1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number: 000-23453
FLEXIINTERNATIONAL SOFTWARE, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 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)
Registrant's telephone number, including area code: (203) 925-3040
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based upon the closing sales price of Common
Stock on March 17, 1999 as reported on the Nasdaq National Market, was
approximately $15.6 million. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 17, 1999, Registrant had 17,293,622 outstanding shares of Common
Stock.
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RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
As a result of the Company's regular quarterly financial statement review with
its independent accountants in the second quarter of 1999, the Company
determined that it would restate the amounts originally reported for 1998 and
the first quarter of 1999, to reflect a change in the revenue recognition for
several 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. The
Company has restated its financial statements for the year ended December 31,
1998 (See Note14 to the Company's consolidated financial statements).
This Annual Report on Form 10-K/A amends and restates Items 3, 6, 7 and 8 and
Exhibit 27 of the Company's previously filed Annual Report on Form 10-K filed on
March 30, 1999.
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FLEXIINTERNATIONAL SOFTWARE, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I.
Item 3. Legal Proceedings................................................................ 1
PART II.
Item 6. Selected Financial Data.......................................................... 2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 3
Item 8. Financial Statements and Supplementary Data...................................... 14
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 15
Signatures....................................................................... 15
Exhibit Index.................................................................... 16
This Annual 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 forgoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The important factors discussed
below under the caption "Certain Factors that May Affect Future Operating
Results," among others, could cause actual results to differ materially from
those indicated by forward-looking statements made herein and presented
elsewhere by management from time to time.
FlexiFinancials, FlexiLedger, FlexiPayables and FlexiReceivables are registered
trademarks, and the Flexi logo, FlexiAnalysis, FlexiAssets, FlexiDB,
FlexiDesigner, FlexiDeveloper, FlexiInfoCenter, FlexiInfoSuite,
FlexiInternational, FlexiInventory, FlexiObjects, FlexiOrders, FlexiPurchasing,
FlexiSecure, FlexiTools, FlexiWorkFlow, FlexiFDW, FlexiFRE, FlexiFDE, FlexiFire,
FlexiXL, FlexiOpenAccess, Flexi.Com,FlexiQuery, FlexiBatch, FlexiNet and
FlexiDistribute are trademarks, of FlexiInternational Software, Inc. All other
trademarks or trade names referred to in this Form 10-K are the property of
their respective owners.
4
PART I
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various disputes and proceedings arising from
the ordinary course of general business activities. Depending on the amount and
the timing, an unfavorable resolution of some or all these matters could
materially adversely affect the Company's future results of operations or cash
flows in a particular period and its financial condition.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license $ 10,542 $ 13,901 $ 5,205 $ 3,166 $ 562
Service and maintenance 13,754 7,723 3,142 1,517 291
-------- -------- -------- -------- --------
Total revenues 24,296 21,624 8,347 4,683 853
Cost of revenues:
Software license 1,757 828 311 88 4
Service and maintenance 10,584 5,450 2,181 1,708 324
-------- -------- -------- -------- --------
Total cost of revenues 12,341 6,278 2,492 1,796 328
Operating expenses:
Sales and marketing 11,233 7,820 4,978 4,350 1,927
Product development 10,752 7,880 5,733 3,660 2,019
General and administrative 6,191 2,316 2,453 1,316 679
Acquired in-process research and development 1,890 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 30,066 18,016 13,164 9,326 4,625
-------- -------- -------- -------- --------
Operating loss (18,111) (2,670) (7,309) (6,439) (4,100)
Net interest income (expense) 880 27 (138) (48) 13
-------- -------- -------- -------- --------
Loss before provision for income taxes (17,231) (2,643) (7,447) (6,487) (4,087)
Provision for income taxes -- -- -- -- --
-------- -------- -------- -------- --------
Net loss $(17,231) $ (2,643) $ (7,447) $ (6,487) $ (4,087)
======== ======== ======== ======== ========
Net loss per share:
Basic $ (1.02) $ (0.42) $ (1.91) $ (1.72) $ (1.08)
======== ======== ======== ======== ========
Diluted $ (1.02) $ (0.42) $ (1.91) $ (1.72) $ (1.08)
======== ======== ======== ======== ========
Weighted average shares:
Basic 16,938 6,332 3,891 3,770 3,795
Diluted 16,938 6,332 3,891 3,770 3,795
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 7,876 $ 24,622 $ 3,273 $ 15 $ 870
Marketable securities 3,000 -- -- -- --
Working capital (deficit) 7,497 26,676 1,480 (2,917) (1,138)
Total assets 32,911 35,670 7,833 2,826 2,456
Redeemable convertible preferred stock -- -- 15,509 7,450 3,230
Stockholders' equity (deficit) 16,614 27,706 (13,823) (10,521) (4,045)
(1) Restated, see Note14 to the consolidated financial statements
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, markets and supports the Flexi Financial
Enterprise Suite of financial and accounting software applications and related
tools. The Flexi solution -- composed of FlexiFinancials, Flexi Financial
Datawarehouse (FlexiFDW), FlexilnfoAccess and FlexiTools -- is designed to
address the needs of users with sophisticated financial accounting and
operational analysis requirements.
The Company's revenues are derived from two sources: software license
revenues and service and maintenance revenues. Software license revenues have
generally grown as additional applications have been released for general
availability and the installed base of customers has increased. Service and
maintenance revenues have grown due to the increase in the Company's installed
base of customers and the growth in the Company's consulting services practice.
Software license revenues include (i) revenues from noncancellable
software license agreements entered into between the Company and its customers
with respect to the Company's products, (ii) royalties due to the Company from
third parties that distribute the Company's products and, to a lesser extent,
(iii) third-party products distributed by the Company. 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 product are
installed on the hardware unit, the unit is shipped and all other criteria are
met. 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 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. See Note 2 of Notes to the
Company's Financial Statements.
Historically, the Company's revenues have been derived from both domestic
sales and international sales, with the international sales comprising 30.4%,
16.9% and 15.2% of total revenues for the years ended December 31, 1998, 1997
and 1996, respectively. With the June 1998 acquisition of Dodge the Company
gained a larger international presence primarily in Europe and Asia. The
Company's international sales generally have the same cost structure as its
domestic sales. Historically, the Company's international sales were denominated
in U.S. dollars, however, as a result of the Dodge acquisition, a majority of
international sales are now denominated in British pounds. An increase in the
value of the British pound relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in foreign markets. In addition, the Company's international business may be
subject to a variety of risks, including difficulties in collecting
international accounts receivable or obtaining U.S. export licenses, the
introduction of non-tariff barriers and higher duty rates and fiscal and
monetary policies that adversely affect non-native firms. See "Certain Factors
that May Affect Future Operating Results."
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed, the Company has evaluated the establishment of technological
feasibility of its various products during the development phase. The time
period during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short, and, consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations. Therefore, the
Company charges all product development expenses to operations in the period
incurred.
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7
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 (1) 1997 1996
-------- ---- ----
Revenues:
Software license 43.4% 64.3% 62.4%
Service and maintenance 56.6% 35.7% 37.6%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of revenues:
Software license 7.2% 3.8% 3.7%
Service and maintenance 43.6% 25.2% 26.1%
------ ------ ------
Total cost of revenues 50.8% 29.0% 29.8%
Operating expenses:
Sales and marketing 46.2% 36.2% 59.6%
Product development 44.3% 36.4% 68.7%
General and administrative 25.5% 10.7% 29.4%
Acquired in-process research and development 7.7% - -
------ ------- -------
Total operating expenses 123.7% 83.3% 157.7%
------ ------ ------
Operating loss (74.5%) (12.3%) (87.5%)
Interest income (expense) 3.6% 0.1% (1.7%)
------ ------ -------
Loss before provision for income taxes (70.9%) (12.2%) (89.2%)
Provision for income taxes - - -
------ ------- -------
Net loss (70.9%) (12.2%) (89.2%)
======= ======= =======
(1) Restated, see Note14 to the consolidated financial statements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues, consisting of software license revenues and
service and maintenance revenues, increased 12.4%, from $21.6 million for the
year ended December 31, 1997 to $24.3 million for the year ended December 31,
1998. Domestic revenues, those derived from sales in the U.S. decreased 5.9%
from $18.0 million for the year ended December 31, 1997 to $16.9 million for the
year ended December 31, 1998. International revenues, those derived from sales
outside of the U.S. increased 102.2% from $3.7 million for the year ended
December 31, 1997 to $7.4 million for the year ended December 31, 1998. In the
first half of 1998, revenues grew 131.5%, as compared to the first half of 1997,
from $5.5 million to $12.8 million, while in the second half of 1998, revenues
declined 28.5% as compared to the second half of 1997, from $16.1 million to
$11.5 million. This revenue slowdown was primarily due to delays in potential
customers' buying decisions, as they began to prepare for the new millennium,
and slower than anticipated integration of the Dodge acquisition.
Software license revenues decreased 24.2%, from $13.9 million for the year
ended December 31, 1997 to $10.5 million for the year ended December 31, 1998.
The decline was due primarily to delays in potential customers' buying
decisions, as they began to prepare for the new millennium partially offset by
growth in international sales, primarily as a result of the Dodge acquisition.
Service and maintenance revenues increased 78.1%, from $7.7 million for the year
ended December 31, 1997 to $13.8 million for the year ended December 31, 1998.
The increase was primarily attributable to the growth of the installed base of
customers that resulted in an increase in maintenance revenues.
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 the cost of
providing 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 increased 112.2%, from $828,000 for the
year ended December 31, 1997 to $1.8 million for the year ended December 31,
1998. Cost of software license revenues as a percentage of software license
revenues increased from 6.0% for the year ended December 31, 1997 to 16.7% for
the year ended December 31, 1998. The increase in cost of revenues in dollars
was primarily due to an increase in third-party software products distributed by
the Company, the acquisition of Dodge, as well as costs associated with
increased sales
4
8
volume. The increase in cost of revenue as a percentage of software license
revenues was primarily due an increase in the proportion of third-party products
sold as a percentage of total license fees.
Cost of service and maintenance revenues increased 94.2%, from $5.5
million for the year ended December 31, 1997 to $10.6 million for the year ended
December 31, 1998. The increase in the dollar amount of such costs resulted
primarily from the addition of service consultants and customer support
personnel to provide services to a larger customer base and additional costs
related to Dodge personnel subsequent to the acquisition. Cost of service and
maintenance revenues as a percentage of service and maintenance revenues
increased from 70.6% for the year ended December 31, 1997 to 77.0% for the year
ended December 31, 1998, due to lower utilization rates of our client services
staff, which resulted from increased staffing in anticipation of continued
revenue growth (see Revenues above and Restructuring below).
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
increased 43.6%, from $7.8 million for the year ended December 31, 1997 to $11.2
million for the year ended December 31, 1998. The increase in dollar amount was
primarily attributable to increased staffing in the direct sales force and sales
and marketing organizations, primarily as a result of the Dodge acquisition.
Sales and marketing expenses as a percentage of total revenues increased from
36.2% for the year ended December 31, 1997 to 46.2% or the year ended December
31, 1998. This increase was primarily due to increased staffing in anticipation
of continued revenue growth (see Revenues above and Restructuring below).
