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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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, 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 No. 00021539
IA CORPORATION I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 94-3161772
<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
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 11,534,829 as of May 12, 1998.
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IA CORPORATION I
REPORT ON FORM 10-Q
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets........................................ 3
Condensed Statements of Operations.............................. 4
Condensed Statements of Cash Flows.............................. 5
Notes to Condensed Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations...........................................
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 16
Signatures................................................................ 17
Exhibit Index............................................................. 18
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA CORPORATION I
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 7,802 $ 7,058
Short-term investments.............................. 1,966 2,000
Receivables, including unbilled receivables of
$4,193 at March 31, 1998 and $4,593 at December 31,
1997, less allowance for doubtful accounts of $46.. 8,516 8,867
Other current assets ............................... 704 748
-------- --------
Total current assets.............................. 18,988 18,673
Property and equipment, net........................... 642 615
-------- --------
$ 19,630 $ 19,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 350 $ 343
Accrued compensation and related liabilities........ 1,578 1,400
Deferred revenues................................... 1,448 1,402
Other accrued liabilities........................... 606 520
-------- --------
Total current liabilities......................... 3,982 3,665
Stockholders' equity:
Common shares, $0.01 par value:
Authorized shares -- 35,000,000
Issued and outstanding shares -- 9,075,896 at March
31, 1998
and 8,866,460 at December 31, 1997................ 91 89
Class B Common shares, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 2,417,112......... 25 25
Additional paid-in capital.......................... 27,771 27,563
Accumulated deficit................................. (12,117) (11,923)
Deferred compensation............................... (122) (131)
-------- --------
Total stockholders' equity........................ 15,648 15,623
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$ 19,630 $ 19,288
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</TABLE>
See accompanying notes
3
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IA CORPORATION I
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31,
--------------
1998 1997
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<S> <C> <C>
Revenues:
License.................................................... $1,646 $2,482
Service.................................................... 2,334 2,796
Maintenance................................................ 966 838
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Total revenues........................................... 4,946 6,116
Cost of revenues:
License.................................................... 84 126
Service.................................................... 1,283 1,858
Maintenance................................................ 565 349
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Total cost of revenues................................... 1,932 2,333
Operating expenses:
Sales and marketing........................................ 1,218 1,152
General and administrative................................. 723 589
Product development........................................ 1,379 1,288
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Total operating expenses................................. 3,320 3,029
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Operating income (loss)...................................... (306) 754
Other income:
Interest income and other.................................. 112 131
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Income (loss) before taxes................................... (194) 885
Provision for income taxes................................... -- 35
------ ------
Net income (loss)............................................ $ (194) $ 850
====== ======
Basic net income (loss) per share............................ $(0.02) $ 0.08
====== ======
Diluted net income (loss) per share.......................... $(0.02) $ 0.07
====== ======
Weighted common shares outstanding........................... 11,477 11,053
Diluted common shares outstanding............................ 11,477 12,157
</TABLE>
See accompanying notes
4
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IA CORPORATION I
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (194) $ 850
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 84 75
Amortization of deferred compensation..................... 9 10
Changes in operating assets and liabilities:
Receivables............................................. 351 301
Other current assets.................................... 44 (3)
Accounts payable........................................ 7 (278)
Accrued compensation and related liabilities............ 178 (75)
Deferred revenues....................................... 46 (258)
Other accrued liabilities............................... 86 (33)
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Net cash provided by operating activities................... 611 589
INVESTING ACTIVITIES
Purchases of property and equipment......................... (111) (132)
Purchases of short-term investments......................... (1,966) --
Maturities of short-term investments........................ 2,000 --
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Net cash used in investing activities....................... (77) (132)
FINANCING ACTIVITIES
Net proceeds from exercise of stock options................. 13 --
Net proceeds from employee stock purchase plan.............. 197 198
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Net cash provided by financing activities................... 210 198
Net increase in cash and cash equivalents................... 744 655
Cash and cash equivalents at beginning of period............ 7,058 10,806
------- -------
Cash and cash equivalents at end of period.................. $ 7,802 $11,461
======= =======
</TABLE>
See accompanying notes
5
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IA CORPORATION I
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The unaudited condensed 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 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, 1997. 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 results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ending December 31, 1998.
2. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share incorporates the incremental shares issuable upon the assumed
exercise of stock options when such effect is dilutive.
