FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001.
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANFE ACT OF 1934
Commission File Number 0-29634
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FUNDTECH LTD.
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(Exact Name of Registrant as Specified in its Charter)
ISRAEL Not Applicable
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12 Ha'hilazon Street
Ramat-Gan, Israel 52522
---------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
011972-3-575-2750
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(Registrant's Telephone Number, Including Area Code)
Former Address: Beit Habonim, 2 Habonim St. Ramat-Gan, Israel
(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: 14,243,596 shares of Ordinary
Shares, NIS 0.01 par value, as of September 30, 2001.
FUNDTECH LTD.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements p. 3
Condensed Consolidated Balance Sheets as of September 30,
2001 (unaudited) and December 31, 2000 p. 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended September 30, 2001 and p. 4
September 30, 2000
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 2001 and September p. 5
30, 2000
Notes to Condensed Consolidated Financial Statements (unaudited) p. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations p. 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk p. 12
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K p. 13
Index To Exhibits p. 13
Signatures p. 14
2
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I
FINANCIAL INFORMATION
FUNDTECH LTD. AND ITS SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
September 30, December 31,
2001 2000
-------------- -------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $9,166 $18,116
Short-term bank deposits -- 3,132
Marketable Securities 41,655 42,067
Trade receivables, net 24,381 24,375
Other current assets 1,265 2,719
----------- ------------
Total current assets 76,467 90,409
Long-term trade receivables 3,032 3,673
Long-term lease deposits 718 476
Property and equipment, net 9,815 11,038
Other assets, net 24,109 20,933
----------- ------------
Total assets $114,141 $126,529
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables $1,460 $3,090
Accrued non-recurring expenses 745 --
Deferred revenues and accrued expenses 10,220 3,479
----------- ------------
Total current liabilities 12,425 6,569
Other liabilities 776 246
----------- ------------
Total liabilities 13,201 6,815
----------- ------------
Shareholders' equity:
Share capital 42 42
Additional paid-in capital 139,598 139,420
Accumulated other comprehensive loss (903) (3,951)
Deferred stock compensation -- (32)
Accumulated deficit (37,797) (15,765)
----------- ------------
Total shareholders' equity 100,940 119,714
----------- ------------
Total liabilities and shareholders' equity $114,141 $126,529
=========== ============
See notes to condensed consolidated financial statements (unaudited)
3
FUNDTECH LTD. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share and Per Share Data)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues
Software license fees $ 3,861 $ 8,926 $ 14,643 $ 21,117
Maintenance and service fees 6,630 4,728 19,987 12,920
Hardware sales 73 210 289 1,146
------------ ------------ ------------ ------------
Total revenues 10,564 13,864 34,829 35,183
------------ ------------ ------------ ------------
Cost of revenues
Software license costs 223 83 824 145
Maintenance and service costs 4,602 3,224 14,400 8,704
Hardware costs 58 163 231 913
------------ ------------ ------------ ------------
Total cost of revenues 4,883 3,470 15,455 9,762
------------ ------------ ------------ ------------
Gross profit 5,681 10,394 19,374 25,421
------------ ------------ ------------ ------------
Operating expenses:
Software development 5,479 4,828 14,426 13,162
Selling and marketing, net 2,743 2,364 8,084 7,242
General and administrative 2,813 1,710 6,955 4,516
Amortization of acquisition-related
goodwill and other intangible assets 632 625 1,885 1,831
Provision for doubtful accounts 3.053 89 3,410 535
Impairment charges -- -- 1,035 --
Non-recurring expenses 281 -- 2,719 --
------------ ------------ ------------ ------------
Total operating expenses 15,001 9,616 38,514 27,286
------------ ------------ ------------ ------------
Operating income (loss) (9,320) 778 (19,140) (1,865)
Impairment of marketable securities (6,031) -- (6,031) --
Financial income, net 915 1,366 3,139 4,372
------------ ------------ ------------ ------------
Net income (loss) $ (14,436) $ 2,144 $ (22,032) $ 2,507
============ ============ ============ ============
Net income (loss) per share:
Basic income (loss) per share $ (1.02) $ 0.15 $ (1.55) $ 0.18
Diluted income (loss) per share $ (1.02) $ 0.15 $ (1.55) $ 0.17
Shares used in computing:
Basic income (loss) per share 14,221,605 14,154,094 14,197,448 14,060,978
Diluted income (loss) per share 14,221,605 14,773,733 14,197,448 14,767,478
Adjusted net income (loss) per share [a]:
Adjusted net income (loss) used in computing income per share $ (4,439) $ 2,858 $ (6,952) $ 4,873
Diluted adjusted income (loss) per share $ (0.31) $ 0.19 $ (0.49) $ 0.33
Shares used in computing Diluted income (loss) per share 14,221,605 14,773,733 14,197,144 14,767,478
Note: Certain prior period amounts have been reclassified to conform to
current year presentation.
