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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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
IA CORPORATION I
(Exact name of Registrant as specified in its charter)
Delaware 94-3161772
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification 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. Yes [X] No [_]
The number of outstanding shares of the Registrant's Common Stock, $0.01 par
value, was 12,164,959 as of April 30, 1999.
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IA CORPORATION I
REPORT ON FORM 10-Q
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TABLE OF CONTENTS
Part I. Financial Information
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 1999 and December 31,
1998.......................................................... 2
Condensed Statements of Operations for the three months ended
March 31, 1999 and 1998....................................... 3
Condensed Statements of Cash Flows for the three months ended
March 31, 1999 and 1998....................................... 4
Notes to Condensed Financial Statements........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .............................. 18
Signatures..................................................... 19
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IA CORPORATION I
CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 4,980 $ 7,582
Receivables, including unbilled receivables of $659 at
March 31, 1999
and $0 at December 31, 1998, less allowance for
doubtful accounts
of $917 at March 31, 1999 and $1,248 at December 31,
1998................................................. 2,047 1,051
Other current assets ................................. 564 678
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Total current assets................................ 7,591 9,311
Property and equipment, net........................... 615 699
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$ 8,206 $10,010
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 97 $ 246
Accrued compensation and related liabilities.......... 2,057 1,809
Deferred revenues..................................... 3,708 3,778
Other accrued liabilities............................. 247 354
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Total current liabilities........................... 6,109 6,187
Stockholders' equity:
Common shares, $0.01 par value:
Authorized shares -- 35,000,000
Issued and outstanding shares -- 9,441,566 at March
31, 1999 and
9,336,329 at December 31, 1998..................... 96 93
Class B Common shares, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 2,417,112.......... 25 25
Additional paid-in capital............................ 28,246 28,150
Accumulated deficit................................... (26,038) (24,204)
Deferred compensation................................. (232) (241)
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Total stockholders' equity.......................... 2,097 3,823
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$ 8,206 $10,010
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</TABLE>
See accompanying notes
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IA CORPORATION I
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
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1999 1998
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<S> <C> <C>
Revenues:
License.................................................... $ 390 $1,646
Service.................................................... 1,665 2,334
Maintenance................................................ 1,389 966
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Total revenues........................................... 3,444 4,946
Cost of revenues:
License.................................................... 17 84
Service.................................................... 1,990 1,283
Maintenance................................................ 770 565
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Total cost of revenues................................... 2,777 1,932
Operating expenses:
Sales and marketing........................................ 1,329 1,218
General and administrative................................. 891 723
Product development........................................ 354 1,379
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Total operating expenses................................. 2,574 3,320
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Operating loss............................................... (1,907) (306)
Other income:
Interest income............................................ 73 112
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Net loss..................................................... $(1,834) $ (194)
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Basic and diluted net loss per share......................... $ (0.15) $(0.02)
======= ======
Shares used in computing basic and diluted net loss per
share........................................................ 11,845 11,477
</TABLE>
See accompanying notes
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IA CORPORATION I
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1999 1998
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<S> <C> <C>
Operating Activities
Net loss.................................................. $ (1,834) $ (194)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................ 94 84
Amortization of deferred compensation................... 9 9
Changes in operating assets and liabilities:
Receivables........................................... (996) 351
Other current assets.................................. 114 44
Accounts payable...................................... (149) 7
Accrued compensation and related liabilities.......... 248 (178)
Deferred revenues..................................... (70) 46
Other accrued liabilities............................. (107) 86
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Net cash provided by (used in) operating activities....... (2,691) 611
Investing Activities
Purchases of property and equipment....................... (10) (111)
Purchases of short-term investments....................... -- (1,966)
Maturities of short-term investments...................... -- 2,000
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Net cash used in investing activities..................... (10) (77)
Financing Activities
Net proceeds from exercise of stock options............... -- 13
Net proceeds from employee stock purchase plan............ 99 197
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Net cash provided by financing activities................. 99 210
Net increase (decrease) in cash and cash equivalents...... (2,602) 744
Cash and cash equivalents at beginning of period.......... 7,582 7,058
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Cash and cash equivalents at end of period................ $ 4,980 $ 7,802
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</TABLE>
See accompanying notes
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IA CORPORATION I
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Our Company and Basis of Presentation
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.