Basic and diluted net income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss)................................... $ (194,000) $ 850,000
Denominator for basic net income (loss) per share--
weighted average common shares outstanding........... 11,476,795 11,053,158
Effect of dilutive securities:
Common stock options................................ -- 1,104,050
----------- -----------
Dilutive potential common shares.................... -- 1,104,050
----------- -----------
Denominator for diluted net income (loss) per share--
adjusted weighted average common shares and assumed
conversions.......................................... 11,476,795 12,157,208
=========== ===========
Basic net income (loss) per share..................... $ (0.02) $ 0.08
=========== ===========
Diluted net income (loss) per share................... $ (0.02) $ 0.07
=========== ===========
</TABLE>
3. REVENUE RECOGNITION
On January 1, 1998, the Company adopted Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2) which superseded Statement of
Position 91-1, "Software Revenue Recognition" (SOP 91-1). The implementation
of SOP 97-2 did not have a material adverse affect on the Company's business
or on the Company's reported revenues and earnings for the three months ended
March 31, 1998. In accordance with SOP 97-2, revenue from product licensing is
recognized when the product is delivered, all significant contractual
obligations have been satisfied and the resulting receivable is deemed
collectible by management.
In March 1998, Statement of Position No. 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition" (SOP 98-4) was
issued. SOP 98-4 defers for one year the application of certain
6
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IA CORPORATION I
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(unaudited)
provisions of SOP 97-2. These provisions limit what is considered vendor-
specific objective evidence of the fair value of the various elements in a
multiple element arrangement. All other provisions of SOP 97-2 remain in
effect.
4. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," as of January 1, 1998. SFAS No. 130
establishes new rules for the reporting of comprehensive income and its
components, however, it has no impact on the Company's net income or
stockholders' equity. There is no difference between comprehensive income
(loss) and net income (loss) for the three months ended March 31, 1998 and
1997.
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 E.M. Warburg, Pincus & Co., LLC, 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 1996 and 1997.
The Company currently sells two leading application framework software
products, CheckVision(R) and RemitVision(R), which are built upon the
Company's transaction management and information archive platform. CheckVision
is designed to maximize the value of archived transaction information over the
entire useful life of such information, 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 the three months ended March 31, 1998, and the
years ended December 31, 1997 and 1996, was 47.2%, 50.5% and 48.0%,
respectively. In addition, the Company has transitioned out of selling
hardware. Due in large part to these transitions, and in part to delays in its
RemitVision product, the Company experienced a decline in total revenue in
1997. The Company recorded lower revenues for the three months ended March 31,
1998 than the comparable period in 1997. 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, software production and
distribution infrastructure as it continues the transition from a service
provider 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.
8
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Installation of the Company's software products requires cooperation between
the Company and its 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. For example, the Company has
experienced product installation delays, which have resulted in the Company
having lower than expected revenues and profits from RemitVision customers in
1997 and for the three months ended March 31, 1998. The failure to resolve
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 total revenues are derived from software licenses, services,
and maintenance. The Company licenses software to end-users under non-
cancelable license agreements and provides services such as installation,
training and software maintenance. Software license 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. 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. An
allowance 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.
At March 31, 1998, the Company had an accumulated deficit of approximately
$12.1 million. The Company reported a net loss of approximately $194,000 for
the three months ended March 31, 1998, and net income of approximately
$850,000 for the three months ended March 31, 1997. There can be no assurance
that the Company will have operating profits in any future period and
profitable operating results recorded in 1997 should not be considered
indicative of future financial performance.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES
License. License revenue is primarily derived from licenses of the Company's
CheckVision, RemitVision, and WorkVision software products. License revenue
decreased 33.7% to $1.6 million from $2.5 million for the three months ended
March 31, 1998 and 1997, respectively. As a percentage of total revenues,
license revenues decreased to 33.3% for the three months ended March 31, 1998
as compared to 40.6% for the three months ended March 31, 1997.
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 16.5% to $2.3 million from
$2.8 million for the three months ended March 31, 1998 and 1997, respectively.
The decrease in service revenue for the three months ended March 31, 1998 is
the result of the implementation of the Company's strategy to focus on product
sales and assisting customers in deploying its software products, thus
decreasing the amount of services performed pursuant to significant
application development contracts. As a percentage of total revenues, service
revenues increased to 47.2% for the three months ended March 31, 1998 as
compared to 45.7% for the three months ended March 31, 1997. 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 15.3% to
$966,000 from $838,000 for the three months ended March 31, 1998 and 1997,
respectively. As a percentage of total revenues, maintenance revenue increased
to 19.5% for the three months ended March 31,
9
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1998 as compared to 13.7% for the three months ended March 31, 1997.
Maintenance revenue increased primarily due to the growing base of installed
CheckVision products resulting in corresponding increase in demand for
maintenance service. Accordingly, the Company believes that fluctuations in
the demand for its CheckVision and RemitVision products could result in
fluctuations of maintenance revenue.