[a] Adjusted net income (loss) and adjusted net income (loss) per share
excludes the pre-tax effects of the line items "Amortization of
acquisition-related goodwill and other intangible assets", "Provision for
doubtful accounts", "Impairment charges", "Non-recurring expenses", and
"Impairment of marketable securities" listed above.
See notes to condensed consolidated financial statements (unaudited)
4
FUNDTECH LTD. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Nine Months Ended
September 30,
-----------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $(22,032) $ 2,507
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 4,804 3,953
Impairment of marketable securities 6,031 --
Impairment charges 1,035 --
Provision for doubtful accounts 3,410 535
Amortization of deferred stock compensation 32 45
Capital gain on sale of property and equipment -- (2)
Increase in trade receivables and long-term trade receivables (2,775) (11,738)
Decrease (increase) in other current assets 357 (1,216)
Increase (decrease) in trade payables (1,630) 1,429
Increase in accrued non-recurring expenses 1,425 --
Increase (decrease) in deferred revenues and accrued expenses 6,612 (1,176)
Increase (decrease) in other liabilities (23) 61
-------- --------
Net cash used in operating activities (2,754) (5,602)
-------- --------
Cash flows from investing activities:
Investments in long-term lease deposits (218) --
Purchase of property and equipment (1,694) (3,679)
Investments in available for sale marketable securities (2,583) (2,509)
Proceeds from sale of short-term bank deposits 3,170 --
Proceeds from sale of property and equipment -- 81
Capitalization of software development costs (5,104) --
-------- --------
Net cash used in investing activities (6,429) (6,107)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of share capital and exercise of
stock options and warrants, net 178 1,474
-------- --------
Net cash provided by financing activities 178 1,474
-------- --------
Effect of exchange rate on cash and cash equivalent 55 (379)
-------- --------
Decrease in cash and cash equivalents (8,950) (10,614)
Cash and cash equivalents at the beginning of the period 18,116 41,493
-------- --------
Cash and cash equivalents at the end of the period $ 9,166 $ 30,879
======== ========
See notes to condensed consolidated financial statements (unaudited)
5
FUNDTECH LTD. AND ITS SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Except Share and Per Share Data)
Fundtech Ltd. and its subsidiaries ("the Company" or "Fundtech") designs,
develops, markets and supports a suite of mission critical client/server
software and internet software which automate the process of transferring funds
among corporations, banks and clearance systems, and enables businesses to
manage global cash positions efficiently and in real time.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements as of
September 30, 2001 and for the three months ended September 30, 2001 and 2000
and for the nine months ended September 30, 2001 and 2000 are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of the financial condition and results of operations,
contained in Fundtech's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000. The results of operations for the three and nine months ended
September 30, 2001 are not necessarily indicative of the results for the entire
fiscal year ending December 31, 2001.
2. MARKETABLE SECURITIES
The Company accounts for its investments in marketable securities using
Statement of Financial Accounting Standard Board No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management
determines the proper classifications of investments in obligations with fixed
maturities and marketable equity securities at the time of purchase and
reevaluates such designations as of each balance sheet date. As of December 31,
2000 and September 30, 2001, all securities covered by SFAS No. 115 were
designated as available-for-sale.
As of December 31, 2000 these securities were stated at fair value and
unrealized losses of $3,036 were reported in a separate component of accumulated
other comprehensive loss in shareholders' equity.
