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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission File Number: 000-23453
FLEXIINTERNATIONAL SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<CAPTION>
<S> <C>
Delaware 06-1309427
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
Two Enterprise Drive, Shelton, CT 06484
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(203) 925-3040
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 13, 1999, there were 17,354,463 shares of FlexiInternational
Software, Inc. Common Stock outstanding.
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FLEXIINTERNATIONAL SOFTWARE, INC.
TABLE OF CONTENTS
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PAGE
----
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet...................................... 3
Condensed Consolidated Statement of Operations............................ 4
Condensed Consolidated Statement of Cash Flows............................ 5
Condensed Consolidated Statement of Stockholders' Equity.................. 6
Notes to Condensed Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 11
Item 3. Quantitative And Qualitative Disclosure About Market Risk..................... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............................ 16
Item 6. Exhibits and Reports on Form 8-K.............................................. 16
Signature..................................................................... 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FLEXIINTERNATIONAL SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
AUDITED
(RESTATED,
SEE NOTE 7)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,283 $ 7,876
Marketable securities 1,000 3,000
Accounts receivable, net of allowance for doubtful
accounts of $1,281 and $812, respectively 7,994 11,041
Prepaid expenses and other current assets 688 999
-------- --------
Total current assets 11,965 22,916
Property and equipment at cost, net of accumulated depreciation
and amortization of $3,729 and $3,121, respectively 2,371 2,732
Acquired software, net of accumulated amortization of
$432 and $216, respectively 1,728 1,944
Goodwill, net of accumulated amortization of $5,356
and $566, respectively (see Note 4) 311 5,101
Other assets 199 218
-------- --------
Total assets $ 16,574 $ 32,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,360 $ 3,199
Accrued commissions 357 725
Accrued restructuring costs 935 --
Accrued expenses - other 1,837 3,483
Current portion of capital lease obligations 606 586
Deferred revenues 9,199 7,426
-------- --------
Total current liabilities 15,294 15,419
Long-term portion of capital lease obligations 558 878
-------- --------
Total liabilities 15,852 16,297
-------- --------
Commitments and contingencies (see Note 6) -- --
Stockholders' equity:
Common stock; $.01 par value; 50,000,000 shares authorized;
issued shares - 17,383,133 and 17,383,133, respectively and
outstanding shares - 17,354,463 and 17,293,622, respectively 174 174
Additional paid-in capital 56,128 56,308
Accumulated deficit (55,611) (39,656)
Currency translation adjustment 83 2
Common stock in treasury at cost - 28,670 and 89,511 shares,
respectively (52) (214)
-------- --------
Total stockholders' equity 722 16,614
-------- --------
Total liabilities and stockholders' equity $ 16,574 $ 32,911
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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FLEXIINTERNATIONAL SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(RESTATED, (RESTATED,
SEE NOTE 7) SEE NOTE 7)
<S> <C> <C> <C> <C>
Revenues:
Software license $ 657 $ 4,114 $ 1,512 $ 6,801
Service and maintenance 3,279 3,159 6,412 5,980
---------- ---------- ----------- -----------
Total revenues 3,936 7,273 7,924 12,781
Cost of revenues:
Software license 94 664 162 1,131
Service and maintenance 1,974 2,106 4,575 3,859
---------- ---------- ----------- -----------
Total cost of revenues 2,068 2,770 4,737 4,990
Operating expenses:
Sales and marketing 1,837 2,605 4,298 4,748
Product development 1,918 2,304 4,604 4,326
General and administrative 1,851 805 4,100 1,417
Goodwill impairment (see Note 4) 4,224 - 4,224 -
Restructuring charge (see Note 5) - - 1,896 -
Acquired in-process research & development - 1,890 - 1,890
---------- ---------- ----------- -----------
Total operating expenses 9,830 7,604 19,122 12,381
---------- ---------- ----------- -----------
Operating loss (7,962) (3,101) (15,935) (4,590)
Interest income 37 284 141 570
Interest expense (27) (29) (57) (42)
---------- ---------- ----------- ------------
Loss before provision for income taxes (7,952) (2,846) (15,851) (4,062)
Provision for income taxes - - - -
---------- ---------- ----------- -----------
Net loss $ (7,952) $ (2,846) $ (15,851) $ (4,062)
========== =========== =========== ===========
Net loss per share:
Basic $ (0.46) $ (0.17) $ (0.91) $ (0.25)
Diluted $ (0.46) $ (0.17) $ (0.91) $ (0.25)
Weighted average shares:
Basic 17,347 16,567 17,326 16,533
Diluted 17,347 16,567 17,326 16,533
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FLEXIINTERNATIONAL SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
-------- --------
(RESTATED,
SEE NOTE 7)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,851) $ (4,062)
Non-cash items included in net loss:
Depreciation and amortization 1,465 348
Goodwill impairment 4,224 --
Acquired in-process research and development -- 1,890
Provision for doubtful accounts 961 150
Change in operating accounts:
Accounts receivable 2,047 (293)
Prepaid expenses and other assets 146 326
Accounts payable and accrued expenses (2,848) 34
Accrued restructuring 882 --
Deferred revenue 1,785 118
-------- --------
Net cash used in operating activities (7,189) (1,489)
Cash flows from investing activities:
Acquisition of subsidiary, less cash acquired -- (493)
Proceeds from sale of property and equipment 29 --
Purchase of property and equipment (355) (552)
-------- --------
Net cash used in investing activities (326) (1,045)
