<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 SEPTEMBER 30, 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>
<S> <C>
DELAWARE 94-3161772
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF 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. YES [X] NO [_]
THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR
VALUE, WAS 11,691,967 AS OF OCTOBER 31, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
IA CORPORATION I
REPORT ON FORM 10-Q
----------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Financial Statements
Condensed Balance Sheet at September 30, 1998 and December 31,
1997......................................................... 3
Condensed Statements of Operations for the three months and
nine months ended September 30, 1998 and 1997................ 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997.................................. 5
Notes to Condensed 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.............................. 17
Signatures............................................................. 18
Exhibit Index.......................................................... 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA CORPORATION I
CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,547 $ 7,058
Short-term investments............................ 3,974 2,000
Receivables, including unbilled receivables of
$224 at September 30, 1998 and $4,593 at December
31, 1997, less allowance for doubtful accounts of
$1,419 at September 30, 1998 and $46 at December
31, 1997......................................... 2,964 8,867
Other current assets ............................. 825 748
-------- --------
Total current assets............................ 10,310 18,673
Property and equipment, net....................... 796 615
-------- --------
$ 11,106 $ 19,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 270 $ 343
Accrued compensation and related liabilities...... 1,634 1,400
Deferred revenues................................. 1,827 1,402
Other accrued liabilities......................... 897 520
-------- --------
Total current liabilities....................... 4,628 3,665
Stockholders' equity:
Common shares, $0.01 par value:
Authorized shares--35,000,000
Issued and outstanding shares--9,263,810 at
September 30, 1998 and 8,866,460 at December
31, 1997....................................... 93 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........................ 28,259 27,563
Accumulated deficit............................... (21,568) (11,923)
Deferred compensation............................. (331) (131)
-------- --------
Total stockholders' equity...................... 6,478 15,623
-------- --------
$ 11,106 $ 19,288
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
IA CORPORATION I
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ----------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenues:
License..................................... $ 532 $1,418 $ 2,561 $ 4,654
Service..................................... 273 3,507 4,233 9,161
Maintenance................................. 1,069 804 3,132 2,360
------- ------ ------- -------
Total revenues............................ 1,874 5,729 9,926 16,175
Cost of revenues:
License..................................... 38 117 164 266
Service..................................... 1,296 2,323 5,669 6,169
Maintenance................................. 1,012 292 2,261 989
------- ------ ------- -------
Total cost of revenues.................... 2,346 2,732 8,094 7,424
Operating expenses:
Sales and marketing......................... 1,355 1,145 3,771 3,537
General and administrative.................. 1,311 712 3,504 2,078
Product development......................... 1,556 998 4,530 3,461
------- ------ ------- -------
Total operating expenses.................. 4,222 2,855 11,805 9,076
------- ------ ------- -------
Operating income (loss)....................... (4,694) 142 (9,973) (325)
Other income:
Interest income............................. 109 127 330 393
------- ------ ------- -------
Income (loss) before income taxes............. (4,585) 269 (9,643) 68
Provision for income taxes.................... -- 3 -- 3
------- ------ ------- -------
Net income (loss)............................. $(4,585) $ 266 $(9,643) $ 65
======= ====== ======= =======
Basic net income (loss) per share............. $ (0.39) $ 0.02 $ (0.83) $ 0.01
======= ====== ======= =======
Diluted net income (loss) per share........... $ (0.39) $ 0.02 $ (0.83) $ 0.01
======= ====== ======= =======
Weighted common shares outstanding............ 11,646 11,214 11,552 11,128
Diluted common shares outstanding............. 11,646 11,497 11,552 11,441
</TABLE>
See accompanying notes
4
<PAGE>
IA CORPORATION I
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1998 1997
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $ (9,643) $ 65
Adjustments:
Depreciation............................................... 244 241
Amortization of deferred compensation...................... 155 31
Changes in operating assets and liabilities:
Receivables.............................................. 5,903 (1,660)
Other current assets..................................... (77) (255)
Accounts payable......................................... (73) (397)
Accrued compensation and related liabilities............. 234 17
Deferred revenues........................................ 425 (137)
Other accrued liabilities................................ 377 38
-------- -------
Net cash used in operating activities........................ (2,455) (2,057)
INVESTING ACTIVITIES
Purchases of property and equipment.......................... (427) (418)
Purchases of short-term investments.......................... (10,827) --
Maturities of short-term investments......................... 8,853 --
-------- -------
Net cash used in investing activities........................ (2,401) (418)
FINANCING ACTIVITIES
Net proceeds from exercise of stock options.................. 31 18
Net proceeds from employee stock purchase plan............... 314 421
Borrowings under bank line of credit......................... -- 300
Repayment of borrowings under bank line of credit............ -- (300)
-------- -------
Net cash provided by financing activities.................... 345 439
Net decrease in cash and cash equivalents.................... (4,511) (2,036)
Cash and cash equivalents at beginning of period............. 7,058 10,806
-------- -------
Cash and cash equivalents at end of period................... $ 2,547 $ 8,770
======== =======
Supplemental disclosure of cash flow information:
Deferred compensation related to stock options............. $ 355 $ --
======== =======
</TABLE>
See accompanying notes
5
<PAGE>
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 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 and nine months ended September 30,
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
The Company's net income (loss) per share has been calculated in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". Basic net income (loss) per share has been computed using the weighted
average number of common shares outstanding during the period. Basic net
income (loss) per share has been computed using the weighted average number of
common shares outstanding plus the dilutive effect of outstanding stock
options using the "treasury stock" method. The following table shows the
computation of basic and diluted net income (loss) per share.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/98 9/30/97
------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic and diluted net
income (loss) available
to common
shareholders........... $(4,585) $ 266 $(9,643) $ 65
Shares used in computing
basic net income (loss)
per share.............. 11,646 11,214 11,552 11,128
Effect of dilutive
securities--stock
Options................ -- (a) 283 -- (a) 313
------- ------- ------- -------
Shares used in computing
diluted net Income
(loss) per share....... 11,646 11,497 11,552 11,441
======= ======= ======= =======
Basic net income (loss)
per share.............. $ (0.39) $ 0.02 $ (0.83) $ 0.01
======= ======= ======= =======
Diluted net income
(loss) per share....... $ (0.39) $ 0.02 $ (0.83) $ 0.01
======= ======= ======= =======
</TABLE>
- --------
(a) The effect of outstanding stock options is excluded from the calculation
of diluted net loss per share, as their inclusion would be anti-dilutive.
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 and
nine months ended September 30, 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.
6
<PAGE>
IA CORPORATION I
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 year.
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 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 had no impact on the Company's net income (loss) or
stockholders' equity. There is no difference between comprehensive income
(loss) and net income (loss) for the three months and nine months ended
September 30, 1998 and 1997.
5. STOCK OPTION REPRICING
In August 1998, the Board of Directors approved a stock option repricing
program pursuant to which employees of the Company could elect to exchange or
amend their then outstanding employee stock options for new employee stock
options having an exercise price of $1.75 per share (equal to the fair market
value at August 17, 1998), with exercisability generally prohibited until
September 29,1998, except in the event of death or disability. A total of
1,166,378 options with exercise prices ranging from $6.00 to $1.81 per share
were exchanged or amended under the program.
7
<PAGE>
This report contains forward-looking statements that involve risks and
uncertainties, including statements regarding the sufficiency of the Company's
cash position, the development of software products, future strategic
development projects, future releases or enhanced products, potential markets,
future purchase and implementation of the enhanced software for the Company's
internal computer systems, likelihood of a material adverse impact due to Year
2000 contingencies, Year 2000 compliance of the Company's software products,
expected purchase and implementation of enhanced software, the Company's
strategy, financial performance, expense, revenue and cash flow sources. The
Company's actual results could differ materially from those discussed herein.