Product Development. Product development expenses include software
development costs and consist primarily of engineering personnel costs. The
Company has made significant investments in product development in the past
several years to bring its suite of component-based, object-oriented financial
accounting products to market.
Product development expenses increased 36.4%, from $7.9 million for the
year ended December 31, 1997 to $10.8 million for the year ended December 31,
1998. The increase in product development expenses was due primarily to the
increase in software specialists, primarily as a result of the Dodge
acquisition, as well as salary increases required to attract and retain skilled
personnel in a highly competitive labor market. The Company continued to hire
software specialists, in 1998, in anticipation of continued revenue growth (see
Revenues above and Restructuring below). Product development expenses as a
percentage of total revenues increased from 36.4% for the year ended December
31, 1997 to 44.3% for the year ended December 31, 1998. The Company will
continue to enhance the functionality of its core financial accounting and
reporting and workflow applications.
General and Administrative. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel, as
well as provisions for doubtful accounts, amortization of goodwill and outside
professional fees. General and administrative expenses increased 167.3%, from
$2.3 million for the year ended December 31, 1997 to $6.2 million for the year
ended December 31, 1998. General and administrative expenses as a percentage of
total revenues increased from 10.7% for the year ended December 31, 1997 to
25.5% for the year ended December 31, 1998. The increase in general and
administrative expenses was primarily due to an increase in provisions for
doubtful accounts, increased legal and professional fees as a result of a full
year's effect of being a public company, costs of administrative personnel as a
result of the Dodge acquisition, and commencement of amortization of acquired
software and goodwill associated with the June 24, 1998 acquisition of Dodge.
Acquired In-Process Research and Development. During June 1998 the Company
completed its acquisition of Dodge. In connection with the allocation of the
purchase price of Dodge, the Company assigned $1.9 of the total purchase price
of $7.6 to certain acquired in process research and development.
The acquired in process research and development includes one significant
software product, Financial Data Warehouse Version 5.0 ("FDW"). The company
estimated that this version was 20% complete at the date of acquisition based on
costs incurred through the date of acquisition as compared to total estimated
expenditures over the product's development cycle. The Company expects to have
FDW Version 5.0, and its related enhanced functionality, available for general
release during 1999 with estimated future development costs totaling $6.4
million at the time of acquisition. Once completed the Company intends to offer
Version 5.0 of the product to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process research and development into a commercially viable product, feature
or functionality within the Company's suite of existing products relates to the
completion of all planning, design and testing activities that are necessary to
establish that the product can be produced to meet design and performance
requirements. The Company currently expects that the product utilizing the
acquired in process research and development will be successful, but there can
be no assurance that commercial viability of any of these products will be
achieved. Further, future developments in the software industry, changes
5
9
in the technology, changes in other products and offerings or other developments
may cause the Company to alter, or abandon, its product plans.
The fair value of in process research and development acquired was based
on analyses of markets, projected cash flows and risks associated with achieving
such projected cash flows. In developing these cash flow projections, revenues
were estimated based on relevant factors, including aggregate revenue growth
rates for the business as a whole, individual service offering revenues,
characteristics of the potential market for the service offerings, and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were estimated based on the characteristics and cash flow
generating potential of the acquired in-process research and development, and
included assumptions that certain expenses would decline over time as operating
efficiencies were obtained. The Company assumed material cash inflow for FDW 5.0
would commence in 1999 and would continue through the year 2002 at which time
yet to be developed products would replace this product. Appropriate adjustments
were made to derive net cash flows, and the estimated net cash flows of the
in-process technology were then discounted to their net present value at a rate
of 30%, a rate of return that the Company believes reflects the specific
risk/return characteristics of the research and development project.
Interest Income and Interest Expense. Interest income represents income
earned on the Company's cash, cash equivalents and marketable securities.
Interest income increased from $27,000 for the year ended December 31, 1997 to
$880,000 for the year ended December 31, 1998. This increase was primarily due
to the investment of the proceeds from the Company's initial public offering
completed in December 1997. Interest expense represents interest expense on
capital equipment leases, and borrowings under the Company's line of credit.
Provision for Income Taxes. No provision or benefit for federal, state or
foreign income taxes was made for the years ended December 31, 1998 or 1997 due
to the operating losses incurred in the respective periods. The Company has
reported only tax losses to date and consequently has approximately $32.6
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. The Company's deferred tax
assets at December 31, 1998 were $16.2 million, consisting primarily of net
operating loss carryforwards. The Company's benefit of deferred tax assets has
been fully reserved as of December 31, 1998 as the realization of deferred taxes
is dependent on future events and earnings, if any, the timing and extent of
which are uncertain.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Total revenues, consisting of software license revenues and
service and maintenance revenues, increased 159.1%, from $8.3 million for the
year ended December 31, 1996 to $21.6 million for the year ended December 31,
1997.
Software license revenues increased 167.1%, from $5.2 million for the year
ended December 31, 1996 to $13.9 million for the year ended December 31, 1997.
The growth was due primarily to the addition of new customers as well as
additional product licenses to existing customers and growth in international
sales, primarily in Europe. Service and maintenance revenues increased 145.8%,
from $3.1 million for the year ended December 31, 1996 to $7.7 million for the
year ended December 31, 1997. The increase was primarily attributable to the
growth of the installed base of customers and the increasing complexity of user
requirements, which resulted in an increase in consulting service revenues.
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 increased 166.2%, from $311,000 for the
year ended December 31, 1996 to $828,000 for the year ended December 31, 1997.
Cost of software license revenues as a percentage of software license revenues
was 6.0% for each of the years ended December 31, 1997 and 1996. The increase in
cost of revenues in dollar amount was primarily due to an increase in
third-party software products distributed by the Company, as well as costs
associated with increased sales volume.
Cost of service and maintenance revenues increased 149.9%, from $2.2
million for the year ended December 31, 1996 to $5.5 million for the year ended
December 31, 1997. Cost of service and maintenance revenues as a percentage of
service and maintenance revenues increased from 69.4% for the year ended
December 31, 1996 to
6
10
70.6% for the year ended December 31, 1997. The increase resulted primarily from
the addition of service consultants and customer support personnel to provide
services to a larger customer base.
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
increased 57.1%, from $5.0 million for the year ended December 31, 1996 to $7.8
million for the year ended December 31, 1997. The increase in dollar amount was
primarily attributable to increased staffing in the direct sales force and sales
and marketing organizations (approximately $1,841,000 in compensation-related
expenses, including an increase in commission expense due to increased revenue
from software license fees and $463,000 in travel-related expenses) and to an
increase in the advertising-related expenses ($476,000). Sales and marketing
expenses as a percentage of total revenues decreased from 59.6% for the year
ended December 31, 1996 to 36.2% for the year ended December 31, 1997 due to an
increasing revenue base. The Company is in the process of expanding its
distribution channels, both domestically and internationally and, accordingly,
sales and marketing expenses are expected to increase in dollar amount in the
future.
Product Development. Product development expenses include software
development costs and consist primarily of engineering personnel costs. The
Company has made significant investments in product development in the past
several years to bring its suite of component-based, object-oriented financial
accounting products to market.
Product development expenses increased 37.4%, from $5.7 million for the
year ended December 31, 1996 to $7.9 million for the year ended December 31,
1997. The increase in product development expenses was due primarily to the
continued hiring of software specialists, principally in the quality assurance,
product engineering and distributed computing development areas, as well as
normal salary increases. Product development expenses as a percentage of total
revenues decreased from 68.7% for the year ended December 31, 1996 to 36.4% for
the year ended December 31, 1997 due to an increasing revenue base. The Company
anticipates that product development expenses will increase in dollar amount in
future periods as the Company continues to enhance the functionality of its core
financial accounting and reporting and workflow applications and as it continues
development work on the next releases of its suite of application modules.
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 decreased 5.6%, from $2.5 million for the year ended
December 31, 1996 to $2.3 million for the year ended December 31, 1997. General
and administrative expenses as a percentage of total revenues decreased from
29.4% for the year ended December 31, 1996 to 10.7% for the year ended December
31, 1997, due to an increasing revenue base. The decrease in general and
administrative expenses was primarily due to a nonrecurring charge of $492,000
in executive compensation in the second quarter of 1996 attributable to stock
options granted at less than market value and a decrease in provisions for
doubtful accounts in 1997 ($165,000), partially offset by increased
compensation-related costs ($287,000) and increased outside professional fees
($132,000). The Company expects general and administrative expenses to increase
in dollar amount in future periods due to the Company's growth as well as the
additional expense of being a public company.
Provision for Income Taxes. No provision or benefit for federal, state or
foreign income taxes was made for the years ended December 31, 1997 or 1996 due
to the operating losses incurred in the respective periods. The Company has
reported only tax losses to date and consequently has approximately $18.0
million of net operating loss carryforwards, which expire at various times
through the year 2012, available to offset future taxable income. The
utilization of such net operating losses is subject to limitations as a result
of an ownership change. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss carryforwards
before utilization. The Company's deferred tax assets at December 31, 1997 were
$8.3 million, consisting primarily of net operating loss carryforwards. The
Company's benefit of deferred tax assets has been fully reserved as of December
31, 1997 as the realization of deferred taxes is dependent on future events and
earnings, if any, the timing and extent of which are uncertain.
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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 December 31, 1998, the Company had cash and cash equivalents of $7.9
million, a decrease of $16.7 million from December 31, 1997, the Company also
had $3.0 million in short-term marketable securities at December 31, 1998. The
Company's working capital at December 31, 1998 was $7.5 million, compared to
$26.7 million at December 31, 1997. As of March 30, 1999 the Company had cash
and cash equivalents of $4.8 million and $3.0 million in short-term marketable
securities.
The Company's operating activities resulted in net cash outflow of $11.0
million, $5.0 million and $6.2 million for the years ended December 31, 1998,
1997 and 1996, respectively, principally from net operating losses and increased
accounts receivable, consistent with the growth in revenues. Investing
activities, consisting of capital expenditures (primarily computer equipment)
and the Dodge acquisition, resulted in net cash outflow of $1.7 million,
$559,000 and $425,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, the Company had no material commitments for
capital expenditures. The Company's financing activities resulted in a net cash
outflow for the year ended December 31, 1998 of $4.1 million and generated net
cash of $26.9 million and $9.9 million for the years ended December 31, 1997 and
1996, respectively. The 1998 cash outflow was primarily the result of the
purchase of marketable securities, and treasury shares, payments for capital
leases and the repayment of a debt acquired in the acquisition of Dodge.
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 March 29, 1999 the Company has purchased 135,000
common shares at a total cost of $463,000.
The Company had a working capital revolving line of credit with a bank,
which was secured by the Company's accounts receivable. The amount available
under this facility is limited to the lesser of 80% of the Company's eligible
accounts receivable, or $5.0 million. The facility will expire on May 17, 1999,
unless renewed. The Company is currently in negotiations with the bank, and the
Company expects that it will be successful in renewing the facility. At March
29, 1999 the company had $2.0 million outstanding under this line of credit.
