<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, 1999
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
ALYSIS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3161772
-------- ----------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
1900 Powell Street, Suite 600
Emeryville, California 94608
(Address of principal executive offices)
(510) 450-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
The number of outstanding shares of the Registrant's Common Stock, $0.01 par
value, was 10,386,338 as of October 31, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets at September 30, 1999 and December 31, 1998........... 2
Condensed Statements of Operations for the three months and nine months
ended September 30, 1999 and 1998.............................................. 3
Condensed Statements of Cash Flows for the nine months ended September
30, 1999 and 1998.............................................................. 4
Notes to Condensed Financial Statements........................................ 5
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............................................... 22
Signatures ............................................................................... 23
</TABLE>
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ALYSIS TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents....................................................... $ 9,432 $ 7,582
Receivables, including unbilled receivables of $699 at September 30, 1999 and
$0 at December 31, 1998, less allowance for doubtful accounts of $741 at
September 30, 1999 and $1,248 at December 31, 1998........................... 2,426 1,051
Other current assets............................................................. 699 678
-------- --------
Total current assets........................................................ 12,557 9,311
Property and equipment, net........................................................ 572 699
Intangible assets.................................................................. 2,518 ---
-------- --------
$ 15,647 $ 10,010
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................ $ 334 $ 246
Accrued compensation and related liabilities.................................... 1,971 1,809
Deferred revenues............................................................... 3,581 3,778
Other accrued liabilities....................................................... 626 354
-------- --------
Total current liabilities................................................... 6,512 6,187
Stockholders' equity:
Preferred shares, Series B, $.001 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 400 at September 30, 1999 and none at
December 31, 1998....................................................... 3,814 ----
Common shares, $0.01 par value:
Authorized shares -- 35,000,000
Issued and outstanding shares -- 10,384,342 at September 30, 1999 and
9,336,329 at December 31, 1998.......................................... 104 93
Class B Common shares, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 2,417,112 at September 30, 1999 and
December 31, 1998....................................................... 24 25
Additional paid-in capital...................................................... 29,736 28,150
Accumulated deficit............................................................. (24,129) (24,204)
Deferred compensation........................................................... (414) (241)
-------- --------
Total stockholders' equity.................................................. 9,135 3,823
-------- --------
$ 15,647 $ 10,010
======== ========
</TABLE>
Note: The December 31, 1998 balance sheet amounts are derived from the December
31, 1998 audited financial statements.
See accompanying notes
2
<PAGE>
ALYSIS TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- ---------------------------------------
1999 1998 1999 1998
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
License..................................... $ 3,839 $ 532 $ 5,769 $ 2,561
Service..................................... 1,759 273 5,525 4,233
Maintenance................................. 1,230 1,069 3,810 3,132
---------------- ----------------- ----------------- ----------------
Total revenues............................. 6,828 1,874 15,104 9,926
Cost of revenues:
License..................................... 16 38 48 164
Service..................................... 1,549 1,296 5,186 5,669
Maintenance................................. 647 1,133 2,478 2,642
---------------- ----------------- ----------------- ----------------
Total cost of revenues..................... 2,212 2,467 7,712 8,475
Operating expenses:
Sales and marketing......................... 880 1,355 3,297 3,771
General and administrative.................. 1,171 1,311 3,128 3,504
Product development......................... 536 1,435 1,070 4,149
---------------- ----------------- ----------------- ----------------
Total operating expenses................... 2,587 4,101 7,495 11,424
---------------- ----------------- ----------------- ----------------
Operating income (loss)...................... 2,029 (4,694) (103) (9,973)
Other income:
Interest income............................. 109 109 224 330
---------------- ----------------- ----------------- ----------------
Net income (loss)............................ 2,138 (4,585) 121 (9,643)
Preferred stock dividends.................... 47 - 47 -
---------------- ----------------- ----------------- ----------------
Net income (loss) applicable to common
shareholders................................ $ 2,091 $(4,585) $ 74 $(9,643)
================ ================= ================= ================
Basic net income (loss) per share applicable
to common shareholders...................... $ 0.17 $ (0.39) $ 0.01 $ (0.83)
================ ================= ================= ================
Diluted net income (loss) per share
applicable to common shareholders........... $ 0.15 $ (0.39) $ 0.01 $ (0.83)
================ ================= ================= ================
Shares used in computing basic net income
and net loss per share applicable to common
shareholders................................ 12,384 11,646 12,134 11,552
================ ================= ================= ================
Shares used in computing diluted net income
and net loss per share applicable to
common shareholders......................... 14,387 11,646 13,042 11,552
================ ================= ================= ================
</TABLE>
See accompanying notes
3
<PAGE>
ALYSIS TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
1999 1998
-------- ---------
<S> <C> <C>
Operating activities
Net income (loss) applicable to common shareholders.................................... $ 74 $ (9,643)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation........................................................................ 266 244
Amortization of deferred compensation............................................... 280 155
Changes in operating assets and liabilities:
Receivables..................................................................... (1,375) 5,903
Other current assets............................................................ (21) (77)
Accounts payable................................................................ 88 (73)
Accrued compensation and related liabilities.................................... 162 234
Deferred revenues............................................................... (197) 425
Other accrued liabilities....................................................... 272 377
------- --------
Net cash used in operating activities.................................................. (451) (2,455)
------- --------
Investing activities
Business combination, net of cash acquired............................................. (1,768) -
Purchases of property and equipment.................................................... (139) (427)
Purchases of short-term investments.................................................... - (10,827)
Maturities of short-term investments................................................... - 8,853
------- --------
Net cash used in investing activities.................................................. (2,690) (2,401)
------- --------
Financing activities
Net proceeds from sale of Preferred Stock.............................................. 3,814 -
Purchases of treasury stock............................................................ (33) -
Net proceeds from exercise of stock options............................................ 250 31
Net proceeds from employee stock purchase plan......................................... 177 314
------- --------
Net cash provided by financing activities.............................................. 4,208 345
------- --------
Net increase (decrease) in cash and cash equivalents................................... 1,850 (4,511)
Cash and cash equivalents at beginning of period....................................... 7,582 7,058
------- --------
Cash and cash equivalents at end of period............................................. $ 9,432 $ 2,547
======= ========
Supplemental disclosure of non-cash information:
Deferred compensation related to stock options...................................... $ - $ 355
======= ========
Common Stock issued in business combination............................................ $ 750 $ -
======= ========
Assumed liabilities related to business combination.................................... $ 227 $ -
======= ========
</TABLE>
4
<PAGE>
ALYSIS TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
1. Our Company and Basis of Presentation
Alysis Technologies, Inc. (previously known as IA Corporation I) was
incorporated on July 20, 1992. We develop, market, implement and support large-
scale application software solutions to financial services organizations
primarily in North America. Certain reclassifications have been made to the
financial statements in order to conform to the current presentation.