For a more complete discussion of the factors that might cause such a
difference, see the risk factors discussed herein and in the Company's Annual
Report as filed on Form 10-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's total revenues are derived from software licenses, services,
and maintenance agreements. The Company licenses software to end-users under
non-cancelable license agreements and provides services such as software
development, software customization installation, training and software
maintenance. Software license revenue for contracts not requiring significant
customization services are recognized when a product has been shipped, 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 year.
Total revenues for the three months ended September 30, 1998 decreased 67.3%
to $1.9 million from $5.7 million for the three months ended September 30,
1997. Total revenues for the nine months ended September 30, 1998 decreased
38.6% to $9.9 million, compared to total revenues of $16.2 million for the
same period in 1997. The decrease in revenues is in part attributable to
numerous mergers in the banking industry causing elimination of expected new
contracts, customer delays in installing the Company's software products, thus
slowing the revenue recognition process, and deferral of purchase decisions
arising from the impact of companies continuing to reallocate technology
resources toward Year 2000 compliance solutions. The Company believes that
mergers and Year 2000 issues have put severe constraints on resources
available within the banking industry to successfully implement the Company's
offerings. The Company believes its technology and expertise apply to a
broader sector of financial services markets, such as brokerage, mutual funds,
insurance and credit card sectors. Although the Company has successfully
completed installations at both Fidelity Investments and Merrill Lynch, there
can be no assurance that the Company will be successful in these markets, nor
can there be any assurance as to the timing of this success.
The Company had an accumulated deficit of approximately $21.6 million at
September 30, 1998, as compared to an accumulated deficit of approximately
$12.4 million at September 30, 1997. The Company reported a net loss of
approximately $9.6 million and net income of $65,000 for the nine months ended
September 30, 1998 and 1997, respectively. There can be no assurance that the
Company will have operating profits in any future period and profitable
operating results recorded in the 1996 and 1997 calendar years should not be
considered indicative of future financial performance.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
License. License revenue is primarily derived from licenses of the Company's
CheckVision software products. License revenue decreased 62.5% to $532,000
from $1.4 million for the three months ended
8
<PAGE>
September 30, 1998 and 1997, respectively. The decrease in license revenues
resulted from cancellation of purchase decisions arising from the impact of
the banking industry mergers and preoccupation with Year 2000 issues. The
Company also expected to realize substantial revenues from its 1997 strategic
alliance with NCR. These revenues have been much slower to materialize than
expected. As a percentage of total revenues, license revenues increased
slightly to 28.4% for the three months ended September 30, 1998 from 24.8% for
the three months ended September 30, 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 software products. Service revenue decreased 92.2% to $273,000
from $3.5 million for the three months ended September 30, 1998 and 1997,
respectively. The service revenue decrease is primarily the result of customer
delays deferring revenue recognition coupled with deferral of expected new
contracts. As a percentage of total revenues, service revenues decreased to
14.6% for the three months ended September 30, 1998 as compared to 61.2% for
the three months ended September 30, 1997. Service revenue as a percentage of
total revenues will vary between periods due to changes in demand for the
Company's services.
Maintenance. Maintenance revenue is generated primarily by software support
contracts to customers who have entered into license agreements for the use of
the Company's software products. Such contracts include telephone support,
minor software upgrades and, in some cases, third party support. Maintenance
revenue increased 33.0% to $1.1 million from $804,000 for the three months
ended September 30, 1998 and 1997, respectively. The increase in maintenance
revenue is principally due to the growing base of installed CheckVision
products resulting in a corresponding increase in demand for maintenance
service. Accordingly, the Company believes that fluctuations in the demand for
products could result in fluctuations of maintenance revenue. As a percentage
of total revenues, maintenance revenue increased to 57.0% for the three months
ended September 30, 1998 as compared to 14.0% for same period in 1997.
COST OF REVENUES
License. Cost of license revenue decreased 67.5% to $38,000 from $117,000
for the three months ended September 30, 1998 and 1997, respectively,
representing 7.1% and 8.3% of license revenues for the three months ended
September 30, 1998 and 1997, respectively. The cost of license revenue
decrease is due to a negotiated decrease in royalties payable to third
parties.
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 44.2% to
$1.3 million from $2.3 million for the three months ended September 30, 1998
and 1997, respectively, representing 474.7% and 66.2% of service revenues for
the three months ended September 30, 1998 and 1997, respectively. The decrease
in cost of service revenue is attributable to the decrease in service revenue
and to customer delays in installing the Company's software products.
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 246.6% to $1.0 million from $292,000 for the three months ended
September 30, 1998 and 1997, respectively, representing 94.7% and 36.3% of
maintenance revenues for the three months ended September 30, 1998 and 1997,
respectively. The cost of maintenance revenue increase is due to maintenance
revenue growth coupled with recently completed software development contracts
requiring much higher level of maintenance labor.
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 18.3% to $1.4 million for
the three months
9
<PAGE>
ended September 30, 1998 as compared to $1.1 million for the three months
ended September 30, 1997. Sales and marketing expense increase is due to the
expansion of the marketing staff of both direct hires and consultants. Sales
and marketing expenses represent 72.3% and 20.0% of total revenues for the
three months ended September 30, 1998 and 1997, respectively. The Company,
however, is implementing cost control measures in an effort to manage expense
growth.
General and administrative. General and administrative expenses increased
84.1% to $1.3 million from $712,000 for the three months ended September 30,
1998 and 1997, respectively. The increase is attributable to an increase in
executive salary and executive recruiting cost totaling $230,000 coupled with
an increase in allowance for doubtful accounts for certain contracts
associated with high collectibility risks. Also contributing to the increase
in general and administrative expenses is stock-based compensation expense
required by EITF 96-18 for stock options granted to non-employees. General and
administrative expenses represent 70.0% and 12.4% of total revenues for the
three months ended September 30, 1998 and 1997, respectively. The Company,
however, is implementing cost control measures in an effort to manage expense
growth.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expenses
increased 55.9% to $1.6 million from $998,000 for the three months ended
September 30, 1998 and 1997, respectively. The increase is directly
attributable to personnel costs and associated infrastructure costs required
to support software development initiatives to enhance and expand the
Company's core software product offerings. Product development expenses
represent 83.0% and 17.4% of total revenues for the three months ended
September 30, 1998 and 1997, respectively. The Company, however, is
implementing cost control measures in an effort to manage expense growth.
Interest income. Interest income represents interest earned by the Company
on its cash, cash equivalents and short-term investments. Interest income
decreased slightly to $109,000 from $127,000 for the three months ended
September 30, 1998 and 1997, respectively, due to lower average invested cash
balances in the three months ended September 30, 1998.
Provision for income taxes. The Company did not record a provision for
income taxes for the three months ended September 30, 1998. A nominal tax
provision was recorded for the three months ended September 30, 1997.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
License. License revenue is primarily derived from licenses of the Company's
CheckVision software products. License revenue decreased 45.0% to $2.6 million
from $4.7 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in license revenues resulted from cancellation of
purchase decisions arising from the impact of the banking industry mergers and
preoccupation with Year 2000 issues. The Company also expected to realize
substantial revenues from its 1997 strategic alliance with NCR. These revenues
have been much slower to materialize than expected. As a percentage of total
revenues, license revenues decreased to 25.8% for the nine months ended
September 30, 1998 as compared to 28.8% for the same period in 1997.
Service. Service revenue is 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 53.8% to $4.2 million from
$9.2 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in service revenues primarily is the result of
customer delays deferring revenue recognition coupled with deferral of
expected new contracts. As a percentage of total revenues, service revenues
decreased to 42.7% for the nine months ended September 30, 1998 as
10
<PAGE>
compared to 56.6% for the nine months ended September 30, 1997. Service
revenue as a percentage of total revenues will vary between periods due to
changes in demand for the Company's services.