Cash flows from financing activities:
Purchase of short-term investments -- (3,448)
Sale of short-term investments 2,000 --
Proceeds from exercise of stock options and warrants 1 38
Proceeds from employee stock purchase plan 56 --
Payments of capital lease obligations (300) (105)
-------- --------
Net cash provided by (used in) financing activities 1,757 (3,515)
-------- --------
Effect of exchange rate changes on cash 165 --
Decrease in cash and cash equivalents (5,593) (6,049)
-------- --------
Cash and cash equivalents at beginning of period 7,876 24,622
-------- --------
Cash and cash equivalents at end of period $ 2,283 $ 18,573
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FLEXIINTERNATIONAL SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
(RESTATED, SEE NOTE 7)
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<CAPTION>
COMMON STOCK ADDITIONAL CURRENCY TOTAL
---------------- PAID-IN ACCUMULATED TRANSLATION TREASURY STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK EQUITY INCOME (LOSS)
------ ------ ------- ------- ---------- ----- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 17,383,133 $174 $56,308 $(39,656) $ 2 $(214) $ 16,614
Shares issued for ESPP -- -- -- (78) -- 134 56
Exercise of stock options -- -- -- (26) -- 28 2
Cancellation of options
issued in conjunction with
the acquisition of
The Dodge Group -- -- (180) -- -- -- (180)
Net loss -- -- -- (15,851) -- -- (15,851) $(15,851)
Currency translation adjustment -- -- -- -- 81 -- 81 81
--------
Comprehensive income (loss) -- -- -- -- -- -- -- $(15,770)
---------- ---- ------- -------- --- ----- -------- ========
Balance at June 30, 1999 17,383,133 $174 $56,128 $(55,611) $83 $ (52) $ 722
========== ==== ======= ======== === ===== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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FLEXIINTERNATIONAL SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION. The
condensed consolidated financial statements contain previously reported amounts
which have been restated to reflect a change in the revenue recognition for
certain contracts (see Note 7).
The condensed 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 generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 (amendment pending to
give effect to restatement). The Company plans to file an amendment of its 1998
Annual Report on Form 10-K, and amendments of its quarterly reports on Form 10-Q
for the first, second and third quarters of 1998 and for the first quarter of
1999 (see Note 7).
The unaudited condensed consolidated financial statements include the accounts
of FlexiInternational Software, Inc. and its subsidiaries 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 three and
six month periods ended June 30, 1999. The results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results
expected for the full year.
Since its initial public offering in 1997, the Company has experienced recurring
losses and net cash outflows from operations and expects to incur additional
losses from operations. The Company has funded its operating losses principally
from available cash resources since that time. As disclosed in prior periods,
management has taken actions to reduce costs in response to a general business
slowdown that began in the second half of 1998 and which has continued through
June 30, 1999. Management is prepared to take further actions, if necessary, in
order to continue to respond to competitive and economic pressures in the
marketplace. Management is also seeking to obtain additional equity capital.
However, there can be no assurance that the Company will be able to obtain
additional funding or generate sufficient cash from operations to meet future
cash needs in which case the Company's financial condition and results of
operations could be materially adversely affected. As a result of the foregoing,
there exists substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amounts of liabilities that might result from the outcome of this uncertainty.
NOTE 2 - LOSS PER SHARE
Basic loss per share includes no dilution and is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution of securities that could share in the earnings of an entity. The
Company has presented basic and diluted loss per share for all periods. The
number of shares used in the June 30, 1999 and 1998 diluted per share
calculations do not include the effect of outstanding stock options and
warrants, as the effect would be anti-dilutive.
NOTE 3 - REVENUE RECOGNITION
The Company licenses software under noncancellable license agreements through
direct and indirect channels, and provides services including maintenance,
training and consulting. Effective January 1, 1998, the Company has adopted SOP
97-2 "Software Revenue Recognition". Software license revenues through the
Company's direct sales channel are recognized when persuasive evidence of an
arrangement exists, the licensed products have been shipped, fees are fixed and
determinable and collectibility is considered probable. Customers may elect to
receive the licensed products pre-loaded and configured on a hardware unit. In
this case, revenue is recognized when the licensed products are installed on the
hardware unit, the unit is shipped and all other criteria are met. Other
software license royalties earned through the Company's indirect sales channel
are recognized as such fees are reported to the Company. Revenues on all
software license transactions in which there are significant outstanding
obligations are not recognized until such obligations are fulfilled. Maintenance
revenues for maintaining, supporting and providing
7
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periodic upgrading are deferred and recognized ratably over the maintenance
period, generally one year. Revenues from training and consulting services are
recognized as such services are performed. The Company does not require
collateral for its receivables, and reserves are maintained for potential
losses.