Late in the second quarter of 1999, management identified a number of
factors that cause them to believe that available cash resources may not be
sufficient to fund anticipated operating losses. These include: (1) the
continued general business slowdown, which resulted in revenue levels
significantly lower than expected in the first half of 1999; (2) payment
disputes that arose in the second quarter of 1999 related to two significant
contracts for licensing of software and provision of services (see Note 14a)
and; (3) delays experienced in the second quarter of 1999 related to the release
of the next version of the Company's general ledger product. Management has
taken actions to reduce costs in response to lower revenues and 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 reduce costs to a level to appropriately
respond to competitive pressures or to obtain additional funding. 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.
RESTRUCTURING
In the first quarter of 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. These
actions were essentially completed on February 26, 1999 and primarily involved
involuntary terminations of selected personnel. Severance packages were granted
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 expects
to record a charge to operations during the first quarter of 1999 of
approximately $1.9 million, consisting of $1.7 million related to anticipated
severance costs, of which $1.4 million will be payable in installments for up to
two years, and $200,000 related to costs of idle facility space. These actions
reduce the Company's operating expense levels by approximately 30%. The Company
believes that these actions will result in sustainable cost savings, primarily
through the elimination of redundant functions in the product development
organization, due to completion of development work on FlexiFinancials Release
4, and to a lesser extent in the support and sales organizations.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Limited Operating History; Accumulated Deficit; Net Losses. The Company
began operations in 1991 and released its first products in 1993. Most of the
Company's revenues to date have been attributable to the licensing of its
financial accounting software products and the provision of related consulting,
training and software installation services. The Company's FlexiFinancials,
FlexilnfoAccess and FlexiTools financial accounting products, which the Company
anticipates will provide the principal source of new license revenues for the
foreseeable future, have a limited history of customer acceptance and use.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified management and
other employees, continue to upgrade its technologies and commercialize products
and services that incorporate such technologies and achieve market acceptance
for its products and services. There can be no assurance that the Company will
be successful in addressing such risks. The Company had an accumulated deficit
of $39.7 million at December 31, 1998 and incurred net losses of $17.2 million
and $2.6 million during 1998 and 1997, respectively. To date, the Company has
only been profitable during the last two quarters of 1997, and there can be no
assurance that the Company will regain its profitability on a quarterly basis.
As of December 31, 1998, management of the Company evaluated the positive and
negative evidence impacting the realizability of its deferred tax assets, which
consist principally of net operating loss carryforwards. Management has
considered the history of losses and concluded that, as of December 31, 1998, it
is more likely than not that the Company will not generate sufficient taxable
income prior to the expiration of the net operating losses in 2012. Accordingly,
the Company has recorded a full valuation allowance for its deferred tax assets
at December 31, 1998.
Potential Fluctuations in Quarterly Performance; Seasonality. The
Company's revenues and operating results have varied substantially from quarter
to quarter. The Company's quarterly operating results may continue to fluctuate
due to a number of factors, including the timing, size and nature of the
Company's licensing transactions; the market acceptance of new services,
products or product enhancements by the Company or its competitors; product and
price competition; the relative proportions of revenues derived from license
fees, services and third-party channels; changes in the Company's operating
expenses; personnel changes; the timing of the introduction, and the performance
of, the Company's Flexi Industry Partners; foreign currency exchange rates; and
fluctuations in economic and financial market conditions.
The timing, size and nature of individual licensing transactions are
important factors in the Company's quarterly results of operations. Many such
transactions involve large dollar amounts, and the sales cycles for these
transactions are often lengthy and unpredictable. In addition, the sales cycles
associated with these transactions are subject to a number of uncertainties,
including customers' budgetary constraints, the timing of customers' budget
cycles and customers' internal approval processes. There can be no assurance
that the Company will be successful in closing such large transactions on a
timely basis or at all. Software license revenues under the Company's license
agreements are recognized upon delivery and installation of the product and when
all significant contractual obligations have been satisfied. Delays in the
installation of the Company's software, including potential delays associated
with contractual enhancements to the Company's software products, could
materially adversely affect the Company's quarterly results of operations. In
addition, as the Company derives a significant proportion of total revenues from
license revenues, the Company may realize a disproportionate amount of its
revenues and income in the last month of each quarter and, as a result, the
magnitude of quarterly fluctuations may not become evident until late in, or at
the end of, a given quarter. Accordingly, delays in product delivery and
installation or in the closing of sales near the end of a quarter could cause
quarterly revenues and, to a greater degree, results of operations to fall
substantially short of anticipated levels.
The Company's expense levels are based, in significant part, on its
expectations as to future revenues and are largely fixed in the short term. As a
result, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenues. Accordingly, any
significant shortfall of revenues in relation to the Company's expectations
would have an immediate and material adverse effect on the Company's business,
financial condition and results of operations.
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's financial condition or results of
operations may be affected by such trends in the future. In past years, the
Company had greater demand for its products in its fourth quarter and has
experienced lower revenues in its succeeding first quarter. These fluctuations
were caused primarily by the Company's quota-based compensation arrangements,
typical of those used in software companies, and year-end budgetary pressures on
the Company's customers. In the second half of 1998, the Company experienced a
general slow down of business due primarily to
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delays in potential customers' buying decisions, as they began to prepare for
the new millennium. The Company believes that 1998's seasonal trends may
continue in 1999, as buying patterns and decisions change given the impact of
Y2K, and its effects on customers' ability to make commitments to new software
products with limited internal resources focused on Y2K issues.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. There can be no assurance that future revenues and results
of operations will not vary substantially. It is also possible that in some
future quarter the Company's results of operations will be below the
expectations of public market analysts and investors. In either case, the price
of the Company's Common Stock could be materially adversely affected.
The Company faces significant challenges in managing growth. The Company
recently experienced a period of rapid growth that continues to place a
significant strain on its management and other resources. Total revenues
increased from $4.7 million in 1995 to $8.3 million in 1996 to $21.6 million in
1997 and $24.3 million in 1998. This growth has placed, and is expected to
continue to place, a significant strain on the Company's management and
operations. In addition, all but one member of the Company's senior management
team have been with the Company for less than a year, senior management has had
limited experience in managing publicly traded companies and more than half of
the Company's sales and marketing professionals have been with the Company for
less than a year. If the Company's management is unable to manage complexity and
growth effectively, the quality of the Company's products and its business,
financial condition and results of operations could be materially adversely
affected.
Dependence on Key Personnel. The Company's performance depends
substantially on the performance of its executive officers and key employees,
including the Company's sales force and software professionals, particularly
project managers, software engineers and other senior technical personnel. The
Company is dependent on its ability to attract, retain and motivate high-quality
personnel, especially its management, sales staff and highly skilled development
team. The Company does not have employment contracts with any of its key
personnel. The loss of the services of any of the Company's executive officers
or other key employees could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company maintains a
key person insurance policy on Stefan R. Bothe.
Lengthy Sales Cycle. The Company's software is often used for
business-critical purposes, and its implementation involves significant capital
commitments by customers. Potential customers generally commit significant
resources to an evaluation of available software and require the Company to
expend substantial time, effort and money educating potential customers about
the value of the Company's solutions. Sales of the Company's software products
required an extensive education and marketing effort throughout a customer's
organization because decisions to license such software generally involve the
evaluation of the software by a significant number of customer personnel in
various functional and geographic areas, each having specific and often
conflicting requirements. A variety of factors, including factors over which the
Company has little or no control, may cause potential customers to favor a
competing vendor or to delay or forego a purchase. As a result of these or other
factors, the sales cycle for the Company's products is long, typically ranging
between three and nine months. Due to the length of the sales cycle for its
software products, including delays in implementing the Company's software
across several functional and geographic areas of an organization, the Company's
ability to forecast the timing and amount of specific sales is limited, and the
delay or failure to complete one or more large license transactions could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Product Concentration. To date, substantially all of the Company's
revenues have been attributable to the licensing of its FlexiFinancials,
FlexilnfoAccess and FlexiTools financial accounting products and the provision
of consulting, training and software installation services in connection
therewith. The Company currently expects that the licensing of its financial
accounting software, and the provision of related services, will account for a
substantial portion of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for such products and
services, such as competition or technological change, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future financial performance will depend, in
significant part, on the continued market acceptance of the Company's existing
products and the successful development, introduction and customer acceptance of
new and enhanced versions of its software products and services. There can be no
assurance that the Company will be successful in developing and marketing its
financial accounting products.
Rapid Technological Change and Evolving Market. The market for the
Company's products and services is characterized by rapidly changing technology,
evolving industry standards and new product introductions and enhancements that
may render existing products obsolete or less competitive. As a result, the
Company's position in the financial applications software market could erode
rapidly due to unforeseen changes in the features and
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functionality of competing products, as well as the pricing models for such
products. The Company's future success will depend in part upon the widespread
adoption of object-oriented, component-based standards and the development of
the Internet as a viable commercial marketplace, as well as the Company's
ability to enhance its existing products and services and to develop and
introduce new products and services to meet changing customer requirements. The
process of developing products and services such as those offered by the Company
is extremely complex and is expected to become increasingly complex and
expensive in the future with the introduction of new platforms and technologies.
In addition, the Company has on occasion experienced delays in the scheduled
release of software products or the porting of such products to specific
platforms or configurations. There can be no assurance that the financial
services and other industries will adopt object-oriented, component-based
standards, that the Company will successfully complete the development of new
products in a timely fashion or that the Company's current or future products
will satisfy the needs of potential customers.
Concentration of Customers. Historically, a limited number of customers
have accounted for a significant percentage of the Company's revenues in each
year. During the years ended December 31, 1998, 1997 and 1996, two customers,
two customers and one customer, respectively, each represented 10% or more of
the Company's total revenues (or an aggregate of 31.7%, 40.2% and 12.3% of total
revenues, respectively). Although the Company's largest customers have varied
from period to period, the Company anticipates that its results of operations in
any given period will continue to depend to a significant extent upon revenues
from a small number of customers. The failure of the Company to enter into a
sufficient number of licensing agreements during a particular period could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Competition. The market for the Company's products and services is
intensely competitive and is characterized by rapid change in technology and
user needs and the frequent introduction of new products. In recent quarters,
the Company has been observing increasingly aggressive pricing practices and/or
unusual terms and conditions offered to customers by its competitors, and
increasing competition in the middle market from competitors which previously
focused principally on larger corporations. A number of the Company's
competitors are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than the
Company and its partners and distributors. In addition, the Company's partners
may develop or offer products and services that compete with the Company's
products and services. There can be no assurance that the Company's partners
will not give higher priority to the sales of these or other competitive
products and services. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
Potential for Product Liability. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective under the laws of certain jurisdictions. The sale and
support of products by the Company and its partners may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. The Company attempts to limit contractually its
liability for damages arising from negligent acts, errors, mistakes or omissions
in rendering its products and services. Despite this precaution, there can be no
assurance that the limitations of liability set forth in its contracts would be
enforceable or would otherwise protect the Company from liability for damages.