2. Basic and Diluted Net Income (Loss) Per Share
Our net income (loss) per share applicable to common shareholders has been
calculated in accordance with Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. Basic net income (loss) per share applicable to
common shareholders has been computed using the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
applicable to common shareholders 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) loss per share applicable to
common shareholders.
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Nine Months Ended
9/30/99 9/30/98 9/30/99 9/30/98
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,138 $ (4,585) $ 121 $ (9,643)
Preferred dividends 47 - 47 -
----------- ----------- ----------- ----------
Net income (loss) available to common
shareholders $ 2,091 $ (4,585) $ 74 $ (9,643)
=========== =========== =========== ==========
Shares used in computing basic net
income(loss) per share applicable to
common shareholders 12,384 11,646 12,134 11,552
Effect of dilutive securities (a) 2,003 - 908 -
----------- ----------- ----------- ----------
Shares used in computing diluted net
income (loss) per share applicable to
common shareholders 14,387 11,646 13,042 11,552
=========== =========== =========== ==========
Basic net income (loss) per share applicable
to common shareholders $ 0.17 $ (0.39) $ 0.01 $ (0.83)
=========== =========== =========== ==========
Diluted net income (loss) per share
applicable to common shareholders $ 0.15 $ (0.39) $ 0.01 $ (0.83)
=========== =========== =========== ==========
</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
Our total revenues are derived from software licenses, services and
maintenance. We license software to end-users and resellers under non-cancelable
license agreements and provide services to end-users consisting of
customization, installation, training and software maintenance. Software license
and service revenues from contracts requiring significant customization services
are recognized on the percentage-of-completion method based on the
5
<PAGE>
ratio of incurred costs to total estimated costs. Allowances for future
estimated warranty costs are provided at the time revenues are recognized.
Estimated losses on contracts are reported in the period in which such losses
become known. Maintenance revenue is recognized ratably over the term of the
related agreements, which in most cases is one year.
4. Comprehensive income
There is no difference between comprehensive income (loss) and net income
(loss) for the three months and nine months ended September 30, 1999 and 1998.
5. Preferred Stock, Series B
On July 30, 1999, we closed a $4.0 million convertible preferred stock
financing (the "Financing"). The Financing was led by Warburg, Pincus
Investors, L.P., an affiliate of E. M. Warburg, Pincus & Co., LLC, our largest
shareholder. We issued 400 shares of Series B Preferred Stock at a purchase
price of $10,000 per share. Each share of Series B Preferred Stock is
convertible into approximately 5,229 shares of our Class B Common Stock. The
conversion price of the Series B Preferred Stock is $1.9125 per share, which
represents a 20% premium over the average closing price of our Common Stock
during the ten days prior to subscription. The conversion price is not subject
to any reset or "floating" adjustment, other than standard anti-dilution
protection. The holders of Series B Preferred Stock will be entitled to
cumulative annual dividends of 7% of the purchase price, which are payable semi-
annually in cash or, at our option, with shares of our Class B Common Stock.
The Class B Common Stock is convertible into Common Stock. Upon the occurrence
of certain events, the Series B Preferred Stock has a liquidation preference
equal to the initial purchase price plus accrued but unpaid dividends. The
Series B Preferred Stock will also be entitled to certain registration rights.
6. Acquisition
On September 15, 1999, we acquired all of the shares of the capital stock of
At Work Corporation ("At Work"), a New York-based provider of advanced document
distribution and electronic commerce applications that utilize Java and other
Internet-based technologies. The aggregate consideration paid for the shares of
At Work was (a) $1,696,000 in cash, (b) 480,031 of Common Stock of the Company,
and (c) $1,000,000 in cash to be paid out as set forth in employment agreements.
The acquisition has been accounted for as a purchase, whereby, all assets
purchased and liabilities assumed were recorded at their fair market value. The
excess of the aggregate purchase price over the fair value of the net assets
acquired was recorded as intangible assets and will be amortized over 3 years.
The unaudited pro forma results of operations, which follow, assume that the
acquisition of At Work had occurred on January 1, 1999 (in thousands, except per
share data).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
9/30/99 9/30/99
------------- ------------
<S> <C> <C>
Revenues $ 6,857 $ 15,257
============= ============
Net income (loss) $ 2,043 $ (126)
============= ============
Basic net income per share
applicable to common shareholders $ 0.17 $ 0.00
============= ============
Diluted net income per share
applicable to common shareholders $ 0.15 $ 0.00
============= ============
</TABLE>
6
<PAGE>
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisition
occurred on January 1, 1999 or of future results of operations of the
consolidated entities.
7
<PAGE>
The following "Management Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report and Annual Report on Form 10-K. Additionally, this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements (identified with an asterisk "*") that
involve risk and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in "Risk Factors." The Company assumes no
obligation to update such forward-looking statements or to update the reasons
actual results could differ materially from those anticipated in such forward-
looking statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were incorporated in July 1992, when the management, in partnership with
E.M. Warburg, Pincus & Co., LLC, purchased certain assets and liabilities of
Litton Industries' Integrated Automation Division, a leading system integrator
with a primary focus on the aerospace industry and an additional focus on the
financial services and transportation industries. Following this acquisition, we
began our transition from a system integrator and a provider of software
development services to a developer of software application solutions. We
decided to de-emphasize the aerospace market, to develop our transaction
management platform into a stand-alone software product, and to build a series
of software and product solutions based upon our complex enterprise transaction
management platform targeted initially to the financial services industry. Our
objective was to increase the portion of our total revenue derived from software
application solutions sales. Through September 30, 1999, a majority of our total
revenues were derived from large application development contracts. We were able
to increase the amount of software license revenue in 1996 and in 1997, but
suffered a significant decline in 1998 and early 1999. We believe this was
primarily due to a much smaller available market for our existing software
application solutions than originally expected. Management believes that it
will need to penetrate additional market segments within financial services to
achieve continued revenue growth, the timing of which is difficult to predict.*
We reversed the downward trend in software license revenues in the third
quarter of 1999. Our revenues increased 622% from $0.5 million for the three
months ended September 30, 1998 to $3.8 million for the three months ended
September 30, 1999. This increase in revenue was primarily due to the licenses
and royalties earned as the result of an amendment to the Global Strategic
Alliance Agreement signed in June 1999. As a result, the company generated net
income of $2.1 million for the three months ended September 30, 1999 as compared
to the net loss of $4.6 million for the three months ended September 30, 1998.
