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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 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
IA CORPORATION I
(Exact name of Registrant as specified in its charter)
Delaware 94-3161772
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(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 12,231,975 as of July 31, 1999.
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IA CORPORATION I
REPORT ON FORM 10-Q
TABLE OF CONTENTS
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<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets at June 30, 1999 and December 31, 1998.......... 2
Condensed Statements of Operations for the three months and six months
ended June 30, 1999 and 1998............................................. 3
Condensed Statements of Cash Flows for the six months ended June 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................................................ 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders...................... 21
Item 6. Exhibits and Reports on Form 8-K......................................... 21
Signatures................................................................................ 22
</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>
June 30, December 31,
1999 1998
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................................... $ 8,640 $ 7,582
Receivables, including unbilled receivables of $713 at June 30, 1999 and $0
at December 31, 1998, less allowance for doubtful accounts of $741 at June
30, 1999 and $1,248 at December 31, 1998..................................... 3,634 1,051
Other current assets......................................................... 630 678
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Total current assets......................................................... 12,904 9,311
Property and equipment, net..................................................... 611 699
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$ 13,515 $ 10,010
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Liabilities and stockholders' equity
Current liabilities:
Accounts payable............................................................. $ 154 $ 246
Accrued compensation and related liabilities................................. 1,885 1,809
Deferred revenues............................................................ 8,669 3,778
Other accrued liabilities.................................................... 450 354
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Total current liabilities.................................................... 11,158 6,187
Stockholders' equity:
Common shares, $0.01 par value:
Authorized shares -- 35,000,000
Issued and outstanding shares -- 9,804,863 at June 30, 1999 and 9,336,329 98 93
at December 31, 1998......................................................
Class B Common shares, $0.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 2,417,112................................. 24 25
Additional paid-in capital................................................... 28,807 28,150
Accumulated deficit.......................................................... (26,221) (24,204)
Deferred compensation........................................................ (351) (241)
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Total stockholders' equity............................................... 2,357 3,823
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$ 13,515 $ 10,010
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IA CORPORATION I
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
License...................................... $ 1,540 $ 383 $ 1,930 $ 2,029
Service...................................... 2,101 1,626 3,766 3,960
Maintenance.................................. 1,190 1,097 2,580 2,063
------- ------- ------- -------
Total revenues.............................. 4,831 3,106 8,276 8,052
Cost of revenues:
License...................................... 14 42 32 126
Service...................................... 1,647 3,090 3,637 4,373
Maintenance.................................. 912 810 1,831 1,509
------- ------- ------- -------
Total cost of revenues...................... 2,573 3,942 5,500 6,008
Operating expenses:
Sales and marketing.......................... 1,088 1,198 2,417 2,416
General and administrative................... 1,066 1,470 1,957 2,193
Product development.......................... 330 1,469 534 2,714
------- ------- ------- -------
Total operating expenses.................... 2,484 4,137 4,908 7,323
------- ------- ------- -------
Operating loss................................ (226) (4,973) (2,132) (5,279)
Other income:
Interest income.............................. 43 109 115 221
------- ------- ------- -------
Net loss...................................... $ (183) $(4,864) $(2,017) $(5,058)
======= ======= ======= =======
Basic and diluted net loss per share.......... $ (0.02) $ (0.42) $ (0.17) $ (0.44)
======= ======= ======= =======
Shares used in computing basic and diluted
net loss per share........................... 12,187 11,532 12,187 11,505
======= ======= ======= =======
</TABLE>
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IA CORPORATION I
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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<CAPTION>
Six Months Ended
June 30
------------------------
1999 1998
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<S> <C> <C>
Operating activities
Net loss............................................................................... $ (2,017) $ (5,058)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation........................................................................ 182 154
Amortization of deferred compensation............................................... 238 20
Changes in operating assets and liabilities:
Receivables......................................................................... (2,583) 3,931
Other current assets................................................................ 48 100
Accounts payable.................................................................... (92) 109
Accrued compensation and related liabilities........................................ 76 (37)
Deferred revenues................................................................... 4,891 131
Other accrued liabilities........................................................... 96 691
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Net cash provided by operating activities.............................................. 839 41
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Investing activities
Purchases of property and equipment.................................................... (94) (192)
Purchases of short-term investments.................................................... -- (5,392)
Maturities of short-term investments................................................... -- 3,967
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Net cash used in investing activities.................................................. (94) (1,617)
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Financing activities
Net proceeds from exercise of stock options............................................ 212 56
Net proceeds from employee stock purchase plan......................................... 101 197
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Net cash provided by financing activities.............................................. 313 253
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Net increase (decrease) in cash and cash equivalents................................... 1,058 (1,323)
Cash and cash equivalents at beginning of period....................................... 7,582 7,058
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Cash and cash equivalents at end of period............................................. $ 8,640 $ 5,735
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</TABLE>
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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. Certain reclassifications
have been made to the financial statements in order to conform to the current
presentation.