During the second quarter of 1999, the Company reviewed its revenue recognition
policies for multiple element arrangements. For such arrangements with extended
payment terms, or where a significant portion of the payment is due after
inception of the license agreement, all revenue is deferred until the final
portion of the license fee becomes due and payable, and all other criteria are
met at that time.
NOTE 4 - ACQUISITION
On June 24, 1998, the Company completed the acquisition of The Dodge Group, Inc.
("Dodge"), a software developer that specializes in financial data warehouse
solutions. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the results of Dodge's operations are included in
the Company's condensed consolidated financial statements from the date of
acquisition.
A summary of the allocation of the purchase price is as follows:
Acquired in-process research and development $ 1,890
Acquired software 2,160
Goodwill 5,667
Liabilities assumed (2,161)
--------
$ 7,556
Acquired in-process research and development represents the fair value of
technologies acquired for use in the Company's own development efforts. The
Company determined the amount of the purchase price to be allocated to
in-process research and development based upon the methodology that focused on
the after tax cash flows attributable to the in-process research and development
combined with the consideration of the stage of completion of the individual
in-process research and development project at the date of acquisition. The
in-process research and development was expensed upon acquisition as it was
determined that technological feasibility of in-process products had not been
established and no alternative future uses existed.
Acquired software represents the fair value of applications and technologies
existing at the date of acquisition. The resulting value is being amortized
using the straight-line method over its estimated life of five years, and is
subject to periodic impairment tests in accordance with established policies.
Goodwill represents the excess of the purchase price over the fair value of
identifiable tangible and intangible net assets acquired and is being amortized
using the straight-line method over its estimated life of five years.
Following executive and staff cutbacks in connection with a first quarter 1999
restructuring program previously disclosed (see Note 5), management has recently
revised its plans for the existing Dodge financial data warehouse business
acquired in 1998. As a result, expected revenues and cash flows from these
software products have been revised significantly downward. Additionally,
competitive pressures and a continuation of the general business slowdown
previously disclosed have caused management to reassess the long term potential
of the Dodge business and to reprioritize its investments.
During June 1999 the Company reassessed the value of the intangible assets
recorded by the Company as a result of the acquisition. Prior to that
reassessment, the unamortized balance of the intangible assets was $6,263,
consisting of $1,728 of acquired software and $4,535 of goodwill. After
assessment of the acquired software asset, management concluded that the
carrying value approximated net realizable value for that software. Management
also assessed the related goodwill arising from the Dodge acquisition in
accordance with established policies. The economic factors indicated above have
caused management to revise downward its estimates of future cash flows from
current and future products associated with the Dodge business as a whole. As a
result of management's analysis, and using the best information available,
management recorded a goodwill impairment of $4,224 in the second quarter to
reduce the carrying amount of the goodwill to $311.
In applying its policy for assessing the carrying amount of the goodwill for
impairment, management first estimated future cash flows from the acquired Dodge
business generated from existing and planned future product introductions over
the next four years (estimated remaining useful life), and assumed a terminal
value factor after the fourth year based on a range of EBITDA (earnings before
interest taxes depreciation and amortization) multiples for a sample of
comparable public financial software companies. That estimate was then compared
to the carrying amount of the underlying assets, and on that basis
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management concluded that an impairment existed. In measuring the impairment,
the estimated future cash flows were discounted to a net present value at 25%, a
rate consistent with that used in the original purchase accounting for the Dodge
business. The goodwill was then reduced accordingly to reflect the difference
between its carrying amount and estimated fair value.
Management will continue, periodically, to conduct reassessments of the value of
the acquired software and goodwill. Because the estimates made in these
reassessments are inherently subjective, there can be no assurance that future
reassessments will not result in further reductions of the carrying value of
these assets.
The following table reflects pro forma combined results of operations
(unaudited) of the Company and Dodge, giving effect to the acquisition of Dodge
at the beginning of the fiscal year 1998, for all periods presented, and
excludes the one-time in-process research and development charge of $1,890 for
the 1998 periods presented:
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ------------------------
1999 1998 1999 1998
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 3,936 $ 9,577 $ 7,924 $ 17,227
Net loss $ (7,952) $ (2,605) $(15,851) $ (5,005)
Net loss per diluted common share $ (0.46) $ (0.15) $ (0.91) $ (0.29)
Shares used in computation 17,347 17,373 17,326 17,368
</TABLE>
NOTE 5 - RESTRUCTURING CHARGE
On February 26, 1999, management, with the approval of the Board of Directors,
took certain actions to reduce employee headcount in order to align its sales,
development and administrative organization with the current overall
organization structure, and to position the Company for profitable growth in the
future consistent with management's long term objectives. In this regard, the
primary actions taken include involuntary terminations of selected personnel.