The decline in revenue in 1998 and the first quarter of 1999 were caused by
delays in implementation of our RemitVision(R) software application solutions,
and by decrease in demand for our CheckVision(R) and RemitVision software
application solutions. These products are affordable only by the top 125 U.S.
banks, and our CheckVision Archive product is still in the early adopter phase
by these banks. Also, the banking industry is consolidating and is focused on
solving the Year 2000 problem. We believe these issues have put severe
constraints on resources available within the banking industry to successfully
implement our offerings. We believe our technology and expertise apply to a
broader sector of financial services, such as brokerage, mutual funds, insurance
and credit card sectors.* Although we have successfully completed installations
at both Merrill Lynch and Fidelity Investments, there can be no assurance that
we will be successful in these markets, nor can there be any assurance as to the
timing of this success.
We currently sell four software application solutions--CheckVision,
WorkVision(R), a loan operations application framework, which are built upon our
enterprise transaction management platform, and CyberStatement(TM). CheckVision
is designed to maximize the value of archived transaction information over the
entire useful life of such information and WorkVision serves as the foundation
for our image and archive applications. The loan operations application
framework uses workflow, imaging, and Intranet technology to enable a bank to
more quickly, efficiently, and accurately initiate a new consumer or installment
loan. CyberStatement
8
<PAGE>
enables financial services firms to efficiently manage, store, and distribute
legacy reports and print-formatted documents such as customer statements over
the Internet. Our software application solutions are comprised of a core
software product plus customization and installation services provided around
the core product. We have also invested in growing a sales and marketing
organization to sell our software solutions. At the same time, we have continued
to develop specific software solutions under application development contracts
for customers primarily in the financial services industry, which we believe may
be the basis for future application frameworks. In early 1999, we released our
new CyberStatement software and product solution, which was based on a large
application development contract. There can be no assurance that this new
software and product solution will generate additional revenues.
During the transition from providing software application solutions to
providing software and product solutions, a majority of our total revenues in
the recent years has been derived from the provision of licenses and services to
customers pursuant to large software application solutions contracts. We
recognize revenue from these contracts on the percentage-of-completion basis.
Service revenue as a percentage of total revenue for the three months ended
September 30, 1999 and 1998 was 25.8% and 14.6%, respectively. To continue to
achieve revenue growth and improve operating margins, we must increase market
acceptance and sales of our software application solutions to a broader base of
the financial services market. We also need to develop and enhance our sales
and marketing capabilities, software development, production and distribution
infrastructure to support our newer product solutions as we continue the
transition from providing software application solutions to providing software
and product solutions.* There can be no assurance that we will be successful in
creating the necessary capabilities and infrastructure. Any significant failure
by us to manage the transition successfully has had and would continue to have a
material adverse affect on our business, operating results and financial
condition and would continue to create significant fluctuation in quarterly
operating results.
Installation of our software application solutions is, in part, dependent
upon certain customer responsibilities. To the extent the customer activities
are delayed, the installation of our application software may be delayed, which
may result in a delay in revenue recognition, which could continue to have a
material adverse affect on our business, operating results and financial
condition. For example, we have experienced product installation delays which
have resulted in us having lower than expected revenue and profits from
RemitVision customers in the quarters ended June 30, September 30 and December
31, 1997 and for each quarter of 1998. We discontinued the RemitVision product
in early 1999. The failure to resolve similar situations in the future could
continue to have an adverse affect on our operating results and could adversely
affect our ability to market software solutions.
Our total revenues are derived from software licenses, services and
maintenance. We license software to end-users under non-cancelable license
agreements and provide services such as customization, installation, training
and software maintenance. 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 have and could continue
to differ from our estimates for a variety of reasons, including delays in the
installation of our application software solutions or greater than anticipated
contract costs, and such differences could continue to be material to the
financial statements. 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. We
have taken steps to improve the accuracy of our software development and
customization estimation process, but there can be no assurance that these
measures will improve results.
At September 30, 1999, we had an accumulated deficit of approximately $24.1
million. There can be no assurance that we will have operating profits in any
future period.
9
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1999 and 1998
Revenues
License. License revenue to-date has been primarily derived from the sale of
licenses of our CheckVision, RemitVision and our loan application framework
software application solutions. License revenue increased 622% to $3.8 million
from $0.5 million for the three months ended September 30, 1999 and 1998,
respectively. This increase in license revenue primarily resulted from increased
licenses and royalties recorded in connection with the amendment of the Global
Strategic Alliance Agreement signed in June 1999. In addition, during the three
months ended September 30, 1998, we adjusted our estimates for costs to complete
certain development contracts resulting in a decrease in revenue. Management
believes that we will need to penetrate additional market segments within
financial services to achieve continued license revenue growth, the timing of
which is difficult to predict. *
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 our CheckVision and RemitVision software
application solutions. Service revenue increased 544% to $1.8 million from $0.3
million for the three months ended September 30, 1999 and 1998, respectively.
The increase is primarily due to the adjustments made to our estimates for costs
to complete certain development contracts that resulted in a decrease in revenue
for the three months ended September 30, 1998. Management believes that we will
need to penetrate other market segments within financial services and expand
into new markets to achieve service revenue growth, the timing of which is
difficult to predict. *
Maintenance. Maintenance revenue is generated by software support contracts
to customers who have entered into license agreements for the use of our
software application solutions. Maintenance support includes telephone support,
minor software upgrades and, in some cases, third party support. Maintenance
revenue increased 15% to $1.2 million from $1.1 million for the three months
ended September 30, 1999 and 1998, respectively. Maintenance revenue increased
for the three months ended September 30, 1999 from the three months ended
September 30, 1998 due to the growing base of installed CheckVision application
framework customers resulting in a corresponding increase in demand for
maintenance related services.
Cost of Revenues
License. Cost of license revenue decreased to $16,000 from $38,000 for the
three months ended September 30, 1999 and 1998, respectively, representing 0.4%
and 7.1% of license revenues for the three months ended September 30, 1999 and
1998, respectively. Costs declined in absolute dollars because there are no
associated costs of license with the license and royalty revenues realized on
the amendment of the Global Strategic Alliance Agreement. The cost of license
revenue as a percentage of license revenue may increase in the future if we
negotiate royalty agreements with partners or customers that fund or partially
fund future application frameworks. *
Service. Cost of service revenue is primarily comprised of employee-related
costs and fees for third-party consultants incurred in providing customization,
installation, and training and development services. Cost of service revenue
increased 20% to $1.5 million from $1.3 million for the three months ended
September 30, 1999 and 1998, respectively, representing 88% and 475% of service
revenues for the three months ended September 30, 1999 and 1998, respectively.
Cost of service revenue as a percentage of revenue decreased substantially due
to an increase in the number of higher gross margin time and material contracts,
a reduction in the number of engineers and improved execution of performance on
contracts resulting in quicker customer acceptance of contract completion. In
addition, the cost of service revenue as a percentage of revenue for the quarter
ended September 30, 1998 was substantially higher due to the effect of the
revenue adjustments, as noted above.
