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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1997
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 No. 00021539
IA CORPORATION I
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3161772
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1900 POWELL STREET, SUITE 600
EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices)
(510) 450-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
The number of outstanding shares of the Registrant's Common Stock, $0.01 par
value, was 11,119,978 as of April 30, 1997.
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IA CORPORATION I
REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 ................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996 .............. 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 .............. 5
Notes to Condensed Consolidated Financial Statements .... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K......................... 19
Signatures ............................................................ 20
Exhibit Index ......................................................... 21
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA CORPORATION I
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 11,461 $ 10,806
Receivables, including unbilled receivables of $4,625 at
March 31, 1997 and $2,422 at December 31, 1996, less
allowance for doubtful accounts of $46 at March 31, 1997 and
December 31, 1996.............................................. 6,958 7,259
Other current assets............................................. 656 653
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Total current assets......................................... 19,075 18,718
Property and equipment, net........................................... 516 459
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$ 19,591 $ 19,177
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 462 $ 740
Accrued compensation and related liabilities..................... 1,358 1,433
Deferred revenues................................................ 1,749 2,007
Other accrued liabilities........................................ 388 421
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Total current liabilities.................................... 3,957 4,601
Stockholders' equity:
Preferred shares, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares-- none......................... -- --
Common shares, $0.01 par value:
Authorized shares -- 35,000,000
Issued and outstanding shares -- 8,651,384 at March 31, 1997
and 8,592,402 at December 31, 1996...................... 87 86
Class B Common shares, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 2,417,112................... 25 25
Additional paid-in capital....................................... 27,318 27,121
Accumulated deficit.............................................. (11,634) (12,484)
Deferred compensation............................................ (162) (172)
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Total stockholders' equity................................... 15,634 14,576
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$ 19,591 $ 19,177
======== ========
</TABLE>
See accompanying notes
3
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IA CORPORATION I
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1996
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<S> <C> <C>
Revenues:
License................................................. $ 2,482 $ 877
Service................................................. 2,796 3,570
Maintenance............................................. 838 571
Hardware................................................ -- 556
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Total revenues...................................... 6,116 5,574
Cost of revenues:
License................................................. 126 30
Service................................................. 1,858 2,419
Maintenance............................................. 349 354
Hardware................................................ -- 456
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Total cost of revenues.............................. 2,333 3,259
Operating expenses:
Sales and marketing..................................... 1,152 1,015
General and administrative.............................. 589 630
Product development..................................... 1,288 547
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Total operating expenses............................ 3,029 2,192
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Operating income............................................. 754 123
Other income (expense):
Interest expense........................................ -- (8)
Interest income and other............................... 131 17
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Income before taxes.......................................... 885 132
Provision for income taxes................................... 35 --
-------------- --------------
Net income................................................... 850 132
Preferred dividends and accretion............................ -- (293)
-------------- --------------
Net income (loss) applicable to common stockholders.......... $ 850 $ (161)
============== ==============
Pro forma net income per share............................... $ 0.07 $ 0.01
============== ==============
Pro forma shares used in per share calculations.............. 12,157 10,083
============== ==============
</TABLE>
See accompanying notes.
4
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IA CORPORATION I
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 850 $ 132
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 75 64
Amortization of deferred compensation.................................... 10 --
Loss on disposal of property and equipment............................... -- (9)
Changes in operating assets and liabilities:
Receivables.......................................................... 301 (1,739)
Other current assets................................................. (3) 68
Accounts payable..................................................... (278) 127
Accrued compensation and related liabilities......................... (75) 261
Deferred revenues.................................................... (258) 2,076
Other accrued liabilities............................................ (33) 55
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Net cash provided by operating activities..................................... 589 1,035
INVESTING ACTIVITIES
Purchases of property and equipment........................................... (132) (152)
Proceeds from sales of property and equipment................................. -- 16
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Net cash used in investing activities......................................... (132) (136)
FINANCING ACTIVITIES
Borrowings under bank line of credit.......................................... -- 500
Proceeds from issuance of common stock........................................ 198 --
----------------- ------------------
Net cash provided by financing activities..................................... 198 500
Net increase in cash.......................................................... 655 1,399
Cash at beginning of period................................................... 10,806 1,079
----------------- ------------------
Cash at end of period......................................................... $11,461 $ 2,478
================= ==================
</TABLE>
See accompanying notes.