Severance packages were offered to 66 employees. This reduction in headcount
also led to the Company having excess leased facility space. As a result of
these actions, the Company recorded a charge to operations during the three
month period ended March 31, 1999 of $1,896. Of the total amount of this charge,
$1,730 was related to severance costs, of which $667 and $181 were paid during
the three month periods ended March 31, 1999, and June 30, 1999, respectively,
and $166 related to costs of idle facility space, of which $18 and $95 were paid
during the three month periods ended March 31, 1999 and June 30, 1999,
respectively. The remaining balance of the severance costs, $882 will be payable
in installments for up to two years. The Company believes that these actions
resulted in sustainable cost savings, primarily through the elimination of
redundant functions in product development, due to completion of development
work on FlexiFinancials Release 4, and to a lesser extent in the support and
sales organizations.
Detail of the restructuring charge is as follows:
SEVERANCE EXCESS
& BENEFITS FACILITIES TOTAL
---------- ---------- ------
Reserve balances,
February 26, 1999 $1,730 $ 166 $1,896
Cash charges (848) (113) (961)
------- ----- ------
Reserve balances,
June 30, 1999 $ 882 $ 53 $ 935
====== ===== ======
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company entered into significant contracts for licensing of software and
provision of services with two customers which are now in dispute. The revenue
recognition for those contracts has been restated as a result of payment
disputes that arose with these customers in the second quarter of 1999 (see Note
7). The Company believes that the amounts in dispute are appropriately due under
terms of the contracts and expects the amounts to be realized. The Company is
planning to vigorously pursue collection of these amounts through all available
means under the contract terms, including arbitration. However, there can be no
assurance that the carrying amounts of these receivables of approximately $2,800
will be realized.
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NOTE 7 - RESTATEMENT OF 1998 AND FIRST QUARTER 1999
As a result of the Company's regular quarterly financial statement review with
its independent accountants, the Company determined that it would restate the
prior period amounts originally reported for 1998 and the first quarter of 1999,
to reflect a change in the revenue recognition for several 1998 software license
contracts. Most of the restated amounts relate to two contracts that the Company
believes were appropriately due and payable under their contractual terms but
payments with respect to which, in the second quarter of 1999 became subject to
dispute by the contracting parties. For all contracts for which revenue has been
restated in 1998 and 1999, all amounts billed are included in accounts
receivable as of June 30, 1999 with a corresponding offset included in deferred
revenues. Any amounts stipulated in the contract which have not been invoiced
have not been recognized in the financial statements. The restatement has
resulted in a reduction in revenue for each of the quarterly periods in 1998 and
the first quarter of 1999. A summary of the effects of the restatement on the
affected statement of operations is as follows:
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THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998
UNAUDITED UNAUDITED UNAUDITED
------------------------- ------------------------ -------------------------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED
----------- -------- ----------- -------- ----------- --------
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Statement of Operations:
Software license $4,687 $ 2,687 $ 6,059 $ 4,114 $ 1,866 $ 1,653
Service and maintenance 2,821 2,821 3,192 3,159 4,243 4,129
Total revenues 7,508 5,508 9,251 7,273 6,109 5,782
Operating income (loss) 511 (1,489) (1,123) (3,101) (6,007) (6,334)
Net income (loss) $ 784 $(1,216) $ (868) $(2,846) $(5,781) $(6,108)
Net income (loss) per share:
Basic $ 0.05 $ (0.07) $ (0.05) $ (0.17) $ (0.33) $ (0.35)
Diluted $ 0.05 $ (0.07) $ (0.05) $ (0.17) $ (0.33) $ (0.35)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
UNAUDITED
------------------------- ------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Statement of Operations:
Software license $ 3,501 $ 2,088 $ 16,113 $ 10,542
Service and maintenance 3,822 3,645 14,078 13,754
Total revenues 7,323 5,733 30,191 24,296
General and administrative 3,122 2,322 6,991 6,191
Total operating expenses 9,820 9,020 30,866 30,066
Operating loss (6,397) (7,187) (13,016) (18,111)
Net loss $(6,271) $(7,061) $(12,136) $(17,231)
Net loss per share:
Basic $ (0.36) $ (0.41) $ (0.72) $ (1.02)
Diluted $ (0.36) $ (0.41) $ (0.72) $ (1.02)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
UNAUDITED
-------------------------
AS REPORTED RESTATED
----------- --------
<S> <C> <C>
Statement of Operations:
Software license $ 1,055 $ 855
Service and maintenance 3,281 3,133
Total revenues 4,336 3,988
Operating loss (7,625) (7,973)
Net loss $(7,551) $(7,899)
Net loss per share:
Basic $ (0.44) $ (0.46)
Diluted $ (0.44) $ (0.46)
</TABLE>
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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. 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. The Company undertakes 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 the
Company files from time to time with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for the year ended December 31, 1998
(amendment pending to give effect to restatement).