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
decreased 43% to $0.6 million from $1.1 million for the three months ended
September 30, 1999 and 1998, respectively, representing 53%
10
<PAGE>
and 106% of maintenance revenues for the three months ended September 30, 1999
and 1998, respectively. The decrease in maintenance costs is primarily due to
reduced headcount and improved productivity in delivering maintenance services
as our products mature.
Operating expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales personnel, field offices,
travel and related expenses, promotional and advertisement expenses. Sales and
marketing expenses decreased 35% to $0.9 million for the three months ended
September 30, 1999 as compared to $1.4 million for the three months ended
September 30, 1998. Sales and marketing expense decreased primarily due to a
decrease in the sales and marketing personnel. Sales and marketing expenses as
a percentage of revenue decreased to 13% for the three months ended September
30, 1999 from 72% for the three months ended September 30, 1998 primarily due to
the increase in revenue for the three months ended September 30, 1999 coupled
with the fact that these expenses are relatively fixed.
General and administrative. General and administrative expense was $1.2
million for the three months ended September 30, 1999 as compared to $1.3
million for the three months ended September 30, 1998, or 17% and 70% of total
revenues, respectively. For the three months ended September 30, 1999, general
and administrative expense decreased 11% from the three months ended September
30, 1998 due primarily to the increase in revenues.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expense was
$0.5 million for the three months ended September 30, 1999 as compared to $1.4
million for the three months ended September 30, 1998, or 8% and 77% of total
revenues, respectively. For the three months ended September 30, 1999, product
development expense decreased primarily as a result of decreased personnel costs
and associated infrastructure costs required to support software development
initiatives to enhance and expand our product offerings. In particular, our
development expenditure decrease for the three months ended September 30, 1999
from the three months ended September 30, 1998 was driven by the completion of
our RemitVision Release 2.0 and Release 4.0 in 1998. We may experience increased
product development costs associated with product enhancements and new
application frameworks, which are deemed necessary to adequately address the
changing needs of the marketplace.* In particular, to the extent we are required
to develop future application frameworks without development contracts, our
expenditures for product development may increase.
Interest income. Interest income represents interest earned by the Company
on its cash, and cash equivalents. Interest income remained unchanged at
$109,000 for the three months ended September 30, 1999 and 1998, respectively.
Provision for income taxes. The Company did not record a provision for
income taxes for the three months ended September 30, 1999 and 1998.
RESULTS OF OPERATIONS
Comparison of Nine Months Ended September 30, 1999 and 1998
Revenues
License. License revenue to-date has been primarily derived from the sale of
licenses of our CheckVision, RemitVision, and our loan application framework
software application solutions. License revenue increased 125% to $5.8 million
from $2.6 million for the nine months ended September 30, 1999 and 1998,
respectively. This increase in license revenue resulted from the increase in
licenses and royalties recorded in connection with the amendment of the Global
Strategic Alliance Agreement signed in June 1999. In addition, during the nine
months ended September 30, 1998, we adjusted our estimates for costs to complete
certain development contracts resulting in a decrease in revenue. Management
believes that we will need to penetrate additional market segments within
financial services to achieve continued license revenue growth, the timing of
which is difficult to predict.*
11
<PAGE>
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 our CheckVision and RemitVision software
application solutions. Service revenue increased 31% to $5.5 million from $4.2
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase is primarily due to the adjustments made to our estimates for costs to
complete certain development contracts that resulted in a decrease in revenue
for the nine months ended September 30, 1998. Management believes that we will
need to penetrate other market segments within financial services and expand
into new markets to achieve service revenue growth, the timing of which is
difficult to predict.*
Maintenance. Maintenance revenue is generated primarily by software support
contracts to customers who have entered into license agreements for the use of
our software application solutions. Maintenance support includes telephone
support, minor software upgrades and, in some cases, third party support.
Maintenance revenue increased 22% to $3.8 million from $3.1 million for the nine
months ended September 30, 1999 and 1998, respectively. This increase is due to
the growing base of installed CheckVision application framework customers
resulting in a corresponding increase in demand for maintenance related
services.
Cost of Revenues
License. Cost of license revenue decreased to $48,000 from $164,000 for the
nine months ended September 30, 1999 and 1998, respectively, representing 0.8%
and 6.4% of license revenues for the nine months ended September 30, 1999 and
1998, respectively. Costs declined in absolute dollars because there are no
associated costs of license with the license and royalty revenues realized on
the amendment of the Global Strategic Alliance Agreement. The cost of license
revenue as a percentage of license revenue may increase in the future if we
negotiate royalty agreements with partners or customers that fund or partially
fund future application frameworks.*
Service. Cost of service revenue is primarily comprised of employee-related
costs and fees for third-party consultants incurred in providing customization,
installation, and training and development services. Cost of service revenue
decreased 9% to $5.2 million from $5.7 million for the nine months ended
September 30, 1999 and 1998, respectively, representing 94% and 134% of service
revenues for the nine months ended September 30, 1999 and 1998, respectively.
Cost of service revenue as a percentage of revenue decreased due to an increase
in the number of higher gross margin time and material contracts, a reduction in
the number of engineers and improved execution of performance on contracts
resulting in quicker customer acceptance of contract completion.
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
decreased 6% to $2.5 million from $2.6 million for the nine months ended
September 30, 1999 and 1998, respectively, representing 65% and 84% of
maintenance revenues for the nine months ended September 30, 1999 and 1998,
respectively.
Operating expenses
Sales and marketing. Sales and marketing expense consists primarily of
salaries, commissions and bonuses earned by sales personnel, field offices,
travel and related expenses, promotional and advertisement expenses. Sales and
marketing expenses decreased to $3.3 million for the nine months ended September
30, 1999 as compared to $3.8 million for the nine months ended September 30,
1998. Sales and marketing expenses as a percentage of revenue decreased for the
nine months ended September 30, 1999 to 22% from 38% for the nine months ended
September 30, 1998 primarily due to the increase in revenue for the nine months
ended September 30, 1999 coupled with the reduction in the sales and marketing
staff.
General and administrative. General and administrative expense was $3.1
million for the nine months ended September 30, 1999 as compared to $3.5 million
for the nine months ended September 30, 1998, or 21% and 35% of total revenues,
respectively. For the nine months ended September 30, 1999, general and
administrative
12
<PAGE>
expense decreased 11% from the nine months ended September 30, 1998, which
includes the effect of an increase in the allowance for doubtful accounts for
certain contracts associated with high collectibility risks.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expense was
$1.1 million for the nine months ended September 30, 1999 as compared to $4.1
million for the nine months ended September 30, 1998, or 7% and 42% of total
revenues, respectively. For the nine months ended September 30, 1999, product
development expense decreased primarily as a result of decreased personnel costs
and associated infrastructure costs required to support software development
initiatives to enhance and expand our product offerings. In particular, our
development expenditure decrease for the nine months ended September 30, 1999
from the nine months ended September 30, 1998 was driven by the completion of
our RemitVision Release 2.0 and Release 4.0 in 1998. We may experience increased
product development costs associated with product enhancements and new
application frameworks, which are deemed necessary to adequately address the
changing needs of the marketplace.* In particular, to the extent we are required
to develop future application frameworks without development contracts, our
expenditures for product development may increase.*
Interest income. Interest income represents interest earned by the Company
on its cash, and cash equivalents. Interest income decreased to $0.2 million
from $0.3 million for the nine months ended September 30, 1999 and 1998,
respectively, due to lower average invested cash balances in the nine months
ended September 30, 1999.
