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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO , 19 .
-------------- ------------ -----
Commission file number : 0-20937
PHOENIX INTERNATIONAL LTD., INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Florida 59-3171810
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
500 International Parkway, Heathrow, Florida 32746
(Address of principal executive offices)
(407) 548-5100
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 13, 2000
Common Stock, $0.01 par value (No. of Shares) 9,410,689
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PHOENIX INTERNATIONAL LTD., INC.
TABLE OF CONTENTS TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three-months and nine-months ended September 30, 2000 and
September 30, 1999 4
Condensed Consolidated Statements of Cash
Flows for the nine-months ended September
30, 2000 and September 30, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure on Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
EXHIBIT INDEX
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,163,376 $ 2,484,977
Accounts receivable, net of allowance for doubtful accounts of $1,273,000 and
$1,085,000 at September 30, 2000 and December 31, 1999, respectively 8,118,768 8,039,819
Prepaid expenses and other current assets 680,754 639,303
------------ ------------
Total current assets 9,962,898 11,164,099
Long-term investments, available for sale 3,054,578 8,964,771
Property and equipment:
Computer equipment and purchased software 5,571,973 5,087,369
Furniture, office equipment and leasehold improvements 2,488,830 2,481,248
------------ ------------
8,060,803 7,568,617
Accumulated depreciation and amortization (5,160,788) (3,964,923)
------------ ------------
Property and equipment, net 2,900,015 3,603,694
Capitalized software costs and purchased software net of accumulated
amortization of $5,842,000 and $4,099,000 at September 30, 2000 and
December 31, 1999, respectively 11,548,047 10,077,480
Goodwill and other intangible assets, net of accumulated
amortization of $214,000 and $41,000 at September 30, 2000, and
December 31, 1999, respectively 1,140,158 1,210,268
Equity investments and other assets 405,912 1,515,826
------------ ------------
Total assets $ 29,011,608 $ 36,536,138
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 439,967 $ 905,395
Accrued expenses 4,621,318 2,791,894
Accrued contractor services 2,351,789 1,683,496
Capital lease, current portion 165,897 155,222
Deferred revenue 16,984,642 14,003,270
------------ ------------
Total current liabilities 24,563,613 19,539,277
Capital lease, long term portion 73,585 199,871
Minority interests 110,728 272,647
------------ ------------
Total long-term liabilities 184,313 472,518
------------ ------------
Total liabilities 24,747,926 20,011,795
Shareholders' equity:
Common stock, $0.01 par value:
50,000,000 shares authorized, 9,410,689 and 8,526,942 issued and
outstanding at September 30, 2000 and December 31, 1999, respectively 94,107 85,269
Additional paid-in capital 48,496,708 43,921,394
Unrealized gain (loss) on investments available for sale (73,483) (577,670)
Retained earnings (deficit) (44,253,650) (26,904,650)
------------ ------------
Total shareholders' equity 4,263,682 16,524,343
------------ ------------
Total liabilities and shareholders' equity $ 29,011,608 $ 36,536,138
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
License fees and other $ 179,379 $ 1,851,167 $ 3,549,637 $ 6,934,123
Implementation, customer and software
support and other service fees 2,743,076 1,901,661 7,796,302 6,506,151
------------ ------------ ------------ ------------
Total revenues 2,922,455 3,752,828 11,345,939 13,440,274
Expenses:
Cost of license fees and other 809,501 1,302,901 4,166,070 2,974,027
Cost of implementation, customer
and software support and other service fees 1,460,374 2,182,682 5,179,366 6,708,549
Sales and marketing 1,045,073 1,207,163 3,295,202 3,533,662
General and administrative 3,980,560 1,954,219 7,025,147 4,817,447
Product development 2,632,058 2,307,869 8,150,460 7,911,508
------------ ------------ ------------ ------------
Total expenses 9,927,566 8,954,834 27,816,245 25,945,193
Other income (expense):
Interest income 79,698 231,843 362,201 842,382
Interest expense (5,910) (9,292) (21,293) (27,207)
Other income (loss) (1,202,168) (4,986) (1,146,249) (31,911)
------------ ------------ ------------ ------------
Loss before income taxes (8,133,491) (4,984,441) (17,275,647) (11,721,655)
Income tax expense 20,580 6,518 73,353 136,965
------------ ------------ ------------ ------------
Net loss $ (8,154,071) $ (4,990,959) $(17,349,000) $(11,858,620)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.87) $ (0.59) $ (1.87) $ (1.39)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted 9,410,258 8,526,768 9,266,517 8,515,506
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of operations.