RESULTS OF OPERATIONS
Restatement. The condensed consolidated financial statements included and
discussed herein contain comparative amounts previously reported which have been
restated to reflect a change in the original revenue recognition for certain
contracts. (See Note 7 to the condensed consolidated financial statements for
effects on prior period statements.) All prior period comparative amounts
discussed below are as restated.
Revenues. Total revenues, consisting of software license revenues and
service and maintenance revenues, decreased 45.9%, from $7.3 million for the
three months ended June 30, 1998 to $3.9 million for the three months ended June
30, 1999. Year to date revenues decreased 38.0% from $12.8 million in 1998 to
$7.9 million for the same period in 1999. One customer provided approximately
22.2% and three customers provided approximately 49.9% of the total revenues for
the three months ended June 30, 1999 and 1998, respectively. Two customers
provided approximately 28.5% and three customers provided approximately 51.6% of
the total revenues for the six months ended June 30, 1999 and 1998,
respectively.
Software license revenues decreased 84.0%, from $4.1 million for the three
months ended June 30, 1998 to $0.7 million for the three months ended June 30,
1999. Year to date software license revenues decreased 77.8% from $6.8 million
in 1998 to $1.5 million in 1999. The Company believes that the decline in
software license revenue was primarily due to continued delays in companies'
buying decisions as a result of their focus on Year 2000 issues.
Service and maintenance revenues increased 3.8%, from $3.2 million for the
three months ended June 30, 1998 to $3.3 million for the three months ended June
30, 1999. Year to date service and maintenance revenues increased 7.2% from $6.0
million in 1998 to $6.4 million in 1999. The increase was primarily attributable
to the growth of the installed base of customers, which resulted in an increased
maintenance revenue stream.
Cost of Revenues. The Company's cost of revenues consists of cost of
software license revenues and cost of service and maintenance revenues. Cost of
software license revenues consists primarily of the cost of third-party software
products distributed by the Company and the cost of product media, manuals and
shipping. Cost of service and maintenance revenues consists of costs to provide
consulting, implementation and training to licensees of the Company's products
and the cost of providing software maintenance to customers, technical support
services and periodic upgrades of software.
Cost of software license revenues decreased 85.8%, from $664,000 for the
three months ended June 30, 1998 to $94,000 for the three months ended June 30,
1999. Cost of software license revenues as a percentage of software license
revenues decreased from 16.1% for the three months ended June 30, 1998 to 14.3%
for the three months ended June 30, 1999. Year to date, the cost of software
license revenues decreased 85.7% from $1.1 million in 1998 to $162,000 in 1999,
while decreasing as a percentage of software license revenue from 16.6% in 1998
to 10.7% in 1999. The decrease in cost of software license revenues in dollar
amount was primarily attributable to lower third-party license fee revenues
which resulted in lower royalties.
Cost of service and maintenance revenues decreased 6.3%, from $2.1 million
for the three months ended June 30, 1998 to $2.0 million for the three months
ended June 30, 1999. Cost of service and maintenance revenues as a percentage of
service and maintenance revenues decreased from 66.7% for the three months ended
June 30, 1998 to 60.2% for the three months ended June 30, 1999. Year to date,
the cost of service and maintenance revenues increased 18.6% from $3.9 million
in 1998 to $4.6 million in 1999, and increased as a percentage of service and
maintenance revenues from 64.5% in 1998 to 71.4% in 1999. The decrease in dollar
amount for the three months ended June 30, 1999 was primarily the result of the
actions taken by the Company in the first quarter to reduce the
11
<PAGE> 12
staffing in the service organization. The increase in dollar amount for the six
months ended June 30, 1999 resulted primarily from under utilization in the
Company's consulting organization during the three months ended March 31, 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses, and facility and
communication costs for direct sales offices. Sales and marketing expenses
decreased 29.5%, from $2.6 million for the three months ended June 30, 1998 to
$1.8 million for the three months ended June 30, 1999. Year to date sales and
marketing expenses decreased 9.5% from $4.7 million in 1998 to $4.3 million in
1999. The decrease in dollar amount was primarily attributable to decreased
staffing in the direct sales force and sales and marketing organizations as the
Company took actions to align its sales and marketing organizations costs with
its anticipated revenues. Sales and marketing expenses as a percentage of total
revenues increased from 35.8% to 46.7% for the three months ended June 30, 1998
and 1999, respectively, and from 37.1% to 54.2% for year to date 1998 and 1999,
respectively. The increases in these percentages were primarily due to a
decreasing revenue base.
Product Development (Excluding Acquired In-Process Research and
Development). Product development expenses include software development costs
and consist primarily of engineering personnel costs.
Product development expenses decreased 16.8%, from $2.3 million for the
three months ended June 30, 1998 to $1.9 million for the three months ended June
30, 1999. Year to date product development expenses increased 6.4% from $4.3
million in 1998 to $4.6 million in 1999. The year to date increase in product
development expenses was due primarily to an increase in staffing during the
first quarter that was needed to complete work on the Company's latest version
of its software. Product development expenses as a percentage of total revenues
increased from 31.7% to 48.7% for the three months ended June 30, 1998 and 1999,
respectively, and from 33.8% to 58.1% for year to date 1998 and 1999,
respectively. The increases in these percentages were primarily due to a
decreasing revenue base.