Maintenance. Maintenance revenue is generated primarily by software support
contracts to customers who have entered into license agreements for the use of
the Company's software products. Such contracts include telephone support,
minor software upgrades and, in some cases, third party support. Maintenance
revenue increased 32.7% to $3.1 million from $2.4 million for the nine months
ended September 30, 1998 and 1997, respectively. As a percentage of total
revenues, maintenance revenue increased to 31.6% for the nine months ended
September 30, 1998 as compared to 14.6% for the nine months ended September
30, 1997. The increase in maintenance revenue is primarily due to the growing
base of installed CheckVision and RemitVision products resulting in
corresponding increase in demand for maintenance service. Accordingly, the
Company believes that fluctuations in the demand for its products could result
in fluctuations of maintenance revenue.
COST OF REVENUES
License. Cost of license revenue decreased 38.4% to $164,000 from $266,000
for the nine months ended September 30, 1998 and 1997, respectively,
representing 6.4% and 5.7% of license revenues for the nine months ended
September 30, 1998 and 1997, respectively. The decrease in cost of license
revenue is due to a negotiated decrease in royalties payable to third parties.
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 8.1% to
$5.7 million from $6.2 million for the nine months ended September 30, 1998
and 1997, respectively, representing 133.9% and 67.3% of service revenues for
the nine months ended September 30, 1998 and 1997, respectively. The decrease
in cost of service revenue is attributable to customer delays in installing
the Company's products. The cost of service revenue has not decreased
proportionately with the decrease in service revenue due to increased costs
incurred to deliver on several of the Company's current contracts.
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 128.6% to $2.3 million from $989,000 for the nine months ended
September 30, 1998 and 1997, respectively, representing 72.2% and 41.9% of
maintenance revenues for the nine months ended September 30, 1998 and 1997,
respectively. The cost of maintenance revenue increase is the result of
increased demand for maintenance services for a growing base of installed
CheckVision and RemitVision products, and from a much higher maintenance labor
required to support recently completed development contracts.
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 6.6% to $3.8 million from
$3.5 million for the nine months ended September 30, 1998 and 1997,
respectively, representing 38.0% and 21.9% of total revenues for the nine
months ended September 30, 1998 and 1997, respectively. The increase was
attributable to the expansion of the marketing staff of both direct hires and
consultants. The Company, however, is implementing cost control measures in an
effort to manage expense growth.
General and administrative. General and administrative expenses increased
68.6% to $3.5 million from $2.1 million for the nine months ended September
30, 1998 and 1997, respectively. The increase is primarily attributed to an
increase in executive compensation and executive recruiting expenses of
$230,000 coupled with an increase allowance for doubtful accounts for certain
contracts associated with high collectibility risks. Additionally, stock-based
compensation expense was recorded as required by EITF 98-16 for the issuance
of stock options to non-employees. General and administrative expenses
represent 35.3% and 12.9% of total
11
<PAGE>
revenues for the nine months ended September 30, 1998 and 1997, respectively.
The Company, however, is implementing cost control measures in an effort to
manage expense growth.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expenses
increased 30.9% to $4.5 million from $3.5 million for the nine months ended
September 30, 1998 and 1997, respectively. The increase is directly
attributable to personnel costs and associated infrastructure costs required
to support software development initiatives to enhance and expand the
Company's core software product offerings. In particular, the Company's
development expenditure increases during 1998 have been driven by expenditures
associated with the unveiling of RemitVision Release 2.0 in July 1998, and by
expenditures required to enhance and expand its CheckVision product line.
Product development expenses represent 45.6% and 21.4% of total revenues for
the nine months ended September 30, 1998 and 1997, respectively. The Company,
however, is implementing cost control measures in an effort to manage expense
growth.
Interest income. Interest income represents interest earned by the Company
on its cash, cash equivalents and short-term investments. Interest income
decreased slightly to $330,000 from $393,000 for the nine months ended
September 30, 1998 and 1997, respectively, due to lower average invested cash
balances in the nine months ended September 30, 1998.
Provision for income taxes. The Company did not record a provision for
income taxes for the nine months ended September 30, 1998. A nominal tax
provision was recorded for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $2.5 million for operating activities for the nine
months ended September 30, 1998, an increase of $400,000 from cash used from
operating activities for the nine months ended September 30, 1997. For the
nine months ended September 30, 1998, cash used by operations was principally
the result of the net loss offset by cash receipts on outstanding accounts
receivables coupled with cash receipts of customer deposits for new and
renewals of annual maintenance agreements.
During the nine months ended September 30, 1998, the Company's net use of
cash for investing activities included purchases and maturities of short-term
investments coupled with purchases of capital equipment totaling $427,000.
Capital expenditures consisted of purchases of computer equipment to support
the Company's product development programs. The Company currently has no
significant capital spending requirements or purchase commitments other than a
non-cancelable operating lease for its facilities.
Financing activities for the nine months ended September 30, 1998 and 1997
is related to the proceeds from the exercise of common stock options by
employees and stock issuance under the employee stock purchase plan program.
At September 30, 1998, the Company had $5.7 million in working capital,
including $2.5 million in cash and cash equivalents and $4.0 million in short-
term investments consisting primarily of high quality commercial paper. The
Company's bank line of credit agreement expired in July 1998. The Company has
decided not to renew the line of credit agreement.
The Company believes that its existing cash, cash equivalents and short-term
investments, together with expected cash flow from operations, will be
sufficient to fund the Company's operations for the next 12 months. In the
event that such existing and expected resources are insufficient to fund the
Company's operations for the next 12 months, the Company will need to obtain
additional financing. There can be no assurance that such additional financing
will be available on acceptable terms, if at all.
12
<PAGE>
YEAR 2000
The Year 2000 Problem generally involves whether a computer system, software
product, or business system, when working alone or in conjunction with other
software or hardware systems, accepts input of, stores, manipulates and
outputs dates in the Year 2000 or thereafter without error or interruption
(the "Year 2000 Problem").
The Company has completed its assessment of the Year 2000 Problem with
respect to its internal technology systems, which include, telecommunications
and internal computer systems. The Company has identified necessary
modifications to its internal technology system to make them Year 2000
compliant. Modifications to the telecommunications and the internal computer
systems are anticipated to be implemented by July 31, 1999 and estimated to
cost approximately $50,000. The Company has expended and will continue to
expend appropriate resources to address this issue on a timely basis. However,
there can be no assurance that the Year 2000 Problem will not have an adverse
impact on the Company's earnings.
RISK FACTORS
History of Operating Losses; No Assurance of Profitability. The Company has
incurred significant net losses since inception. At September 30, 1998, the
Company had an accumulated deficit of approximately $21.6 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. The Company expects a net loss for
the quarter ended December 31, 1998.
Variability of Quarterly Operating Results. The Company's revenues and
operating results have varied in the past, and may continue 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 impact of the current
consolidations in the banking industry which may continue to slow sale cycles,
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 still 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 has, and may
continue to have a significant impact on quarterly operating results. In
addition, the Company had expected substantial revenue contributions from its
1997 alliance with NCR. This alliance has to-date provided significantly less
revenue than originally expected, and there can be no assurance this alliance
will be successful in the future. Although the Company is pursuing additional
alliance opportunities, there can be no assurance any of these will be
successful either. 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. Further, as the Year 2000
approaches, many current and potential customers are focusing their resources
on the Year 2000 capability issues, which may further cause deferrals or
cancellations on their decision to purchase the Company's software products.
13
<PAGE>
Due primarily to hardware requirements and customer site preparation, there
is typically a three to four month period between when a CheckVision customer
order is placed and the commencement of the Company's installation services.