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PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(17,349,000) $(11,858,620)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,099,152 2,657,314
Loss on marketable securities 1,229,369 --
Provision for doubtful accounts 188,000 220,000
Minority interest (161,919) --
Changes in operating assets and liabilities:
Accounts receivable (266,950) (5,180,957)
Prepaid expenses and other current assets (500,894) (215,382)
Accounts payable (465,428) 775,420
Accrued expenses 2,497,717 1,293,811
Deferred revenue 3,440,815 6,251,098
------------ ------------
Net cash used in operating activities (8,289,138) (6,057,316)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (492,186) (574,583)
Sale of short term investments 5,959,075 8,956,280
Investment in ERAS (103,297) --
Capitalized software costs (4,570,896) (6,294,799)
Settlement of prepaid royalty 335,850 --
Purchase of other assets -- (70,000)
------------ ------------
Net cash provided by investing activities 1,128,546 2,016,898
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (115,612) (107,090)
Proceeds from funded research and development arrangements 1,370,450 1,451,868
Net proceeds from issuance of common stock 4,584,152 139,899
------------ ------------
Net cash provided by financing activities 5,838,991 1,484,677
------------ ------------
Net decrease in cash and cash equivalents (1,321,601) (2,555,741)
Cash and cash equivalents at beginning of the period 2,484,977 3,795,962
------------ ------------
Cash and cash equivalents at end of the period $ 1,163,376 $ 1,240,221
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of cash flows.
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PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring accruals, which we
consider necessary for a fair presentation of our financial position and the
results of operations for the interim periods presented. The condensed
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
(including the auditors report, which contains a going concern qualification),
"Selected Financial and Operating Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Phoenix's
annual report on Form 10-K/A for the year ended December 31, 1999.
2. RESTATEMENT
As a result of the nonpayment of amounts due under certain software
license arrangements, we conducted a comprehensive review of our software
licensing arrangements and the recognition of revenue for the years 1997 through
1999. As a result of that review, we determined that, in certain instances,
revenue that we recognized at the time the software was delivered should have
been recognized either as payments became due, as the services related to the
software were performed, upon completion of all services required under the
arrangements or over the life of the contract (up to five years). Additionally,
in some instances we should have offset revenue against development costs. In
addition, we have determined that we capitalized certain software development
costs prior to the related software reaching technological feasibility, or
otherwise capitalized development costs in error. As a result, we have restated
the financial statements for the years ended December 31, 1999, 1998, and 1997,
the three-month periods ended March 31, 2000 and 1999, the three- and six-month
periods ended June 30, 1999, and the three- and nine-months ended September 30,
1999.
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The effects of the restatement of our financial statements for the
three and nine-month periods ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------------------- -----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Capitalized software
costs, net $ 12,884,808 $ 9,230,454 $ 12,884,808 $ 9,230,454
Total assets 56,695,535 41,883,557 56,695,535 41,883,557
Deferred revenue 4,978,905 14,149,798 4,978,905 14,149,798
Total liabilities 12,503,058 19,703,701 12,503,058 19,703,701
Shareholders' equity 44,192,477 22,179,856 44,192,477 22,179,856
License fees $ 387,659 $ 1,851,167 $ 5,201,067 $ 6,934,123
Services fees 2,550,777 1,901,661 9,008,380 6,506,151
Total revenues 2,938,436 3,752,828 14,209,447 13,440,274
Total expenses 8,852,447 8,954,834 24,967,845 25,945,193
Net loss (3,702,690) (4,990,959) (6,483,837) (11,858,620)
Net loss per share -
basic and diluted $ (0.43) $ (0.59) $ (0.76) $ (1.39)
Weighted average shares
outstanding - basic
and diluted 8,526,768 8,526,768 8,515,506 8,515,506
</TABLE>
3. NET LOSS PER SHARE
Net loss per share is calculated and presented in accordance with
Statement of Financial Accounting Standards No. 128, Earnings per Share. We have
computed basic earnings per share using the average number of common shares
outstanding. We have computed diluted earnings per share on the basis of the
average number of common shares outstanding plus the effect of dilutive
outstanding stock options using the "treasury stock" method based on average
stock price for the period.
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
(Restated) (Restated)
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator - net loss available to
common shareholders $(8,154,071) $(4,990,959) $(17,349,000) $(11,858,620)
Denominator for basic and diluted
net loss per share - weighted
average shares outstanding 9,410,258 8,526,768 9,266,517 8,515,506
Net loss per share - basic and
diluted $ (0.87) $ (0.59) $ (1.87) $ (1.39)
</TABLE>
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Pursuant to Statement of Financial Accounting Standards No. 128 the
denominators for basic and diluted net loss per share are identical for the
nine months ended September 30, 2000 and 1999, due to our net losses. According
to the statement, the exercise of any outstanding options or warrants for a
company with a net loss is considered antidilutive. Accordingly, we have
excluded from the computation of diluted net loss per share employee stock
options and warrants exercisable into 1,948,915 shares of common stock at
September 30, 1999 and 2,093,969 shares of common stock at September 30, 2000.
4. COMPREHENSIVE LOSS
We adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income as of January 1, 1998. This statement establishes
new rules for the reporting and display of comprehensive income and its
components. Comprehensive loss for the three months and nine months ended
September 30, 2000 and 1999, is comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net loss as reported $ (8,154,071) $ (4,990,959) $(17,349,000) $(11,858,620)
Other comprehensive income:
unrealized gain (loss) on investments
available for sale 1,293,683 (26,543) 504,187 (423,964)
------------ ------------ ------------ ------------
Comprehensive loss $ (6,860,388) $ (5,017,502) $(16,844,813) $(12,282,584)
============ ============ ============ ============
</TABLE>
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2000, we are required to adopt the provisions of
SOP 97-2 that limit what is considered vendor-specific objective evidence (VSOE)
of the fair value of the various elements in a multiple-element software
arrangement to the price charged when the same element is sold separately.