General and Administrative. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel, as
well as provisions for doubtful accounts and outside professional fees. General
and administrative expenses increased 129.9%, from $805,000 for the three months
ended June 30, 1998 to $1.9 million for the three months ended June 30, 1999.
Year to date general and administrative expenses increased 189.3% from $1.4
million in 1998 to $4.1 million in 1999. The increase was primarily attributable
to an increase in the reserve for bad debts, commencement of amortization of
acquired software and goodwill associated with the June 1998 acquisition of The
Dodge Group and an increase in administrative personnel as a result of The Dodge
Group acquisition. General and administrative expenses as a percentage of total
revenues increased from 11.1% to 47.0% for the three months ended June 30, 1998
and 1999, respectively, and from 11.1% to 51.7% for year to date 1998 and 1999,
respectively. The increase in these percentages were primarily due to a
decreasing revenue base.
Goodwill Impairment. During June 1999 management conducted a periodic
impairment assessment of the intangible assets resulting from the Dodge
acquisition. As a result of that review, management concluded that an impairment
had occurred with the goodwill and that a $4.2 million write down of goodwill to
a carrying value of $0.3 million should be recorded in the second quarter of
1999 (see Note 4 to the condensed consolidated financial statements.) The
Company's financial data warehouse products based on existing technologies are
expected to continue generating revenue through 2002, and thereafter, be
substantially replaced by more advanced technologies currently under
development. However, future research and development spending on follow-on
technologies will be dependent on management's prioritization of investments
under conditions of limited financial resources (see Liquidity and Capital
Resources section). As a result, expected future revenue and cash flows from the
acquired Dodge business have been revised downward significantly, causing the
impairment of goodwill.
Prior to the reassessment, the unamortized balance of the intangible
assets was $6.2 million, consisting of $1.7 million of acquired software and
$4.5 million of goodwill. After assessment of the acquired software asset,
management concluded that the carrying value approximated net realizable value
for that software. Management also assessed the related goodwill arising from
the Dodge acquisition in accordance with established policies. The economic
factors indicated above have caused management to revise downward its estimates
of future cash flows from current and future products associated with the Dodge
business as a whole. As a result of management's analysis, and using the best
information available, management recorded a goodwill impairment charge of $4.2
million in the second quarter to reduce the carrying amount of the goodwill to
$0.3 million.
In applying its policy for assessing the carrying amount of the goodwill
for impairment, management first estimated future cash flows from the acquired
Dodge business generated from existing and planned future product introductions
over the next four years (estimated remaining useful life), and assumed a
terminal value factor after the fourth year based on a range of EBITDA multiples
for a sample of comparable public financial software companies. That estimate
was then compared to the carrying amount of the underlying assets, and on that
basis management concluded that an impairment existed. In measuring the
impairment, the estimated future cash flows
12
<PAGE> 13
were discounted to a net present value at 25%, a rate consistent with that used
in the original purchase accounting for the Dodge business. The goodwill was
then reduced accordingly to reflect the difference between its carrying amount
and estimated fair value.
Management will continue, periodically, to conduct reassessments of the
value of the acquired software and goodwill. Because the estimates made in these
reassessments are inherently subjective, there can be no assurance that future
reassessments will not result in further reductions of the carrying value of
these assets.
Acquired In-Process Research and Development. As a result of the June 24,
1998 acquisition of The Dodge Group, there is a one-time charge of $1.9 million
for acquired in-process research and development in the three-month and
six-month periods ended June 30, 1998.
Provision for Income Taxes. No provision or benefit for federal, state or
foreign income taxes was made for the three-month or year to date periods ended
June 30, 1999 and 1998. The Company has reported only annual tax losses to date
and consequently has approximately $31.0 million and $7.3 million of U.S. and
foreign net operating loss carryforwards, respectively, which expire at various
times through the year 2018, available to offset future taxable income. The
utilization of such net operating losses is subject to limitations as a result
of ownership changes. The annual limitation and the timing of attaining
profitability will result in the expiration of net operating loss carryforwards
before utilization.