5
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IA CORPORATION I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements as included in the
Annual Report on Form 10-K for the year ended December 31, 1996. Certain
information and footnote disclosures normally included in audited financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. The consolidated results of operations for the
period ended March 31, 1997 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1997.
2. Net income (loss) per share
Net income (loss) per share applicable to common stockholders is computed using
the weighted average number of shares of common stock outstanding. Common
equivalent shares from stock options (using the treasury stock method) have been
included in the computation only when dilutive, except that pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued by the Company at prices below the initial public
offering price during the twelve month period prior to the Company's initial
public offering of its common stock have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method) through September 30, 1996. Per share information calculated on this
basis is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
1997 1996
-------------------
<S> <C> <C>
Net income (loss) per share applicable $ 0.07 $(0.02)
to common stockholders.................
Shares used in computing net income 12,157 6,499
(loss) per share (in thousands)........
</TABLE>
The pro forma calculation of net income (loss) per share presented in the
consolidated statements of operations is computed as described above and also
gives retroactive effect to the conversion of all outstanding shares of
convertible preferred stock and accrued dividends into common stock upon the
closing of the Company's initial public offering in November 1996. All of the
convertible preferred stock outstanding upon the completion of the initial
public offering was automatically converted into an aggregate of 2,973,117
shares of common stock.
6
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In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
------------------
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact would result in a $0.01 increase in
primary earnings per share for the quarter ended March 31, 1997. There is no
impact in primary earnings per share for the quarter ended March 31, 1996. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these quarters is not material.
7
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This report contains forward-looking statements that involve risks and
uncertainties, including statements regarding the Company's strategy, financial
performance, expense levels and revenue sources. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in July 1992, when the management of the
Company, in partnership with Warburg Pincus purchased certain assets and
liabilities of Litton Industries' Integrated Automation Division, a leading
system integrator with a primary focus on the aerospace industry and secondary
focus on the financial services and transportation industries. Following this
acquisition, the Company began its transition from a system integrator to a
provider of software development services and a developer of application
framework software products. The Company decided to de-emphasize the aerospace
market, to develop its transaction management platform into a stand-alone
software product, and to build a series of standard software application
products based upon its complex transaction management platform targeted
initially to the financial services industry. To date, a majority of the
Company's total revenues has been derived from the provision of services to
customers pursuant to large software development contracts. The Company's
objective is to increase the portion of the Company's total revenue derived from
software product sales. The Company was able to increase the amount of software
license revenue in each quarter of 1996, and the quarter ended March 31, 1997.
The Company currently sells two leading application framework software
products for advanced cash management services, CheckVision(R) and
RemitVision/TM/, which are built upon the Company's advanced, client/server
complex transaction management software platform, WorkVision/TM/. CheckVision is
designed to add new products and services to a commercial bank's check
processing business offerings, and RemitVision is designed to provide banks and
other remittance processors with the ability to combine high volume consumer
payment activity with complex accounts receivable processing in one production
environment. The Company has also invested in growing a sales and marketing
organization to sell its software products. At the same time, the Company has
continued to develop specific software solutions under application development
contracts for customers primarily in the financial services industry, which the
Company believes may be the basis for future software products.
During the transition from providing software development services to
developing and selling software products, which is still under way, a majority
of the Company's total revenues has been derived from the provision of services
to customers pursuant to large software development contracts, certain of which
provide the basis for the Company's application framework software products. The
Company recognizes revenue from software development contracts on the
percentage-of-completion basis. Service revenue as a percentage of total revenue
for 1996, 1995, and the quarter ended March 31, 1997 was
8
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48.0%, 57.9%, and 45.7%, respectively. In addition, the Company is transitioning
from selling hardware. Due in large part to these transitions, the Company did
not experience significant growth in total revenue in 1995 and 1994 and has only
recently begun to experience such growth in the year ended December 31, 1996 as
compared to the year ended December 31, 1995. To achieve revenue growth and
improve operating margins, the Company must continue to increase market
acceptance and sales of the Company's software products. As the Company becomes
increasingly reliant upon software product sales, it could experience a decline
in total revenues if service revenue declines more quickly than the Company can
increase revenue from software product sales. The Company must develop and
enhance its sales and marketing capabilities and software production and
distribution infrastructure as it continues the transition from a service
business to a software product business. There can be no assurance that the
Company will be successful in creating the necessary capabilities and
infrastructure in a timely manner or at all. Any significant failure by the
Company to manage the transition successfully would have a material adverse
effect on the Company's business, operating results and financial condition and
would create significant fluctuation in quarterly operating results.