Because of the structure of our contracts prior to October 1, 2000, we
determined that we do not have VSOE, as defined in SOP 97-2, for all undelivered
elements in its software arrangements entered into between January 1, 2000 and
October 1, 2000 (the date that we modified the structure of our contracts). As a
result, all contracts that include maintenance entered during that period will
be required to be recognized over the post-contract support period, generally
five years.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
financial instruments and requires recognition of derivatives in the Statement
of Financial Position to be measured at fair value. Gains or losses resulting
from changes in the value of derivatives would be accounted for depending on the
intended use of the derivative and whether it qualifies for hedge accounting.
This statement is effective for our financial statements beginning in 2001. We
are currently studying the future
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effects of adopting this statement. However, due to our limited use of
derivative financial instruments, adoption of Statement No. 133 is not expected
to have a significant effect on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. We are
required to adopt the provisions of this Staff Accounting Bulletin in our fourth
fiscal quarter of 2000 and are currently in the process of assessing the impact
of its adoption. While Staff Accounting Bulletin 101 does not supersede the
software industry specific revenue recognition guidance, which we believe we
are in compliance with, once complete guidance is disseminated, it may change
current interpretations of software revenue recognition requirements. We do not
expect the adoption of SAB 101 to have a significant effect on our financial
position or results of operations.
6. FACILITIES
In the third quarter of 2000, we moved most of our Orlando operations
into one building, and we are currently seeking to sublet a portion of our
second, smaller facility there. As a result, we have accrued the cost of the
unoccupied space through the date upon which we expect to sublease the space,
the cost of rental commissions expected to be paid, expected write-downs on
furniture and equipment to be disposed of, and the difference between rental
payments expected to be received and amounts payable under our lease, which
together approximate $0.7 million.
7. INVESTMENT IN EQUITY SECURITIES
In the third quarter of 2000, we determined that the decline in the
fair value of our investment in Netzee, Inc. from its historical cost should be
accounted for in earnings as a realized loss in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". As a result, we recorded a $1.2 million charge to
operations for the quarter. We had previously accounted for the decline in the
fair value of this investment through a separate component of shareholders'
equity, which equaled $1.1 million at June 30, 2000.
8. CONTINGENCIES
Litigation
On November 23, 1999, a lawsuit was filed in the District Court for the
Middle District of Florida as a purported class action initiated by George
Taylor, a former Phoenix employee. Initially, Phoenix and our chief executive
officer were named as defendants. The lawsuit alleges, among other things, that
Phoenix and our chief executive officer improperly recognized revenues,
overstated revenues and failed to disclose that our revenues were allegedly in
decline, all of which allegedly caused our stock price to be higher than it
otherwise would have been during the class period. The lawsuit alleges that
these purported actions violate Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On May 5, 2000, the plaintiffs filed
an Amended Complaint which, among other things, (1) added four additional
investors as named plaintiffs and proposed class representatives; (2) expanded
the purported class period to the period from May 5, 1997 to April 15, 1999; and
(3) added Phoenix's president as an additional named defendant. Phoenix
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and the other two defendants filed Motions to Dismiss, which were denied by the
Court without opinion in August 2000. The parties are beginning to conduct
discovery. Our insurance carriers have denied coverage for the claims in this
lawsuit. On October 24, 2000, we entered into an agreement in principle to
settle the consolidated securities class action litigation with a settlement
class comprising shareholders who acquired Phoenix common stock during the
period between May 5, 1997 and August 22, 2000. The settlement of this action
provides that we will pay $4.2 million in cash to the putative shareholder
class. The settlement is subject to certain customary conditions, notice to the
proposed settlement class and preliminary and final court approval.
In addition, we are subject to various claims and legal proceedings
covering a variety of matters arising in the ordinary course of our business
activities.
Customer Disputes
- IBM/Sekerbank. In 1998, we contracted to provide software and software
development and implementation services as a subcontractor to IBM Turk
Limited Sirketi for the benefit of its customer, Sekerbank T.A.S. In
May of 1999, IBM informed us that its contract with Sekerbank had been
cancelled. IBM then purported to cancel its contract with Phoenix.
According to IBM, Sekerbank cancelled their contract with IBM because
of our failure to perform, called in an IBM performance bond from a
bank, and received most of its money back from IBM. IBM has paid
Phoenix over $1 million under the subcontract, has requested a return
of all funds, and has indicated they may have claims against us up to
$5.2 million in damages. We disagree with IBM's position. We believe
that IBM, and not Phoenix, is responsible for the cancellation of the
contract by Sekerbank, and believes that we have claims against IBM
under its subcontract for the remaining value of the contract, which
amounts to at least $3.9 million. The parties are in negotiation to
resolve the dispute. The contract calls for arbitration of disputes;
however, no arbitration or other action has been filed by either party.