Provision for income taxes. The Company did not record a provision for
income taxes for the nine months ended September 30, 1999 and 1998.
Liquidity and Capital Resources
Operating activities for the nine months ended September 30, 1999 used $0.5
million of cash. For the nine months ended September 30, 1998, operating
activities used $2.5 million of cash. The net cash used by the operating
activities of the Company for the nine months ended September 30, 1999 was
primarily the result of an increase in receivables.
Our investing activities for the nine months ended September 30, 1999
consisted primarily of the purchase of At Work. Short-term investment purchases
and sales did not occur during the nine months ended September 30, 1999. For
the nine months ended September 30, 1998, total short-term investments purchases
totaled $10.8 million and total sales totaled $8.9 million. Capital expenditures
for the nine months ended September 30, 1999 and for 1998 were $0.1 million and
$0.4 million, respectively. Capital expenditures consisted of purchases of
computer equipment and office furniture to support our product development needs
and Year 2000 compatibility requirements. We currently have no significant
capital spending requirements or purchase commitments other than a non-
cancelable operating lease for our facilities.
Cash provided by financing activities was $4.2 million and $0.3 million for
the nine months ended September 30, 1999 and 1998, respectively. The cash
generated during the nine months ended September 30, 1999 was primarily the
result of net proceeds from the Preferred Stock, Series B financing.
At September 30, 1999, we had $9.4 million in cash and cash equivalents and
$6.0 million in working capital. We believe that our existing cash and cash
equivalents, together with expected cash flows from operations, will be
sufficient to fund our operations for the next 12 months. * In the event that
such existing and expected resources are not sufficient to fund our operations
for the next 12 months, we will need to obtain financing.* There can be no
assurance that such financing will be available on acceptable terms, if at all
and that such terms will not be dilutive to our existing stockholders. Our
inability to secure necessary funding would have a material adverse affect on
our financial condition and results of operation.
13
<PAGE>
Impact of Year 2000
Our Business Could be Affected by Year 2000 Issues. 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. The failure of our internal systems to correctly recognize date
information when the year changes to 2000 could significantly harm our
operations.
In assessing the affect of the Year 2000 Issue on the Company, we have
determined the need to evaluate the following general areas:
. internal infrastructure
. supplier relationships
. products sold to customers
Internal Infrastructure. We have assessed our internal systems, including
our telecommunication services, climate control, building access and other
infrastructural services. Based on our assessment, we have identified necessary
modifications to our telecommunications and internal computer systems to make
them Year 2000 compatible. We expect to implement the telecommunications and
computer systems modifications by November 30, 1999.* We cannot assure you that
our other internal systems contain all necessary software for Year 2000
compatibility.*
Supplier Relationships. We have contacted our critical suppliers of products
and services to determine that their operations and the products and services
they provide to us are Year 2000 compatible. We cannot assure you that the
failure of one of our suppliers to ensure appropriate Year 2000 capability would
not significantly harm our business, operations or financial condition.
Products Sold to Customers. We have also assessed the capability of our
products that we sold to customers. Based on this assessment, we do not expect
that contingencies related to the Year 2000 Issue for the products we sold are
likely to significantly harm our business.* We cannot assure you, however, that
our software application solutions contain all necessary software for Year 2000
compatibility. Additionally, our products incorporate third party software
products, which are in turn incorporated into our customers' products and
internal systems, which we do not develop. The performance of our software
application solutions could be affected if a Year 2000 Issue exists in any
different third party software product or a component of a customer's product or
internal system.* We have not, and will not, assess the existence of these
potential problems in our customers' products or internal systems.*
If any of our licensees experience Year 2000 Issues, such licensees could
assert claims for damages against us. Any such litigation could result in
substantial costs and diversion of our resources, even if ultimately decided in
our favor. In addition, many companies are expending significant resources to
correct their software systems for Year 2000 compatibility. These expenditures
may result in reduced funds available to purchase our application software
solutions.* The occurrence of any of the foregoing could significantly harm our
business, financial condition and results from operations.
We have not developed a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our products or
critical operations, and we do not plan to do so in the future. The expected
costs associated with respect to Year 2000 Issues is estimated to equal $50,000
and are to be funded by our available cash.* We will continue to expend
resources to address this issue in the future.* We cannot assure you, however,
that the Year 2000 Issue will not have an adverse impact on our business,
financial condition and results of operations.
Risk Factors
We Cannot Assure You That We Will Be Profitable In Any Future Period. We have
incurred significant net losses since our inception. At September 30, 1999, we
had an accumulated deficit of approximately $24.1 million. Although we achieved
a net operating profit in the three months ended September 30, 1999 and the
three months
14
<PAGE>
ended March 31, 1995, 1996 and 1997, June 30, 1996, September 30, 1996 and 1997,
and December 31, 1996 and 1997, we cannot assure you that we will have operating
profits in any future period.
Our Quarterly Operating Results Will Fluctuate Because Of Many Factors. Our
quarterly operating results have varied in the past, and we expect our quarterly
operating results to vary significantly in the future.* Our revenues and
operating results are difficult to forecast and could be significantly harmed by
many factors, some of which are outside our control, including, among others:
. the relatively long sales and implementation cycles of our software
application solutions
. the variable size and timing of individual license transactions
. the timing of our revenue which we recognize under the percentage-of-
completion method
. increased competition
. the timing of new product releases by us and our competitors
. market acceptance of our software application solutions
. delay or deferral of customer implementations of our software application
solutions
. software defects or other quality problems with our software application
solutions
. changes in pricing policies by us and our competitors
. the mix of our license and service revenue
. budgeting cycles of our customers
. the introduction of indirect sales into our revenue mix which has resulted
in and could continue to result in lower gross margins
. changes in operating expenses
. changes in our strategy
. personnel changes
. general economic factors
We are in the process of transitioning from an application services focus to
a product-centric focus in order to continue our expansion into the financial
services marketplace, which entails a number of risks, including potential
continued declines in revenue and the need to develop the appropriate sales,
marketing and software production and distribution infrastructure. Further,
because our 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, even one existing contract may have a
significant impact on our quarterly operating results. For example, we had lower
than anticipated revenues and profits from RemitVision customers in the quarters
ended June 30, September 30 and December 31, 1997, in each quarter of 1998, and
in the quarters ended March 31, June 30 and September 30, 1999. In addition, we
have experienced substantially longer sales cycles for our application software
solutions than originally expected. Alliances have to-date provided
significantly less revenue than we had originally expected, and although we
continue to seek ways to expand on alliances, we cannot assure you that these
efforts will be successful. In addition, our customers or potential customers
may defer their purchases of our application frameworks if there is a downturn
in their business or the economy in general. 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 our software application solutions.