Installation of the Company's software products requires the cooperation of
the Company's customers. To the extent the installation of the Company's
software products is delayed, the Company's recognition of revenue may be
delayed, which could have a material adverse effect on the Company's business,
operating results and financial condition. The Company has experienced in the
past and is currently experiencing product installation delays which have
resulted in strained customer relations. The Company has been successful in
resolving such issues in the past and is working to resolve the issues which it
is currently experiencing. However, there is no assurance that the Company will
be successful in resolving its current situation or that it will be successful
in resolving similar situations in the future. The failure to resolve the
current siutation or similar situations in the future could have an adverse
effect on the Company's operating results and could also adversely affect the
Company's ability to market its products.
The Company's total revenues are derived from software licenses, services,
maintenance and hardware. The Company licenses software to end users under non-
cancelable license agreements and provides services such as installation,
training and software maintenance. To date, the Company has provided its
software primarily under contracts requiring significant customization services.
Software license and service revenues from contracts requiring significant
customization services are recognized on the percentage-of-completion method
based on the ratio of incurred costs to total estimated costs. Actual costs and
gross margins on such contracts could differ from the Company's estimates and
such differences could be material to the financial statements. Software license
revenue for contracts not requiring significant customization services is
recognized when a product has been shipped and all significant contractual
obligations have been satisfied and the resulting receivable is deemed
collectible by management. Allowances for future estimated warranty costs are
provided at the time revenue is recognized. Maintenance revenue is recognized
ratably over the term of the related agreements, which in most cases is one
year.
At March 31, 1997, the Company had an accumulated deficit of approximately
$11.6 million. The Company achieved net income of approximately $327,000 for the
quarter ended March 31, 1995, and
9
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incurred losses during the remaining three quarters and for the year ended
December 31, 1995. While the Company was profitable in each quarter of 1996 and
for the quarter ended March 31, 1997, there can be no assurance that the Company
will have operating profits in any future period and recent operating results
should not be considered indicative of future financial performance. The Company
does not believe that the increase in license revenues from the quarter ended
March 31, 1996 to the quarter ended March 31, 1997 is necessarily indicative of
future license revenue growth.
10
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUES
License. License revenue is primarily derived from licenses of the Company's
-------
CheckVision, RemitVision, and WorkVision software products. License revenue
increased 183.0% to $2.5 million from $877,000 for the quarters ended March 31,
1997 and 1996, respectively. As a percentage of total revenues, license revenues
increased to 40.6% for the quarter ended March 31, 1997 as compared to 15.7% for
the quarter ended March 31, 1996. Total license revenues increased as a result
of an increase in the installed base of CheckVision and RemitVision products,
reflecting increased market awareness, and acceptance of the Company's products
in the marketplace.
Service. Service revenue has been comprised primarily of fees from software
-------
application development contracts, and to a lesser extent, fees from
installation services and training for the Company's CheckVision and RemitVision
products. Service revenue decreased 21.7% to $2.8 million from $3.6 million for
the quarters ended March 31, 1997 and 1996, respectively. As a percentage of
total revenues, service revenues decreased to 45.7% for the quarter ended March
31, 1997 as compared to 64.0% for the quarter ended March 31, 1996. The Company
believes the decrease in service revenue for the quarter ended March 31, 1997 is
the result of the implementation of its strategy to focus on product sales and
assisting customers in deploying the Company's software products, and a related
decrease in the amount of services performed pursuant to significant application
development contracts. Service revenue as a percentage of total revenues will
vary between periods due to changes in demand for the Company's services and
changes in the rate of growth in license revenue.
Maintenance. Maintenance revenue is generated primarily by software support
-----------
agreements that include telephone support, minor software upgrades, and in some
cases, third party support. Maintenance revenue increased 46.8% to $838,000 from
$571,000 for the quarters ended March 31, 1997 and 1996, respectively. As a
percentage of total revenues, maintenance revenue increased to 13.7% for the
quarter ended March 31, 1997 as compared to 10.2% for the quarter ended March
31, 1996. The growing installed base of CheckVision and RemitVision products has
resulted in a corresponding increase in demand for maintenance services.