- Toprakbank. In June of 2000, we received notice from Toprakbank A.S.,
one of our customers in Turkey, that it had canceled its implementation
of the Phoenix System. The parties have exchanged letters making cross
claims against each other. Toprakbank has paid us $550,000 under the
contract and has requested a refund of this money. Our receivables from
Toprakbank exceed $1.3 million, and we have requested payment of this
amount, plus future support fees under the contract. The parties are in
negotiation to resolve the dispute. The contract calls for arbitration
of disputes; however, no arbitration or other action has been filed by
either party.
- Demirbank. In June of 2000, we received notice from Demirbank T.A.S.,
one of our customers in Turkey, that it has canceled its implementation
of the Phoenix System. To date Demirbank has paid us over $4.6 million
under its agreement. Our receivables from Demirbank currently exceed
$900,000. We have not received any demand from Demirbank. We have
requested payment of all receivables due. The parties are in
negotiation to resolve the dispute. The contract calls for arbitration
of disputes; however, no arbitration or other action has been filed by
either party.
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9. SUBSEQUENT EVENTS.
Asset Purchase Agreement Executed with London Bridge Software Holdings plc
On October 25, 2000, we entered into an Asset Purchase Agreement with
London Bridge Software Holdings plc. and its indirect wholly owned subsidiary
London Bridge Acquisition Company, Inc. Pursuant to the Agreement, we have
agreed to sell substantially all of our assets to London Bridge for cash in the
amount of $45,462,092, subject to adjustment based on the deterioration in our
working capital between the date of the agreement and the closing of the
transaction. In connection with this transaction, London Bridge has agreed to
assume certain specified liabilities. We will retain all other liabilities.
London Bridge has also agreed to loan us up to $10 million for our interim
working capital requirements pursuant to a loan agreement. The loan agreement
contains various restrictions and limitations on our ability to borrow funds.
Because of the potential reductions in the purchase price, uncertainty regarding
the amount of claims to be made by London Bridge under the representations and
warranties made in the purchase agreement, and uncertainty regarding the value
of some of the assets and liabilities we will retain, the amount of net proceeds
ultimately distributed to our shareholders likely will differ from and could be
substantially less than the stated purchase price of $45,462,092.
International Turnkey Systems.
On November 9, 2000, we amended our agreement with our reseller in the
Middle East, International Turnkey Systems. In exchange for the forgiveness of
$660,000 of outstanding receivables from ITS, the amendment eliminates the
requirement in our marketing agreement with ITS for Phoenix to provide ITS with
$1.65 million in professional services work.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This 10-Q contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements appear in a number of places in this Quarterly Report and
include all statements that are not historical statements of fact regarding our
intent, belief, current expectations, and those of our management with respect
to, among other things:
- The asset sale and related transactions contemplated by the Asset Purchase
Agreement
- our financing plans;
- trends affecting our financial condition or results of operations;
- our growth strategy and operating strategy;
- the development and implementation of the Phoenix System and our other
products;
- sales performance and prospects; and
- the possible impact on our operations and financial performance of market
conditions and other factors that have hindered us in the past, such as
currently-pending litigation and our current financial situation.
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The words "may," "would," "could," "continue," "will," "expect," "estimate,"
"anticipate," "goal," "strategy," "believe," "hope," "intend," "plan" and
similar expressions are intended to identify forward looking statements.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, many of which we cannot control. Our actual results may
differ materially from those projected in forward-looking statements. Among the
key risks, assumptions, and factors that may adversely affect our operating
results, performance, and financial condition are:
- whether we will be able to complete a transaction with London Bridge or
otherwise raise sufficient capital to continue operations;
- whether the market conditions and other factors which hindered our
success in 1999, such as the negative publicity and litigation against us
and our current financial condition will continue to affect our
operations in the future;
- unanticipated delays in developing new products and enhancements;
- unanticipated delays in deploying our products and services through our
application service centers;
- whether the market accepts our new products and services, including those
under development and our e-commerce operating environment and services;
- our reliance on significant new customers to reach or exceed market
expectations for our performance;
- the timing of customer contracts, which may slip from one quarter to
later quarters or fiscal periods;
- the timing of the recognition of revenue under new contracts;
- our ability to leverage our sales force, marketing relationships, and
other distribution channels worldwide to generate new customers;
- settlement of customer disputes;
- the distraction of management's time and attention, increased legal and
other costs, and other adverse impacts of pending litigation and negative
publicity;
- our ability to grow and manage our growth despite adverse market and
other factors described above; and
- competition and other factors discussed in detail in our prior press
releases and filings with the Securities and Exchange Commission,
including the "Risk Factors" section of our registration statement on
Form S-1, as declared effective on August 13, 1997 (No. 333-31415).
We derive our revenues from two primary sources: (i) license fees for
software products, principally the Phoenix System, and commissions from the sale
of third party software and hardware; and (ii) fees for services, which include
implementation services, custom programming, training, interface development for
third party products, ongoing software support, and Internet/Intranet consulting
services.