Supplemental Disclosure of Net Income (Loss) and Income (Loss) per Share
Actual and Excluding Nonrecurring Charges. Excluding the one-time charges for
acquired in-process research and development of $1.9 million, restructuring
charge of $1.9 million and goodwill impairment of $4.2 million, as described
above, unaudited net loss and loss per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- ----------------------------------------------
1999 1999(a) 1998 1998(b) 1999 1999(c) 1998 1998(b)
ACTUAL SUPPLEMENTAL ACTUAL SUPPLEMENTAL ACTUAL SUPPLEMENTAL ACTUAL SUPPLEMENTAL
------ ------------ ------- ------------ ------ ------------ ------ ------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Supplemental net loss $ (7,952) $ (3,728) $ (2,846) $ (956) $(15,851) $ (9,731) $(4,062) $(2,172)
Percent of revenue (202.0%) (94.7%) (39.1%) (13.1%) (200.0%) (122.8%) (31.8%) (17.0%)
Supplemental net loss
per share
Basic $ (0.46) $ (0.21) $ (0.17) $ (0.06) $ (0.91) $ (0.56) $ (0.25) $ (0.13)
Diluted $ (0.46) $ (0.21) $ (0.17) $ (0.06) $ (0.91) $ (0.56) $ (0.25) $ (0.13)
</TABLE>
(a) Excludes one-times charge of $4.2 million for goodwill impairment
(b) Excludes one-time charge of $1.9 million for acquired in-process research
& development
(c) Excludes one-time charges of $4.2 million for goodwill impairment and
$1.9 million restructuring charge
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations
through private placements of its stock to private investors, issuances of
convertible promissory notes and loans, equipment financing and traditional
borrowing arrangements, and in December 1997, an initial public offering of its
Common Stock, resulting in net proceeds to the Company of approximately $22.2
million.
As of June 30, 1999, the Company had cash, cash equivalents and marketable
securities of $3.3 million, a decrease of $7.6 million from December 31, 1998.
The Company's working capital at June 30, 1999 was a deficiency of $3.3 million,
compared to $7.5 million at December 31, 1998.
The Company's operating activities resulted in net cash outflow of $7.2
million for the six months June 30, 1999, principally from the net operating
loss. Investing activities, consisting of capital expenditures, resulted in net
cash outflow of $323,000 for the six months ended June 30, 1999. The Company's
financing activities resulted in a net cash inflow for the six months ended June
30, 1999 of $1.8 million, principally from the sale of short-term investments.
The Company's Board of Directors has adopted a share repurchase program
authorizing the Company to purchase up to 1.0 million shares of its common stock
on the open market. As of June 30, 1999 the Company has purchased 135,000 common
shares at a total cost of $463,000.
Since its initial public offering in 1997, the Company has experienced
recurring losses and net cash outflows from operations and expects to incur
additional losses from operations. The Company has funded its operating losses
principally from available cash resources since that time. As disclosed in prior
periods, management has taken
13
<PAGE> 14
actions to reduce costs in response to a general business slowdown that began in
the second half of 1998 and which has continued through June 30, 1999.
Management is prepared to take further actions, if necessary, in order to
continue to respond to competitive and economic pressures in the marketplace. In
addition, as of June 30, 1999 the Company had a negative working balance of $3.3
million. Management is also seeking to obtain additional equity capital.
However, there can be no assurance that the Company will be able to obtain
additional funding or generate sufficient cash from operations to meet future
cash needs in which case the Company's financial condition and results of
operations could be materially adversely affected. As a result of the foregoing,
there exists substantial doubt about the Company's ability to continue as going
concern.
YEAR 2000 COMPLIANCE
The year 2000 issue relates to computer programs and systems that
recognize dates using two-digit year data rather than four-digit year data.
These programs and systems may fail or provide incorrect information when using
dates after December 31, 1999. If the year 2000 issue disrupts our internal
information technology systems, or the information technology systems of
companies with whom we have significant commercial relationships, our business
and financial condition could be materially adversely affected.
The year 2000 issue may affect three areas of our business: (1) the design
of our products, (2) our internal computer systems, and (3) the computer systems
of our significant suppliers or customers. Each area is addressed below.
1. YEAR 2000 COMPLIANCE OF OUR PRODUCTS. In as much as no test of year 2000
compliance can simulate the actual change of the millennium, we cannot assure
you that our products will be unaffected by the year 2000. From the beginning,
our products have been designed and tested to be year 2000 compliant, and we
design new products, and any updates of existing products, to be year 2000
compliant. However, failures that cannot be detected using currently available
compliance testing could have a material adverse effect on our business and
financial condition.
2. YEAR 2000 COMPLIANCE OF OUR INTERNAL SYSTEMS. Our internal computer
programs and operating systems relate to virtually all segments of our business,
including:
* merchandising
* customer database management
* marketing
* order processing
* order fulfillment
* contract management
* customer service
* financial reporting
These applications are currently, or are expected to be, year 2000 compliant.
Nonetheless, we are requesting compliance statements from any parties that
service and supply these applications. We intend to evaluate any risks disclosed
in their responses and, if necessary, consider possible alternative sources.
3. YEAR 2000 COMPLIANCE OF THIRD-PARTY SYSTEMS. The computer programs and
operating systems used by entities with whom we have commercial relationships
pose potential problems relating to the year 2000 issue, which may affect our
operations in a variety of ways. These risks are more difficult to assess than
those posed by internal programs and systems. We rely on third parties for some
of the software code or programs that are embedded in, or work with, our
products. We are assessing whether the functionality of our products would be
materially diminished by a failure of such third-party software to be year 2000
compliant. There can be no assurance that we may not experience unanticipated
expenses or be otherwise adversely impacted by a failure of third-party systems
or software to be year 2000 compliant. The most reasonably likely worst-case
scenarios may include: (i) corruption of data contained in our internal
information systems, (ii) hardware failure, and (iii) failure of infrastructure
services provided by utilities or government. We intend to include an evaluation
of these scenarios in our plan for assessing the programs and systems of the
entities with whom we have commercial relationships.