Accordingly, the Company believes that fluctuations in the demand for its
CheckVision and RemitVision products could result in fluctuations of maintenance
revenue.
11
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Hardware. The Company did not record revenue for hardware sales for the
--------
quarter ended March 31, 1997. The Company does not expect to record significant
hardware revenue in the future as it has found alternate distribution channels
to support its customers.
COST OF REVENUES
License. Cost of license revenue increased 320.0% to $126,000 from $30,000
-------
for the quarters ended March 31, 1997 and 1996, representing 5.1% and 3.4% of
license revenues, respectively. Cost of license revenue increased due to
royalties payable to third parties on increased sales of the Company's
RemitVision product. The cost of license revenue as a percentage of license
revenue may increase in the future if the Company's strategy of increasing
revenue from software products developed under software application framework
development contracts is successful and associated royalties become due.
Service. Cost of service revenue is primarily comprised of employee-related
-------
costs and fees for third party consultants incurred in providing installation,
training and development services. Cost of service revenue decreased 23.2% to
$1.9 million from $2.4 million for the quarters ended March 31, 1997 and 1996,
representing 66.5% and 67.8% of service revenues, respectively. The decrease in
cost of service revenue was due to the related decrease in service revenue in
the quarter ended March 31, 1997.
Maintenance. Cost of maintenance revenue is primarily comprised of employee-
-----------
related costs incurred in providing customer support and also includes the costs
of services provided by third parties for hardware-related maintenance for
certain of the installed base of customers. Cost of maintenance revenue declined
1.4% to $349,000 from $354,000 for the quarters ended March 31, 1997 and 1996,
representing 41.6% and 62.0% of maintenance revenues, respectively. Cost of
maintenance revenue remained steady for the quarters ended March 31, 1997 and
1996, respectively, despite an increase in maintenance revenues for the quarter
ended March 31, 1997 due to economies of scale as a result of revenue growth.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses consist primarily of
-------------------
salaries, commissions, and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment, promotional expenses, and
advertising. Sales and marketing expenses increased 13.5% to $1.2 million from
$1.0 million for the quarters ended March 31, 1997 and 1996, respectively. These
increases reflect a greater level of commissions, and increased costs associated
with promotional activities. Sales and marketing expenses represent 18.8% and
18.2% of total revenues for the quarters ended March 31, 1997 and 1996,
respectively.
12
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General and administrative. General and administrative expenses decreased
--------------------------
6.5% to $589,000 from $630,000 in the quarters ended March 31, 1997 and 1996,
respectively, due to lower expenses for employee incentives. General and
administrative expenses represent 9.6% and 11.3% of total revenues for the
quarters ended March 31, 1997 and 1996, respectively. To the extent that the
Company is successful in expanding its operations and as a result of becoming a
public entity, general and administrative expense is expected to increase in
absolute dollars.
Product development. Product development expenses consist primarily of
-------------------
salaries, other personnel-related expenses, and depreciation of development
equipment. The Company believes that a significant level of investment for
product development is required to remain competitive. Product development
expenses increased 135.5% to $1.3 million from $547,000 for the quarters ended
March 31, 1997 and 1996, respectively. These increases are primarily
attributable to personnel costs related to the development of RemitVision, and
to a lesser extent, new software products. Product development expenses
represent 21.1% and 9.8% of total revenues for the quarters ended March 31, 1997
and 1996, respectively. The Company anticipates that it will continue to devote
substantial resources to product development and product development costs will
increase in absolute dollars in the future and may increase as a percentage of
total revenues.
Interest income. Interest income represents interest earned by the Company on
---------------
its cash and cash equivalents. Interest income increased to $131,000 from
$17,000 for the quarters ended March 31, 1997 and 1996, respectively. These
increases are primarily a result of interest income related to the proceeds from
the Company's initial public offering completed in November 1996.
Provision for income taxes. The effective tax rate for the quarter ended
--------------------------
March 31, 1997 was 4%. The Company expects its fiscal 1997 effective tax rate to
be approximately 4%. This rate differs from the federal statutory rate primarily
due to the utilization of net operating loss carryovers and tax credits. This
rate could change based on changes in the U.S. tax law.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed an initial public offering of common stock in November
1996 with net proceeds of $10.6 million. The common stock is trading on the
Nasdaq National Market under the symbol IACP.