COST OF REVENUES
License. Cost of license revenue decreased 33.3% to $84,000 from $126,000
for the three months ended March 31, 1998 and 1997, representing 5.1% of
license revenues for the three months ended March 31, 1998 and 1997. Cost of
license revenue decreased as royalties payable to third parties decreased due
to lower revenues for RemitVision. The cost of license revenue as a percentage
of license revenue is expected to increase in the future if the Company's
strategy of increasing revenue from software products developed under software
applications 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 30.9% to
$1.3 million from $1.9 million for the three months ended March 31, 1998 and
1997, representing 55.0% and 66.5% of service revenues, respectively. The
decrease in cost of service revenue for the three months ended March 31, 1998
was due to a decrease in service revenues.
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
increased 61.9% to $565,000 from $349,000 for the three months ended March 31,
1998 and 1997, representing 58.5% and 41.6% of maintenance revenues,
respectively. The cost of maintenance revenue increase resulted from increased
demand for maintenance services for new products coupled with supporting a
growing base of installed CheckVision products.
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 5.7% to $1.2 million from
$1.2 million for the three months ended March 31, 1998 and 1997, respectively.
The increase is a result of additional personnel in the three months ended
March 31, 1998. Sales and marketing expenses represent 24.6% and 18.8% of
total revenues for the three months ended March 31, 1998 and 1997,
respectively.
General and administrative. General and administrative expenses increased
22.8% to $723,000 from $589,000 in the three months ended March 31, 1998 and
1997, respectively, as a result of increased personnel expenses coupled with
executive recruiting expenses. General and administrative expenses represent
14.6% and 9.6% of total revenues for the three months ended March 31, 1998 and
1997, respectively.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expenses
increased 7.1% to $1.4 million from $1.3 million for the three months ended
March 31, 1998 and 1997, 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 27.9% and 21.1% of total revenues for the three months ended March
31, 1998 and 1997, respectively. The Company intends to continue to invest in
product development to enhance current and develop new software products to
remain competitive and increase revenues. In particular, to the extent the
Company is required to develop future applications without development
contracts, the Company's expenditures for product development may increase.
Interest income. Interest income represents interest earned by the Company
on its cash, cash equivalents and short-term investments. Interest income
decreased to $112,000 from $131,000 for the three months ended
10
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March 31, 1998 and 1997, respectively. The decrease is primarily a result of a
decrease in cash and investment balances.
Provision for income taxes. The Company did not record a provision for
income taxes for the three months ended March 31, 1998. A tax expense of 4.0%
was recorded for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash of $611,000 from operating activities for the
three months ended March 31, 1998, an increase of $22,000 from cash generated
from operating activities for the three months ended March 31, 1997. For the
three months ended March 31, 1998, cash provided by operations was mainly
attributable to changes in working capital due to a decrease in accounts
receivable and increases in accruals and customer deposits. For the three
months ended March 31, 1997, cash provided by operations was mainly
attributable to net income.
The Company's investing activities have consisted primarily of purchases of
short-term investments and capital equipment. Capital expenditures totaled
$111,000 for the three months ended March 31, 1998, as compared to $132,000
for the three months ended March 31, 1997. 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, 1998, the Company had $9.8 million in cash, cash equivalents
and short-term investments and $15.0 million in working capital. The Company
has a bank line of credit agreement that expires in May 1998. The Company
intends to extend the line of credit under similar terms and conditions. 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
letters of credit. There were no borrowings under this line of credit at March
31, 1998. 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 .5% (9% at March 31, 1998). The line of credit, which contains
financial and non-financial covenants, is secured by substantially all of the
Company's assets.
The Company believes that its existing cash, cash equivalents and short-term
investments, 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 12 months.
RISK FACTORS
History of Operating Losses; No Assurance of Profitability. The Company has
incurred significant net losses since inception. At March 31, 1998, the
Company had an accumulated deficit of approximately $12.1 million. The Company
has had operating profits only in the quarters ended March 31, 1995, 1996 and
1997, June 30, 1996, September 30, 1996 and 1997, and December 31, 1996 and
1997. There can be no assurance that the Company will have operating profits
in future quarters or on an annual basis.
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
11
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Company's customers, the impact of the current consolidations in the banking
industry which may slow sales cycle, 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 may have a significant impact on
quarterly operating results. For example, the Company had lower than
anticipated revenues and profits from RemitVision customers in 1997 and for
the three months ended March 31, 1998. 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 1997, June 30, 1996, September 30, 1996 and 1997, and December 31,
1996 and 1997, and there can be no assurance that the Company will have
operating profits in future quarters or on an annual basis.
Due primarily to hardware requirements and customer site preparation, there
is typically a three to four months period between when a CheckVision customer
order is placed and the commencement of the Company's installation services.