2. Basic and Diluted Net Loss Per Share
The Company's net loss per share has been calculated in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share. Basic net loss per share has been computed using the weighted average
number of common shares outstanding during the period. Diluted net 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 loss per share.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
3/31/99 3/31/98
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(in thousands, except
per share data)
<S> <C> <C>
Net loss...................................... $(1,834) $ (194)
Shares used in computing basic net loss per
share........................................ 11,845 11,477
Effect of dilutive securities--stock options.. (a) -- (a) --
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Shares used in computing diluted net loss per
share........................................ 11,845 11,477
======= =======
Basic net loss per share...................... $ (0.15) $ (0.02)
======= =======
Diluted net loss per share.................... $ (0.15) $ (0.02)
======= =======
</TABLE>
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(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 re-sellers 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 ratio of incurred costs to total estimated costs. Allowances for
future estimated warranty costs are provided at the time revenue is
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 loss and net loss for the three
months ended March 31, 1999 and 1998.
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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
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 "Business" and "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 secondary 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 application software 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 application frameworks based upon our complex enterprise
transaction management platform targeted initially to the financial services
industry. Through March 31, 1999, a majority of our total revenues were
derived from large application development contracts. Our objective was to
increase the portion of our total revenue derived from application software
solutions sales. We were able to increase the amount of software license
revenue in 1996 and in 1997, but suffered a significant decline in 1998 and
through March 31, 1999. We believe this was primarily due to a much smaller
available market for our existing application frameworks than originally
expected, and that new application frameworks must be introduced in 1999 and
subsequent years in order to substantially increase revenues. Our revenues
declined 30.4% from $4.9 million for the three months ended March 31, 1998 to
$3.4 million for the three months ended March 31, 1999. Also for the three
months ended March 31, 1999, we recorded a net loss of $1.8 million as
compared to a net loss of $194,000 for the three months ended March 31, 1998.
These results were caused by delays in implementation of our RemitVision
application framework, and by the limited market potential of our CheckVision
and RemitVision application frameworks. 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. The market is also 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 Fidelity Investments and Merrill Lynch, 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 application frameworks, CheckVision, RemitVision, a
loan operations application framework and CyberStatement, which are built upon
our enterprise transaction management platform. CheckVision is designed to
maximize the value of archived transaction information over the entire useful
life of such information, and RemitVision is designed to provide banks and
other remittance processors with the ability to combine high volume consumer
payment activity with complex accounts receivable processing in one production
environment. The 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 enables
financial services firms to efficiently manage, store, and distribute
computer-generated reports and print-formatted documents such as customer
statements. Our application software 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
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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. We released in early 1999 our new CyberStatement application
framework, which was based on a large application development contract. There
can be no assurance that this new application framework will generate
additional revenues.
During the transition from providing software development services to
developing and selling application software solutions, a majority of our total
revenues has been derived from the provision of services to customers pursuant
to large software development contracts, certain of which provide the basis
for our application frameworks. We recognize revenue from software development
contracts on the percentage-of-completion basis. Service revenue as a
percentage of total revenue for the three months ended March 31, 1999 and 1998
was 48.3% and 47.2%, respectively. Due in part to these transitions, in part
to delays in our RemitVision application framework, and in part to fewer sales
in 1998, we experienced a decline in total revenue in 1998 and a significant
decline in total revenue for the three months ended March 31, 1999. To achieve
revenue growth and improve operating margins, we must increase market
acceptance and sales of our application software solutions and introduce new
application frameworks to expand our market appeal within the financial
services industry. We must develop and enhance our sales and marketing
capabilities, software development estimation, production and distribution
infrastructure as we continue the transition from a pure service provider
business to an application solutions business. 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 application software 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, for each quarter of 1998 and for the quarter ended
March 31, 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 its 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. Allowances for future
estimated warranty costs are provided at the time revenue is recognized.