The Company maintains general liability insurance coverage, including coverage
for errors or omissions. However, there can be no assurance that such coverage
will continue to be available on acceptable terms, or will be available in
sufficient amounts to cover one or more large claims, or that the insurer will
not disclaim coverage as to any future claim. The successful assertion of one or
more large claims against the Company that exceed available insurance coverage
or changes in the Company's insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, litigation with respect to liability claims,
regardless of its outcome, could result in substantial cost to the Company and
divert management's attention from the Company's operations. Any product
liability claim or litigation against the Company could, therefore, have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has included security features in its products that are
intended to protect the privacy and integrity of customer data. Despite the
existence of these security features, the Company's software products may be
vulnerable to break-ins and similar disruptive problems. Such computer break-ins
and other disruptions may jeopardize the security of information stored in and
transmitted through the computer systems of the Company's customers, which may
result in loss of or delay in market acceptance of the Company's products.
Addressing these evolving security issues may require significant expenditures
of capital and resources by the Company, which may have a material adverse
effect on the Company's business, financial condition or results of operations.
Software Errors or Bugs. The Company's software products are highly
complex and sophisticated and could from time to time contain design defects or
software errors that could be difficult to detect and correct. Although the
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Company has not experienced material adverse effects resulting from any software
errors, bugs or viruses, there can be no assurance that, despite testing by the
Company and its customers, errors will not be found in new or existing products,
which errors could result in a delay in or inability to achieve market
acceptance and thus could have a material adverse impact upon the Company's
business, financial condition and results of operations.
Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary technology. The Company relies on a combination
of copyright, trademark and trade secret laws and license agreements to
establish and protect its rights in its software products and other proprietary
technology. In addition, the Company currently requires its employees and
consultants to enter into nondisclosure agreements to limit use of, access to
and distribution of its proprietary information. There can be no assurance that
the Company's means of protecting its proprietary rights in the United States or
abroad will be adequate to prevent misappropriation. Also, despite the steps
taken by the Company to protect its proprietary rights, it may be possible for
unauthorized third parties to copy aspects of the Company's products, reverse
engineer such products, develop similar technology independently or obtain and
use information that the Company regards as proprietary
In the future, the Company may receive notice of claims of infringement of
other parties' proprietary rights. Although the Company does not believe that
its products infringe the proprietary rights of third parties, there can be no
assurance that infringement or invalidity claims (or claims for indemnification
resulting from infringement claims) will not be asserted or prosecuted against
the Company or that any such assertions or prosecutions will not materially
adversely affect the Company's business, financial condition or results of
operations.
Dependence on Third-Party Technology. The Company's proprietary software
is currently designed, and may in the future be designed, to work on or in
conjunction with certain third-party hardware and/or software products. If any
of these current or future third-party vendors were to discontinue making their
products available to the Company or to licensees of the Company's software or
to increase materially the cost for the Company or its licensees to acquire,
license or purchase the third-party vendors' products, or if a material problem
were to arise in connection with the ability of the Company to design its
software to properly use or operate with any third-party hardware and/or
software products, the Company may be required to identify additional sources
for such products. In such an event, interruptions in the availability or
functioning of the Company's software and delays in the introduction of new
products and services may occur until equivalent technology is obtained. There
can be no assurance that an alternative source of suitable technology would be
available or that the Company would be able to develop an alternative product in
sufficient time or at a reasonable cost. The failure of the Company to obtain or
develop alternative technologies or products on a timely basis and at a
reasonable cost could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated with Third-Party Channels. The Company addresses certain
vertical and geographic markets through its partners. The Company relies on its
third-party channels to provide sales and marketing presence and name
recognition, as well as the resources necessary to offer industry-specific
financial accounting solutions. Although the Company expects to dedicate
significant resources to develop its partners, there can be no assurance that
the Company will be able to attract and retain qualified firms in its targeted
vertical markets. The failure of the Company to maintain its current third-party
channels or find other third-party channels, the Company's inability to
adequately support such channels, the development of competitive products and
services by the Company's third-party channels or the entry by such firms into
alliances with competitors of the Company would substantially limit the
Company's ability to provide its products and services and, accordingly, have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company has attempted to seek partners in
distinct vertical markets and distributors in distinct geographic markets, and
to manage them in a manner to avoid potential channel conflicts, there can be no
assurance that channel conflicts may not develop. Any such conflicts may
adversely affect the Company's relationship with third-party channels or
adversely affect its ability to develop new channels.
Risks Associated with International Operations. The Company's
international sales represented approximately 30.4%, 16.9% and 15.2% of total
revenues during 1998, 1997 and 1996, respectively. The Company's international
presence increased by virtue of its acquisition of Dodge. As a result of the
acquisition the Company now has an office in London and distributors in Hong
Kong and Japan. There can be no assurance that the Company will be able to
maintain or increase international market demand for the Company's products and
services. The Company's international sales are generally denominated in British
pounds. An increase in the value of the British pound relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. Currently, the Company does not
employ currency hedging strategies to reduce this risk. In addition, the
Company's international business may be subject to a variety of risks, including
difficulties in collecting international accounts receivable or obtaining U.S.
export licenses, potentially longer payment cycles, increased costs associated
with maintaining international marketing efforts, the introduction of non-tariff
barriers and higher duty rates and difficulties in enforcement of contractual
obligations and intellectual property rights.
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There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's business, financial condition or results of operations.
Risks Associated with Dataworks Accounts Receivable. On December 31, 1998,
Platinum Software, Inc. a competitor of Flexi, acquired Dataworks, a Flexi FIP.
Under the terms of Flexi's contract with Dataworks, if Dataworks were acquired
by a competitor of Flexi on or before December 31, 1998, the relationship with
Dataworks would terminate and $800,000 of guaranteed royalty payments still to
be paid would no longer be due to Flexi. However, the remaining guaranteed
royalty payments of $950,000 would become due under the contract terms. Of this
amount, $500,000 was not billed as of December 31, 1998, and as such is not
included in accounts receivable. Also due is $83,000 for services performed by
Flexi under the contract. The Company continues to vigorously pursue the
collection of all amounts owed and believes that the contract provisions
governing payments of these remaining amounts are clear and that, despite the
termination of the FIP relationship, the amounts will be realized, but there can
be no assurance that such will be the case.
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. As a
result, such programs and systems may fail or provide incorrect information when
using dates after December 31, 1999. If the Year 2000 issue were to disrupt to
the Company's internal information technology systems, or the information
technology systems of entities with whom the Company has significant commercial
relationships, the Company's business and financial condition could be
materially adversely affected.
The Year 2000 issue is relevant to three areas of the Company's business:
(1) the Company's accounting software products, (2) the Company's internal
computer systems and (3) the computer systems of significant suppliers or
customers of the Company. Each such area is addressed below.
1. THE COMPANY'S PRODUCTS. From its inception, the Company's
products have been designed and tested all of its products to be Year 2000
compliant. Accordingly, the Company does not intend to adopt a formal Year 2000
compliance program for its products, other than to maintain its policy of
designing all new products, and any updates of its existing products, to be Year
2000 compliant.
2. INTERNAL SYSTEMS. The Company's internal computer programs and
operating systems relate to virtually all segments of the Company's business,
including merchandising, customer database management, marketing, order
processing, order fulfillment, contract management, customer service and
financial reporting. These programs and systems consist primarily of:
-- Application Systems. These systems automate and manage
business functions such as accounting and financial reporting.
-- Personal Computers and Local Area Networks. These systems are
used for word processing, document management and other
similar administrative functions.
-- Telecommunications Systems. These systems provide telephone,
voicemail, e-mail, Internet and intranet connectivity, and
enable the Company to manage overall internal and external
communications.
All of the Company's Application systems that relate to accounting and
financial functions consist of the Company's own products, which have been
designed and tested to be Year 2000 compliant. All other internal systems
consist of widely available office applications and application suites for
word-processing, voicemail and other office-related functions. The Company
maintains current versions of all such applications and all are, or are expect
to be, Year 2000 compliant. Accordingly, the Company does not intend to adopt a
formal Year 2000 compliance program for its internal systems.
3. THIRD-PARTY SYSTEMS. The computer programs and operating
systems used by entities with whom the Company has commercial relationships pose
potential problems relating to the Year 2000 issue, which may affect the
Company's operations in a variety of ways. These risks are more difficult to
assess than those posed by internal programs and systems. The Company believes
that the programs and operating systems used by entities with whom it has
commercial relationships generally fall into two categories:
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-- First, the Company relies upon programs and systems used by
providers of basic services necessary to enable the Company to
reach, communicate and transact business with its suppliers
and customers. Examples of such providers include the United
States Postal Service, UPS, telephone companies, other utility
companies and banks. Services provided by such entities affect
almost all facets of the Company's operations. However, these
third-party dependencies are not specific to the Company's
business, and disruptions in their availability would likely
have a negative impact on most enterprises within the software
industry and on many enterprises outside the software
industry. The Company believes that all of the most reasonably
likely worst-case scenarios involving disruptions to its
operations stemming from the Year 2000 issue relate to
programs and systems in this first category.
-- Second, the Company relies upon third parties for certain
software code or programs that are embedded in, or work with,
its products. The Company believes that the functionality of
its products would not be materially diminished by a failure
of such third-party software to be Year 2000 compliant.
Nonetheless, the Company expects, as part of its plan for
assessing third-party programs and systems, to solicit
assurances of Year 2000 compliance from each provider of
significant in-licensed software.
There can be no assurance that the Company 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 the Company's internal information systems, (ii)
hardware failure, and (iii) failure of infrastructure services provided
by utilities and/or government.
The Company has requested verification from the vendors of its third-party
systems that these systems are Year 2000 compliant. Thus far the Company has
received responses from most of these vendors questioned. To date the Company
has not found any serious Year 2000 issues with these systems. If any issues
arise the Company intends to resolve any material risks and uncertainties that
are identified by communicating further with the relevant vendors and providers,
by working internally to identify alternative sourcing and by formulating
contingency plans to deal with such material risks and uncertainties. To date,
however, the Company has not formulated such a contingency plan. The Company
expects the resolution of such material risks and uncertainties to be an ongoing
process until all year 2000 problems are satisfactorily resolved. The Company
does 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and the accompanying financial
statements, notes and schedules which are filed as part of this 10-K following
the signature page.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS. The financial statements listed in the
Index to Financial Statements are filed as part of this Annual
Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE. Valuation and Qualifying
Accounts.
3. EXHIBITS. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual
Report on Form 10-K
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment of report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FLEXIINTERNATIONAL SOFTWARE, INC.
By: /s/ Stefan R. Bothe
------------------------------
Date: November 5, 1999
15
19
EXHIBIT NO. EXHIBIT INDEX 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.
4 Specimen certificate for shares of Common Stock is incorporated
herein by reference to Exhibit 4 to the Form S-1.
10.1 1992 Stock Option Plan, as amended is incorporated herein by
reference to Exhibit 10.1 to the Form S-1.
10.2 1997 Stock Incentive Plan, including forms of incentive and
nonstatutory stock option agreements is incorporated herein by
reference to Exhibit 10.2 to the Form S-1.
10.3 1997 Director Stock Option Plan, including form of option
agreement is incorporated herein by reference to Exhibit 10.3 to
the Form S-1.
10.4 1997 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10.4 to the Form S-1. 10.5 Registration
Rights Agreement dated May 7, 1996, as amended, among the
Registrant and the Purchasers (as defined therein) is incorporated
herein by reference to Exhibit 10.5 to the Form S-1.