The Company has experienced a nine-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, and, in one instance, a contract termination. Similar
situations in the future could continue to 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 continues to be 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 continue to 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
continue to be materially adversely affected in the future if new competitors,
technological advances by existing competitors, other competitive factors, or
the Company's failure to obtain software development contracts continue to
require the Company to invest significant 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 had been derived
from the provision of services pursuant to large software development
contracts, certain of which provided 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 42.7%
and 56.6% for the nine months ended September 30, 1998 and 1997, respectively.
To achieve revenue growth and improve operating margins, the Company must
increase market acceptance and sales of the Company's software products. As
the Company has become increasingly reliant upon software product sales, it
could continue to experience a decline in total revenues if service revenue
continues to decline 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. Any significant
failure by the Company to manage the transition successfully would continue to
have a material adverse effect on the Company's business, operating results
and financial condition and would continue to create significant fluctuation
in quarterly operating results.
Dependence on Development Services. Through 1997 the majority of the
Company's total revenues had been derived from large application development
contracts. The majority of these contracts are now complete, and the Company
has been unable to attract new customers to enter into such contracts while
focusing on sales of its software products. Sales of the Company's software
products have been lower than expected. Furthermore, the Company has
historically used the research derived from its software development contracts
as the basis for its software products and anticipates that future software
products may arise from new software development contracts. To the extent that
the Company is unable to attract new customers to enter into such contracts,
the
14
<PAGE>
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 may continue to
materially adversely affect operating margins. There can be no assurance that
the Company 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 software development
contracts or that it will be able to independently develop new software
products, 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, 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 software
products developed in connection with software development contracts, 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 large
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, mutual funds, 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 continue to 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.
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, sale
cycles could continue to 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 September 30, 1998, the Company's
largest three customers provided 54.5% of the Company's total revenues. For
the nine months ended September 30, 1998, no sales to any one customer
accounted for 10% or more of total revenues. For the nine months ended
September 30, 1997, the Company's largest two customers provided 22.0% 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 and on the Company's reliance on the top tier of the
banking market. The Company intends to continue to seek customer support for
strategic development projects
15
<PAGE>
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 continues to experience difficulties
in increasing revenues derived from the sale of software products as a
percentage of total revenues, the Company's business, operating results and
financial condition could continue to 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 experienced delays
in the development of RemitVision. The Company had lower than anticipated
profits due to delays in RemitVision contracts and due to its much lower sales
of CheckVision products than originally anticipated. The failure of the
Company's software products to achieve broader market acceptance and increased
sales could continue to 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 July 31, 1999.
The Company has contacted 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
16
<PAGE>
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."
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 and nine months ended September 30,
1998:
<TABLE>
<C> <S>
10.1 Employment Agreement between the Registrant and Kevin Moran, dated
July 22, 1998.
10.2 Severance and Non-Compete Agreement between the Registrant and Dr.
C.V. Ravi, dated July 27, 1998.
27.1 Financial Data Schedule (electronic filing only).
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
17
<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
/s/ David M. Winkler
_____________________________________
David M. Winkler
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Date: November 13, 1998
18
<PAGE>
IA CORPORATION I
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.1 Employment Agreement between the Registrant and Kevin Moran, dated
July 22, 1998.
10.2 Severance and Non-Compete Agreement between the Registrant and Dr.
C.V. Ravi, dated July 27, 1998.
27.1 Financial Data Schedule (electronic filing only).
</TABLE>
19
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT, by and between Kevin Moran (the "Executive") and IA
Corporation I, a Delaware corporation (the "Company"), shall become effective
as of July 22, 1998 (the "Effective Date").
In consideration of the mutual covenants herein contained, and in
consideration of the employment of Executive by the Company, the parties agree
as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company agrees to employ the Executive under the
--------
terms of this Agreement in the position of Chief Executive Officer of the
Company. Executive will report to the Board of Directors of the Company.
(b) Obligations. During the term of this Agreement, the Executive
-----------
shall devote Executive's full business efforts and time to the Company. The
foregoing, however, shall not preclude the Executive from engaging in
appropriate civic, charitable or religious activities or from devoting a
reasonable amount of time to private investments or from serving on the boards
of directors of other entities, as long as such activities and service do not
interfere or conflict with Executive's responsibilities to the Company and do
not represent business conflicts with the Company's business.
(c) Company Policies. Executive shall comply with all of the
----------------
Company's rules, policies and regulations applicable to the employees of the
Company and with all of the Company's policies applicable to other similarly
situated executives established by the Company's management and Board of
Directors.
(d) Director Position. Executive shall be appointed to the Board of
-----------------
Directors of the Company promptly following the Effective Date and during the
term of this Agreement shall be nominated by the Company for reelection as a
director at the Annual Meeting of Stockholders each year thereafter. Executive
agrees to resign as a director promptly following any termination of this
Agreement.
2. Base Compensation and Bonus.
---------------------------
(a) Base Compensation. Beginning on the Effective Date, the Executive
-----------------
shall be paid a base salary of $265,000 annually, payable every two weeks (the
"Base Compensation"). The Base Compensation shall be subject to review annually
for increases by the Board of Directors, in its discretion, in connection with
the annual review of salary and benefits for the Company's management.
(b) Annual Performance Bonus. Executive shall be entitled to a
------------------------
guaranteed annual performance bonus for Executive's first year of employment
equal to $250,000, payable in quarterly installments of $62,500 on September 30,
1998, January 7, 1999, March 31, 1999 and June 30, 1999. Beginning in 1999 and
for each year thereafter, Executive shall be eligible to receive an annual
performance bonus of up to 100% of Executive's Base Compensation subject to
Executive meeting or exceeding annual goals. The amount of the bonus, the
annual goals and the determination of achievement of the goals shall be made by
the Board of Directors, or a subcommittee thereof in their discretion. Any
bonus for a calendar year shall be payable on January 31 of the subsequent
calendar year. Executive's 1999 annual performance bonus will be prorated for
one-half year.
(c) Allowance. Executive shall be entitled to an allowance of up to
---------
$7,500 per year for tax and estate planning. Expenses will be reimbursed
Executive by the Company on an as incurred basis.
(d) Employment Condition. Except as otherwise provided herein,
--------------------
payment of any bonus or allowance shall be conditioned on Executive's continued
employment through the date of payment.
3. Definitions. As used herein, the following definitions shall apply:
-----------
(a) Cause. "Cause" shall mean the termination of employment of
-----
Executive shall have taken place as a result of (i) Executive's continued
failure to substantially perform Executive's principal duties and
responsibilities
<PAGE>
(other than as a result of Disability or death) after 30 days written notice
from the Company specifying the nature of Executive's failure and demanding that
such failure be remedied; (ii) Executive's material and continuing breach of
Executive's obligations to the Company set forth in this Agreement, the
Confidentiality Agreement (as defined herein), or any written rule, regulation
or policy of the Company applicable to all employees after 30 days written
notice from the Company specifying the nature of Executive's breach and
demanding that such breach be remedied (unless such breach by its nature cannot
be cured, in which case notice and an opportunity to cure shall not be
required); (iii) Executive's being convicted of a felony; or (iv) act or acts of
dishonesty undertaken by Executive and intended to result in substantial gain or
personal enrichment of Executive at the expense of the Company.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended), other than Warburg,
Pincus investors, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 50% or more of the total voting power represented by the Company's
then outstanding voting securities; or
(ii) The consummation of (A) a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or the entity
that controls such surviving entity) at least 50% of the total voting power
represented by the voting securities of the Company or such surviving entity or
the entity that controls such surviving entity outstanding immediately after
such merger or consolidation; or (B) the sale or disposition by the Company of
all or substantially all the Company's assets.
