Out of the public eye

Out of the public eye

Stefan Bothe discovered running a public company wasn't worth the time and expense, so he decided to

de-register the stock of his accounting-software development company. It turned out to be a great move.

TECHNOLOGY by Jean Gruss | Editor/Lee-Collier

Wall Street's latest crisis notwithstanding, any executive thinking about taking a company public one day may want to have a chat with Stefan Bothe.

The chairman and chief executive officer of Naples-based Flexi Software rode the tech boom of the 1990s, courting venture capitalists and going public in the tech-led euphoria. But Flexi sank with the tech bust and Enron-inspired regulations that followed.

Knowing what he does now, Bothe would never have taken his company public. "It's not worth it," he says. If he could turn back the clock, Bothe would have traded slower growth for the boom that boosted Flexi's revenues to $15.6 million in 1999, just seven years after he and two partners founded the company.

As a company registered with the Securities and Exchange Commission, Flexi was spending $1 million a year on lawyers and accountants to comply with regulations that became intolerably burdensome with the passage of the Sarbanes Oxley Act. In 2003, Flexi's annual sales were $6.8 million, so it was spending more than 10% of its annual revenues on compliance.

But Bothe, 60, didn't take Flexi private. He simply de-registered his company and let the company's shares continue to trade in the lightly regulated over-the-counter market. Going private would have cost about $2 million in accounting and legal fees. "It almost cost as much as going public," he says.

Fortunately, the company had less than a dozen major shareholders, so the decision was relatively easy. What's more, he didn't need private equity or enormous amounts of debt, two things to be thankful for in today's economic crunch.

Public expense

Early in his tech career, the German born Bothe helped build Computer Associates, one of the world's most successful information-technology companies. He joined CA in 1982, when the firm's annual revenues were just $20 million. By the time he left in 1989, CA had grown to $1 billion in annual sales and Bothe was president of the company's application-products division.

With the wealth he accumulated at CA, Bothe and two partners started Flexi in 1992 to focus on developing accounting software for the health care and financial service industries. "We self-funded the company," he says.

The timing was great because Bothe and his partners hit the market when it began to shift from mainframe computers to personal computers. This shift to the PC meant all the software that had been written for mainframes had to be rewritten for PCs. "We rode that wave," Bothe says.

Then, Flexi was confronted with what many successful firms face: How to boost growth and go after really big customers. Bothe says he turned to venture capitalists. "It was one of these euphoria trends," Bothe recalls.

Flexi raised about $6 million, but unlike many other free-spending tech counterparts Bothe was careful with the investment. He never flew first class and stayed in cheap motels when he traveled. One venture capitalist told him his biggest fears with funding startups was their addiction to debt to fuel growth.

Now, Bothe has this advice: "If you can do without VCs, it's better," he says. "They're not your friends. They are very successful, cold-headed investors. They're looking for a return on their investment."

Of course, venture capitalists get their return either through a private or public sale of a company. In the 1990s, that was usually the latter. And Flexi was no exception, going public in 1997 for $10 a share during the boom.

To be sure, there were advantages to going public. Employees got stock options and Flexi's positive financial statements reassured customers that the company would be around to maintain and upgrade the software they sold.

But the tech bust drove Flexi's shares into penny-stock territory. Leading into the bust was the Y2K scare and companies stopped buying new software, preferring to spend their technology budgets on rewriting code. "It didn't turn into a Bill Gates scenario," Bothe says, referring to the Microsoft millionaires.

When Flexi was public, Bothe says he spent 25% of his time preparing quarterly results, discussing the company with investors and traveling to meet with analysts. It's not something he enjoyed. "I have never managed my company with a focus on the share price," Bothe says. "You have to focus on running your business."

As the tech bust deepened in the early 2000s, Bothe cut costs, laying off three-quarters of a staff that once numbered 200 people. Bothe has been careful about hiring ever since and the company still has about 50 employees.

Meanwhile, the government's response to the Enron scandal boosted the cost of compliance. For small companies like Flexi, those costs became unbearable. Flexi joined hundreds of companies that de-registered their stock with the SEC, allowing them to avoid those costs. "If you have good management, you don't need those rules," Bothe says.

Flexi's 17.8 million shares are still traded in the over-the-counter market (symbol: FLXI; recent price: 10 cents), but Bothe doesn't worry about the stock. He says he can focus on the long-term future of the company and no longer has to worry about pleasing fickle investors who only care about the most recent quarterly results. Cracking a smile, he declines to cite the company's annual revenues today.

Private growth

Bothe says de-registering the company hasn't hurt the business. Customers didn't mind because he could now spend all his energies on Flexi instead of Wall Street investors and analysts.

What's more, Bothe says customers are realizing that the monolithic software companies that try to provide every kind of business software aren't as responsive as smaller firms like Flexi that focus on a specific task. "The industry is returning to the boutique-specialist approach," he says.

That's been good for Flexi, which provides accounting software to hospitals, contractors that focus on government health-insurance plans, insurance companies and banks. For example, about 600 hospitals now use Flexi's accounting software. The software is non-proprietary, meaning it can be seamlessly integrated with different programs that run other parts of a business.

The company has forged partnerships with larger companies that distribute Flexi's software as part of their bigger software packages. Companies can use Flexi's software instead of spending years creating new programs and Flexi gains access to their larger sales forces.

Companies such as McKesson Information Solutions in health care, Unisys in government health care, Fiserv in the insurance industry and Jack Henry in banking pay Flexi royalties when they sell and maintain Flexi's accounting software. "I don't have the cost of sales and front-line [sales force] business," Bothe explains. "I leverage my organization across a much larger platform."

That strategy has allowed Flexi to grow without having to invest huge sums in creating an army of salespeople. It has self funded its growth without outside financing.

Now, Bothe says the company is in better shape to weather this economic downturn, which he believes will only last another year or two. "We have a conservative, strong balance sheet. We're confident we can weather this," he says.

REVIEW SUMMARY

Company. Flexi Software

Industry. Software technology

Key. Trading slower growth to avoid going public is a smart corporate move for the long run.