10.6 Series C Preferred Stock Purchase Agreement dated May 7, 1996
among the Registrant and the Purchasers (as defined therein) is
incorporated herein by reference to Exhibit 10.8 to the Form S-1.
10.7 Warrant Agreement dated June 28, 1994 held by CDC Realty, Inc. is
incorporated herein by reference to Exhibit 10.10 to the Form S-1.
10.8 Warrant Agreement dated July 25, 1995 issued to Comdisco, Inc.
(exercisable for 45,000 shares) is incorporated herein by
reference to Exhibit 10.11 to the Form S-1.
10.9 Warrant Agreement dated July 25, 1995 issued to Comdisco, Inc.
(exercisable for 12,600 shares) is incorporated herein by
reference to Exhibit 10.12 to the Form S-1.
10.10 Master Lease Agreement dated June 28, 1994 between the Registrant
and Comdisco, Inc. is incorporated herein by reference to Exhibit
10.13 to the Form S-1.
10.11 Letter Agreement dated April 30, 1997 between the Registrant and
Fleet National Bank ("Fleet") is incorporated herein by reference
to Exhibit 10.15 to the Form S-1.
10.12 Accounts Receivable Security Agreement dated April 30, 1997
between the Registrant and Fleet is incorporated herein by
reference to Exhibit 10.16 to the Form S-1.
10.13 Promissory Note of the Registrant dated January 30, 1998 to Fleet
in the principal amount of $5,000,000 is incorporated herein by
reference to Exhibit 10.13 to the Registrant's Annual Report on
form 10-K (File No 000-23453) for the fiscal year ended December
31, 1997 (the "1997 10-K").
10.14 Subordination Agreement dated April 30, 1997 between the
Registrant and the Connecticut Development Authority is
incorporated herein by reference to Exhibit 10.18 to the Form S-1.
10.15 Standard Sublease Agreement dated February 7, 1996 between the
Registrant and Symantec Corporation is incorporated herein by
reference to Exhibit 10.19 to the Form S-1.
10.16 Warrant Agreement dated December 10, 1996 issued to Comdisco, Inc.
is incorporated herein by reference to Exhibit 10.20 to the Form
S-1.
10.17 Stockholders' Voting Agreement dated May 7, 1996 among the
Registrant and the Stockholders (as defined therein) is
incorporated herein by reference to Exhibit 10.21 to the Form S-1.
10.18 Participation Agreement dated May 7, 1996 among the Registrant and
the Purchasers (as defined therein) is incorporated herein by
reference to Exhibit 10.22 to the Form S-1.
10.19 Loan modification agreement dated January 30, 1998 between the
Registrant and Fleet is incorporated herein by reference to
Exhibit 10.19 to the 1997 10-K.
10.20 Agreement and Plan of Merger dated June 24, 1998 among the
Registrant, Princess Acquisition Corporation and The Dodge Group,
Inc. is incorporated by reference to Exhibit 2 to Current Report
on Form 8-K, dated June 29, 1998 (File No 000-23453), as amended.
21 Subsidiary.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
16
20
FLEXIINTERNATIONAL SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-3
Consolidated Statement of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-19
Report of Independent Accountants on Financial Statement Schedule F-20
Valuation and Qualifying Accounts F-21
F-1
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
FlexiInternational Software, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
FlexiInternational Software, Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note14a, the accompanying financial statements as of December
31, 1998 and for the year then ended have been restated with respect to the
revenue recognition of certain contracts.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14b to the
consolidated financial statements, the Company has suffered recurring losses and
net cash outflows from operations that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 14b. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 26, 1999, except as
to Note 13 which is as of
February 26, 1999 and
to Note 14 which is as
of August 11, 1999
F-2
22
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
1998 1997
---- ----
(Restated,
see Note 14)
ASSETS
Current assets:
Cash and cash equivalents $ 7,876 $ 24,622
Marketable securities 3,000 --
Accounts receivable, net of allowance for doubtful
accounts of $812 and $672, respectively 11,041 8,571
Prepaid expenses and other current assets 999 1,143
-------- --------
Total current assets 22,916 34,336
Property and equipment at cost, net of accumulated depreciation
and amortization of $3,121 and $1,392, respectively 2,732 1,222
Acquired software, net of accumulated amortization of $216 and $0, respectively (see Note 4) 1,944 --
Goodwill, net of accumulated amortization of $566 and $0, respectively (see Note 4) 5,101 --
Other assets, net of accumulated amortization of $217 and $197, respectively 218 112
-------- --------
Total assets $ 32,911 $ 35,670
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 3,199 $ 1,489
Accrued commissions 725 1,209
Accrued expenses 3,483 1,711
Current portion of capital lease obligations (see Note 6) 586 206
Deferred revenues 7,426 3,045
-------- --------
Total current liabilities 15,419 7,660
Long-term portion of capital lease obligations (see Note 6) 878 304
-------- --------
Total liabilities 16,297 7,964
-------- --------
Commitments and contingencies (Note 12) -- --
Stockholders' equity:
Common stock: $.01 par value; 50,000,000 shares authorized;
issued shares - 17,383,133 and 16,492,008, respectively and
outstanding shares - 17,293,622 and 16,492,008, respectively 174 165
Additional paid-in capital 56,308 49,749
Accumulated deficit (39,656) (22,208)
Currency translation adjustment 2 --
Common stock in treasury at cost - 89,511 and 0 shares, respectively (214) --
-------- --------
Total stockholders' equity 16,614 27,706
-------- --------
Total liabilities and stockholders' equity $ 32,911 $ 35,670
======== ========
See accompanying notes to consolidated financial statements.
F-3
23
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(Restated,
see Note 14)
Revenues:
Software license $ 10,542 $ 13,901 $ 5,205
Service and maintenance 13,754 7,723 3,142
-------- -------- --------
Total revenues 24,296 21,624 8,347
Cost of revenues:
Software license 1,757 828 311
Service and maintenance 10,584 5,450 2,181
-------- -------- --------
Total cost of revenues 12,341 6,278 2,492
Operating expenses:
Sales and marketing 11,233 7,820 4,978
Product development 10,752 7,880 5,733
General and administrative 6,191 2,316 2,453
Acquired in-process research and development (see Note 4) 1,890 -- --
-------- -------- --------
Total operating expenses 30,066 18,016 13,164
-------- -------- --------
Operating loss (18,111) (2,670) (7,309)
Net interest income (expense) 880 27 (138)
-------- -------- --------
Loss before provision for income taxes (17,231) (2,643) (7,447)
Provision for income taxes -- -- --
Net loss $(17,231) $ (2,643) $ (7,447)
======== ======== ========
Net loss per share:
Basic $ (1.02) $ (0.42) $ (1.91)
======== ======== ========
Diluted $ (1.02) $ (0.42) $ (1.91)
======== ======== ========
Weighted average shares:
Basic 16,938 6,332 3,891
Diluted 16,938 6,332 3,891
See accompanying notes to consolidated financial statements.
F-4
24
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
C0MMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------- -------
Balance at January 1, 1996 3,774,522 $ 38 $ 1,559 $(12,118)
Issuance of common stock 885,000 9 3,531 --
Compensation expense related to stock options granted
and vested -- -- 492 --
Exercise of stock options 84,622 1 112 --
Net loss -- -- -- (7,447)
Comprehensive income (loss) -- -- -- --
---------- ---- -------- --------
Balance at December 31, 1996 4,744,144 48 5,694 (19,565)
Issuance of common stock, net of stock issue costs 3,324,998 33 26,484 --
Conversion of preferred shares to common stock 7,861,350 79 15,433 --
Issuance of common stock to vendor 47,938 -- 289 --
Exchange of debt for common stock 275,003 3 1,097 --
Exercise of stock options and warrants 238,575 2 752 --
Net loss -- -- -- (2,643)
Comprehensive income (loss) -- -- -- --
---------- ---- -------- --------
Balance at December 31, 1997 16,492,008 165 49,749 (22,208)
Stock issued in conjunction with the acquisition of
The Dodge Group 863,500 9 6,512 --
Treasury stock acquired -- -- -- --
Shares issued for ESPP -- -- -- (13)
Exercise of stock options 27,625 -- 47 (204)
Net loss (Restated, see Note 14) -- -- -- (17,231)
Currency translation adjustment -- -- -- --
Comprehensive income (loss) (Restated, see Note 14) -- -- -- --
Balance at December 31, 1998 (Restated, see Note 14) 17,383,133 $174 $ 56,308 $(39,656)
========== ==== ======== ========
TOTAL
CURRENCY STOCKHOLDERS'
TRANSLATION TREASURY EQUITY COMPREHENSIVE
ADJUSTMENT STOCK (DEFICIT) INCOME /(LOSS)
----------- -------- ------------- --------------
Balance at January 1, 1996 $- $ -- $(10,521)
Issuance of common stock - -- 3,540
Compensation expense related to stock options granted
and vested - -- 492
Exercise of stock options - -- 113
Net loss - -- (7,447) $ (7,447)
--------
Comprehensive income (loss) - -- -- $ (7,447)
-- ----- -------- ========
Balance at December 31, 1996 - -- (13,823)
Issuance of common stock, net of stock issue costs - -- 26,517
Conversion of preferred shares to common stock - -- 15,512
Issuance of common stock to vendor - -- 289
Exchange of debt for common stock - -- 1,100
Exercise of stock options and warrants - -- 754
Net loss - -- (2,643) $ (2,643)
--------
Comprehensive income (loss) - -- -- $ (2,643)
-- ----- -------- ========
Balance at December 31, 1997 - -- 27,706
Stock issued in conjunction with the acquisition of
The Dodge Group - -- 6,521
Treasury stock acquired - (463) (463)
Shares issued for ESPP - 45 32
Exercise of stock options - 204 47
Net loss (Restated, see Note 14) - -- (17,231) $(17,231)
Currency translation adjustment 2 -- 2 2
--------
Comprehensive income (loss) (Restated, see Note 14) - -- -- $(17,229)
-- ----- -------- ========
Balance at December 31, 1998 (Restated, see Note 14) $2 $(214) $ 16,614
== ====== ========
See accompanying notes to consolidated financial statements.