(b) Constructive Termination. "Constructive Termination" shall mean a
------------------------
termination of employment due to any of the following, unless agreed to by
Executive in writing: (i) a reduction in Executive's salary or benefits (except
in connection with a decrease to be applied equally to all executives of the
Company because the Company's performance has decreased, and excluding the
substitution of substantially equivalent compensation and benefits); (ii) a
material diminution of Executive's responsibilities (e.g., title, primary
duties, resources); (iii) relocation of Executive by the Company to a location
more than 50 miles from Emeryville, California; or (iv) failure of a successor
to assume and perform under this Agreement.
(c) Disability. "Disability" shall mean that the Executive, at the
----------
time notice is given, has been unable to perform Executive's duties under this
Agreement for a period of not less than 90 days consecutively as the result of
Executive's incapacity due to physical or mental illness. In the event that the
Executive resumes the performance of substantially all of Executive's duties
hereunder within 90 days of the commencement of leave before the termination of
employment under Section 6(b)(iii) becomes effective, the notice of termination
shall automatically be deemed to have been revoked. This paragraph will be
interpreted in compliance with the Americans with Disabilities Act.
4. Executive Benefits.
------------------
(a) General. Executive shall be entitled to participate in pension
-------
plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess-benefit plans, stock option, incentive or
other bonus plans, life, disability, health, accident and other insurance
programs, paid vacation time off (which will accrue for the Executive at a rate
of 4.62 days per pay period beginning on the Effective Date), a car mileage
allowance for business mileage and similar plans or programs made available to
employees of the Company, subject in each case to the generally applicable terms
and conditions of the plan or program and the decision of the Board of Directors
or administrators of such plan.
(b) Business Expenses and Travel. During the term of Executive's
----------------------------
employment under this Agreement, Executive shall be authorized to incur
necessary and reasonable travel, entertainment and other business expenses in
connection with Executive's duties hereunder. The Company shall reimburse
Executive for such expenses upon presentation of an itemized account and
appropriate supporting documentation, all in accordance with the Company's
generally applicable policies.
Page 2
<PAGE>
(c) Stock Awards. The Executive shall be granted stock options (the
------------
"Options") to purchase 530,000 shares of Common Stock of the Company at an
exercise price of the closing price of the Common Stock as quoted on the NASDQ
National Market System as of three business days following the issuance of the
press release announcing Executive as Chief Executive Officer of the Company.
The Options will be granted pursuant to the Company's standard form of stock
option agreements. The Options shall be designated as incentive stock options
under the Internal Revenue Code (the "Code") to the maximum extent possible
under the Code. The Options shall be exercisable as to 132,500 shares, 12
months following the Effective Date, and an additional 11,042 shares at the end
of each additional one-month period after the Effective Date such that all
530,000 shares will be exercisable on the date four years after the Effective
Date. The Options shall have a term of ten years. Executive will be eligible
to receive additional stock option grants at the discretion of the Company's
Board of Directors. Such additional grants will be based on performance, and
will be reviewed annually by the Board of Directors.
5. Acceleration After Change of Control.
------------------------------------
(a) First Year Guaranteed Annual Performance Bonus. The payment of
----------------------------------------------
the of Executive's first year guaranteed annual performance bonus shall be
accelerated and paid in full in the event of a Change of Control and provided
Executive has not been offered the job of Chief Executive Officer of the
combined entity that includes the Company after such Change of Control (the
"Combined Entity").
(b) Options. The exercisability of the Options shall be accelerated as
-------
follows:
(i) Change of Control During First Year. In the event of a
-----------------------------------
Change of Control during Executive's first two years of employment with the
Company, and provided Executive has not been offered the job of Chief Executive
Officer of the Combined Entity, exercise of the Options shall be accelerated so
that 50% of the Options are exercisable.
(ii) Change of Control After Year Two. In the event of a Change
--------------------------------
of Control after Executive's second year of employment with the Company, and
provided Executive has not been offered the job of Chief Executive Officer of
the Combined Entity, the exercise of the Options shall be accelerated so that
100% of the Options are exercisable.
6. Term of Employment.
------------------
(a) Basic Rule. The Company agrees to continue Executive's
----------
employment, and Executive agrees to remain in the employ of the Company,
pursuant to the provisions of this Agreement. Executive's employment is and
shall be "at will".
(b) Termination by the Company. The Company may terminate Executive's
--------------------------
employment at any time, for any reason or no reason, with 30 days advance notice
in writing.
(i) Termination Without Cause. If the Company terminates
-------------------------
Executive's employment during the term of this Agreement for any reason
whatsoever, including a Constructive Termination, and other than voluntary
termination of employment or Termination for Cause, the provisions of Section
7(a) shall apply.
(ii) Termination for Cause. If the Company terminates
---------------------
Executive's employment for Cause during the term of this Agreement, the
provisions of Section 7(b) shall apply.
(iii) Termination on Death or Disability. If Executive's
----------------------------------
employment terminates as a result of Executive's death or the Company terminates
Executive's employment as a result of Disability, the provisions of Section 7(c)
shall apply.
(c) Voluntary Termination by the Executive. The Executive may
--------------------------------------
terminate Executive's employment voluntarily by giving the Company 30 days
advance notice in writing, at which time the provisions of Section 7(b) shall
apply. However, if the Executive terminates Executive's employment pursuant to
this Section 6(c) as a result of the occurrence of any of the events set forth
in the definition of a Constructive Termination, the provisions of Section 7(a)
shall
Page 3
<PAGE>
apply, provided the Executive has provided written notice to the Company
reasonably specifying the reasons why one of such events in the definition of a
Constructive Termination has occurred and the Company has not cured such event
within 20 days after receipt of such notice.
(d) Waiver of Notice. Any waiver of notice shall be valid only if it
----------------
is made in writing and expressly refers to the applicable notice requirement in
this Section 6.
7. Payments Upon Termination of Employment.
---------------------------------------
(a) Payments Upon Termination Pursuant to Section 6(b)(i) and
---------------------------------------------------------
Constructive Termination. If, during the term of this Agreement, the
- ------------------------
Executive's employment is terminated by the Company pursuant to Section 6(b)(i)
or voluntarily by the Executive under Section 6(c) as a result of a Constructive
Termination, the Executive shall be entitled to receive the following:
(i) Severance Payment. In lieu of any payments under the
-----------------
Company's severance plan, the Company shall continue to pay to the Executive his
Base Compensation (the "Severance Payment") for up to 12 months following the
termination date (the "Severance Period"). The duration of the Severance Period
will be determined by the Company's Board of Directors, but in no event will the
Severance Payment be less than that amount Executive would have otherwise have
been entitled to under the Company's severance plan. The Base Compensation
amount shall be determined with reference to the Base Compensation in effect for
the month in which the date of employment termination occurs.
(ii) Stock Options. Except as otherwise provided in Section 5,
-------------
Executive shall have 90 days from the date of termination of employment in which
to exercise any Options, to the extent such Options are exercisable as of the
termination date.
(iii) Method of Payment. The Severance Payment shall be made
-----------------
every two weeks during the Severance Period. In the event Executive accepts
other full-time employment during the Severance Period, Executive will notify
the Company of such employment and the Company will pay Executive an amount
equal to the unpaid portion of the Severance Payment.
(iv) Health and Welfare Benefits. The Company shall continue to
---------------------------
provide health and welfare benefits for the duration of the Severance Period.
Such benefits will be discontinued to the extent that Executive receives similar
benefits in connection with new employment. Executive will also be entitled to
such payments and benefits as may be provided under applicable benefit plans and
programs of the Company.
(v) Payment in Lieu of Contract Damages. The Severance Payment
-----------------------------------
shall be in lieu of any further payments to the Executive and any further
accrual of benefits with respect to periods subsequent to the date of the
employment termination.
(vi) No Duty to Mitigate. The Executive shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Section 7(a) (whether by
seeking new employment or in any other manner).