The Company generated cash of $589,000 from operating activities for the three
months ended March 31, 1997, a decrease of $446,000 from cash generated from
operating activities for the three months
13
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ended March 31, 1996. For the three months ended March 31, 1997, cash provided
by operations was mainly attributable to profitability, a decrease in accounts
receivable, an increase in accounts payable offset by a decrease in accrued
liabilities due to payments of accrued IPO expenses. For the three months ended
March 31, 1996, cash provided by operations was mainly attributable to changes
in working capital as a result of the increase in current liabilities and
customer deposits, partially offset by an increase in accounts receivable, and
to profitability.
The Company's investing activities have consisted primarily of purchases of
capital equipment. Capital expenditures totaled $132,000 for the three months
ended March 31, 1997, compared to $152,000 for the three months ended March 31,
1996. Capital expenditures consisted of purchases of computer equipment and
office furniture to support the Company's growing employee base. The Company
currently has no significant capital spending requirements or purchase
commitments other than a non-cancelable operating lease for its facilities.
At March 31, 1997, the Company had $11.5 million in cash and cash equivalents
and $15.1 million in working capital. The Company has a $2.0 million bank line
of credit agreement that expires in May 1998. Under the terms of the credit
agreement, the Company may borrow up to $2.0 million under a revolving line of
credit, which includes up to $500,000 in commercial and standby letters of
credit. There were no borrowings under this line of credit at March 31, 1997.
The line of credit is secured by substantially all of the Company's assets.
Advances under the line of credit are limited to 80% of eligible billed accounts
receivable. Borrowings accrue interest at the bank's prime rate plus .05% (9.0%
at March 31, 1997). The line of credit contains financial and non-financial
covenants which the Company was in compliance with at March 31, 1997.
The Company believes that its existing cash and cash equivalents, together
with cash flow from operations and available borrowings under its revolving line
of credit, will be sufficient to meet its working capital requirements for at
least the next twelve months.
14
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RISK FACTORS
History of Operating Losses; No Assurance of Profitability. Through 1995, the
----------------------------------------------------------
Company has incurred significant net losses of $4.0 million, $3.9 million and
$1.3 million for 1993, 1994 and 1995, respectively. At March 31, 1997, the
Company had an accumulated deficit of approximately $11.6 million. The Company
achieved net income of approximately $327,000 for the quarter ended March 31,
1995, and incurred losses during the remaining three quarters and for the year
ended December 31, 1995. While the Company achieved net income of approximately
$2.3 million for the twelve months ended December 31, 1996, and $850,000 for the
quarter ended March 31, 1997, there can be no assurance that the Company will
have operating profits in any future period, and recent operating results should
not be considered indicative of future financial performance.
Variability of Quarterly Operating Results. The Company's quarterly operating
------------------------------------------
results have varied in the past, and the Company expects quarterly operating
results to vary significantly in the future. The Company's revenues and
operating results are difficult to forecast and could be materially adversely
affected by many factors, some of which are outside the control of the Company,
including, among others, the relatively long sales and implementation cycles of
the Company's software products, the variable size and timing of individual
license transactions, the timing of revenue recognized under the percentage-of-
completion method, increased competition, the timing of new product releases by
the Company and its competitors, market acceptance of the Company's software
products, delay or deferral of customer implementation of the Company's software
products, software defects or other quality problems with the Company's software
products, changes in the Company's and its competitors' pricing policies, the
mix of license and service revenue, budgeting cycles of the Company's customers,
the introduction of indirect sales into the Company's revenue mix which could
result in lower gross margins, changes in operating expenses, changes in Company
strategy, personnel changes and general economic factors. In addition, the
Company is in the process of transitioning from providing software development
services to developing and selling software products, which entails a number of
risks, including potential declines in revenue and the need to develop the
appropriate sales, marketing and software production and distribution
infrastructure. Further, because the Company's orders range in size from several
hundred thousand dollars to several million dollars, any deferral or
cancellation of an expected new order, termination of, or delay in completion
of, an existing large application development contract could have a significant
impact on quarterly operating results. For example, the Company is currently
working on a large application development contract for several million dollars.