As of September 30, 2001, due to the market conditions, the unrealized losses
increased to $6,031. Since the Company believes this decline is other than
temporary, the cost basis of these securities was written down to fair value as
a new cost basis. As of September 30, 2001, an impairment of available-for-sale
marketable securities charge of $6,031 was included in earnings.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Due to overall deteriorating market conditions affecting Fundtech's customer
base and in order to reflect these conditions, the Company has reevaluated its
accounts receivable collectability. Management's assessment for uncertainties of
outstanding debts collectability resulted in a provision for doubtful accounts
of $3,053 and $3,410 for the three and nine months ended September 30, 2001,
respectively.
6
FUNDTECH LTD. AND ITS SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Except Share and Per Share Data)
4. NON-RECURRING EXPENSES
In response to declines associated with the current cautious information
technology ("IT") spending environment within the financial services industry,
during the second quarter of 2001, the Company adopted a restructuring and
integration plan. As part of that plan, the Company has begun and will continue
to reduce its work force by approximately twenty percent (20%) from its May 2001
level of 445 employees and sublet portions of its existing office space. As part
of the plan, the Company is also consolidating aspects of its Dallas operation
into its existing Atlanta operation in order to improve efficiency and eliminate
duplicate cost structures.
As a result, the Company recorded non-recurring expenses totaling $2,719 in
connection with the restructuring and integration plan as follows:
Nine
Months ended
September 30, 2001
------------------
Facility closures and related costs $1,561
Employee termination benefits and
related costs 763
Integration costs 395
------------
Total $2,719
============
The Company's management believes that the restructuring and integration plan
will be substantially completed by the end of 2001. The Company anticipates
additional integration charges in the future. All integration charges have been
and will be expensed as incurred.
The following table summarizes the current status of this plan as of September
30, 2001:
Actual
Payments Ending
Provision To Date Liability
--------- ---------- --------
Restructuring Costs:
Employee termination benefits and
related costs $763 $556 $207
Facility closures and related costs 1,561 343 1,218
--------- ---------- --------
2,324 899 1,425
Integration costs:
Relocation, recruiting and other
employees costs 395 395 -
--------- ---------- --------
Total non-recurring expenses $2,719 $1,294 $1,425
========= ========== ========
5. IMPAIRMENT CHARGES
In response to current market conditions and internal management considerations,
primarily the cautious IT spending environment within financial institutions,
the management of the Company has decided to re-evaluate certain investments and
to re-focus its efforts on its core business. This evaluation resulted in an
impairment charge of $1,035 in the Company's second quarter, representing the
excess of the carrying value over the estimated fair market value of the assets.
7
FUNDTECH LTD. AND ITS SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Except Share and Per Share Data)
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and other Intangible Assets" (collectively, "the Statements"),
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Under the new rules, other intangible assets will continue
to be amortized over their useful lives.
The Company will begin to apply the new rule in the first quarter of 2002. The
Company is currently amortizing goodwill and other intangible assets at the rate
of approximately $ 2,460 per year. During 2002, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets. The Company cannot yet estimate what the effect of these
tests will be on its earnings and financial position.
In August 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), that is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. SFAS No. 144 supersedes previous guidance under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and portions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations". The provisions of SFAS No. 144 are not
expected to have a material effect, if any, on the Company's financial position
or operating results.
7. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during each period. Diluted net income (loss) per
share is computed using the weighted average number of common shares outstanding
and dilutive common stock equivalents outstanding during the period. The
reconciliation of the numerators and denominators used in computing the basic
and diluted net income (loss) per share is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator for basic and
diluted per share amounts -
net income (loss) $(14,436) $2,144 $(22,032) $2,507
Denominator for basic net
income (loss) per share
weighted average shares 14,221,605 14,154,094 14,197,448 14,060,978
Effect of dilutive stock
options and warrants -- 619,639 -- 706,500
Denominator for dilutive
net income (loss) per share
weighted average shares and
assumed conversions 14,221,605 14,773,733 14,197,448 14,767,478
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Fundtech was incorporated in 1993. The Company is a leading provider of software
that enables businesses and their banks to process payments, transfer funds and
manage cash positions electronically. Fundtech's client/server web enabled
software products automate the process of transferring funds among corporations,
banks and clearance systems and enable businesses to manage global cash
positions efficiently and in real-time. The Company acquired its Access Banking
product in April 1998, its BBP product in June 1999 and its Banker product in
September 1999. To date, Fundtech has derived substantially all of its revenues
from licenses of its Access Banking, Access-Pro, FEDplu$, PAY$tar, PAYplus RTGS,
PAYplus CLS, Global CASHstar, WireUp and service bureau products and solutions,
and related services and third-party hardware sales.