(vii) Termination In Year One of Employment. In addition to the
-------------------------------------
foregoing, if Executive's termination occurs during Executive's first year of
employment with the Company, Executive will be entitled to an amount equal to
the unpaid balance of Executive's (A)Base Compensation for year one of
employment and (B) $250,000 guaranteed annual performance bonus for year one of
employment.
(b) Termination By Company for Cause or Voluntary Termination. If the
---------------------------------------------------------
Executive's employment is terminated pursuant to Section 6(b)(ii) or voluntarily
(other than a Constructive Termination) pursuant to Section 6(c), no
compensation or payments will be paid or provided to Executive for the periods
following the date when such a termination of employment is effective.
Notwithstanding the preceding sentence, Executive's rights under the benefit
plans and any stock option plans of the Company shall be determined under the
provisions of the applicable benefit plans and stock option plans and related
agreements under which Options were granted, provided Executive shall have 90
days from the date
Page 4
<PAGE>
of termination of employment in which to exercise the Options to the extent such
Options are exercisable as of the termination date.
(c) Termination on Death or Disability. If Executive's employment is
----------------------------------
terminated because of Executive's death or Disability, then no compensation
payments will be paid or provided to Executive or Executive's estate for periods
following the date of such termination under this Agreement and Executive shall
receive severance and disability payments as provided in the Company's standard
benefit plans. Executive's Options shall be exercisable as provided in such
agreements in each case to the extent such Options are exercisable as of the
date of termination.
(d) Adjustment Upon Change of Control For Excise Tax. Notwithstanding
------------------------------------------------
any other provision of this Agreement, if a termination of employment occurs and
as a result Executive is subject to any Federal excise tax imposed pursuant to
Section 4999 of the Internal Revenue Code (or any successor provision),
Executive's Severance Payment shall be reduced to the extent necessary if
Executive would receive a greater after tax benefit as a result of any such
reduction than if Executive receives full payment of the Severance Payment.
8. Inventions and Proprietary Information. The Executive agrees to
--------------------------------------
comply fully with the Company's policies relating to invention and non-
disclosure of the Company's trade secrets and proprietary information and
processes, as set out in Exhibit A hereto (the "Confidentiality Agreement").
9. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume this Agreement and agree expressly to perform this
Agreement in the same manner and to the same extent as the Company would be
required to perform it in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by this Agreement by
operation of law.
(b) Executive's Successors. This Agreement and all rights of the
----------------------
Executive hereunder shall inure to the benefit of, and be enforceable by,
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
10. Notice. Notices and all other communications contemplated by this
------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered; upon delivery when sent by over night courier; or five
days after being mailed by first class mail, return receipt requested and
postage prepaid. In the case of the Executive, mailed notices shall be
addressed to Executive at the home address which Executive most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Chief Financial Officer.
11. Non-Competition. During the term of this Agreement and for one year
---------------
following the termination of this Agreement (the "Non-Competition Period"),
Executive shall not maintain or enter into any employment position or consulting
relationship with a "Direct Competitor" of the Company, which is generally
defined as the business unit, division, subsidiary or individual that offers or
sells products or services substantially similar to those offered or sold by the
Company ("Competitive Products") during the term of this Agreement. Direct
Competitor shall not generally include affiliates, business units, divisions or
subsidiaries of any Direct Competitor that do not offer or sell Competitive
Products. The classification of any entity as a Direct Competitor shall be at
the Company's reasonable discretion. In the event during the Non-Competition
Period Executive breaches this Section 11, Executive agrees that all obligations
of the Company to make the Severance Payment, shall immediately terminate and
Executive shall repay to the Company an amount equal to the after tax proceeds
to Executive of any Severance Payments paid to date.
12. Solicitation of Employees. Executive agrees that for a period of 12
-------------------------
months immediately following the termination of Executive's employment with the
Company, Executive shall not either directly or indirectly solicit, induce,
recruit, or encourage any of the Company's employees to leave their employment,
or take away such employees, or attempt
Page 5
<PAGE>
to solicit, induce, recruit, encourage or take away employees of the Company,
either for Executive or for any other person or entity.
13. Miscellaneous Provisions.
------------------------
(a) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Executive and an officer or a director of the Company
authorized by the Board of Directors. No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes and replaces any
and all previous agreements between the Executive and the Company regarding
compensation or terms of employment.
(c) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(d) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(e) Arbitration. With the exception of the equitable relief provided
-----------
for in Exhibit A, any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in San Francisco,
California, in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
(f) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Limitation of Remedies. If the Executive's employment terminates
----------------------
for any reason, the Executive shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this Agreement.
(h) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable taxes.
(i) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
-this space left intentionally blank-
Page 6
<PAGE>
(j) Representation by Counsel. Executive represents that Executive
-------------------------
has had the opportunity to seek and has been represented by independent legal
counsel in connection with entering into the Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer.
IA Corporation I
/s/ C.V. Ravi /s/ Kevin D. Moran
- ------------------------------- -------------------------------
Executive's Signature
Chairman 430 Fulton Road
- ------------------------------- -------------------------------
Title Address
July 10, 1998 San Mateo, CA 94402
- ------------------------------- -------------------------------
Date City, State, Zip
(650) 401-7055
-------------------------------
Telephone
###-##-####
-------------------------------
Social Security #
July 10, 1998
-------------------------------
Date
Page 7
<PAGE>
EXHIBIT A
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
1. Confidential Information.
------------------------
(a) Company Information. I agree at all times during the term of my
-------------------
employment and thereafter, to hold in strictest confidence, and not to use,
except for the benefit of the Company, or to disclose to any person, firm or
corporation without written authorization of the Board of Directors of the
Company, any Confidential Information of the Company. I understand that
"Confidential Information" means any Company proprietary information, technical
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, customer lists and customers (including, but
not limited to, customers of the Company on whom I called or with whom I became
acquainted during the term of my employment), markets, software, developments,
inventions, processes, formulas, technology, designs, drawings, engineering,
hardware configuration information, marketing, finances or other business
information disclosed to me by the Company either directly or indirectly in
writing, orally or by drawings or observation of parts or equipment. I further
understand that Confidential Information does not include any of the foregoing
items which has become publicly known and made generally available through no
wrongful act of mine or of others who were under confidentiality obligations as
to the item or items involved.
(b) Former Employer Information. I agree that I will not, during my
---------------------------
employment with the Company, improperly use or disclose any proprietary
information or trade secrets of any former or concurrent employer or other
person or entity and that I will not bring onto the premises of the Company any
unpublished document or proprietary information belonging to any such employer,
person or entity unless consented to in writing by such employer, person or
entity.
(c) Third Party Information. I recognize that the Company has
-----------------------
received and in the future will receive from third parties (which includes, but
is not limited to customers of the Company) their confidential or proprietary
information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. I agree to hold all such confidential or proprietary information in
the strictest confidence and not to disclose it to any person, firm or
corporation or to use it except as necessary in carrying out my work for the
Company consistent with the Company's agreement with such third party.
2. Inventions.
----------
(a) Inventions Retained and Licensed. I have attached hereto, as
--------------------------------
Attachment 1, a list describing all inventions, original works of authorship,
developments, improvements, and trade secrets which were made by me prior to my
employment with the Company (collectively referred to as "Prior Inventions"),
which belong to me, which relate to the Company's proposed business, products or
research and development, and which are not assigned to the Company hereunder;
or, if no such list is attached, I represent that there are no such Prior
Inventions.
(b) Assignment of Inventions. I agree that I will promptly make full
------------------------
written disclosure to the Company, will hold in trust for the sole right and
benefit of the Company, and hereby assign to the Company, or its designee, all
my right, title, and interest in and to any and all inventions, original works
of authorship, developments, concepts, improvements or trade secrets, whether or
not patentable or registrable under copyright or similar laws, which I may
solely or jointly conceive or develop or reduce to practice, or cause to be
conceived or developed or reduced to practice, during the period of time I am in
the employ of the Company (collectively referred to as "Inventions"), except as
provided in Section 3(f) below. I further acknowledge that all original works
of authorship which are made by me (solely or jointly with others) within the
scope of and during the period of my employment with the Company and which are
protectible by copyright are "works made for hire," as that term is defined in
the United States Copyright Act.