While the majority of the revenue pursuant to this contract has been recognized,
the Company has experienced delays with respect to this contract, which to date
have been resolved, however, any future delay in completing the Company's
obligations under this contract on the anticipated schedule would have an
adverse effect on the Company's operating results in the next few quarters and
could have an adverse effect on the Company's ability to market its products in
the future. In addition, in the event of any downturn in any potential
customer's business or the economy in general, purchases of the Company's
software products may be deferred or canceled. The Company has had operating
profits only in the quarters ended March 31, 1995, 1996, and
15
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1997, June 30, 1996, September 30, 1996 and December 31, 1996, and there can be
no assurance that the Company will have operating profits in future quarters or
on an annual basis.
It typically takes the Company four to five months to install CheckVision
after an order is placed and the Company anticipates a six month to one year
installation period for RemitVision. Installation of the Company's software
products requires the cooperation of the Company's customers. To the extent the
installation of the Company's software products is delayed, the Company's
recognition of revenue may be delayed, which could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company has experienced in the past and is currently experiencing product
installation delays which have resulted in strained customer relations. The
Company has been successful in resolving such issues in the past and is working
to resolve the issues which it is currently experiencing. However, there is no
assurance that the Company will be successful in resolving its current situation
or that it will be successful in resolving similar situations in the future. The
failure to resolve the current situation or similar situations in the future
could have an adverse effect on the Company's operating results and could also
adversely effect the Company's ability to market its products. The Company's
expense levels are based in part on its expectations of future revenues. If
revenue is below expectations, net income may be disproportionately affected
because a significant portion of the Company's expenses does not vary with
revenues. In the quarter ended March 31, 1997, the Company's revenues were lower
than expected due to a lengthy sales cycle, but margins remained relatively
constant. The Company's future operating results could be adversely affected if
revenues do not meet the Company's expectations. The Company may also choose to
reduce prices, increase spending in response to competition or to pursue new
market opportunities. In particular, the Company's operating margins may be
materially adversely affected in the future if new competitors, technological
advances by existing competitors, other competitive factors, or the Company's
failure to continue to obtain software development contracts require the Company
to invest significantly greater resources in software product development
efforts.
Because of the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future performance.
Further, it is possible that in future periods the Company's operating results
may be below the expectations of public market analysts and investors. In such
an event, the price of the Company's Common Stock would likely be materially
adversely affected. See "--Risks Associated with Transition to Software Product
Business," "--Dependence on Growth of Market for Client/Server Applications
Software in the Financial Services Industry," and "--Lengthy Sales Cycle".
Risks Associated with Transition to Software Product Business. When the
-------------------------------------------------------------
Company was formed in 1992, the Company shifted its strategy to focus
increasingly on deriving revenue from software products rather than from system
integration services. During the transition from providing software development
services to developing and selling software products, which is still under way,
a majority of the Company's total revenues has been derived from the provision
of services pursuant to large software development contracts, certain of which
provide the basis for the Company's software products. The Company recognizes
revenue from software development contracts on the percentage-of-completion
basis. Service revenue as a percentage of total revenues for 1996 and 1995 was
48.0% and 57.9%, respectively, and
16
<PAGE>
45.7% and 64.0% for the three months ended March 31, 1997 and 1996,
respectively. To achieve revenue growth and improve operating margins, the
Company must continue to increase market acceptance and sales of the Company's
software products. As the Company becomes increasingly reliant upon software
product sales, it could experience a decline in total revenues if service
revenue declines more quickly than the Company can increase revenue from
software product sales. The Company must develop and enhance its sales and
marketing capabilities and software production and distribution infrastructure
as it continues the transition from a service business to a software product
business. There can be no assurance that the Company will be successful in
creating the necessary capabilities and infrastructure in a timely manner or at
all. Any significant failure by the Company to manage the transition
successfully would have a material adverse effect on the Company's business,
operating results and financial condition and would create significant
fluctuation in quarterly operating results.
Dependence on Development Services. To date, the majority of the Company's
----------------------------------
total revenues has been derived from large application development contracts.