Due primarily to hardware requirements and customer site preparation, there
is typically a three to five months period between when a customer places an
order for CheckVision and when we commence installation services. This may be
longer if the customer orders significant customization services. We have
experienced a one-year installation period for RemitVision, a product we have
recently discontinued. Installation of our software application solutions is, in
part, dependent upon certain customer responsibilities. To the extent the
customer activities are delayed, the installation of our application software
may be delayed, which has and may continue to result in a delay in revenue
recognition. Any delay in the installation of our software products or the
recognition of revenue could seriously harm our business, operating results and
financial condition. In the past, we have 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 harm
our operating results and could also adversely affect our ability to market our
15
<PAGE>
products.* Our expense levels are based in part on our expectations of future
revenues. If our revenue is below expectations, net income has been and may
continue to be disproportionately affected because a significant portion of our
expenses does not vary with revenues. Our operating results could continue to be
adversely affected if our revenues do not meet our expectations. We may also
choose to reduce prices, increase spending in response to competition or to
pursue new market opportunities. In particular, if new competitors,
technological advances by existing competitors, other competitive factors, or
our failure to continue to obtain software development contracts require us to
invest significantly greater resources in software product development efforts,
our operating margins may be significantly harmed in the future.
Because of the foregoing factors, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and that you
should not rely on them as indications of our future performance. Further, it is
possible that in future periods our operating results may be below the
expectations of public market analysts and investors. Such an event would most
likely significantly harm the price of our common stock.
We Encounter Risks Associated with Our Transition from a Software Application
Solutions Business to a Product-Centric Business. During this transition, which
is currently underway, we are moving from selling software application solutions
to providing product solutions.
We recognize revenue from our contracts on the percentage-of-completion
basis. To achieve revenue growth and improve operating margins, we must increase
market acceptance and sales of our existing software application solutions and
must introduce new software and product solutions.* As we become increasingly
reliant upon product-centric sales, our total revenues could continue to decline
if service revenue continues to decline more quickly than we can increase
revenue from software and product solutions sales.* We must develop and enhance
our sales and marketing capabilities and software production and distribution
infrastructure as we continue the transition from a service business to a
software and product solutions business. We cannot assure you that we will
successfully create the necessary capabilities and application infrastructure.
Our failure to successfully manage the transition would continue to
significantly harm our business, operating results and financial condition and
would continue to create significant fluctuation in our quarterly operating
results.
To Be Successful We Will Need to Enter into New Software Development
Contracts. Through the end of September 30, 1999, we derived the majority of our
total revenues from large application development contracts. We have completed
the majority of these contracts but have been unable so far to attract new
customers to enter into such contracts as we focus on future sales. We suffered
a decline in software license revenue primarily due to a much smaller available
market for our existing software application solutions than originally expected.
Furthermore, we have historically used the research we derived from our software
development contracts as the basis for our software application solutions and
anticipate that any future software and product solutions will arise from new or
existing software application contracts. Our failure to attract new customers to
enter into such contracts would significantly harm our ability to develop new
software and product solutions. In addition, if we are required to develop
future software and product solutions without software development contracts, we
will need to increase our expenditures for product development, which may
significantly harm our operating margins.* We cannot assure you that we will be
able to attract new customers to enter into software development contracts or
that we will be able to develop new software and product solutions based on the
research we undertake in connection with new or recently completed software
development contracts, if any. Any such failure would significantly harm our
business, operating results and financial condition. If we develop new software
and product solutions based upon technology that we develop in connection with
software development contracts, we may have to expend additional resources on
product development*, and we cannot assure you that such software and product
solutions will achieve market acceptance. In addition, once we commercialize any
such application frameworks, we have 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.* Any such
payments could significantly harm our business, operating results and financial
condition.
We Derive A Significant Portion of Our Revenue From The Banking Industry And
For Us To Be Successful We Will Need To Penetrate Additional Segments Of The
Financial Services Industry. Currently, a substantial
16
<PAGE>
majority of our total revenue results from services and licenses provided to
large banks. Our future operating results will depend in part on our ability to
penetrate additional segments of the financial services industry such as the
brokerage, mutual funds, insurance and credit card segments.* While we may
devote substantial resources to penetrate these and other markets, we cannot
assure you that the revenues we generate from this effort, if any, will exceed
the cost of such efforts. To successfully expand our product offerings to market
segments other than the banking industry, we must create new software and
product solutions and modify our software application solutions.* We cannot
assure you that we will be able to create or modify such software products
effectively or that such application frameworks, if successfully created or
modified, will achieve market acceptance. If we are unable to penetrate new
markets, our future financial condition will depend upon our ability to further
penetrate the banking industry.* The current focus of the banking industry on
mergers and on Year 2000 issues may impede our ability to further penetrate this
industry.* If we are unable to adapt our software and product solutions or our
sales and marketing efforts to meet the needs of new markets, or if we are not
able to further penetrate the banking industry, our business, operating results
and financial condition could continue to be significantly harmed.
The Sales Cycle for Our Products Is Long. Our sales cycle is typically six to
12 months and varies substantially from customer to customer. We believe the
purchase of our software application solutions is discretionary and represents a
strategic decision requiring a significant capital investment by our customers.
As a result, purchases of our software application solutions generally involve a
significant commitment of management attention and resources by prospective
customers and require multiple approvals. Accordingly, our sales are subject to
a long approval process. Our business, operating results and financial condition
have been in the past, and could be in the future, significantly harmed if
customers delay, reduce or cancel orders. Such delays, reductions or
cancellations may contribute to significant fluctuations of our quarterly
operating results in the future and may adversely affect such results.
The Loss Of One Or More Of Our Key Customers Would Adversely Affect Our
Business And Results Of Operations. Our reliance on a concentrated base of
customers, although in decline, has been due primarily to our dependence on
large software development contracts. We intend to continue to seek customer
support for strategic development projects that may yield additional software
and product solutions and expect that we may continue to depend on a few
significant customers for the foreseeable future.* If we are unable to establish
relationships with additional significant customers and if we continue to
experience difficulties increasing revenues derived from the sale of software
and product solutions as a percentage of total revenues, our business, operating
results and financial condition could continue to be significantly harmed.
For Us To Be Successful We Will Need To Develop New Application Frameworks
Which Satisfy Rapidly Changing Customer Requirements And Technological Trends.