The Company generates revenues from licensing the rights to use its software
products directly to end-users and indirectly through sub-license fees from
resellers. The Company also generates revenues from sales of professional
services, including consulting, implementation, training and maintenance.
The following table sets forth certain financial data and the percentage total
revenue of the Company for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- -----------------------------------------
(Unaudited) (Unaudited)
(in thousands) (in thousands)
2001 % 2000 % 2001 % 2000 %
------- ------- ------- ----- -------- ------- -------- ------
Revenues:
Software license fees $3,861 36.5% $8,926 64.4% $14,643 42. $21,117 60.0%
Maintenance and services fees 6,630 62.8 4,728 34.1 19,897 57.1 12,920 36.7
Hardware sales 73 0.7 210 1.5 289 0.9 1,146 3.3
------- ------- ------- ----- -------- ------- -------- ------
Total revenues 10,564 100.0 13,864 100.0 34,829 100.0 35,183 100.0
------- ------- ------- ----- -------- ------- -------- ------
Cost of revenues:
Software license costs 223 2.1 83 0.6 824 2.4 145 0.4
Maintenance and services fees 4,602 43.6 3,224 23.2 14,400 41.3 8,704 24.7
Hardware costs 58 0.5 163 1.2 231 0.7 913 2.6
------- ------- ------- ----- -------- ------- -------- ------
Total cost of revenues 4,883 46.2 3,470 25.0 15,455 44.4 9,762 27.7
------- ------- ------- ----- -------- ------- -------- ------
Gross profit 5,681 53.8 10,394 75.0 19,374 55.6 25,421 72.3
------- ------- ------- ----- -------- ------- -------- ------
Operating expenses:
Software development 5,479 51.9 4,828 34.8 14,426 41.4 13,162 37.4
Selling and marketing, net 2,743 26.0 2,364 17.1 8,084 23.2 7,242 20.6
General and administrative 2,813 26.6 1,710 12.3 6,955 20.0 4,516 12.9
Amortization of acquisition-related
goodwill and other intangible assets 632 6.0 625 4.5 1,885 5.4 1,831 5.2
Provision for doubtful accounts 3,053 28.9 89 0.7 3,410 9.8 535 1.5
Impairment charges -- -- -- -- 1,035 3.0 -- --
Non-recurring expenses 281 2.6 -- -- 2,719 7.8 -- --
------- ------- ------- ----- -------- ------- -------- ------
Total operating expenses 15,001 142.0 9,616 69.4 38,514 110.6 27,286 77.6
------- ------- ------- ----- -------- ------- -------- ------
Operating Income (loss) (9,320) (88.2) 778 5.6 (19,140) (55.0) (1,865) (5.3)
Impairment of marketable securites (6,031) (57.1) -- -- (6,031) (17.3) -- --
Financial income, net 915 8.7 1,366 9.9 3,139 9.0 4,372 12.4
------- ------- ------- ----- -------- ------- -------- ------
Net income (loss) $(14,436) (136.6%) $ 2,144 15.5% $(22,032) (63.3%) $ 2,507 7.1%
======== ======= ======= ===== ======== ======= ======== ======
9
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000
SOFTWARE LICENSE FEES. Software license fees consist of revenues derived from
software license agreements entered between Fundtech and its customers. Software
license fees decreased by $5,065,000, or 57%, to $3,861,000 for the three months
ended September 30, 2001 from $8,926,000 for the three months ended September
30, 2000. Software license fees decreased by $6,474,000, or 30.7%, to
$14,643,000 for the nine months ended September 30, 2001 from $21,117,000 for
the nine months ended September 30, 2000. The decreases for both comparative
periods were primarily attributable to lengthening sales cycles and more
cautious spending on the part of the Information Technology departments of
financial institutions.