Although the Company's strategy is to reduce the percentage of its total
revenues from such contracts over time, the Company's total revenues for the
foreseeable future will continue to be substantially dependent upon its ability
to perform services under existing contracts and to attract new customers to
enter into such contracts. Furthermore, the Company has historically used the
research derived from its software development contracts as the basis for its
software products and anticipates that any future software products will arise
from new or existing software development contracts. To the extent that the
Company is unable to complete work on its existing software development
contracts or to attract new customers to enter into such contracts, the
Company's ability to develop new software products will be materially adversely
affected. In addition, to the extent the Company is required to develop future
software products without software development contracts, the Company's
expenditures for software product development will have to increase, which may
materially adversely affect operating margins. There can be no assurance that
the Company will be able to successfully complete work on its existing software
development contracts, that it will be able to attract new customers to enter
into software development contracts or that it will be able to develop new
software products based on the research undertaken in connection with new or
existing software development contracts, and any such failure would have a
material adverse effect on the Company's business, operating results and
financial condition. To the extent that the Company does develop new software
products based upon technology developed in connection with software development
contracts, the Company may have to expend substantial additional financial
resources on software product development, and there can be no assurance that
such software products will achieve market acceptance. In addition, upon
commercialization of any such software products, the Company has agreed under
certain circumstances in the past, and may in the future agree to pay royalties
to repay development expenses to the customer for whom the development services
were undertaken, and any such payments could have a material adverse effect on
the Company's business, operating results and financial condition. For example,
the Company recorded $126,000 in RemitVision royalties to third parties for the
three months ended March 31, 1997.
17
<PAGE>
Reliance on Banking Industry; Need to Penetrate Additional Segments of the
--------------------------------------------------------------------------
Financial Services Industry. Currently, a substantial majority of the Company's
- ---------------------------
total revenues results from services and licenses provided to banks. The
Company's future operating results will depend in part on its ability to
penetrate additional segments of the financial services industry such as the
insurance, credit card and brokerage segments. While the Company may devote
substantial resources to penetrate these and other markets, there can be no
assurance that the revenues generated from this effort, if any, will exceed the
cost of such efforts. To be successful in expanding its product offerings to
market segments other than the banking industry, the Company will be required to
create new software products and to modify its existing software products. There
can be no assurance that it will be able to create or modify such software
products effectively or that such software products, if successfully created or
modified, will achieve market acceptance. To the extent that the Company is
unable to penetrate new markets, its future financial condition will be
dependent upon its ability to further penetrate the banking industry. If the
Company is unable to adapt its software products, or its sales and marketing
efforts to meet the needs of new markets, or if the Company is unsuccessful in
its efforts to further penetrate the banking industry, the Company's business,
operating results and financial condition could be materially adversely
affected.
Lengthy Sales Cycle. The Company's sales cycle is typically six to twelve
-------------------
months and varies substantially from customer to customer. The Company believes
the purchase of its software products is discretionary and represents a
strategic decision requiring a significant capital investment by its customers.
As a result, purchase of the Company's software products generally involves a
significant commitment of management attention and resources by prospective
customers and requires multiple approvals. Accordingly, the Company's sales are
subject to a long approval process. The Company's business, operating results
and financial condition have been in the past, and could be in the future,
materially adversely affected if customers delay, reduce or cancel orders. In
the quarter ended March 31, 1997, the Company's revenues were lower than
expected due to a lengthy sales cycle, but margins remained relatively constant.
The Company's future operating results could be adversely affected if revenues
do not meet the Company's expectations. Such delays, reductions or cancellations
may contribute to significant fluctuations of quarterly operating results in the
future and may adversely affect such results.
Customer Concentration. To date, the Company has been highly dependent on a
----------------------
concentrated customer base. In 1993, 1994, 1995 and 1996, the Company's two
largest customers provided 48%, 39%, 45% and 34% of the Company's total
revenues, respectively. For the three months ended March 31, 1997, three
customers provided 16%, 12%, and 11%, respectively, of the Company's total
revenues. The Company's reliance on a concentrated base of customers has been
due primarily to the Company's dependence on large software development
contracts. The Company intends to continue to seek customer support for
strategic development projects that may yield additional software products and
expects that it may continue to experience a dependence on a few significant
customers for the foreseeable future. If the Company is unable to establish
relationships with additional significant customers and if the Company is unable
to increase revenues derived from the sale of software products
18
<PAGE>
as a percentage of total revenues, the Company's business, operating results and
financial condition could be materially adversely affected.
