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 March 31, 2003
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
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
Two Enterprise Drive, Shelton, CT
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
06484
(ZIP CODE)
(203) 925-3040
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
06-1309427
(I.R.S. EMPLOYER IDENTIFICATION NO.)
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 March 31, 2003, there were 17,784,185 shares of FlexiInternational
Software, Inc. Common Stock outstanding.
#
FLEXIINTERNATIONAL SOFTWARE, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets................................................................3
Consolidated Statements of Operations......................................................4
Consolidated Statements of Cash Flows......................................................5
Consolidated Statements of Stockholders'Deficit............................................6
Notes to 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.................................12
Item 4. Controls and Procedures....................................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................13
Item 6. Exhibits and Reports on Form 8-K...........................................................13
Signature..........................................................................................14
Certification......................................................................................15
#
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
A S S E T S (UNAUDITED) (audited)
-----------
CURRENT ASSETS
Cash and cash equivalents $ 600 $ 892
Interest bearing deposits 37 37
Accounts receivable, net of allowance for doubtful accounts of
$54 and $76, respectively 1,343 1,034
Prepaid expenses and other current assets 275 92
------------- -------------
TOTAL CURRENT ASSETS 2,255 2,055
Property and equipment at cost, net of accumulated depreciation
Of $4,784 and $4,746, respectively 264 295
Other assets 785 791
------------- -------------
$ 3,304 $ 3,141
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 929 $ 916
Deferred revenue 2,478 2,480
Current portion of long-term debt 484 611
------------- -------------
TOTAL CURRENT LIABILITIES 3,891 4,007
------------- -------------
LONG-TERM DEBT LESS PRINCIPAL DUE WITHIN
ONE YEAR 740 811
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 (57,899) (58,233)
Other accumulated comprehensive income 277 261
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (1,327) (1,677)
------------- -------------
$ 3,304 $ 3,141
============= =============
See accompanying notes to consolidated financial statements.
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
--------------------------------------
MARCH 31, MARCH 31,
2003 2002
----------------- ------------------
REVENUE
- -------
Software license $ 701 $ 166
Other operating revenue 0 500
Service and maintenance 1,135 1,609
----------------- -----------------
TOTAL REVENUE 1,836 2,275
----------------- -----------------
COST OF REVENUE
- ---------------
Software license 36 19
Service and maintenance 450 585
----------------- -----------------
TOTAL COST OF REVENUE 486 604
----------------- -----------------
GROSS PROFIT 1,350 1,671
----------------- -----------------
OPERATING EXPENSES
- ------------------
Sales and marketing 427 357
Product development 318 380
General and administrative 263 375
----------------- -----------------
TOTAL OPERATING EXPENSES 1,008 1,112
----------------- -----------------
INCOME FROM OPERATIONS 342 559
OTHER (DEDUCTIONS)
- ------------------
Net interest (expense) (8) (12)
----------------- -----------------
INCOME BEFORE INCOME TAXES 334 547
INCOME TAXES
- ------------ 0 0
----------------- -----------------
NET INCOME $ 334 $ 547
================= =================
INCOME PER SHARE
- ----------------
Basic $ 0.02 $ 0.03
================= =================
Diluted $ 0.02 $ 0.03
================= =================
WEIGHTED AVERAGE SHARES
- -----------------------
Basic 17,784 17,784
================= =================
Diluted 17,784 17,784
================= =================
See accompanying notes to consolidated financial statements
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
--------------------
MARCH 31,
--------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $334 $547
Non-cash items:
Depreciation and amortization 38 57
(Credit) provision for doubtful accounts (22) 172
Change in operating accounts:
Accounts receivable (287) 274
Prepaid expenses and other assets (177) (170)
Accounts payable and accrued expenses 13 (144)
Deferred revenue (2) (630)
--------- ---------
Net cash (used in) provided by operating activities (103) 106
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (7) 0
--------- ---------
Net cash used in investing activities (7) 0
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (101) (15)
Payments of capital lease obligations (97) (28)
--------- ---------
Net cash used in financing activities (198) (43)
--------- ---------
Effect of exchange rate changes on cash 16 5
--------- ---------
Increase decrease in cash and cash equivalents (292) 68
Cash and cash equivalents at beginning of period 892 637
--------- ---------
Cash and cash equivalents at end of period $600 $705
========= =========
Supplemental disclosures:
Interest paid in cash $10 $12
See accompanying notes to consolidated financial statements.