MAINTENANCE AND SERVICE FEES. Maintenance and service fees consist of revenues
derived from maintenance contracts, installation and training fees, service
bureau fees, consulting fees and related items. Fundtech generally receives a
contract for maintenance and services at the time of the sale of software
licenses. Maintenance and service fees increased by $1,902,000, or 40%, to
$6,630,000 for the three months ended September 30, 2001, from $4,728,000 for
the three months ended September 30, 2000. Maintenance and services fees
increased by $6,977,000, or 54%, to $19,897,000 in the nine months ended
September 30, 2001 from $12,920,000 in the nine months ended September 30, 2000.
The increases for both comparative periods were primarily commensurate with the
increases in software licenses and (corresponding license fees) under
maintenance and the increase in the services provided under large projects for
top-tiered customers.
HARDWARE SALES. Hardware sales consist of the reselling of third-party hardware
in connection with the license and installation of Fundtech's software. Hardware
sales decreased by $137,000, or 65%, to $73,000 for the three months ended
September 30, 2001 from $210,000 for the three months ended September 30, 2000.
Hardware sales decreased $857,000, or 74.8%, to $289,000 for the nine months
ended September 30, 2001 from $1,146,000 for the nine months ended September 30,
2000. The decreases in hardware sales for both comparative periods were
primarily attributable to a decrease in the number of software licenses whereby
the customer purchased hardware through the Company.
SOFTWARE LICENSE COSTS. Software license costs consist primarily of the royalty
payments related to grants from the Government of Israel, product media,
duplication, manuals, shipping and royalties to others. Software license costs
increased by $140,000, 169%, to $223,000 for the three months ended September
30, 2001 from $83,000 for the three months ended September 30, 2000. The gross
margin of software license fees decreased from 99% for the three months ended
September 30, 2000 to 94% for the three months ended September 30, 2001.
Software license costs increased by $679,000, or 468%, to $824,000 for the nine
months ended September 30, 2001 from $145,000 for the nine months ended
September 30, 2000. The gross margin of software license fees decreased from 99%
in the nine months ended September 30, 2000 to 94% in the nine months ended
September 30, 2001. The decreases in gross margin in each comparable period were
primarily due to an increase in third-party embedded software costs and
royalties.
MAINTENANCE AND SERVICES COSTS. Maintenance and services costs consist primarily
of personnel costs, telephone support costs and other costs related to the
provision of maintenance, service bureau and consulting services. Maintenance
and services costs increased by $1,378,000, or 43%, to $4,602,000 for the three
months ended September 30, 2001 from $3,224,000 for the three months ended
September 30, 2000. The gross margin on maintenance and services fees decreased
from 32% for the three months ended September 30, 2000 to 31% for the three
months ended September 30, 2001. Maintenance and services costs increased by
$5,696,000, or 65%, to $14,400,000 for the nine months ended September 30, 2001
from $8,704,000 for the nine months ended September 30, 2000. The gross margin
on maintenance and services fees decreased from 33% for the nine months ended
September 30, 2000 to 28% for the nine months ended September 30, 2001. The
decreases in gross margin for each comparable period were primarily due to an
increase in contracts that include lower margin third party services performed
and billed by the Company as prime vendor. Due to the Company's restructuring
plan, maintenance and services costs decreased by $300,000, or 6%, for the three
months ended September 30, 2001 from $4,902,000 for the three months ended June
30, 2001 and the gross margin on maintenance and services fees increased to 31%
for the three months ended September 30, 2001 from 30% for the three months
ended June 30, 2001.
10
HARDWARE COSTS. Hardware costs consist primarily of Fundtech's cost of computer
hardware resold to its customers. Hardware costs decreased $105,000, or 64%, to
$58,000 for the three months ended September 30, 2001 from $163,000 for the
three months ended September 30, 2000. Hardware costs decreased $682,000, or
75%, to $231,000 for the nine months ended September 30, 2001 from $913,000 for
the nine months ended September 30, 2000. The decrease in costs is commensurate
with the decrease in hardware sales. The gross margin on hardware sales remained
relatively stable decreasing from 22% for the three months ended September 30,
2000 to 21% for the three months ended September 30, 2001 and constant at 20%
for both the nine month periods ended September 30, 2001 and 2000.