Rapid Technological Change and Dependence on New Software Products. The
------------------------------------------------------------------
market for the Company's software products is characterized by rapid
technological developments, evolving industry standards and rapid changes in
customer requirements. The introduction of competitive software products
responding to these trends could render the Company's existing software products
obsolete and unmarketable. As a result, the Company's success depends upon its
ability to continue to enhance its existing software products, respond to
changing customer requirements and develop and introduce in a timely manner new
software products that keep pace with technological developments and emerging
industry standards. Customer requirements include, but are not limited to,
operability across distributed heterogeneous and changing hardware platforms,
operating systems, relational databases and networks. For example, as certain of
the Company's customers start to utilize Microsoft NT or other emerging
operating systems on server platforms, it may be necessary for the Company to
enhance its software products to operate on such platforms in order to maintain
its competitive ability. There can be no assurance that the Company's software
products will achieve market acceptance, or will adequately address the changing
needs of the marketplace, or that the Company will be successful in developing
and marketing enhancements to its existing software products, or new software
products incorporating new technology on a timely basis. If the Company is
unable to develop and introduce new software products, or enhancements to
existing software products, in a timely manner to adequately address changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected.
The Company has a number of ongoing software development projects. The Company
expects to release enhancements to its CheckVision, RemitVision and WorkVision
software products. The Company's objective is to increase the portion of the
Company's total revenues derived from these software products. There can be no
assurance the Company will release these enhancements in a timely manner or at
all, or that the features these enhanced software products include will be
features required to achieve market acceptance. The Company's product
development programs have been delayed in the past and the Company has recently
experienced delays in the development of RemitVision. The Company has not
completed an installation of the full RemitVision product. Accordingly, the
Company has no experience with installed versions of RemitVision, and there can
be no assurance that problems with the implementation of RemitVision at customer
sites will not arise which cannot be successfully resolved. The inability of the
Company to complete and successfully install RemitVision would materially
adversely affect the Company's business, operating results and financial
condition. The failure of the Company's software products to achieve broader
market acceptance and increased sales could have a material adverse effect on
the Company's business, operating results and financial condition.
Additional Risks. For a discussion of additional risks and uncertainties that
----------------
could affect the Company's business, operating results or financial condition,
please see the Company's Annual Report on Form 10-K, "Item 1, Business--Risk
Factors."
19
<PAGE>
IA CORPORATION I
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
The following exhibits are furnished along with this Form 10-Q
Quarterly Report for the period ended March 31, 1997:
11.1 Statement of Computation of Net Income (Loss) per Share
27 Financial Data Schedule
b. Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1997.
20
<PAGE>
IA CORPORATION I
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IA CORPORATION I
Date: May 9, 1997 /s/ David M. Winkler
-------------------------------------------
David M. Winkler
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE>
IA CORPORATION I
EXHIBIT INDEX
Exhibit No.
11.1 Statement of Computation of Net Income (Loss) per Share
27 Financial Data Schedule
22
<PAGE>
IA CORPORATION I
COMPUTATION OF NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
AND
PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
-------------- -----------
<S> <C> <C>
HISTORICAL:
Net income(loss) $ 850,000 $ (161,000)
Weighted average common shares 11,053,158 5,640,656
outstanding
Common stock equivalents (using
treasury stock method) 1,104,050 --
Common and common stock options issued
during the twelve month period prior
to the initial public offering in
accordance with Staff Accounting -- 858,641
Bulletin No. 83 (using the treasury
stock method)
-------------- -----------
12,157,208 6,499,297
Net income (loss) per share applicable ============== ===========
to common stockholders $ 0.07 $ (0.02)
============== ===========
PRO FORMA:
Net income $ 850,000 $ 132,000
Historical weighted average shares 12,157,208 6,499,297
outstanding
Common stock equivalents (using
treasury stock method) -- 610,437
Effect of assumed conversion of -- 2,973,117
preferred stock
============== ===========
12,157,208 10,082,851
============== ===========
Pro forma net income per share $ 0.07 $ 0.01
============== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,461
<SECURITIES> 0
<RECEIVABLES> 6,958
<ALLOWANCES> (46)
<INVENTORY> 0
<CURRENT-ASSETS> 656
<PP&E> 1,822
<DEPRECIATION> (1,306)
<TOTAL-ASSETS> 19,591
<CURRENT-LIABILITIES> 3,957
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> 15,522
<TOTAL-LIABILITY-AND-EQUITY> 19,591
<SALES> 0
<TOTAL-REVENUES> 6,116
<CGS> 0
<TOTAL-COSTS> 2,333
<OTHER-EXPENSES> 3,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 885
<INCOME-TAX> 35
<INCOME-CONTINUING> 850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 850
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