Rapid technological developments, evolving industry standards and rapid changes
in customer requirements characterize the market for our software and product
solutions. The introduction of competitive software products responding to these
trends could render our existing software application solutions obsolete and
unmarketable. As a result, our success depends upon our ability to continue to
enhance our existing software application solutions, respond to changing
customer requirements and develop and introduce in a timely manner new software
and product solutions 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 our customers start
to utilize or adopt other emerging operating systems on server platforms, we may
need to optimize the operation of our application frameworks on such platforms
in order to maintain our competitive ability.* We cannot assure you that our
application frameworks will achieve market acceptance, or will adequately
address the changing needs of the marketplace, or that we will successfully
develop and market enhancements to our existing software application solutions,
or new software and product solutions incorporating new technology on a timely
basis. Our failure to develop and introduce new application frameworks, or
enhancements to existing software application solutions, in a timely manner to
adequately address changing market conditions or customer requirements, will
significantly harm our business, operating results and financial condition.
17
<PAGE>
We have a number of ongoing software development projects. We have released
enhancements to our CheckVision, RemitVision and a loan operations application
framework, as well as a new CyberStatement software and product solution. Our
objective is to increase the portion of our total revenues derived from these
application frameworks. We cannot assure you that the features these enhanced
software and product solutions include will be features required to achieve
market acceptance. Our product development programs have been delayed in the
past and we have experienced delays in the development of RemitVision. We had
operating losses due to delays in RemitVision contracts and due to much lower
sales of CheckVision software application solutions than originally anticipated.
The failure of our software and product solutions to achieve broader market
acceptance and increased sales could continue to significantly harm our
business, operating results and financial condition.
Our Business Could Be Affected By Software Defects And Product Liability
Claims. Software products as complex as ours may contain errors that may be
detected at any point in the products' life cycles. We have in the past
discovered software errors in certain of our software application solutions and
have experienced delays in shipment of application frameworks during the period
required to correct these errors. We cannot assure you that, despite our
testing and testing by current and potential customers, errors will not be
found, resulting in:
. loss of, or delay in, market acceptance
. diversion of development resources
. injury to our reputation
. increased service and warranty costs, any of which could significantly
harm our business, operating results and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. Our
software application solutions are generally used to manage data that is
critical to an organization, and, as a result, our sale and support of our
application frameworks may entail the risk of significant product liability
claims. A liability claim brought against us could significantly harm our
business, operating results and financial condition.
Our Industry Is Highly Competitive And We Cannot Assure You That We Will Be
Able To Effectively Compete. Our competitors vary in size and in scope and
breadth of the software products they offer. We compete with various companies,
including:
. a number of private companies and certain public companies which offer
software products targeted at one or more specific market segments such as
BancTec, Fiserv, Check Solutions, NCR and Unisys
. the internal information technology departments of potential customers
which develop proprietary customer information solutions
. a number of companies, such as Check Solutions and Mobius targeting the
enterprise-wide information systems market
In particular, our CheckVision application framework competes with Check
Solutions and Fiserv. Our CyberStatement product competes primarily with Blue
Gill and Xenos. Among our potential competitors are also a number of large
hardware and software companies that may develop or acquire software products
that compete with software application solutions. We may be at a competitive
disadvantage to hardware vendors because they are able to package and discount
sales of software bundled with hardware to allow the customer the opportunity to
deal with a single vendor. Many of our competitors have:
. longer operating histories
. substantially greater financial, technical, sales, marketing and other
resources
. greater name recognition
. larger customer bases than we do.
Our current and future competitors could introduce software products with
more features, higher scalability, greater functionality and lower prices than
our application frameworks. These competitors could also bundle existing or new
software products with other, more established software products in order to
compete with us. Moreover, as
18
<PAGE>
the client/server solutions market develops, a number of companies with
significantly greater resources than we have could attempt to increase their
presence in this market by acquiring or forming strategic alliances with our
competitors or business partners. Further, because there are relatively low
barriers to entry for the software market, we expect additional competition from
other established and emerging companies.* We expect increased competition to
continue to result in price reductions, reduced gross margins and loss of market
share, any of which could continue to significantly harm our business, operating
results and financial condition.* Any material reduction in the price of our
software and product solutions would negatively affect gross margins. We cannot
assure you that we will be able to provide software and product solutions that
compete favorably with our competitor's software products or that competitive
pressures will not require us to reduce our prices. Our failure to provide
competitive products will significantly harm our business, operating results and
financial condition.
Our Success Depends on the Growth of Market for Client/Server Applications
Solutions in the Financial Services Industry. Substantially all of our current
business is in the market for client/server solutions and services for check
transaction archives and applications and remittance processing applications in
the banking industry, which is still an emerging market and which is highly
fragmented and subject to rapid change. Our future financial performance will
depend in large part on continued growth in the number of companies in the
financial services industry adopting client/server technology and systems
solutions requiring our software application solutions.* We also intend to adapt
our CheckVision software and product solutions to the Internet and to offer an
Internet component as part of any new product offerings.* We cannot assure you
that the market for our client/server software and product solutions and
services will grow or that our Internet strategy will be successful. If the
client/server software and services market segment in which we operate fails to
grow, or grows more slowly than we currently anticipate, or if our Internet
strategy is unsuccessful, our business, operating results and financial
condition would continue to be significantly harmed.
Our Success Depends on Our Ability to Expand Our Distribution Channels and
Successfully Manage the Risks Associated with Such Expansion. To-date, we have
sold our software application solutions primarily through our direct sales
force. We will need to successfully recruit, retain and train sufficient direct
sales personnel and establish other distribution channels and partnerships to
achieve significant revenue growth in the future.* We continue to seek ways to
augment our direct sales force by establishing indirect distribution channels,
including the development of joint marketing relationships with firms that have
a large market presence or sell complementary software products.* Our
distribution channels and alliances have to-date produced substantially less
revenue than we originally expected. We cannot assure you that we will
successfully increase our revenue through channels and alliances. We cannot
assure you that we will successfully expand our direct sales force or that any
such expansion will result in any substantial increase in our revenues. Our
failure to expand our direct sales force or other distribution channels could
continue to significantly harm our business, operating results and financial
condition.
Year 2000 Issues Could affect Our Business. 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. The
failure of our internal systems to correctly recognize date information when the
year changes to 2000, could significantly harm our operations. We have assessed
our internal systems and expect to purchase enhanced software for our internal
computer systems, which we expect to be Year 2000 compatible.* We expect to
implement the new software by November 30, 1999.* We have contacted our
critical suppliers of products and services to determine that their operations
and the products and services they provide to us are Year 2000 capable. We
cannot assure you that the failure of one of our suppliers to ensure appropriate
Year 2000 capability would not significantly harm our business, operations or
financial condition. We have also assessed the capability of our products sold
to customers and do not expect that contingencies related to Year 2000 Issues
are likely to significantly harm our business.* We cannot assure you, however,
that our application software solutions contain all necessary software for Year
2000 compatibility. If any of our licensees experience Year 2000 problems, such
licensees could assert claims for damages against us. Any such litigation could
result in substantial costs and diversion of our resources, even if ultimately
decided in our favor. In addition, many companies are expending significant
resources to correct their software systems for Year 2000 compatibility. These
expenditures have in the past and may continue to result in reduced funds
19
<PAGE>
available to purchase our products. The occurrence of any of the foregoing could
significantly harm our business, financial condition and results from
operations.