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.
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<CAPTION>
(In thousands, except per share data) Three Months Three Months
Ended Ended
6/30/99 6/30/98
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<S> <C> <C>
Net loss $ (183) $ (4,864)
Shares used in computing basic net
loss per share 12,187 11,532
Effect of dilutive securities stock
options (a) - -
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Shares used in computing diluted net
loss per share 12,187 11,532
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Basic and diluted net loss per share $ (0.02) $ (0.42)
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</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 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.
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4. Comprehensive income
There is no difference between comprehensive loss and net loss for the three
months and six months ended June 30, 1999 and 1998.
5. Subsequent Events
On July 30, 1999, the Company 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, the Company's
largest shareholder. The Company issued 400 shares of Series B Preferred Stock
at a purchase price of $10,000 per share. Each share of Series B Preferred Stock
will be convertible into approximately 5,229 shares of the Company's 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 the
Company's 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 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 the option of the Company, with shares of
the Company's 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.
On July 28, 1999, the Company entered into a letter of intent to purchase a
company that is a new entrant into the enterprise-wide knowledge-management and
business intelligence software market. The acquisition is expected to be
completed in the fourth quarter of 1999.
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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 "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 June 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 were successful in reversing the downward trend in software license
revenues in the second quarter of 1999. Our revenues increased 55% from $3.1
million for the three months ended June 30, 1998 to $4.8 million for the three
months ended June 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. Also for the three months
ended June 30, 1999, the Company's net loss of $0.2 million was significantly
less than the net loss of $4.9 million for the three months ended June 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 five software application solutions--CheckVision,
RemitVision, 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
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
7
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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 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. We released in early 1999 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 development services to
developing and selling software application 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 June 30, 1999 and 1998 was 43.5% and
52.4%, respectively. The decline in service revenue as a percentage of total
revenue is primarily due to the increase in software license revenue recognized
in the three months ended June 30, 1999 from the amendment of the Global
Strategic Alliance Agreement signed in June 1999. 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 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 a software 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 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, for each quarter of 1998 and for the quarters ended March 31 and June
30, 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 our 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 June 30, 1999, we had an accumulated deficit of approximately $26.2
million, including a net loss of $2.0 million for the six months ended June 30,
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 June 30, 1999 and 1998
Revenues
License. License revenue to-date has been primarily derived from the sale of
licenses of our CheckVision, RemitVision and WorkVision software application
solutions. License revenue increased 302% to $1.5 million from $0.4 million for
the three months ended June 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. 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 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 29% to $2.1 million from $1.6
million for the three months ended June 30, 1999 and 1998, respectively. The
increase is primarily due to the effect of an approximately $0.4 million
cancelled order in the three months ended June 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 8% to $1.2 million from $1.1 million for the three
months ended June 30, 1999 and 1998, respectively. Maintenance revenue increased
for the three months ended June 30, 1999 from the three months ended June 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 $14,000 from $42,000 for the
three months ended June 30, 1999 and 1998, respectively, representing 0.9% and
11.0% of license revenues for the three months ended June 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 47% to $1.6 million from $3.1 million for the three months ended June
30, 1999 and 1998, respectively, representing 78% and 190% of service revenues
for the three months ended June 30, 1999 and 1998, respectively. Cost of service
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.