We have formed a management team assigned with the task of assessing the
programs and systems of the entities with whom we have commercial relationships;
questionnaires have been sent out and responses are being evaluated for possible
next steps. We have identified risks and uncertainties and are resolving those
by working with the relevant vendors and providers, by working internally to
identify alternative sourcing and by formulating contingency plans to deal with
those risks and uncertainties. To date, however, we have not
14
<PAGE> 15
contingency plan. We expect the resolution of all risks and uncertainties, if
any, to be completed by December 31, 1999. We do not currently anticipate that
the total cost of any year 2000 remediation efforts that may be needed will be
material.
EUROPEAN MONETARY UNION ("EMU")
The Company's internal business information systems are comprised of the
same commercial application software products generally offered for license by
the Company to end user customers. The Company's latest software release
contains EMU functionality that allows for dual currency reporting and
information management. The Company is not aware of any material operational
issues or costs associated with preparing internal systems for the EMU. However,
the Company utilizes other third party software products that may or may not be
EMU compliant. Although the Company is currently taking steps to address the
impact, if any, of EMU compliance for such third party products, failure of any
critical technology components to operate properly post EMU may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on Company's financial results and conditions,
primarily foreign currency exchange rates and interest rates on marketable
securities. The Company does not utilize derivative instruments in managing its
exposure to such changes. The Company does not believe that near-term changes in
foreign currency exchange rates or interest rates will have a material effect on
its future earnings, fair values or cash flows.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds.
(1) The Company's registration statement on Form S-1 under the
Securities Act of 1933, as amended, (File No. 333-38403)
for the Company's initial public offering, the use of
proceeds of which is herein reported, was declared
effective as of December 11, 1997.
(4)(vii) The Company used approximately $20.2 million of
the proceeds from the initial public offering for
ongoing operations of the Company ($17.8 million),
the purchase and installation of property and
equipment ($1.2 million), the payment of convertible
notes payable in connection with the Dodge
acquisition ($754,000)and the purchase 135,000 shares
($463,000) of its common stock on the open market
under the Company's share repurchase program. Other
than officers salaries and severance payments, no
payments of these expenses were to persons other than
(a) directors or officers of the Company or their
associates, (b) persons owning 10% or more of the
equity securities of the Company or (c) affiliates of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on April 29,
1999 (the "Annual Meeting").
(b) At the Annual Meeting, the stockholders elected each of
Jennifer V. Cheng and Brian P. Friedman as a Class II director
of the Company for a three-year term by a vote of 14,442,273
shares for and 2,851,349 shares withheld and 13,628,623 shares
for and 3,664,999 shares withheld, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated By-Laws
10.1 Severance and Settlement Agreement and Release dated
February 2, 1999 between the Registrant and Jennifer V.
Cheng.
10.2 Severance and Settlement Agreement and Release dated
February 2, 1999 between the Registrant and
James W. Schenck.
10.3 Amendment of Options dated May 12, 1999 between the
Registrant and Jennifer V. Cheng.
10.4 Amendment of Options dated May 12, 1999 between the
Registrant and James W. Schenck.
27.1 Financial Data Schedule
(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 & CEO
Date: August 16, 1999
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, as amended (File No 333-38403)
(the "Form S-1").
3.2 Amended and Restated By-Laws of the Registrant is incorporated herein
by reference to Exhibit 3.4 to the Form S-1.
10.1 Severance and Settlement Agreement and Release dated February 2, 1999
between the Registrant and Jennifer V. Cheng.
10.2 Severance and Settlement Agreement and Release dated February 2, 1999
between the Registrant and James W. Schenck.
10.3 Amendment of Options dated May 12, 1999 between the Registrant and
Jennifer V. Cheng.
10.4 Amendment of Options dated May 12, 1999 between the Registrant and
James W. Schenck.
27.1 Financial Data Schedule (six month period ended June 30, 1999).
17
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,283
<SECURITIES> 1,000
<RECEIVABLES> 9,275
<ALLOWANCES> 1,281
<INVENTORY> 0
<CURRENT-ASSETS> 11,965
<PP&E> 6,100
<DEPRECIATION> 3,729
<TOTAL-ASSETS> 16,574
<CURRENT-LIABILITIES> 15,294
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 548
<TOTAL-LIABILITY-AND-EQUITY> 16,574
<SALES> 1,512
<TOTAL-REVENUES> 7,924
<CGS> 162
<TOTAL-COSTS> 4,737
<OTHER-EXPENSES> 19,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> (15,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,851)
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