We Expect Our Transition to a Software Solutions Business Will Continue to
Strain Our Management, Operational and Technical Resources. We are in the
process of transitioning from an application services focus to a product-centric
focus in order to continue our expansion into the financial services
marketplace. Our transition has placed significant demands on our management,
operational and technical resources. We expect this transition to continue to
challenge our sales, marketing, technical and support personnel and senior
management.* Our future performance will depend in part on our ability to adapt
our operational systems to respond to changes in our business.* Our transition
entails a number of risks, including continued potential declines in revenue and
the need to develop the appropriate sales and marketing capabilities and
software development estimation, production, delivery and distribution
infrastructure. We cannot assure you that we will be successful in creating the
necessary capabilities and infrastructure at all. Our failure to manage the
transition successfully has had and could continue to significantly harm our
business, operating results and financial condition.
Our Senior Management and Key Personnel Are Critical to Our Business and
Those Officers and Personnel May Not Remain with Us in the Future. We must
retain the continued service of our senior management as well as sales and
product development personnel if we are to provide improved future performance.
We do not have and do not intend to obtain key person life insurance on our
personnel. The loss of one or more of our key personnel could significantly harm
our business, operating results and financial condition. We are also actively
seeking key technical personnel. We believe that our future success will depend
in large part upon our ability to attract and retain highly skilled management,
marketing, sales and product development personnel.* Competition for such
personnel is intense, and we cannot assure you that we can retain our key
employees or that we will successfully attract, assimilate and retain such
personnel in the future. Our failure to attract, assimilate and retain key
personnel could significantly harm our business, operating results and financial
condition.
Our Efforts to Protect Our Intellectual Property May Not Protect Us Against
Misuse and Others May Claim That Our Products Infringe. Our success depends in
significant part upon our proprietary technology. We rely on a combination of
copyright, patent, trademark and trade secret laws, confidentiality procedures,
and licensing arrangements to establish and protect our proprietary rights. We
presently have four patents. While our current products are not dependent on
these patents, we may utilize these patents in future software products. As part
of our confidentiality procedures, we generally enter into non-disclosure
agreements with our employees, consultants, distributors and business partners,
and limit access to and distribution of our products, supporting documentation
and other proprietary information. Despite these precautions, a third party may
be able to copy or otherwise obtain and use our software products or technology
without our authorization, or to develop similar technology independently. In
addition, effective protection of intellectual property rights is unavailable or
limited in certain foreign countries, which have in the past licensed and may in
the future license our products. We cannot assure you that protection of our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology, duplicate our software products or
design around any intellectual property rights upon which our business is now or
may in the future be dependent.
Our products incorporate certain software that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform key functions. We cannot assure you that:
. such firms will remain in business
. they will continue to support their software products
. their software products will otherwise continue to be available to us on
commercially reasonable terms
We believe that substantially all of the software we license is available
from vendors other than our current vendors. We also believe that we could
develop such software internally. However, it is possible that the loss or
inability to maintain any of these software licenses could result in delays or
reductions in product shipments until we could develop, identify, license and
integrate equivalent software. Such delays could significantly harm our
business, operating results and financial condition.
20
<PAGE>
We are not aware that any of our products infringe the proprietary rights of
third parties. We cannot assure you, however, that third parties will not claim
such infringement by us with respect to our current or future products. We
expect that software product developers will increasingly be subject to such
claims as the number of software products and competitors in our industry
segment grows and the functionality of software products in the industry segment
overlaps. Any such claims, with or without merit, could result in costly
litigation that could absorb significant management time, which could have a
material adverse affect on our business, operating results and financial
condition. Such claims might require us to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to us or at all, which could significantly harm
our business, operating results and financial condition.
We Plan to Appeal NASDAQ's Decision to Move the Company to the NASDAQ
SmallCap Market. Effective September 22, 1999, the Nasdaq Listing Qualifications
Panel removed the conditional "C" from our ticker symbol. As previously
announced on July 9, 1999, we were granted a qualifications exception from the
net tangible asset requirement by the Nasdaq Listing Qualifications Panel. In
accordance with that decision, on or before September 30, 1999, we were
obligated to provide Nasdaq with an internal August 31, 1999 balance sheet
demonstrating a minimum of $2,000,000 in net tangible assets. On or before
November 15, 1999, we were obligated to file a Form 10-Q for the quarter ended
September 30, 1999, demonstrating net tangible assets of $3,900,000. On August
13, 1999, we filed a Form 8-K that contained a pro-forma balance sheet for the
period ended June 30, 1999, documenting $6,176,000 in net tangible assets. As a
result, the Panel determined to terminate the exception and deem us in
compliance. Also on July 9, 1999, the Nasdaq Listing Qualifications Panel moved
us to the Nasdaq SmallCap Market. We plan to appeal this decision and to
request reinstatement to the Nasdaq National Market.
21
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
The following exhibits are furnished along with this Form 10-Q
Quarterly Report for the three months ended September 30, 1999:
27.1 Financial Data Schedule (electronic filing only).
b. Reports on Form 8-K
-------------------
The Company filed two reports on Form 8-K during the three months
ended September 30, 1999.
22
<PAGE>
ALYSIS TECHNOLOGIES, INC.
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.
ALYSIS TECHNOLOGIES, INC.
Date: November 10, 1999 /s/ Leslie J. Alvarez
--------------------------------------------
Leslie J. Alvarez
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY
CONDENSED BALANCE SHEET (UNAUDITED) FOR SEPTEMBER 30, 1999 AND CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,432
<SECURITIES> 0
<RECEIVABLES> 3,167
<ALLOWANCES> (741)
<INVENTORY> 0
<CURRENT-ASSETS> 12,904
<PP&E> 2,735
<DEPRECIATION> (2,163)
<TOTAL-ASSETS> 15,647
<CURRENT-LIABILITIES> 6,512
<BONDS> 0
0
3,814
<COMMON> 128
<OTHER-SE> 5,193
<TOTAL-LIABILITY-AND-EQUITY> 15,647
<SALES> 15,104
<TOTAL-REVENUES> 15,104
<CGS> 7,712
<TOTAL-COSTS> 7,712
<OTHER-EXPENSES> 11,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 121
<INCOME-TAX> 0
<INCOME-CONTINUING> 121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