F-5
25
FLEXIINTERNATIONAL SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(Restated,
see Note 14)
Cash flows from operating activities:
Net loss $(17,231) $ (2,643) $(7,447)
Non-cash items included in net loss:
Depreciation and amortization 2,018 572 466
Acquired in-process research and development 1,890 -- --
Provision for doubtful accounts 1,450 500 665
Conversion of accrued interest to preferred stock -- -- 59
Expense related to stock options -- 141 640
Change in operating accounts:
Accounts receivable (3,137) (5,950) (2,097)
Prepaid expenses and other assets (19) (548) (117)
Accounts payable and accrued expenses 704 1,837 738
Deferred revenue 3,297 1,110 877
-------- -------- -------
Net cash used in operating activities (11,028) (4,981) (6,216)
Cash flows from investing activities:
Acquisition of subsidiary, less cash acquired (774) -- --
Proceeds from sales of property and equipment 33 -- --
Purchases of property and equipment (921) (559) (425)
-------- -------- -------
Net cash used in investing activities (1,662) (559) (425)
Cash flows from financing activities:
Purchases of marketable securities (6,448) -- --
Sales of marketable securities 3,448 -- --
Proceeds from sales of preferred stock -- -- 5,000
Proceeds from sales of common stock, net of stock issue costs -- 26,517 3,540
Proceeds from exercise of stock options and warrants 47 754 113
Proceeds from convertible loan and promissory notes -- -- 2,000
Repayments of line of credit (1,450) -- (453)
Proceeds from line of credit 1,450 -- --
Repayments of convertible note payable -- (106) (45)
Repayments of debt (392) -- --
Proceeds from employee stock purchase plan 32 -- --
Purchase of treasury stock (463) -- --
Payments of capital lease obligations (278) (276) (256)
-------- -------- -------
Net cash (used in) provided by financing activities (4,054) 26,889 9,899
Effect of exchange rate changes on cash (2) -- --
-------- -------- -------
(Decrease) increase in cash and cash equivalents (16,746) 21,349 3,258
-------- -------- -------
Cash and cash equivalents at beginning of period 24,622 3,273 15
-------- -------- -------
Cash and cash equivalents at end of period $ 7,876 $ 24,622 $ 3,273
======== ======== =======
Supplemental disclosures:
Interest paid in cash $ 108 $ 139 $ 197
Assets acquired through capital lease obligations $ 1,232 $ 503 --
Exchange of loan and accrued interest for preferred stock -- -- $ 3,059
Exchange of loan for common stock -- $ 1,100 --
Shares issued in connection with the acquisition of The Dodge Group $ 6,521 -- --
See accompanying notes to consolidated financial statements.
F-6
26
FLEXIINTERNATIONAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - THE COMPANY:
FlexiInternational Software, Inc. (the "Company") began operations in 1991. The
Company designs, develops, markets and supports the Flexi Financial Enterprise
Suite of financial and accounting software applications and related tools. The
Flexi solution -- composed of FlexiFinancials, Flexi Financial Datawarehouse
(FlexiFDW), FlexilnfoAccess and FlexiTools -- is designed to address the needs
of users with sophisticated financial accounting and operational analysis
requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of FlexiInternational
Software, Inc. and its wholly owned subsidiaries since its acquisition of The
Dodge Group ("Dodge") in June 1998 (See Note 4). Intercompany profits,
transactions and balances have been eliminated in consolidation.
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 product are installed on the
hardware unit, the unit is shipped and all other criteria are met. 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. For multiple element
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. Maintenance revenues for maintaining,
supporting and providing 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.
FOREIGN CURRENCY TRANSLATION:
In accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," the assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Revenue and expense items are translated into U.S. dollars
at the average exchange rate for the year. Resulting unrealized translation
adjustments are included in shareholders' equity.
Gains and losses on foreign currency exchange transactions are reflected in the
Statement of Operations. Net transaction losses charged to income for the years
ended December 31, 1998, 1997 and 1996 were $21, $0 and $0, respectively.
PRODUCT DEVELOPMENT COSTS:
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," the Company has evaluated the establishment of technological
feasibility of its various products during the development phase. The time
period during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short, and consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations. Therefore, the
Company charges all the product development expenses to operations in the period
incurred.
F-7
27
CASH AND CASH EQUIVALENTS:
The Company considers all interest-bearing securities having original maturities
of three months or less to be cash equivalents.
MARKETABLE SECURITIES:
Marketable securities consist of U.S. Government obligations, and all are
interest-bearing having original maturities of between three months and one
year.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company
controls this risk through credit approvals, customer limits and monitoring
procedures. The Company can, however, limit the amount of support provided to
its customers in the event of non-performance. Two customer, two customers and
one customers, respectively, each represented 10% or more of the Company's total
revenues, or an aggregate of 31.7%, 40.2% and 12.3% of total revenues for the
years ended December 31, 1998, 1997 and 1996, respectively. One customer
represented approximately 30.0% and 18.7% of the Company's net accounts
receivable at December 31, 1998 and 1997, respectively.
PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consist primarily of prepaid expenses,
deferred commissions and other assets. Certain other assets are being amortized
over periods not exceeding five years. Amortization expense for the years ended
December 31, 1998, 1997 and 1996 was $220, $85 and $71, respectively.
PROPERTY AND EQUIPMENT:
Property and equipment is composed of furniture and equipment and is stated at
cost less accumulated depreciation and amortization. Depreciation is calculated
using an accelerated method over the estimated useful lives of the assets
ranging from three to seven years. Depreciation expense for the years ended
December 31, 1998, 1997 and 1996 amounted to $1,016, $487 and $395,
respectively, and includes amortization of assets recorded under capital lease
obligations.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets are stated on the basis of cost and
amortized on a straight-line basis, over the estimated future periods to be
benefited (5 years). Goodwill and other intangible assets are periodically
reviewed for impairment based upon anticipated cash flows generated from such
underlying assets. Accumulated amortization was $782 and $0 on December 31, 1998
and 1997, respectively.
INCOME TAXES:
Deferred taxes are determined under the asset and liability approach. Deferred
tax assets and liabilities are recognized on differences between the book and
tax bases of assets and liabilities using presently enacted tax rates.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash, accounts receivable,
capital lease obligations, accounts payable and other short-term borrowings. The
current carrying amount of these instruments approximates fair market value.
ACCOUNTING FOR STOCK BASED COMPENSATION:
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation." As permitted by this statement, the
Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for its stock-based
employee compensation arrangements.
COMPREHENSIVE INCOME:
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"), for the year ended December
31, 1998, and has restated prior comparative years to report comprehensive
income. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software
Revenue Recognition With Respect to Certain Transactions", to be effective for
fiscal years beginning after March 15, 1999. SOP 98-9 amends SOP 97-2 and
F-8
28
the definitions of what constitutes vendor specific objective evidence of fair
value, as defined in SOP 97-2. Management believes that the adoption of SOP 98-9
will not have a material impact on the Financial Statements.
USE OF ESTIMATES:
The accompanying financial statements reflect estimates and assumptions made in
the application of generally accepted accounting principles. Actual results may
vary from those estimates.
GEOGRAPHIC INFORMATION:
Geographic information for the Company, for the years ended December 31, 1998,
1997 and 1996 is summarized in the table below. The Company's international
revenues were derived primarily from the United Kingdom, Sweden and South
America for the year ended December 31, 1998, 1997 and 1996, respectively, and
the Company's international long lived assets at December 31, 1998 resided
primarily in the United Kingdom.
REVENUES:
1998 1997 1996
---- ---- ----
United States $16,907 $17,970 $7,078
International $7,389 $3,654 $1,269
LONG LIVED ASSETS:
1998 1997 1996
---- ---- ----
United States $9,459 $1,222 $647
International $318 - -
NOTE 3 - INCOME TAXES:
Significant components of the Company's deferred tax asset at December 31, 1998
and 1997 are as follows:
December 31,
1998 1997
---- ----
Net operating loss carryforwards $ 15,318 $ 7,195
Other 838 1,101
-------- -------
Subtotal 16,156 8,296
Valuation allowance (16,156) (8,296)
-------- -------
Net deferred tax asset $ - $ -
======== =======
No provision or benefit for federal, state or foreign income taxes has been made
for the years ended December 31, 1998, 1997 and 1996 given the Company's loss
position. At December 31, 1998, the Company had U.S. and foreign net operating
loss carryforwards of approximately $32,600 and $7,300, respectively, which
expire through the year 2018. The deferred tax assets at December 31, 1998 and
1997 have been fully reserved due to the uncertainty of their realization,
primarily attributed to the Company's historical losses.
For tax purposes, there is an annual limitation on the utilization of the U.S.
net operating loss carryforwards resulting from an ownership change as defined
by Internal Revenue Code Section 382. Due to this annual limitation, a portion
of the U.S. net operating loss carryforwards will expire prior to when otherwise
utilizable.
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. Under the terms of the acquisition, the Company issued an aggregate
of 863,500 shares of its common stock and $754 in cash in exchange for all
outstanding shares of Dodge stock and payment in full of principal and interest
on promissory notes of Dodge held by certain former stockholders of Dodge. In
addition, the Company granted options to employees of Dodge, under its 1997
Stock Incentive Plan to purchase an aggregate of 168,000
F-9
29
shares of common stock. 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 purchase price for the acquisition is as follows:
Stock and stock options $ 6,521
Payment of convertible notes payable 754
Acquisition costs 281
-------
$ 7,556
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 and acquired software, 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. The excess of the purchase price over the net assets acquired and the
in-process research and development is being amortized on a straight-line basis
over five years.
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 assets acquired and is amortized using the
straight-line method over its estimated life of five years.
The acquisition of Dodge was a tax free reorganization under the Internal
Revenue Code ("IRC"). Therefore, the charge for in-process research and
development is not deductible for income tax purposes. The Company acquired a
net operating loss carryforward of approximately $29 million, which expires no
later than 2009. Under the provisions of the IRC, the amount of these net
operating loss carryforwards available annually to offset future taxable income
is significantly limited. No value has been attributed to these net operating
losses in the purchase price allocation due to these limitations.
In connection with the acquisition, approximately 86,350 shares of common stock
issued were placed in escrow as security for obligations made by former
stockholders of Dodge.
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 1997, for all periods presented, and
excludes the one-time in-process research and development charge of $1,890 for
the periods presented:
1998 1997
---- ----
(unaudited)
Revenue $ 28,742 $30,342
Net loss $(18,174) $(7,034)
Net loss per diluted common share $ (1.05) $ (0.98)
Shares used in computation 17,356 7,196
F-10
30
NOTE 5 - BORROWINGS:
CONVERTIBLE NOTE PAYABLE:
In August 1995, the Company executed a note agreement which provided financing
totaling $750. The note bore interest at the LIBOR rate, adjusted annually. The
note was convertible, subsequent to August 1, 1996 at the option of the holder,
into common stock at a price of $4.00 per share and was secured by certain
assets of the Company. In August 1997, the remaining principal balance of the
note of $600 was converted, pursuant to its terms, into 150,000 shares of the
Company's common stock.
ACCOUNTS RECEIVABLE LINE OF CREDIT:
In April 1997, the Company entered into a revolving credit agreement with a
financial institution. The agreement, as modified, allows the Company to borrow
up to $5,000, with maximum borrowings not to exceed 80% of eligible receivables
as defined by the agreement. Interest on borrowings is set at the lender's prime
rate. Among other provisions, the Company is required to maintain certain
financial covenants. Due to the Company's losses in the third and fourth
quarters of 1998, the Company was not in compliance with these covenants at
December 31, 1998. As no borrowings were outstanding at December 31, 1998, this
event of default, did not impact the consolidated financial statements. In
addition, payment of cash dividends is prohibited without the lender's consent.
The financial institution has waived these events of default and has agreed to
extend the facility to May 17, 1999.
The Company maintained a line of credit facility with a holder of shares of the
Company's Series B convertible preferred stock which allowed for borrowings of
the lesser of 75% of eligible receivables, as defined by the agreement, or
$1,500. This line of credit was extended through December 31, 1996 and then
canceled.