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)
(unaudited)
Other Total
Additional accumulated stockholders'
Common Stock Paid-in Accumulated comprehensive Treasury equity
------------------ Capital Deficit income Stock (deficit)
Shares Amount
---------- ------ --------- ----------- ------------- -------- ------------
Balance at December 31, 2002 17,784,185 $178 $56,117 $(58,233) $261 $0 $(1,677)
Shares issued for stock
purchase plan 0 0 0 0 0 0 0
Net income 0 0 0 334 0 0 334
Currency translation
adjustment 0 0 0 0 16 0 16
------------
Comprehensive income 0 0 0 0 0 0 350
---------- ------ --------- ----------- ------------- -------- ------------
Balance at March 31, 2003 17,784,185 $178 $56,117 $(57,899) $277 $0 $(1,327)
========== ====== ========= =========== ============= ======== ============
See accompanying notes to consolidated financial statements
#
FLEXIINTERNATIONAL SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002
(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, 2002.
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.
Effective December 15, 2002, the company adopted Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure" (SFAS 148). This statement amends FASB statement
123, "Accounting for Stock Based Compensation". It provides alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for employee stock based compensation. It also amends the
disclosure provision of FASB statement No. 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. As
permitted by SFAS 123 and amended by SFAS 148, the Company continues to apply
the intrinsic value method under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," to account for its
stock-based employee compensation arrangements.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. If the Company had
recorded compensation cost based upon the fair value at the grant date for
awards under these plans, consistent with SFAS 123, the Company's net income
and net income per share would be the pro forma amounts indicated below for the
three-month periods ended March 31:
2003 2002
----- -----
Net income as reported $334 $547
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects
0 0
----- -----
Net income pro forma $334 $547
===== =====
Income per share as reported - basic and diluted $0.02 $0.03
===== =====
Income per share pro forma - basic and diluted $0.02 $0.03
===== =====
#
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 business processing outsourcing service, 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, 2002.
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. At
December 31, 2002, this loan was converted to an equity investment in this
reseller. On April 14, 2003, the reseller was acquired by a larger BPO
provider. Flexi was paid $357,000 immediately for its ownership share of the
reseller and may realize an additional gain of up to $400,000 if certain
earn-out targets are achieved by the reseller over the next two years. The
acquirer of the reseller intends to continue to utilize FlexiFinancials in its
BPO operations. According to industry analysts, the finance and accounting
outsourcing segment of the BPO market is in the early adoption phase and
is expected to grow substantially 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:
-- non-cancelable software license agreements entered into with
respect to our products;
-- royalties paid to us from third parties that distribute our
products;
-- to a lesser extent, third-party products distributed by us; and
-- 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 16.1% and 15.6% of total
revenues for the three-month periods ended March 31, 2003 and 2002,
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."
#
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
THREE MONTHS ENDED
--------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
REVENUE
Software license 38.2% 7.3%
Other operating revenue 0.0% 22.0%
Service and maintenance 61.8% 70.7%
--------- ---------
TOTAL REVENUE 100.0% 100.0%
--------- ---------
COST OF REVENUE
Software license 2.0% 0.8%
Service and maintenance 24.5% 25.7%
--------- ---------
TOTAL COST OF REVENUE 26.5% 26.5%
--------- ---------
GROSS PROFIT 73.5% 73.5%
--------- ---------
OPERATING EXPENSES
Sales and marketing 23.3% 15.7%
Product development 17.3% 16.7%
General and administrative 14.3% 16.4%
--------- ---------
TOTAL OPERATING EXPENSES 54.9% 48.8%
--------- ---------
INCOME FROM OPERATIONS 18.6% 24.7%
OTHER (DEDUCTIONS)
Net interest (expense) (0.4%) (0.5%)
--------- ---------
INCOME BEFORE INCOME TAXES 18.2% 24.2%
INCOME TAXES 0.0% 0.0%
--------- ---------
NET INCOME 18.2% 24.2%
========= =========
Revenue. Total revenues, consisting of software license revenues, other
operating revenues and service and maintenance revenues, decreased 19.3% from
$2.3 million for the quarter ended March 31, 2002 to $1.8 million for the
quarter ended March 31, 2003. Total revenue for the first quarter of 2002
included a one-time sale of $500,000 for the sale of our rights to the URL
dodge.com. Software license revenues increased 321% to $701,000 in the first
quarter of the current year from $166,000 in the comparable period of the prior
year. The first quarter of the current year included $450,000 of one-time
revenue related to a settlement with a reseller. Total software license
revenue was $701,000 for the first quarter (83.5% 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 29.5% from $1.6 million for the
three-month period ended March 31, 2002 to $1.1 million for the three-month
period ended March 31, 2003. 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.