<PAGE>
(c) Inventions Assigned to the United States. I agree to assign to
----------------------------------------
the United States government all my right, title, and interest in and to any and
all Inventions whenever such full title is required to be in the United States
by a contract between the Company and the United States or any of its agencies.
(d) Maintenance of Records. I agree to keep and maintain adequate and
----------------------
current written records of all Inventions made by me (solely or jointly with
others) during the term of my employment with the Company. The records will be
in the form of notes, sketches, drawings, and any other format that may be
specified by the Company. The records will be available to and remain the sole
property of the Company at all times.
(e) Patent and Copyright Registrations. I agree to assist the
----------------------------------
Company, or its designee, at the Company's expense, in every proper way to
secure the Company's rights in the Inventions and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto in any and
all countries, including the disclosure to the Company of all pertinent
information and data with respect thereto, the execution of all applications,
specifications, oaths, assignments and all other instruments which the Company
shall deem necessary in order to apply for and obtain such rights and in order
to assign and convey to the Company, its successors, assigns, and nominees the
sole and exclusive rights, title and interest in and to such Inventions, and any
copyrights, patents, mask work rights or other intellectual property rights
relating thereto. I further agree that my obligation to execute or cause to be
executed, when it is in my power to do so, any such instrument or papers shall
continue after the termination of this Agreement. If the Company is unable
because of my mental or physical incapacity or for any other reason to secure my
signature to apply for or to pursue any application for any United States or
foreign patents or copyright registrations covering Inventions or original works
of authorship assigned to the Company as above, then I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agent and attorney in fact, to act for and in my behalf and stead to execute
and file any such applications and to do all other lawfully permitted acts to
further the prosecution and issuance of letters patent or copyright
registrations thereon with the same legal force and effect as if executed by me.
(f) Exception to Assignments. I understand that the provisions of
------------------------
this Agreement requiring assignment of Inventions to the Company do not apply to
any invention which qualifies fully under the provisions of California Labor
Code Section 2870 (attached hereto as Attachment 2). I will advise the Company
promptly in writing of any inventions that I believe meet the criteria in
California Labor Code Section 2870 and not otherwise disclosed on Attachment 1.
3. Returning Company Documents. I agree that, at the time of leaving the
---------------------------
employ of the Company, I will deliver to the Company (and will not keep in my
possession, recreate or deliver to anyone else) any and all devices, records,
data, notes, reports, proposals, lists, correspondence, specifications, drawings
blueprints, sketches, materials, equipment, other documents or property, or
reproductions of any aforementioned items developed by me pursuant to my
employment with the Company or otherwise belonging to the Company, its
successors or assigns. In the event of the termination of my employment, I
agree to sign and deliver the "Termination Certification" attached hereto as
Attachment 3.
4. Notification of New Employer. In the event that I leave the employ of
----------------------------
the Company, I hereby grant consent to notification by the Company to my new
employer about my rights and obligations under this Agreement.
5. Equitable Relief. I agree that it would be impossible or inadequate
----------------
to measure and calculate the Company's damages from any breach of the covenants
set forth in Sections 1, 2, and 3 herein. Accordingly, I agree that if I breach
any of such Sections, the Company will have available, in addition to any other
right or remedy available in arbitration, the right to obtain an injunction from
a court of competent jurisdiction restraining such breach or threatened breach
and to specific performance of any such provision of this Agreement. I further
agree that no bond or other security shall be required in obtaining such
equitable relief and I hereby consent to the issuance of such injunction and to
the ordering of specific performance.
<PAGE>
ATTACHMENT 1
------------
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
Identifying Number
Title Date or Brief Description
- ----- ---- --------------------
[X] No inventions or improvements
[_] Additional Sheets Attached
Signature of Employee: /s/ Kevin D. Moran
---------------------------
Print Name of Employee: Kevin D. Moran
---------------------------
Date: July 10, 1998
-------------
<PAGE>
ATTACHMENT 2
------------
CALIFORNIA LABOR CODE SECTION 2870
EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
"(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable."
<PAGE>
ATTACHMENT 3
------------
TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed
to return, any devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints, sketches, materials,
equipment, other documents or property, or reproductions of any aforementioned
items belonging to IA Corporation I, its subsidiaries, affiliates, successors or
assigns (together, the "Company").
I further certify that I have complied with all the terms of the Company's
Employment Confidential Information and Invention Assignment Agreement signed by
me, including the reporting of any inventions and original works of authorship
(as defined therein), conceived or made by me (solely or jointly with others)
covered by that agreement.
I further agree that, in compliance with the Confidentiality Agreement, I
will preserve as confidential all trade secrets, confidential knowledge, data or
other proprietary information relating to products, processes, know-how,
designs, formulas, developmental or experimental work, computer programs, data
bases, other original works of authorship, customer lists, business plans,
financial information or other subject matter pertaining to any business of the
Company or any of its employees, clients, consultants or licensees.
Date: ___________________
/s/ Kevin D. Moran
- -------------------------------
(Executive's Signature)
Kevin D. Moran
- -------------------------------
(Type/Print Executive's Name)
<PAGE>
EXHIBIT 10.2
IA CORPORATION I
SEVERANCE AND NON-COMPETE AGREEMENT
-----------------------------------
THIS AGREEMENT is made as of July 27, 1998 by IA Corporation I, a Delaware
Corporation (the "Company") and Dr. C. V. Ravi (the "Executive").
1. Effective Date. This Agreement supersedes and replaces the agreement dated
--------------
July 31, 1992, between Integrated Automation and Design, Inc, IA Corporation and
Dr. C.V. Ravi. The Effective Date of this Agreement shall be the date the
Company hires a Chief Executive Officer to replace Executive.
2. Definitions. For the purposes of this Agreement, the following terms shall
-----------
have the meaning set forth below:
a. Cause. "Cause" shall mean (i) Executive's continued failure to
-----
substantially perform Executive's principal duties and responsibilities (other
than as a result of Disability or death) after thirty (30) days written notice
from the Company specifying the nature of Executive's failure and demanding that
such failure be remedied; (ii) Executive's material and continuing breach of
Executive's obligations to the Company set forth in Executive's employment
agreement, or any written rule, regulation or policy of the Company applicable
to all employees after thirty (30) days written notice from the Company
specifying the nature of Executive's breach and demanding that such breach be
remedied (unless such breach by its nature cannot be cured, in which case an
opportunity to cure shall not be required); (iii) Executive's being convicted of
a felony; or (iv) act or acts of dishonesty undertaken by Executive and intended
to result in substantial gain or personal enrichment of Executive at the expense
of the Company.
b. Change of Control. "Change of Control" shall mean the occurrence of any
-----------------
of the following events:
i. Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than Warburg, Pincus
Investors L.P. or its affiliates, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 50% or more of the total voting power represented by
the Company's then outstanding voting securities; or
ii. The consummation of (A) a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or the entity that
controls such surviving entity) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such surviving
entity or the entity that controls such surviving entity outstanding immediately
after such merger or consolidation; or (B) the sale or disposition by the
Company of all or substantially all of the Company's assets.
c. Constructive Termination. "Constructive Termination" shall mean a
------------------------
termination of employment due to any of the following, unless agreed to by
Executive in writing: (i) a reduction in Executive's salary or benefits (except
in connection with a decrease to be applied equally to all executives of the
Company because the Company's performance has decreased, and excluding the
substitution of substantially equivalent compensation and benefits); (ii) a
material diminution of Executive's responsibilities (e.g., title, primary
duties, resources); (iii) relocation of Executive by the Company to a location
more than fifty (50) miles from Emeryville, California; or (iv) failure of a
successor to assume and perform under this Agreement.
d. Disability. "Disability" shall mean that Executive, at the time notice
----------
is given, has been unable to perform Executive's duties under this Agreement for
a period of not less than ninety (90) days consecutively as the result of
Executive's incapacity due to physical or mental illness. In the event that
Executive resumes the performance of substantially all of Executive's duties
hereunder within ninety (90) days of the commencement of leave before the
termination of employment under Section 6(b)(iii) becomes effective, the notice
of termination shall automatically be deemed to have been revoked. This
paragraph will be interpreted in compliance with the Americans with Disabilities
Act.