CONVERTIBLE LOAN:
In November 1996, the Company issued a convertible loan totaling $500 to a
private investor. In January 1997, the loan was converted into 125,002 shares of
common stock at a price of $4.00 per share.
CONVERTIBLE PROMISSORY NOTES:
In February 1996, the Company issued convertible promissory notes payable
totaling $900 to certain of its Series B preferred stockholders. The notes bore
interest at a rate of 5.33% and were canceled in connection with the issuance of
shares of Series C convertible preferred stock in May 1996 (Note 7).
In January 1996, the Company issued convertible promissory notes payable
totaling $600 to certain of its Series B preferred stockholders. The notes bore
interest at a rate of 5.33% and were converted into Series C convertible
preferred stock in May 1996 (Note 7).
In October 1995, the Company issued a convertible promissory note payable
totaling $1,500 to certain of its Series B preferred stockholders. The note bore
interest at a rate of 5.33% and was converted into Series C convertible
preferred stock in May 1996 (Note 7).
NOTE 6 - CAPITAL LEASE OBLIGATIONS:
Certain fixed asset acquisitions during the years ended December 31, 1998 and
1997, were financed through capital lease arrangements. Total property and
equipment acquired under these capitalized leases, which consisted primarily of
computer equipment, amounted to $1,795 and $1,363, at December 31, 1998 and
1997, respectively. Accumulated depreciation on these assets at December 31,
1998 and 1997 amounted to $775 and $571, respectively.
The annual interest rates on such obligations range from 7.5% to 10.1%.
Approximate maturities of such capital lease obligations are as follows at
December 31, 1998:
1999 $ 713
2000 626
2001 300
------
Total 1,639
Less amounts representing interest 175
------
Total capital lease obligations 1,464
Less amounts due within one year 586
------
Long-term portion capital lease obligations $ 878
======
F-11
31
NOTE 7 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company had authorized 13,027,874 shares of preferred stock, $0.01 par value
per share and had designated the following series, all of which have been
converted to common stock effective with the initial public offering in December
1997:
SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In February 1994, the Company sold 1,750,000 shares of Series A convertible
preferred stock ("Series A Preferred Stock") to a private investor group for
$1.16 per share and sold 862,069 shares for $1.16 per share in March 1994 to
another private investor group. In addition, in July 1994, the board of
directors approved the exchange by a stockholder of 107,137 shares of common
stock for 172,414 shares of Series A preferred stock. Each share of Series A
preferred stock was convertible at any time into .75 shares of common stock, as
adjusted in the event of future dilution, and had full voting rights. The total
number of Series A preferred shares authorized was 2,840,517, with a par value
of $.01. In the event of involuntary liquidation or some other event as
described in the Company's certificate of incorporation, a holder of such Series
A preferred stock was entitled to receive up to $3.30 per share (for a total of
$9,189). The right to receive dividends was noncumulative. Dividends were
payable when and as declared by the Company's board of directors at the rate of
$0.0812 per share per annum. The Series A preferred shares were mandatorily
converted upon the closing of the Company's initial public offering of shares of
common stock pursuant to an effective registration statement under the
Securities Act of 1933.
SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In January 1995, the Company sold 2,007,645 shares of Series B convertible
preferred stock ("Series B Preferred Stock") to a private investor group for
$1.50 per share. In addition, in July 1995, the Company sold 125,000 shares of
Series B preferred stock to a private investor group for $2.00 per share. In
connection with the sale, the convertible promissory note issued in November
1994 totaling $1,010 and related accrued interest were converted into 680,355
shares of Series B convertible preferred stock and such note was canceled. Each
share of Series B preferred stock is convertible at any time into .75 shares of
common stock, as adjusted in the event of future dilution, and has full voting
rights. The total number of Series B preferred shares authorized is 5,000,000
with a par value of $.01. In the event of involuntary liquidation or some other
event as described in the Company's certificate of incorporation, a holder of
such Series B preferred stock is entitled to receive up to $3.30 per share (for
a total of $9,283). The right to receive dividends is noncumulative. Dividends
are payable when and as declared by the Company's board of directors at the rate
of $0.105 per share per annum. The Series B preferred shares were mandatorily
converted upon the closing of the Company's initial public offering of shares of
common stock pursuant to an effective registration statement under the
Securities Act of 1933.
SERIES C MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In May 1996, the Company sold 3,030,303 shares of Series C convertible preferred
stock ("Series C Preferred Stock") to a private investor group for $1.65 per
share. In connection with the sale, the convertible promissory notes issued in
October 1995, January 1996 and February 1996 totaling $3,000 and related accrued
interest were converted into 1,854,024 shares of Series C preferred stock and
such notes were canceled. Each share of Series C preferred stock is convertible
at any time into .75 shares of common stock, as adjusted in the event of future
dilution, and has full voting rights. The total number of Series C preferred
shares authorized is 5,187,357 with a par value of $.01. In the event of
involuntary liquidation or some other event as described in the Company's
certificate of incorporation, a holder of such Series C preferred stock is
entitled to receive up to $3.30 per share (for a total of $16,118). The right to
receive dividends is noncumulative. Dividends are payable when and as declared
by the Company's board of directors at the rate of $0.1155 per share per annum.
The Series C preferred shares were mandatorily converted upon the closing of the
Company's initial public offering of shares of common stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended.
F-12
32
NOTE 8 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
After the completion of an initial public offering of shares of common stock
(described below), the Company filed a Restated Certificate of Incorporation
which provides that its authorized capital stock will include 5,000,000 shares
of preferred stock, $.01 par value.
The Company's board of directors is authorized, subject to any limitations
prescribed by law, without stockholder approval, to issue such shares of
preferred stock in one or more series. Each such series of preferred stock shall
have such rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences, as shall be determined by the board of directors.
The purpose of authorizing the board of directors to issue preferred stock and
determine its rights and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of preferred stock.
COMMON STOCK:
In December 1997, the Company completed an initial public offering of shares its
common stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended. The Company sold 2,250,000 shares (and
selling stockholders sold 1,200,000 shares) of common stock to the public. Net
proceeds to the Company were $22,218, after underwriting discounts and
commissions and deducting expenses of the offering aggregating $800.
In December 1996, the Company sold 885,000 shares of the Company's common stock
to a private investor group. The shares were sold for $4.00 per share and the
total proceeds were $3,540.
On January 10, 1997, January 15, 1997, February 28, 1997 and March 25, 1997, the
Company sold 500,000, 75,000, 249,998 and 250,000 shares of the Company's common
stock, respectively. The shares were sold for $4.00 per share and the total
proceeds were $4,300.
On November 6, 1997, the Company effected a three-for-four reverse split of the
Company's common stock. All references to common stock amounts, shares, per
share data, and preferred stock conversion rights included in the financial
statements and notes have been adjusted to give retroactive effect to the stock
split.
STOCK WARRANTS:
In conjunction with the issuance of a note payable in August 1995, the Company
issued a warrant for the purchase of 75,000 shares of its common stock at a
price of $8.00 per share, subject to adjustment, exercisable at the holder's
election at any time after August 1, 1997. This warrant was exercised in
December 1997.
In connection with the Company's 1995 financing arrangements, a warrant was
issued for the purchase of 5,129 shares of Series C preferred stock for $1.65
per share. Such warrant allows the holder to acquire 3,846 shares of common
stock for $2.20 per share. This warrant expires in December 2006.
In connection with the Company's 1995 financing arrangements, a warrant was
issued for the purchase of 76,800 shares of Series B preferred stock for $1.50
per share. This warrant allows the holder to acquire 57,600 shares of common
stock for $2.00 per share and the warrant expires in July 2005.
In connection with the Company's capital lease obligations in 1994, a warrant
was issued for the purchase of 43,103 shares of Series A preferred stock for
$1.16 per share. This warrant allows the holder to acquire 32,327 shares of
common stock for $1.546 per share, and the warrant expires in June 2004.
All warrants issued by the Company were accounted for in accordance with APB
Opinion No. 14.
F-13
33
NOTE 9 - EMPLOYEE STOCK PLANS:
EMPLOYEE STOCK PURCHASE PLAN:
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the board of directors in September 1997 and was approved by the
stockholders in October 1997. The Purchase Plan authorizes the issuance of up to
a total of 300,000 shares of common stock to participating employees. Under the
terms of the Purchase Plan, the option price is an amount equal to 85% of the
average market price (as defined) per share of the common stock on either the
first day or the last day of the offering period, whichever is lower. Under the
Purchase Plan the Company issued 7,989 shares to participants during 1998.
OPTION EXCHANGE PROGRAM:
In November 1998, the Company's Board of Directors approved an option exchange
program, which allowed certain employees to exchange their existing options for
new options with a lower exercise price and a longer vesting period. Employee
options with exercise prices ranging from $2.00 to $16.50, to purchase 512,160
shares of common stock were exchanged for 470,640 shares ranging in price from
$1.88 to $2.44, which was at or above the fair market value at the time of the
exchange. The tables below have been adjusted to reflect these reduced exercise
prices, and the extension of the options' life.
STOCK OPTION PLANS:
The Company's 1992 Stock Option Plan (the "1992 Plan") provides for the issuance
of up to 1,362,000 shares of common stock through the granting of stock options
to employees, officers, directors, consultants and advisors. The board of
directors has authority to determine awards and establish the exercise price.
Such options vest over various periods up to five years and expire on various
dates through 2007. No additional option grants will be made under the 1992
Plan.
Options to purchase 47,938 shares of common stock were granted to a vendor for
services rendered in 1996 and 1997. Such options vested after six months, and
were exercisable at $.01 per share. All of such options we exercised in 1997.
The Company's 1997 Stock Incentive Plan (the "Incentive Plan") was adopted by
the board of directors in September 1997 and was approved by the stockholders in
October 1997. The Incentive Plan is intended to replace the Company's 1992 Plan.
Up to 1,875,000 shares of Common Stock (subject to adjustment in the event of
stock splits and other similar events) may be issued pursuant to awards granted
under the Incentive Plan. Options may be granted at an exercise price which may
be less than, equal to or greater than the fair market value of the common stock
on the date of grant. Officers, employees, directors, consultants and advisors
of the Company and its subsidiaries are eligible to receive awards under the
Incentive Plan. During 1998, 1,446,090 options under the Incentive Plan were
granted.
The Company's 1997 Director Stock Option Plan (the "Director Plan) was adopted
by the board of directors in September 1997 and was approved by the stockholders
in October 1997. Under the terms of the Director Plan, directors of the Company
who are not employees of the Company or any subsidiary of the Company are
eligible to receive nonstatutory options to purchase shares of Common Stock. A
total of 150,000 shares of Common Stock may be issued upon exercise of options
granted under the Director Plan. The exercise price per share, for shares
granted initially, was equal to the initial public offering price ($11.00). The
exercise price per share for all shares thereafter will be the closing price per
share of Common Stock on the date of grant. All options granted under the
Director Plan vest one year from the date of grant so long as the optionee
remains a director of the Company. During 1998, 15,750 options under the
Director Plan were granted.