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.
Cost of software license revenue increased 89.5% from $19,000 for the
quarter ended March 31, 2002 to $36,000 for the quarter ended March 31, 2003.
Cost of software license revenues as a percentage of software license revenues
decreased to 5.1% for the quarter ended March 31, 2003 from 11.4% for the
quarter ended March 31, 2002. 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.
Cost of service and maintenance revenues decreased 23.1%, from $585,000 for
the quarter ended March 31, 2002 to $450,000 for the quarter ended March 31,
2003. This decrease is attributable to operational adjustments due to a lower
level of client implementations.
Operating Expenses. Aggregate operating expenses declined 9.4% in the
quarter ended March 31, 2003 to $1.0 million from $1.1 million in the quarter
ended March 31, 2002. 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
increased 19.6% to $427,000 for the first quarter of 2003 from $357,000 in the
comparable period of last year. This increase is due to increased staffing and
sales costs incurred to generate the first quarter 2003 increase in software
license revenue.
Product Development. Product development expenses relate to new and
existing software development and consist primarily of engineering personnel
costs. Product development expenses decreased 16.3% to $318,000 for the
quarter ended March 31, 2003 from $380,000 for the quarter ended March 31,
2002. 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 29.9% to
$263,000 for the quarter ended March 31, 2003 from $375,000 in the first
quarter of fiscal year 2002. This is primarily due to continued reduction
efforts to attain a level of profitability.
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 $8,000 for the quarter ended March 31, 2003 versus net
interest expense of $12,000 for the comparable period of last year.
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. Due to a strong net income for
the year ended December 31, 2002, Flexi recaptured $330,000 of previously
recorded valuation allowance against deferred income taxes. Flexi will
continue to assess whether further recapture is warranted as the year
progresses but none is deemed necessary for the quarter ended March 31, 2003.
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, 2002 were approximately $28.3
million, consisting primarily of net operating loss carryforwards. The
Company's benefit of deferred tax assets has been reserved as of December 31,
2002 and March 31, 2003 in the amount of $28.0 million as the realization of
deferred taxes is dependent on future events and earnings, if any, the timing
and extent of which are uncertain.
LIQUIDITY AND CAPITAL RESOURCES
Since 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 March 31, 2003, we had cash and cash equivalents of $600,000, a
decrease of $292,000 from December 31, 2002. The Company's working capital
deficit at March 31, 2003 was $1.6 million, compared to a working capital
deficit of $1.9 million at December 31, 2002.
The Company's operating activities resulted in a net cash outflow of
$103,000 for the three-month period ended March 31, 2003 which was mainly the
result of an increase in accounts receivable and prepaid expenses and other
assets. The Company's investing activities resulted in a net cash outflow of
$7,000 for the period ended March 31, 2003 from the purchase of property and
equipment. At March 31, 2003, the Company had no material commitments for
capital expenditures. The Company paid $10,000 in interest during the three-
month period ended March 31, 2003.
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 $266,000 for the
three-month period ended March 31, 2003 and are expected to amount to
approximately $89,000 per month for the balance of fiscal 2003.
Payments Due by Period
(in thousands)
------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- -------- -------- --------- --------- --------
Facilities Obligations................... $666.5 $235.2 $227.4 $180.3 $23.6
Capital Lease Obligations................ 223.1 223.1 - - -
Operating Leases......................... 13.0 13.0 - - -
Other Obligations........................ 1,201.7 406.8 421.6 120.0 253.3
-------- -------- --------- --------- --------
Total Contractual Cash Obligations....... $2,104.3 $878.1 $649.0 $300.3 $276.9
======== ======== ========= ========= ========
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 or BPO service, 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:
-- the growth, acceptance and changing requirements in the BPO
industry;
-- the performance, quality and price of our new service and our
existing product suites; and
-- 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 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 Chief 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
transaction 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 could 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
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 condition,
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
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 reached a final settlement in March 2003 and the
Company was paid $450,000.
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
#
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: May 13, 2003
#
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: May 13, 2003
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)
#
Exhibit 99
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FLEXIINTERNATIONAL
SOFTWARE, INC. (the "Company") on Form 10-Q for the period ended March 31, 2003
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stefan R. Bothe, as Chief Executive Officer and Acting Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C.
{section} 1350, as adopted pursuant to {section} 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By /s/ Stefan R. Bothe
-----------------------
Stefan R. Bothe
May 13, 2003