels or the
entry by such firms into alliances with competitors of the Company would
substantially limit the Company's ability to provide its products and services
and, accordingly, have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company has
attempted to seek partners in distinct vertical markets and distributors in
distinct geographic markets, and to manage them in a manner to avoid potential
channel conflicts, channel conflicts may develop. Any such conflicts may
adversely affect the Company's relationship with third-party channels or
adversely affect its ability to develop new channels.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on the Company's financial results and conditions,
primarily foreign currency exchange rates and interest rates on marketable
securities. The Company does not utilize derivative instruments in managing its
exposure to such changes. The Company does not believe that near-term changes in
foreign currency exchange rates or interest rates will have a material effect on
its future earnings, fair values or cash flows.
ITEM 4. CONTROLS AND PROCEDURES(1)
--------------------------
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and Acting Chief Financial
Officer within 90 days of filing of this report, the Company's Chief Executive
Officer and Acting Chief Financial Officer concluded that the Company's
disclosure controls and procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms issued by the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
its principal financial officer and officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On July 18, 2001, the Company filed for arbitration with the American
Arbitration Association in a royalty and enhancement fee dispute with its
healthcare industry reseller McKesson Information Services (formerly known as
McKesson HBOC). The companies currently are in active settlement discussions and
the Company expects to reach a settlement before December 31, 2002.
The Company is also a party to various disputes and proceedings arising
from the ordinary course of general business activities including a sales tax
audit by the State of Connecticut involving past acquisition of computer and
related equipment. Although the final outcome of these matters cannot be
determined, we believe that these matters will not seriously harm our business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
99 Certification of Chief Executive Officer and Acting Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
(1)The requirement for this item and the certification after the signature page
is part of the response to the Sarbanes-Oxley Act.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLEXIINTERNATIONAL SOFTWARE, INC.
By /s/ Stefan R. Bothe
---------------------------------------
Stefan R. Bothe
Chairman of the Board, President,
Chief Executive Officer and Acting
Chief Financial Officer
(Principal executive officer and principal
financial officer)
Date: November 12, 2002
14
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14
I, Stefan R. Bothe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FLEXIINTERNATIONAL
SOFTWARE, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my evaluation
as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether there were any
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
By /s/ Stefan R. Bothe
--------------------------------------
Stefan R. Bothe
Chairman of the Board, President,
Chief Executive Officer and Acting
Chief Financial Officer
(Principal executive officer and principal
financial officer)
15