F-14
34
The following table describes the Company's stock option activity under its all
of its Option Plans:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
------- ---------
(PRICED AT DATE OF GRANT)
Outstanding at January 1, 1996 768,000 $1.24
Granted 425,144 $0.92
Exercised (84,622) $1.33
Canceled (192,578) $1.81
--------
Outstanding at December 31, 1996 915,944 $0.96
Granted 488,720 $4.89
Exercised (211,514) $0.73
Canceled (296,250) $1.93
---------
Outstanding at December 31, 1997 896,900 $2.92
Granted 1,461,840 $3.91
Exercised (65,125) $0.73
Canceled (1,009,552) $6.01
-----------
Outstanding at December 31, 1998 1,284,063 $1.73
Exercisable at December 31, 1996 636,854 $0.52
Exercisable at December 31, 1997 468,030 $0.43
Exercisable at December 31, 1998 496,809 $1.03
Options available for grant at December 31, 1998 1,248,887 -
The following table summarizes information regarding stock options granted
during 1996, 1997 and 1998 under the Company's Option Plans:
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
OPTIONS EXERCISE FAIR
GRANTED PRICE VALUE
------- ----- -----
1996:
- ----
Options granted at less than market value 256,619 $0.01 $2.19
Options granted at market value 168,525 $2.09 $0.53
1997:
- ----
Options granted at less than market value 144,194 $1.24 $3.04
Options granted at market value 344,526 $6.52 $2.03
1998:
- ----
Options granted at less than market value 50,000 $0.01 $6.87
Options granted at market value 1,248,940 $4.26 $3.93
Options granted above market value 162,900 $2.44 $0.22
F-15
35
The following table summarizes information regarding stock options outstanding
at December 31, 1998 under all of the Company's Option Plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE
PRICES AT 12/31/98 IN YEARS PER SHARE AT 12/31/98 PRICE
------ ----------- -------- --------- ----------- -----
$0.00027-$0.01333 350,000 7.28 $0.01 300,000 $0.01
$0.97-$2.00 678,790 8.79 $1.66 151,434 $1.49
$2.06-$2.67 175,675 9.71 $2.44 17,685 $2.48
$4.00 16,625 8.15 $4.00 8,025 $4.00
$6.88-$10.00 37,473 8.99 $8.01 4,665 $8.67
$11.00-$12.63 25,500 9.10 $11.67 15,000 $11.00
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"), on January 1, 1996.
The Company continues to apply Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," in accounting for its stock based
compensation plans. If the Company had recorded compensation cost based upon the
fair value at the grant date for awards under these plans, consistent with SFAS
No. 123, the Company's net loss would have increased to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Net loss as reported $(17,231) $(2,643) $(7,447)
Net loss pro forma $(18,027) $(2,690) $(7,452)
Loss per share as reported $ (1.02) $ (0.42) $ (1.91)
Loss per share pro forma $ (1.06) $ (0.42) $ (1.92)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 4.92%, 6.31% and 6.48% for the years
ended December 31, 1998, 1997 and 1996, respectively, an option life of 5 years
for all the years presented and a volatility of 1.52 and .65 for the years ended
December 31, 1998 and 1997, respectively. In accordance with SFAS No. 123, the
fair value method of accounting has not been applied to options granted prior to
January 1, 1995. Therefore, the resulting pro forma impact may not be
representative of that to be expected in future years.
The Company has reserved 1,284,063 shares of common stock for options
outstanding under its 1992 Plan, Incentive Plan and Director Plan, and 93,773
shares of common stock for exercisable warrants. In addition to the outstanding
options, the Company has reserved 1,248,887 shares of common stock for future
grants under its Incentive Plan and Director Plan.
NOTE 10 - RELATED PARTY TRANSACTIONS:
As a result of the June 24, 1998 acquisition of Dodge, Mr. Alan Hambrook,
President of International Operations, was granted options to purchase 25,000
shares of common stock of the Company at $0.01 each. In connection with these
option grants, the Company loaned Mr. Hambrook $180, secured by a pledge of the
options as collateral. As of December 31, 1998, no amounts were repaid with
respect to the above loan. The loan is included within the prepaid expenses and
other current assets section of the Company's Consolidated Balance Sheet (see
financial statements attached). Subsequently, Mr. Hambrook resigned his position
in February 1999. As a result of his resignation, Mr. Hambrook surrendered his
options and pursuant to his loan agreement the loan was forgiven.
F-16
36
NOTE 11 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) Savings Plan (the "Plan"). Employees are eligible
to participate in the Plan upon completion of one month of service with the
Company. Eligible employees may contribute up to 15% of their annual
compensation to the Plan on a pre-tax basis. Participant contributions to the
Plan are immediately vested. In addition, under the terms of the Plan, the
Company, at its discretion, may match all or a portion of a participant's
contribution to the Plan up to 6% of the participant's compensation. The
Company's matching contribution is made on a monthly basis. Participants become
vested in Company matching contributions to the Plan over a five year period.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
The Company leases space in several buildings which it uses for offices and
development facilities as well as various equipment and vehicles, all subject to
operating leases. As of December 31, 1998, the minimum annual rental payments
under the terms of such noncancellable leases which expire at various dates
through 2004 are as follows:
1999 $1,156
2000 1,006
2001 840
2002 629
2003 427
Thereafter 210
--------
Total minimum lease payments $4,268
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted to
$991, $531 and $317, respectively.
On December 31, 1998, Platinum Software, Inc. a competitor of Flexi, acquired
Dataworks, a Flexi FIP. Under the terms of Flexi's contract with Dataworks, if
Dataworks were acquired by a competitor of Flexi on or before December 31, 1998,
the relationship with Dataworks would terminate and $800 of guaranteed royalty
payments still to be paid would no longer be due to Flexi. However, the
remaining guaranteed royalty payments of $950 would become due under the
contract terms; although due under the contract terms, revenue has not been
recognized. Of this amount, $500 was not billed as of December 31, 1998, and as
such is not included in accounts receivable. Also due is $83 for services
performed by Flexi under the contract. The Company continues to vigorously
pursue the collection of all amounts owed and believes that the contract
provisions governing payments of these remaining amounts are clear and that,
despite the termination of the FIP relationship, the amounts will be realized.
From time to time, the Company is a party to various disputes and proceedings
arising from the ordinary course of general business activities. In the opinion
of management, resolution of these matters is not expected to have a material
adverse effect on the results of operations of the Company. However, depending
on the amount and the timing, an unfavorable resolution of some or all these
matters could materially affect the Company's future results of operations or
cash flows in a particular period.
NOTE 13- RESTRUCTURING
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 expects to record a charge to operations during the
first quarter of 1999 of approximately $1,900 ($1,700 related to anticipated
severance costs, $1,360 will be payable in installments for up to two years, and
$200 related to costs of idle facility space.) The selected employees have left
the Company, and a significant number of employees will have been paid their
required severance payments by the end of the first quarter of 1999. The Company
believes that these actions will result 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.
F-17
37
NOTE 14 - SUBSEQUENT EVENTS
a) RESTATEMENT OF 1998
As a result of the Company's regular quarterly financial statement review with
its independent accountants in the second quarter of 1999, 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 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
revenue which has been restated in 1998, all amounts billed are included in
accounts receivable as of December 31, 1998 with a corresponding offset included
in deferred revenues. Any amounts stipulated in contracts which have not been
invoiced have not been recognized in the financial statements. A summary of the
effects of the restatement follows:
YEAR ENDED DECEMBER 31, 1998
----------------------------
AS REPORTED RESTATED
----------- --------
OPERATING STATEMENTS:
Software license revenue $ 16,113 $ 10,542
Service and maintenance revenue 14,078 13,754
Total revneues 30,191 24,296
General and administrative 6,991 6,191
Total operating expenses 30,866 30,066
Operating loss (13,016) (18,111)
Loss before provision for taxes (12,136) (17,231)
Net loss (12,136) (17,231)
Net loss per share:
Basic $ (0.72) $ (1.02)
Diluted $ (0.72) $ (1.02)
YEAR ENDED DECEMBER 31, 1998
----------------------------
AS REPORTED RESTATED
----------- --------
BALANCE SHEET:
Accounts receivable, net of allowance
or doubtful accounts $ 13,051 $ 11,041
Total current assets 24,926 22,916
Total assets 34,921 32,911
Deferred revenues 4,341 7,426
Total current liabilities 12,334 15,419
Total liabilities 13,212 16,297
Accumulated deficit (34,561) (39,656)
Total stockholdes' equity 21,709 16,614
Total liabilities and stockholders' equity 34,921 32,911
b) GOING CONCERN
Late in the second quarter of 1999, management identified a number of factors
that cause them to believe that available cash resources may not be sufficient
to fund anticipated operating losses. These include: (1) the continued general
business slowdown, which resulted in revenue levels significantly lower than
expected in the first half of 1999; (2) payment disputes that arose in the
second quarter of 1999 related to two significant contracts for licensing of
software and provision of services (see Note 14a) and; (3) delays experienced in
the second quarter of 1999 related to the release of the next version of the
Company's general ledger product. Management has taken actions to reduce costs
in response to lower revenues and 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
reduce costs to a level to appropriately respond to competitive pressures or to
obtain additional funding. As a result of the foregoing, there exists
substantial doubt about the Company's ability to continue as a going
F-18
38
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 15 - SELECTED QUARTERLY INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, QUARTER QUARTER QUARTER QUARTER
1998 (Restated, see Note 14)
Total revenues $ 5,508 $ 7,273 $ 5,782 $ 5,733
Gross profit 3,288 4,503 2,331 1,833
Net loss (1,216) (2,846) (6,108) (7,061)
Net loss per diluted share (0.07) (0.17) (0.35) (0.41)
1997
Total revenues $ 2,547 $ 2,975 $ 6,938 $ 9,164
Gross profit 1,474 1,712 5,156 7,004
Net (loss) income (2,847) (2,429) 636 1,997
Net (loss) income per diluted share (0.52) (0.41) 0.09 0.23
F-19
39
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
FlexiInternational Software, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1999, except as to Note 13 which is as of February 26, 1999
and to Note 14 which is as of August 11, 1999, appearing on page F-2 of the 1998
Annual Report on Form 10-K of FlexiInternational Software, Inc. also included an
audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 26, 1999, except as
to Note 13 which is as of
February 26, 1999 and
to Note 14 which is as of
August 11, 1999
F-20
40
FLEXIINTERNATIONAL SOFTWARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1997 EXPENSES DEDUCTIONS DECEMBER 31, 1998
----------- ----------------- -------- ---------- -----------------
(Restated, see Note 14)
Allowance for doubtful accounts $ 672 $1,450 $(1,310) $ 812
Valuation allowance for deferred tax asset $ 8,296 $7,860 $ 16,156
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1996 EXPENSES DEDUCTIONS DECEMBER 31, 1997
----------- ----------------- -------- ---------- -----------------
Allowance for doubtful accounts $ 405 $ 500 $ (233) $ 672
Valuation allowance for deferred tax asset $ 7,254 $ 1,042 $ 8,296
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION DECEMBER 31, 1995 EXPENSES DEDUCTIONS DECEMBER 31, 1996
----------- ----------------- -------- ---------- -----------------
Allowance for doubtful accounts $ 422 $ 665 $ (682) $ 405
Valuation allowance for deferred tax asset $ 4,143 $ 3,111 $ 7,254
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