Maintenance revenue is recognized ratably over the term of the related
agreements, which in most cases is one year.
At March 31, 1999, we had an accumulated deficit of approximately $26.0
million, including a net loss of $1.8 million for the three months ended March
31, 1999. There can be no assurance that we will have operating profits in any
future period.
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RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1999 and 1998
Revenues
License. License revenue to-date has been primarily derived from the sale of
licenses of our CheckVision, RemitVision, and WorkVision application
frameworks. License revenue decreased 76.3% to $390,000 from $1.6 million for
the three months ended March 31, 1999 and 1998, respectively. This decrease in
license revenue resulted from a smaller number of sales of our application
frameworks, cancellation of purchase decisions arising from the impact of the
banking industry mergers and customer preoccupation with Year 2000 Issues.
Furthermore, customer imposed implementation and installation delays have
delayed revenue recognition under the percentage-of-completion method.
Management believes that we will need to penetrate additional market segments
within financial services to achieve license revenue growth, the timing of
which is difficult to predict.
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
application frameworks. Service revenue decreased 28.7% to $1.7 million from
$2.3 million for the three months ended March 31, 1999 and 1998, respectively.
The decrease for the three months ended March 31, 1999 from the three months
ended March 31, 1998 in service revenue is primarily the result of a smaller
number of sales of our application software solutions, customer delays
deferring revenue recognition and deferral of expected new contracts.
Additionally, the decrease in service revenue is also attributable to the
continued transition from providing software development services to
developing and selling application software solutions coupled with the
completion of the majority of our large application development contracts.
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 application frameworks. Maintenance support includes telephone support,
minor software upgrades and, in some cases, third party support. Maintenance
revenue increased 43.8% to $1.4 million from $966,000 for the three months
ended March 31, 1999 and 1998, respectively. Maintenance revenue increased for
the three months ended March 31, 1999 from the three months ended March 31,
1998 due to the growing base of installed CheckVision application framework
customers resulting in a corresponding increase in demand for maintenance
related services, and due to the completion of a large application development
contract that entered into maintenance in 1998. Due to the small number of
sales in 1998, we believe that maintenance revenue is unlikely to increase in
the short term and may decline.
Cost of Revenues
License. Cost of license revenue decreased to $17,000 from $84,000 for the
three months ended March 31, 1999 and 1998, respectively, representing 4.4%
and 5.1% of license revenues for the three months ended March 31, 1999 and
1998, respectively. Costs declined in absolute dollars due to the decline in
license revenues. 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, training and development services. Cost of
service revenue increased 55.1% to $2.0 million from $1.3 million for the
three months ended March 31, 1999 and 1998, respectively, representing 119.5%
and 55.0% of service revenues for the three months ended March 31, 1999 and
1998, respectively. Cost of service revenue increased for the three months
ended March 31, 1999 over cost of services for the three months ended March
31, 1998 due both to customer delays and our delays. Although we have taken
steps to reduce our cost of service revenue, there can be no assurance these
steps will prove effective.
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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 36.3% to $770,000 from $565,000 for the three months ended March 31,
1999 and 1998, respectively, representing 55.4% and 58.5% of maintenance
revenues for the three months ended March 31, 1999 and 1998, respectively. The
cost of maintenance revenue increase was due to maintenance revenue growth.
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 increased 9.1% to $1.3 million for the three months ended
March 31, 1999 as compared to $1.2 million for the three months ended March
31, 1998. Sales and marketing expense increased primarily due to an expansion
of the marketing staff. Sales and marketing expenses increased substantially
for the three months ended March 31, 1999 as a percentage of revenue due to
the decrease in revenue from the three months ended March 31, 1998 coupled
with the fact that these expenses are relatively fixed. We are, however,
implementing cost control measures in an effort to manage expense growth, but
there can be no assurance these measures will be successful.