SOFTWARE DEVELOPMENT. Software development expenses are related to the
development and testing of new products. Software development expenses increased
by $651,000, or 13%, to $5,479,000 for the three months ended September 30,
2001, from $4,828,000 for the three month ended September 30, 2000. This amount
excludes $881,000 of capitalized costs, incurred principally for the development
of the Company's Global PAYplus product. Software development expenses increased
by $1,264,000, or 10%, to $14,426,000 for the nine months ended September 30,
2001 from $13,162,000 for the nine months ended September 30, 2000. This amount
excludes $5,104,000 of capitalized costs. The increase in software development
costs is principally related to the development and enhancement of new products
such as Global PAYplus RTGS, PAYplus CLS, Access.pro, NostroPlus and the Banker
suite Global CASHstar.
SELLING AND MARKETING, NET. Selling and marketing expenses increased by
$379,000, or 16%, to $2,743,000 for the three months ended September 30, 2001
from $2,364,000 for the three months ended September 30, 2000. Selling and
marketing expenses as a percentage of revenues increased from 17% for September
30, 2000 to 26% for the three months ended September 30, 2001. Selling and
marketing expenses increased by $842,000, or 12%, to $8,084,000 for the nine
months ended September 30, 2001 from $7,242,000 for the nine months ended
September 30, 2000. These increases in costs in each comparable period were
attributed to a decrease in sales per salesperson, expanding the sales channels
in Europe and Singapore, and increasing the size of the U.S. sales group.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$1,103,000, or 64%, to $2,813,000 for the three months ended September 30, 2001
from $1,710,000 for the three months ended September 30, 2000. General and
administrative expenses increased by $2,439,000, or 54%, to $6,955,000 for the
nine months ended September 30, 2001 from $4,516,000 for the nine months ended
September 30, 2000. These increases for each comparable period were primarily
due to the headcount addition of general and administrative personnel and an
increase in average salaries.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLE ASSETS. Amortization expense
increased by $7,000, or 1%, to $632,000 for the three months ended September 30,
2001 from $625,000 for the three months ended September 30, 2000. This
amortization of goodwill has remained relatively stable.
PROVISION FOR DOUBTFUL ACCOUNTS. Due to overall deteriorating market conditions
affecting Fundtech's customer base and in order to reflect these conditions, the
Company increased its provision for doubtful accounts by $3,053,000 for the
three months ended September 30, 2001 compared to $89,000 for the three months
ended September 30, 2000. The provision for doubtful accounts for the nine
months ended September 30, 2001 were $3,410,000 as compared to $535,000 for the
nine months ended September 30, 2000.
IMPAIRMENT CHARGES. In response to current market conditions and internal
management considerations, primarily the cautious IT spending environment within
financial institutions, the management of the Company has decided to re-evaluate
certain investments and to re-focus its efforts on its core business. This
evaluation resulted in an impairment charge of $1,035,000 for the nine months
ended September 30, 2001 representing the excess of the carrying value over the
estimated fair market value of the assets.
NON-RECURRING EXPENSES. In response to declines associated with the current
cautious IT spending environment within the financial services industry, during
the second quarter of 2001, the Company adopted a restructuring and integration
plan. As part of that plan, the Company has begun and will continue to reduce
its work force by approximately twenty percent (20%) from its May 2001 level of
455 employees and sublet portions of its existing office space. As part of the
plan, the Company is consolidating aspects of its Dallas operation into its
existing Atlanta operations in order to improve efficiency and eliminate
duplicate cost structures. As a result, the Company recorded non-recurring
expenses totaling $2,719,000 in connection with the restructuring and
integration plan, of which $1,294,000 has been paid as of September 30, 2001.
These non-recurring expenses include: (i) facility closures and related costs in
the amount of $1,561,000; (ii) employee termination benefits and related costs
in the amount of $763,000; and (iii) integration costs of $395,000 related to
relocation, recruiting and other employee costs, of which $343,000, $556,000 and
$395,000 have been paid to-date, respectively. The Company's management believes
that the restructuring and integration plan will be substantially completed by
the end of 2001. The Company anticipates additional integration charges in the
future. All integration charges have been and will be expensed as incurred.