Our quarterly and annual operating results have varied significantly in the
past and may vary significantly in the future. Factors that may cause our future
operating results to vary include, but are not limited to:
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- whether adverse market conditions and other factors that hindered our
sales in 1999 continue to impact our efforts;
- the size and timing of significant orders;
- the mix of direct and indirect sales;
- the mix and timing of U.S. and foreign sales;
- the manner in which revenue from new orders is recognized as a result of
the application of generally accepted accounting principles;
- possible delays or other problems in new product announcements;
- changes in our pricing policies and those of our competitors;
- possible delays or other problems in the development, implementation, and
release of our products and enhancements;
- the distraction of management's time, adverse impact on sales and
marketing efforts, and possible increased costs due to pending
litigation;
- whether we will have sufficient capital to satisfy concerns of prospects;
- changes in our strategy and operating expenses; and
- competition and general economic factors.
Product revenues are difficult to forecast because the market for client/server
application software products is evolving and affected by many different
factors, including general considerations beyond our control such as the recent
slowdown attributable to Year 2000 concerns. Our sales cycle varies
substantially from customer to customer and can exceed 12 months in some cases.
In addition, license fee revenue from any particular contract can be recognized
in multiple ways which can cause significant variations in the recognition of
revenue from customer to customer. Depending on how the contract is structured,
the terms of each transaction, and other factors, license fees can be recognized
immediately upon execution of the contract (up front), over the period required
to implement the software for the customer (over 3 to 12 months), or over the
life of the contract (up to five years). Therefore we do not believe that
quarter-to-quarter comparisons of our results of operations can or should be
relied upon as indications of our future performance.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues
represented by certain line items in our statement of operations for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues:
License fees and other 6.1% 49.3% 31.3% 51.6%
Implementation, customer and software
support and other service fees 93.9% 50.7% 68.7% 48.4%
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of license fees and other 27.7% 34.7% 36.7% 22.1%
Cost of implementation, customer
and software support and other service fees 50.0% 58.2% 45.6% 49.9%
Sales and marketing 35.8% 32.2% 29.0% 26.3%
General and administrative 136.2% 52.1% 61.9% 35.8%
Product development 90.1% 61.5% 71.8% 58.9%
------ ------ ------ ------
Total expenses 339.7% 238.6% 245.2% 193.0%
Other income (expense):
Interest income 2.7% 6.2% 3.2% 6.3%
Interest expense (0.2)% (0.2)% (0.2)% (0.2)%
Other income (loss) (41.1)% (0.1)% (10.1)% (0.2)%
------ ------ ------ ------
Loss before income taxes (278.3)% (132.8)% (152.3)% (87.2)%
Income tax expense 0.7% 0.2% 0.6% 1.0%
------ ------ ------ ------
Net loss (279.0)% (133.0)% (152.9)% (88.2)%
====== ====== ====== ======
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Total revenues decreased by 22% to $2.9 million in the three
months ended September 30, 2000, from $3.8 million in the three months ended
September 30, 1999. Revenues from license fees decreased 90% to $0.2 million in
the three months ended September 30, 2000, from $1.9 million in the three months
ended September 30, 1999, while service fee revenues increased 44% to $2.7
million in the three months ended September 30, 2000 from $1.9 million in the
three months ended September 30, 1999. No new contracts to license and implement
the Phoenix System were signed in the third quarter of 2000, compared with 2
contracts signed in the third quarter of 1999. The decrease in license fee
revenue in the third quarter of 2000 is attributable to the absence of new
contract signings in the quarter; the effect of applying subscription accounting
to all contracts signed in the first and second quarters of 2000, pursuant to
which all license and service revenues are spread over the term of the contract,
which is typically five years; and only a modest amount of license fees
recognized from contracts executed in prior periods. Since a significant portion
of our license fees are deferred under the provisions of SOP 97-2, there is
often a lag between the signing of a contract and the recognition
14
<PAGE> 15
of the related license fee revenue. Service fee revenues increased largely as a
result of higher customer and software support fees, which increased from $0.9
million in the third quarter of 1999 to $1.5 million in the third quarter of
2000.
Expenses. Cost of license fees decreased 38% to $0.8 million in the
three months ended September 30, 2000 from $1.3 million in the three months
ended September 30, 1999. These costs decreased primarily as a result of lower
third-party commission and royalty expenses, which declined from $0.7 million in
the third quarter of 1999 to $0.2 million in the third quarter of 2000.
Amortization of capitalized software was unchanged at $0.6 million in both
quarters.
Cost of implementation, customer and software support and other service
fees decreased 33% to $1.5 million in the three months ended September 30, 2000
from $2.2 million in the three months ended September 30, 1999, largely as a
result of decreased employee headcount, primarily in the implementation services
area.
Sales and marketing expenses decreased 13% to $1.0 million in the three
months ended September 30, 2000 from $1.2 million in the three months ended
September 30, 1999, primarily as a result of cost containment initiatives
instituted during the quarter.