General and administrative. General and administrative expense was $891,000
for the three months ended March 31, 1999 as compared to $723,000 for the
three months ended March 31, 1998, or 26.1% and 14.6% of total revenues,
respectively. For the three months ended March 31, 1999, general and
administrative expense increased 23.2% from the three months ended March 31,
1998 due primarily to an increase in executive salary and executive recruiting
costs coupled with an increase in allowance for doubtful accounts for certain
contracts associated with high collectibility risks. Additionally, stock-based
compensation expense was recorded for the issuance of stock options to non-
employees. General and administrative expenses increased substantially for the
three months ended March 31, 1999 as a percentage of revenues due to the
decrease in revenues coupled with the fact that these expenses are relatively
fixed. We are implementing cost control measures in an effort to manage
expense growth, but there can be no assurance these measures will be
successful.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expense was
$354,000 for the three months ended March 31, 1999 as compared to $1.4 million
for the three months ended March 31, 1998, or 10.3% and 27.9% of total
revenues, respectively. For the three months ended March 31, 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
March 31, 1999 from the three months ended March 31, 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 $73,000 from
$112,000 for the three months ended March 31, 1999 and 1998, respectively, due
to lower average invested cash balances in the three months ended March 31,
1999.
Provision for income taxes. The Company did not record a provision for
income taxes for the three months ended March 31, 1999 and 1998.
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Liquidity and Capital Resources
We used cash of $2.7 million for operating activities for the three months
ended March 31, 1999. For the three months ended March 31, 1998, operating
activities generated cash of $611,000. The use of cash for the three months
ended March 31, 1999 was the result of the net loss for the quarter, the
decrease in deferred revenues and an increase in accounts receivables. For the
three months ended March 31, 1998, cash provided was attributable to changes
in working capital due to a decrease in accounts receivable and increases in
accruals and customer deposits.
Our investing activities for the three months ended March 31, 1998 consisted
primarily of purchases and sales of short-term investments and property and
equipment. Short-term investment purchases and sales did not occur for the
three months ended March 31, 1999. For the three months ended March 31, 1998,
total short-term investments purchases totaled $2.0 million and total sales
totaled $2.0 million. Capital expenditures for the three months ended March
31, 1999 and for 1998 were $10,000 and $111,000, 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 99,000 and $210,000 for the three
months ended March 31, 1999 and 1998, respectively. The cash generated was the
result of net proceeds from the exercise of stock options and employee stock
purchases under our employee stock purchase plan.
At March 31, 1999, we had $5.0 million in cash and cash equivalents and $1.5
million in working capital. We believe that our existing cash, cash
equivalents and short-term cash investments, 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 may be delutive
to our existing stockholders. Our inability to secure necessary funding would
have a material adverse affect on our financial condition and results of
operation.
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
infrastructual 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 July 31, 1999. We cannot assure you that our
other internal systems contain all necessary software for Year 2000
compatibility.
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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 application software 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
application frameworks 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 compatible. 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 March 31, 1999,
we had an accumulated deficit of approximately $26.0 million. Although we
achieved net operating profits in the quarters 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
11
<PAGE>
. 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
In addition, we are in the process of transitioning from providing software
development services to developing and selling application software solutions,
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 the quarter
ended March 31, 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 application software 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. Installation of
our application software 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 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.
12
<PAGE>
We Encounter Risks Associated With Our Transition to an Application Software
Solutions Business. When we were formed in 1992, we shifted our strategy to
focus increasingly on deriving revenue from software products rather than from
system integration services. During this transition, which is still underway,
we are moving from providing software development services to developing and
selling application software solutions, which includes our enterprise
transaction management platform, application frameworks plus customization and
installation services we have derived a majority of our total revenues from
the provision of services pursuant to large software development contracts,
certain of which provide the basis for our application frameworks.
We recognize revenue from software development contracts on the percentage-
of-completion basis. Service revenue as a percentage of total revenues for the
three months ended March 31, 1999 and 1998 was 48.3% and 47.2%, respectively.