<PAGE>
3. Duties. Executive shall serve as Chairman of the Board and Chief Strategy
------
Officer of the Company.
4. Payments Upon Termination of Employment.
---------------------------------------
a. Termination Without Cause, Constructive Termination, Disability, Death or
-------------------------------------------------------------------------
Termination by Mutual Agreement . If the Company terminates Executive's
- --------------------------------
employment other than for Cause, or if Executive resigns as a result of a
Constructive Termination, Change of Control or if Executive's employment is
terminated due to Disability, Death or by mutual agreement, Executive shall be
entitled to receive the following:
i. Severance Payment. In lieu of any payments under the Company's
-----------------
severance plan and subject to the offset set forth below, the Company shall
continue to make payments to Executive equal to Executive's salary plus
Claremont or equivalent membership fee and a car allowance (to the extent
Executive received a car allowance at the time of termination) (the "Severance
Payment") for a period of eighteen (18) months (the "Severance Period").
ii. Health and Welfare Benefits. The Company shall continue to
---------------------------
provide Executive health and welfare benefits (including dependent coverage, as
is applicable) during the Severance Period. Such benefits will be discontinued
to the extent that Executive receives similar benefits in connection with new
employment. Executive will also be entitled to such payments and benefits as
may be provided under applicable benefit plans and programs of the Company.
iii Method of Payment. With the exception of the Severance Payment
-----------------
made as a result of Executives's Disability or Death, the Severance Payment will
be made every two (2) weeks during the Severance Period. In the case of
Disability, the Severance Payment will be made every two (2) weeks, offset by
the combined amount received by Executive pursuant to (a) the long-term
disability coverage, if any, then offered by the Company, (b) state disability
insurance, and/or (c) workers compensation insurance. In the case of
Executive's death, payment will be made in one lump sum to Executive's estate.
b. Other Termination. If Executive's employment terminates for any reason
-----------------
other than as described in Section 4a above, then Employee shall be entitled to
receive severance, if any, and any other benefits only as may then be
established under the Company's existing severance and benefit plans and
policies at the time of such termination.
5. Successors.
----------
a. Company's Successors. Any successor to the Company (whether direct or
--------------------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume this Agreement and agree expressly to perform this Agreement in the
same manner and to the same extent as the Company would be required to perform
it in the absence of a succession. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by this Agreement by operation of law.
b. Executive's Successors. This Agreement and all rights of Executive
----------------------
hereunder shall inure to the benefit of, and be enforceable by, Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
6. Notice. Notices and all other communications contemplated by this Agreement
------
shall be in writing and shall be deemed to have been duly given when personally
delivered; upon delivery when sent by overnight courier; or five(5) days after
being mailed by first class mail, return receipt requested and postage prepaid.
In the case of the Executive, mailed notices shall be addressed to Executive at
the home address which Executive most recently communicated to the Company in
writing. In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its Chief Financial Officer.
7. Non-Competition. During the term of this Executive's employment and for the
---------------
longer of (a) one (1) year following the termination of employment or (b) the
Severance Period the (the "Non-Competition Period"), Executive shall not
Page 2
<PAGE>
maintain or enter into any employment position or consulting relationship with a
"Direct Competitor" of the Company, which is generally defined as the business
unit, division, subsidiary or individual that offers or sells products or
services substantially similar to those offered or sold by the Company
("Competitive Products") during the term of this Agreement. Direct Competitor
shall not generally include affiliates, business units, divisions or
subsidiaries of any Direct Competitor that do not offer or sell Competitive
Products. The classification of any entity as a Direct Competitor shall be at
the Company's reasonable discretion. In the event during the Non-Competition
Period Executive breaches this Section 7, Executive agrees that all obligations
of the Company to make the Severance Payment, shall immediately terminate and
Executive shall repay to the Company an amount equal to the after tax proceeds
to Executive of any Severance Payments paid to date.
8. Solicitation of Employees. Executive agrees that for the longer of (a) one
-------------------------
(1) year following termination of Executive's employment or (b) the Severance
Period with the Company, Executive shall not either directly or indirectly
solicit, induce, recruit, or encourage any of the Company's employees to leave
their employment, or take away such employees, or attempt to solicit, induce,
recruit, encourage or take away employees of the Company, either for Executive
or for any other person or entity.
9. Miscellaneous Provisions.
------------------------
a. Waiver. No provision of this Agreement shall be modified, waived or
------
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Executive and an officer or a director of the Company
authorized by the Board of Directors. No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
b. Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) regarding severance
which are not expressly set forth in this Agreement have been made or entered
into by either party with respect to the subject matter hereof. With the
exception of the terms in paragraphs 2, 3, 14, and 15, contained in Executive's
employment agreement dated August 1, 1992 (the "Employment Agreement") which
terms are modified by this Agreement, said Employment Agreement remains in full
force and effect and Executive's "at will" employment is not changed. IA
acknowledges that the Severance Payment provided for in this Agreement is not
"other compensation" and will not be governed by paragraph 4 of the Employment
Agreement.
c. Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
d. Severability. The invalidity or unenforceability of any provision or
------------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
e. Arbitration. Any dispute or controversy arising under or in connection
-----------
with this Agreement shall be settled exclusively by arbitration in San
Francisco, California, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction.
f. No Assignment of Benefits. The rights of any person to payments or
-------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection (f) shall be void.
g. Limitation of Remedies. If the Executive's employment terminates for any
----------------------
reason, the Executive shall not be entitled to any payments, benefits, damages,
awards or compensation other than as provided by this Agreement.
h. Employment Taxes. All payments made pursuant to this Agreement will be
----------------
subject to withholding of applicable taxes.
Page 3
<PAGE>
i. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
j. Representation by Counsel. Executive represents that Executive has had
-------------------------
the opportunity to seek and has been represented by independent legal counsel in
connection with entering into the Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer.
IA Corporation I
/s/ David M. Winkler /s/ C.V. Ravi
- ------------------------------- -------------------------------
Executive's Signature
V.P./CFO C. V. Ravi
- -------------------------------
Title
Page 4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 2,547 2,547
<SECURITIES> 3,974 3,974
<RECEIVABLES> 4,383 4,383
<ALLOWANCES> (1,419) (1,419)
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,310 10,310
<PP&E> 2,600 2,600
<DEPRECIATION> (1,804) (1,804)
<TOTAL-ASSETS> 11,106 11,106
<CURRENT-LIABILITIES> 4,628 4,628
<BONDS> 0 0
0 0
0 0
<COMMON> 118 118
<OTHER-SE> 6,360 6,360
<TOTAL-LIABILITY-AND-EQUITY> 11,106 11,106
<SALES> 1,874 9,926
<TOTAL-REVENUES> 1,874 9,926
<CGS> 2,346 8,094
<TOTAL-COSTS> 2,346 8,094
<OTHER-EXPENSES> 4,222 11,805
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (109) (330)
<INCOME-PRETAX> (4,585) (9,643)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,585) (9,643)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,585) (9,643)
<EPS-PRIMARY> ($0.39) ($0.83)
<EPS-DILUTED> ($0.39) ($0.83)
</TABLE>