General and administration expenses increased 104% to $4.0 million in
the three months ended September 30, 2000, from $2.0 million in the three months
ended September 30, 1999. Professional services fees relating largely to the
restatement of our financial statements and the negotiations for the sale of our
assets to London Bridge Software Holdings plc totaled $1.9 million in the third
quarter of 2000, a significant increase from professional services fees of $0.5
million in the third quarter of 1999. Also in the third quarter of 2000, we
recorded an accrual for the cost of subletting unoccupied office space and
disposing of unused furniture and equipment of $0.7 million.
Product development expenses increased 14% to $2.6 million in the three
months ended September 30, 2000 from $2.3 million in the three months ended
September 30, 1999, primarily as a result of less costs being capitalized in the
third quarter of 2000 than in the third quarter of 1999, which was partially
offset by decreased employee headcount and related costs.
Total Other Income (Expense). Interest income was $80,000 in the three
months ended September 30, 2000 compared to $232,000 in the three months ended
September 30, 1999. Interest income decreased primarily due to a decrease in
interest-yielding investments used to fund operations. Other income (expense)
included a realized loss of $1.2 million related to the decline in the fair
value of an investment we had previously recorded as a charge to shareholders'
equity.
Income Tax Expense (Benefit). Income tax expense was $21,000 for the
three months ended September 30, 2000, and $7,000 for the three months ended
September 30, 1999, reflecting our estimate of foreign taxes on projected
foreign income.
Net Income (Loss). As a result of all of the above, we incurred a net
loss of $8.2 million for the three months ended September 30, 2000, compared to
net loss of $5.0 million for the three months ended September 30, 1999.
15
<PAGE> 16
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues. Total revenues decreased 16% to $11.3 million in the nine
months ended September 30, 2000 from $13.4 million for the nine months ended
September 30, 1999. License fee revenues decreased 49% to $3.5 million for the
nine months ended September 30, 2000 from $6.9 million in the nine months ended
September 30, 1999, while service fee revenues increased 20% to $7.8 million for
the nine months ended September 30, 2000 from $6.5 million for the nine months
ended September 30, 1999. We signed new contracts to license and implement the
Phoenix System with 8 customers in the nine months ended September 30, 2000,
compared with 12 customers in the nine months ended September 30, 1999. The
decrease in license fee revenue for the nine months ended September 30, 2000 is
largely attributable to the absence of new contract signings in the third
quarter of 2000 and the effect of applying subscription accounting to all
contracts signed in the first and second quarters of 2000, pursuant to which all
license and service revenues are spread over the term of the contract, typically
five years. Since a significant portion of our license fees are deferred under
the provisions of SOP 97-2, there is often a lag between the signing of a
contract and the recognition of the related license fee revenue. Service fee
revenues increased largely as a result of higher customer and software support
fees, which increased from $2.3 million for the nine months ended September 30,
1999 to $4.1 million for the nine months ended September 30, 2000.
Expenses. Cost of license fees increased 40% to $4.2 million in the
nine months ended September 30, 2000 from $3.0 million in the nine months ended
September 30, 1999. These costs increased primarily as a result of higher
amortization of capitalized software costs, which increased from $1.7 million in
the nine months ended September 30, 1999 to $2.2 million in the nine months
ended 2000, write-downs of capitalized software costs of $0.5 million to their
net realizable values, and higher third-party commission and royalty expenses,
which increased from $1.3 million in the nine months ended September 30, 1999 to
$2.0 million in the nine months ended September 30, 2000.
Cost of implementation, customer and software support and other service
fees decreased $1.5 million, or 23%, to $5.2 million in the nine months ended
September 30, 2000 from $6.7 million in the nine months ended September 30,
1999, primarily as a result of decreased staffing, travel and personnel costs
related to implementation activities, and to a lesser extent, customer support
activities.
Sales and marketing expenses decreased to $3.3 million in the nine
months ended September 30, 2000, from $3.5 million in the nine months ended
September 30, 1999. This decrease is attributable to cost containment
initiatives instituted during 2000.
General and administration expenses increased 45% to $7.0 million in
the nine months ended September 30, 2000 from $4.8 million in the nine months
ended September 30, 1999. Professional services fees increased from $0.7 million
in the nine months ended September 30, 1999 to $2.2 million in the nine months
ended September 30, 2000. This is largely due to costs incurred in the third
quarter of 2000 associated with the restatement of our financial statements and
the negotiations for the sale of our assets to London Bridge Software Holdings.
Also in the third quarter of 2000, we recorded an accrual for the cost of
subletting unoccupied office space and disposing of unused furniture and
equipment of $0.7 million.
16
<PAGE> 17
Product development expenses increased 3.0% to $8.2 million in the nine
months ended September 30, 2000 from $7.9 million in the nine months ended
September 30, 1999, primarily as a result of less costs being capitalized in the
third quarter of 2000 than in the third quarter of 1999, which was partially
offset by decreased employee headcount and related costs.