To achieve revenue growth and improve operating margins, we must increase
market acceptance and sales of our existing application frameworks and must
introduce new application frameworks. As we become increasingly reliant upon
application framework sales, our total revenues could continue to decline if
service revenue continues to decline more quickly than we can increase revenue
from application framework 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 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 March1999, 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 sales of our application
software solutions. Sales of our application software solutions have been
lower than expected. Furthermore, we have historically used the research we
derived from our software development contracts as the basis for our
application frameworks and anticipate that any future application frameworks
will arise from new or existing software development contracts. Our failure to
attract new customers to enter into such contracts would significantly harm
our ability to develop new application frameworks. In addition, if we are
required to develop future application frameworks 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 application frameworks 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 application frameworks based upon technology that we develop in connection
with software development contracts, we may have to expend substantial
additional financial resources on product development, and we cannot assure
you that such application frameworks 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 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 application frameworks and to
modify our existing application frameworks. We cannot assure you that we will
be able to create or modify such software products effectively or
13
<PAGE>
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 application frameworks 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 application software solutions is discretionary and
represents a strategic decision requiring a significant capital investment by
our customers. As a result, purchases of our application software 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
application frameworks 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 application frameworks 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
application frameworks. The introduction of competitive software products
responding to these trends could render our existing application frameworks
obsolete and unmarketable. As a result, our success depends upon our ability
to continue to enhance our existing application frameworks, respond to
changing customer requirements and develop and introduce in a timely manner
new application frameworks 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 Microsoft NT 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 application
frameworks, or new application frameworks incorporating new technology on a
timely basis. Our failure to develop and introduce new application frameworks,
or enhancements to existing application frameworks, in a timely manner to
adequately address changing market conditions or customer requirements, will
significantly harm our business, operating results and financial condition.
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 application framework. 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
application frameworks 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
14
<PAGE>
delays in RemitVision contracts and due to much lower sales of CheckVision
application frameworks than originally anticipated. The failure of our
application frameworks 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 application frameworks 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
application frameworks 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 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 RemitVision application framework competes with
BancTec, VICOR and Unisys. Among our potential competitors are also a number
of large hardware and software companies that may develop or acquire software
products that compete with our application frameworks. 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 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
15
<PAGE>
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 application frameworks would
negatively affect gross margins. We cannot assure you that we will be able to
provide application frameworks 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 application software solutions. We also intend to
adapt our CheckVision application frameworks 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 application frameworks 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 application software 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.
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. 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 July 31,
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 compatible. These expenditures have in
the past and may continue to result in reduced funds available to purchase our
products. The occurrence of any of the foregoing could significantly harm our
business, financial condition and results from operations.
16
<PAGE>
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 providing software development services as a
software developer to developing and selling application software solutions.
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 remaining 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, affective
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.
17
<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. See "--
intellectual Property and Licensing."
The NASDAQ National Market May Delist the Company's Common Stock. Our common
stock trades on the NASDAQ National Market. The NASDAQ National Market's
continued listing standards require the Company to have (i) 750,000 shares
publicly held; (ii) a market value of publicly held shares of $5 million;
(iii) net tangible assets of at least $4 million; (iv) 400 shareholders of
round lots; (v) a minimum bid price of at least $1 per share. The market value
of the publicly held shares has been below $5 million in the past. In
addition, our common stock has traded below $1.00 in the past. Accordingly, we
have failed to satisfy items (ii) and (v) above. In addition, our tangible net
assets at March 31, 1999 was $2.1 million, significantly below NASDAQ's
requirement of $4.0 million. NASDAQ has notified us of potential delisting.
Although NASDAQ has granted us extensions on two separate occasions to meet
minimum listing requirements, there can be no assurance that NASDAQ will
continue to grant extensions necessary for us to achieve the minimum
requirements. Our delisting from the NASDAQ National Market would adversely
affect the ability or willingness of investors to purchase our common stock
and therefore would severely adversely affect the market liquidity of our
securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are furnished along with this Form 10-Q
Quarterly Report for the three months ended March 31, 1999:
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1999.
18
<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/ Leslie J. Alvarez
_____________________________________
Leslie J. Alvarez
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: May 17, 1999
19
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