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IMPAIRMENT OF MARKETABLE SECURITIES. The charge for impairment of marketable
securities was $6,031,000 for the three and nine months ended September 30, 2001
as compared to $-0- for the three and nine months ended September 30, 2000. As
of September 30, 2001, due to the market conditions, the unrealized losses in
the Company's marketable securities increased to $6,031,000. Since the Company
believes this decline is other than temporary, the cost basis of these
securities was written down to fair value as a new cost basis.
FINANCIAL INCOME, NET. Net financial income decreased by $451,000, or 33%, to
$915,000 for the three months ended September 30, 2001 from $1,366,000 for the
three months ended September 30, 2000. Net financial income decreased by
$1,233,000, or 28%, to $3,139,000 for the nine months ended September 30, 2001
from $4,372,000 for the nine months ended September 30, 2000. The decrease of
the financial income was due primarily to a decrease in cash and cash
equivalents and marketable securities, as well as interest and dividend rate
declines that were earned on such holdings.
LIQUIDITY AND CAPITAL RESOURCES
Fundtech has financed its operations primarily through the sale of equity
securities in the amount of approximately $139.6 million including net proceeds
from the 1998 initial public offering in the amount of approximately $29.0
million, proceeds from the follow-on 1999 public offering in the amount of
approximately $92.3 million and grants from the Government of Israel. As of
September 30, 2001 working capital was $64.0 million, of which cash and cash
equivalents and marketable securities were $50.8 million.
Cash flows from operations. Net cash used in operating activities amounted to
$2.8 million for the nine months ended September 30, 2001 as compared to $5.6
million for the nine months ended September 30, 2000. This decrease of $2.8
million was primarily due to the decrease in net income, net of the charge for
impairment of marketable securities in 2001, offset by the decrease in trade
receivables and long-term trade receivables and the increase in deferred
revenues and accrued expenses.
Cash flows from investing activities. Net cash used in investing activities
amounted to $6.5 million for the nine months ended September 30, 2001 as
compared to $6.1 million for the same period in 2000. This increase was
primarily due to the capitalization of software development costs in 2001,
offset by both the sale of short-term bank deposits in 2001 and the decrease in
purchase of property and equipment from the prior-year period. Capital
expenditures totaled $1.7 million in the nine months ended September 30, 2001 as
compared to $3.7 million for the same period in 2000. The Company believes its
capital expenditure program is sufficient to maintain its current level and
quality of operations. The Company reviews its capital expenditures program
periodically and modifies it as required to meet current needs.
Cash flows from financing activities. Net cash provided by investing activities
was $0.2 million for the nine months ended September 30, 2001 as compared to
$1.5 million for the nine months ended September 30, 2000. The decrease was due
to the decrease in proceeds from the issuance of share capital and exercise of
stock options and warrants, net.
Fundtech believes that cash and cash equivalents and marketable securities
(including proceeds from its public offerings) will provide adequate financial
resources to finance its current and planned future operations for the
foreseeable future. However, in the event that Fundtech makes one or more
acquisitions for consideration consisting of all or a substantial part of
Fundtech's available cash, Fundtech might be required to seek external debt or
equity financing for such acquisition or acquisitions or to fund subsequent
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fundtech does not utilize financial instruments for trading purposes and holds
no derivative financial instruments, which could expose Fundtech to significant
market risk.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter, Fundtech filed the following Current Report on Form 8-K:
A Current Report on Form 8-K dated and filed on July 19, 2001, which reports
(1) the resignation of Michael Carus as the Chief Financial Officer and
appoints Oz Cohen as acting Chief Financial Officer, and (2) the second
quarter results and includes Fundtech's and its subsidiaries consolidated
balance sheets as of June 30, 2001 and December 31, 2000 and the related
consolidated statements of operations for the three and six months ended
June 30, 2001 and for the three and six months ended June 30, 2000.
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SIGNATURES
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.
Fundtech Ltd.
(Registrant)
/s/ Reuven Ben Menachem
-----------------------------
Reuven Ben Menachem
Dated: November 14, 2001 Chairman, President and CEO
/s/ Yoram Bibring
-----------------------------
Dated: November 14, 2001 Yoram Bibring
Chief Financial Officer
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