Total Other Income (Expense). Interest income was $362,000 in the nine
months ended September 30, 2000 and $842,000 in the nine months ended September
30, 1999. Interest income decreased in the nine months ended September 30, 2000
period primarily due to a decrease in interest-bearing funds used to fund
operations. Other income (expense) included a realized loss of $1.2 million
related to the decline in the fair value of our investment in Netzee Inc. we had
previously recorded as a charge to shareholders' equity.
Income Tax Expense. The income tax expense was $73,000 for the nine
months ended September 30, 2000 and $137,000 for the nine months ended September
30, 1999.
Net Income (Loss). As a result of all of the above, we incurred a $17.3
million net loss in the nine months ended September 30, 2000 compared to net
loss of $11.9 million in the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We fund our cash needs through existing cash and investment balances,
sales of capital stock, interest on investments and, to a lesser extent, through
cash flow from operations. We have not historically relied on lines of credit or
other borrowings to fund operations. At September 30, 2000, we had cash and cash
equivalents of $1.2 million, and long-term investments of $3.1 million.
Long-term investments consist primarily of U.S. Treasury securities. For the
nine months ended September 30, 2000, our operations used net cash of $8.3
million, primarily due to our net loss position.
For the nine months ended September 30, 2000, investing activities
provided net cash of $1.1 million, which included $5.9 million from the sale of
investments, reduced primarily by $4.6 million invested in capitalized software
development costs and $0.5 million in purchase of property and equipment.
For the nine months ended September 30, 2000, financial activities
provided $5.8 million primarily from the net proceeds from the issuance of
common stock.
Shortly after the execution of the asset purchase agreement pursuant to
which we agreed to sell substantially all of our assets to London Bridge, we
also entered into a loan agreement. Under the terms of the loan agreement,
London Bridge Acquisition Company has agreed to provide us with a $10,000,000
line of credit. We may draw upon the line of credit to fund approved operational
expenses to keep our cash reserve from falling below $2 million. The amount that
we borrow under the line of credit will be repaid at the closing of the asset
sale by application of a credit against the purchase price. The credit will be
reduced to the extent that we borrow more than an allowed amount. At November 6,
2000, we had cash and marketable investment securities available for sale of
$3.0 million.
17
<PAGE> 18
With the line of credit, we believe our cash balances, investments, and
cash flow from operations will be sufficient to meet working capital, capital
expenditure, and software development requirements through the closing of the
transaction with London Bridge, expected to occur during the first quarter of
2001. This assumes that we do not sign any new business during this period. To
the extent that we sign new contracts and collect license and other fees up
front, our need to borrow capital from London Bridge will be reduced. However,
based on recent experience we cannot count on new contracts in the near future.
If the transaction with London Bridge does not close, we will have an
immediate need for additional capital to continue operations and to repay the
amounts borrowed from London Bridge under the loan agreement. If we are unable
to raise this capital in a timely fashion, London Bridge may be able to
foreclose on our intellectual property, in which we have granted them a security
interest in connection with the loan agreement. Further, we may not be able to
continue operations. Therefore, if we are not able to complete the transaction
with London Bridge, these factors raise substantial doubt about the ability of
Phoenix to continue as a going concern. These statements are "forward looking"
statements which are subject to risks and uncertainties as previously discussed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ON MARKET RISK
Phoenix does not use derivative financial instruments in its operations
or investments. While we have significant international operations, our
contracts provide for all payments to be made in U.S. Dollars. We therefore do
not believe that fluctuations in foreign currency exchange rates will have a
material impact on our results or operations. We have experienced foreign
exchange losses from the operations of two of our foreign subsidiaries, but
believe these losses have been immaterial in amount. Foreign exchange risks in
the future could, however, have a material adverse impact on our results of
operations. Phoenix's short-term and long-term investments are deposited
principally in a single financial institution with significant assets and
consist of U.S. Treasury bills and notes with maturities of less than three
years. We do not consider the interest rate risk for these investments to be
material. We do not have any material credit facilities and, therefore, do not
have a significant risk due to potential fluctuations in interest rates for
loans at this time. Changes in interest rates could decrease our interest
income, could make it more costly to borrow money in the future, and may impede
Phoenix's future acquisition and growth strategies if management determines that
the costs associated with borrowing funds are too high to implement these
strategies.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 23, 1999, a lawsuit was filed in the District Court for the
Middle District of Florida as a purported class action initiated by George
Taylor, a former Phoenix employee. Initially, Phoenix and our chief executive
officer were named as defendants. The lawsuit alleges, among other things, that
Phoenix and our chief executive officer improperly recognized revenues,
overstated revenues and failed to disclose that our revenues were allegedly in
decline, all of which allegedly caused our stock price to be higher than it
otherwise would have been during the class period. The lawsuit alleges that
these purported actions violate Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On May 5, 2000, the plaintiffs filed
an Amended Complaint which, among other things, (1) added four additional
investors as named plaintiffs and proposed class representatives; (2) expanded
the purported class period to the period from May 5, 1997 to April 15, 1999; and
(3) added Phoenix's president as an additional named defendant. Phoenix and the
other two defendants filed Motions to Dismiss, which were denied by the Court
without opinion in August 2000. The parties are beginning to conduct discovery.