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. In the past, the Company
has experienced product installation delays, which resulted in strained
customer relations. To date, the Company has been successful in resolving any
and all such issues. However, there is no assurance that the Company will
continue to be successful in similar situations. The failure to resolve
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. 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 1997 and 1996 was 50.5% and 48.0%, respectively, and 47.2%
and 45.7% for the three months ended March 31, 1998 and 1997, respectively. To
achieve revenue growth and improve operating margins, the
12
<PAGE>
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 have 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.
Reliance on Banking Industry; Need to Penetrate Additional Segments of the
Financial Services Industry. Currently, a substantial majority of the
Company's total revenue 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
brokerage, insurance and credit card 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. The current focus of the banking industry on mergers and
on year 2000 issues may impede the Company's ability to further penetrate this
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.
13
<PAGE>
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. In addition, sales
cycle could be impacted by current consolidations in the banking industry.
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. 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 1997, 1996 and 1995, the Company's two largest
customers provided 24%, 34% and 45% of the Company's total revenue,
respectively. For the three months ended March 31, 1998, three customers
provided 11%, 10% and 10%, respectively, of the Company's total revenues. For
the three months ended March 31, 1997, three customers provided 16%, 12% and
12%, 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 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 more of the Company's customers start to utilize
Microsoft NT or adopt other emerging operating systems on server platforms, it
may be necessary for the Company to optimize the operation of the Company's
software products 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 and RemitVision
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 had lower
than anticipated profits due to delays in RemitVision contracts. The inability
of the Company to complete and successfully install upgraded versions of
RemitVision would materially adversely affect the Company's business,
operating results and financial condition. The failure of the Company's
14
<PAGE>
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. See "--Year 2000 Compliance".
Year 2000 Compliance. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If the Company's internal
systems do not correctly recognize date information when the year changes to
2000, there could be an adverse impact on the Company's operations. The
Company has completed an assessment and expects to purchase enhanced software
for its internal computer systems, which is expected to be Year 2000
compliant. The new software is expected to be implemented by December 31,
1998. The Company is contacting its critical suppliers of products and
services to determine that such suppliers' operations and the products and
services they provide to the Company are Year 2000 capable. There can be no
assurance that the failure of one of the Company's suppliers to ensure
appropriate Year 2000 capability would not have an adverse effect on the
Company. The Company has also assessed the capability of its products sold to
customers and believes that the likelihood of a material adverse impact due to
contingencies related to the Year 2000 issue for the product it has sold is
remote. There can be no assurance, however, that the Company's software
products contain all necessary software for Year 2000 compatibility. If any of
the Company's licensees experience Year 2000 problems, such licensees could
assert claims for damages against the Company. Any such litigation could
result in substantial costs and diversion of the Company's resources, even if
ultimately decided in favor of the Company. In addition, many companies are
expending significant resources to correct their software systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase new software products such as those offered by the Company. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results from operations.
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."
15
<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 three months ended March 31, 1998:
<TABLE>
<C> <S>
27 Financial Data Schedules
</TABLE>
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1998.
16
<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
<TABLE>
<S> <C>
Date: May 15, 1998 /s/ David M. Winkler
--------------------
</TABLE>
David M. Winkler
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
17
<PAGE>
IA CORPORATION I
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
<C> <S>
27 Financial Data Schedules
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997<F1>
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 7,802 11,461
<SECURITIES> 1,966 0
<RECEIVABLES> 8,562 7,004
<ALLOWANCES> 46 46
<INVENTORY> 0 0
<CURRENT-ASSETS> 18,988 19,075
<PP&E> 2,270 1,822
<DEPRECIATION> 1,628 1,306
<TOTAL-ASSETS> 19,630 19,591
<CURRENT-LIABILITIES> 3,982 3,957
<BONDS> 0 0
0 0
0 0
<COMMON> 116 112
<OTHER-SE> 15,532 15,522
<TOTAL-LIABILITY-AND-EQUITY> 19,630 19,591
<SALES> 4,946 6,116
<TOTAL-REVENUES> 4,946 6,116
<CGS> 1,932 2,333
<TOTAL-COSTS> 1,932 2,333
<OTHER-EXPENSES> 3,320 3,029
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (112) (131)
<INCOME-PRETAX> (194) 835
<INCOME-TAX> 0 35
<INCOME-CONTINUING> (194) 850
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (194) 850
<EPS-PRIMARY> ($0.02) $0.08
<EPS-DILUTED> ($0.02) $0.07
<FN>
<F1>The EPS for the three months ended March 31, 1997 has been restated to
comply with the Financial Accounting Statement No. 128, "Earnings Per Share"
and Staff Accounting Bulletin No. 98.
</FN>
</TABLE>