Our insurance carriers have denied coverage for the claims in this lawsuit. On
October 24, 2000, we entered into an agreement in principle to settle the
consolidated securities class action litigation with a settlement class
comprising shareholders who acquired Phoenix common stock during the period
between May 5, 1997 and August 22, 2000. The settlement of this action, which
was filed on November 23, 1999, provides that we will pay $4,225,000 in cash to
the putative shareholder class. The settlement is subject to certain customary
conditions, notice to the proposed settlement class and preliminary and final
court approval.
In addition, we are subject to various claims and legal proceedings
covering a variety of matters arising in the ordinary course of our business
activities.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
INTERNATIONAL TURNKEY SYSTEMS
On November 9, 2000, we amended our agreement with our reseller in the Middle
East, International Turnkey Systems. In exchange for the forgiveness of $660,000
of outstanding receivables from ITS, the amendment eliminates the requirement in
our marketing agreement with ITS for Phoenix to provide ITS with $1.65 million
in professional services work.
NASDAQ TRADING HALT
On August 23, 2000, the Nasdaq National Market halted trading in our
common stock at the last reported price of $3.00 per share. On October 30, 2000,
Nasdaq resumed trading in Phoenix stock under the symbol PHXX.
In order for Phoenix's stock to continue to be traded on the Nasdaq
National Market, Phoenix must meet Nasdaq's maintenance standards, unless Nasdaq
grants an exception. These standards include the requirement that Phoenix have
net tangible assets of at least $4 million. At September 30, 2000, our net
tangible assets totaled approximately $3.4 million. Accordingly, Nasdaq may give
notice that Phoenix's stock will be delisted from the Nasdaq National Market. In
that event, we would seek to be listed on the Nasdaq SmallCap Market, but this
would be at Nasdaq's discretion, and we can not be sure that we could meet that
market's listing or maintenance standards.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation, as amended by the
Articles of Amendment to Amended and Restated Articles of
Incorporation as filed with the Secretary of the State of Florida on
May 28, 1997 (incorporated by reference to Exhibit 3.1 of our
Registration Statement on Form S-1 (No. 333-31415) as declared
effective by the SEC on August 13, 1997 (the "Registration
Statement")).
3.2 Amended and Restated Bylaws, effective July 8, 1996 (incorporated by
reference to Exhibit 3.2 of Phoenix's Form 10-Q, dated August 14,
1996, File No. 0-20937).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws defining
the rights of the holders of Common Stock of Phoenix (incorporated by
reference to Exhibit 4.1 of Registration Statement).
10.1 Marketing Agreement between London Bridge Software Limited and
Phoenix International Ltd., Inc. (incorporated by reference to
Exhibit 10.1 of Phoenix's Form 10-Q for the quarter ended March 31,
2000, dated May 15, 2000, File No. 0-20937).
27.1 Financial Data Schedule for the nine months ended September 30, 2000
(for SEC use only).
</TABLE>
20
<PAGE> 21
b) Reports on Form 8-K
(1) Form 8-K filed August 23, 2000 with respect to events on
August 22, 2000: this filing reported, in response to
Item 5, "Other Events," on the following:
- a review of our revenue recognition practices,
- the delayed filing of our Form 10-Q for June 30, 2000,
- the potential acquisition by London Bridge Software
Holdings, and
- litigation matters.
(2) Form 8-K filed September 26, 2000: this filing reported
in response to Item 5, "Other Events," an extension of
the exclusivity agreement between Phoenix and London
Bridge Software Holdings.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PHOENIX INTERNATIONAL LTD., INC.
November 14, 2000 /s/ Bahram Yusefzadeh
-------------------------------------------------
Bahram Yusefzadeh
Chairman of the Board and Chief Executive Officer
(principal executive officer)
November 14, 2000 /s/ Theodore C. Burns
-------------------------------------------------
Theodore C. Burns
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, as amended by the
Articles of Amendment to Amended and Restated Articles of
Incorporation as filed with the Secretary of the State of Florida on
May 28, 1997 (incorporated by reference to Exhibit 3.1 of Phoenix's
Registration Statement on Form S-1 (No. 333-31415) as declared
effective by the SEC on August 13, 1997 (the "Registration
Statement")).
3.2 Amended and Restated Bylaws, effective July 8, 1996 (incorporated by
reference to Exhibit 3.2 of Phoenix's Form 10-Q, dated August 14,
1996, File No. 0-20937).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws defining
the rights of the holders of Common Stock of Phoenix (incorporated by
reference to Exhibit 4.1 of Registration Statement).
10.1 Marketing Agreement between London Bridge Software Limited and
Phoenix International Ltd., Inc. (incorporated by reference to
Exhibit 10.1 of Phoenix's Form 10-Q for the quarter ended March 31,
2000, dated May 15, 2000, File No. 0-20937)
27.1 Financial Data Schedule for the nine months ended September 30, 2000
(for SEC use only).
</TABLE>
23