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 13% to $0.9 million from $0.8 million for the three months ended June
30, 1999 and 1998, respectively, representing 77% and 74% of maintenance
revenues for the three months ended June 30, 1999 and 1998, respectively. The
absolute dollar amount increase in the cost of maintenance was due to the
increase in maintenance revenue.
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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 9% to $1.1 million for the three months ended June
30, 1999 as compared to $1.2 million for the three months ended June 30, 1998.
Sales and marketing expense decreased primarily due to a slight decrease in the
sales and marketing staff. Sales and marketing expenses as a percentage of
revenue decreased for the three months ended June 30, 1999 primarily due to the
increase in revenue for the three months ended June 30, 1999 coupled with the
fact that these expenses are relatively fixed.
General and administrative. General and administrative expense was $1.1
million for the three months ended June 30, 1999 as compared to $1.5 million for
the three months ended June 30, 1998, or 22% and 47% of total revenues,
respectively. For the three months ended June 30, 1999, general and
administrative expense decreased 27% from the three months ended June 30, 1998
due primarily to the effect of an increase in the allowance for doubtful
accounts for certain contracts associated with high collectibility risks made in
the three months ended June 30, 1998, partially offset by an increase in
executive salary and executive recruiting costs incurred in the three months
ended June 30, 1999. Additionally, stock-based compensation expense was recorded
for the issuance of stock options to non-employees in the three months ended
June 30, 1999. General and administrative expenses as a percentage of revenues
decreased for the three months ended June 30, 1999, primarily due to the
increase in revenues.
Product development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expense was
$0.3 million for the three months ended June 30, 1999 as compared to $1.5
million for the three months ended June 30, 1998, or 7% and 47% of total
revenues, respectively. For the three months ended June 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 June 30, 1999 from
the three months ended June 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 $43,000 from
$109,000 for the three months ended June 30, 1999 and 1998, respectively, due to
lower average invested cash balances in the three months ended June 30, 1999.
Provision for income taxes. The Company did not record a provision for
income taxes for the three months ended June 30, 1999 and 1998.
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1999 and 1998
Revenues
License. License revenue to-date has been primarily derived from the sale of
licenses of our CheckVision, RemitVision, and WorkVision software application
solutions. License revenue decreased 5% to $1.9 million from $2.0 million for
the six months ended June 30, 1999 and 1998, respectively. This slight decrease
in license revenue results from a decrease in demand for our CheckVision and
RemitVision application frameworks offset by the increase in licenses and
royalties recorded in connection with the amendment of the Global Strategic
Alliance Agreement signed in June 1999. 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.*
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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 decreased 5% to $3.8 million from $4.0
million for the six months ended June 30, 1999 and 1998, respectively. The
decrease is the result of a smaller number of sales of our application software
solutions offset by the effect of an approximately $0.4 million cancelled order
in the six months ended June 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 25% to $2.6 million from $2.1 million for the six
months ended June 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 $32,000 from $126,000 for the
six months ended June 30, 1999 and 1998, respectively, representing 1.7% and
6.2% of license revenues for the six months ended June 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 17% to $3.6 million from $4.4 million for the six months ended June
30, 1999 and 1998, respectively, representing 97% and 110% of service revenues
for the six months ended June 30, 1999 and 1998, respectively. Cost of service
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
increased 21% to $1.8 million from $1.5 million for the six months ended June
30, 1999 and 1998, respectively, representing 71% and 73% of maintenance
revenues for the six months ended June 30, 1999 and 1998, respectively. The
absolute dollar amount increase in the cost of maintenance was due to the
increase in maintenance revenue.
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 remained almost unchanged at $2.4 million for both the six
months ended June 30, 1999 and 1998. Sales and marketing expenses as a
percentage of revenue decreased for the six months ended June 30, 1999 to 29%
from 30% for the six months ended June 30, 1998 primarily due to the slight
increase in revenue for the six months ended June 30, 1999 coupled with the fact
that these expenses are relatively fixed.
General and administrative. General and administrative expense was $2.0
million for the six months ended June 30, 1999 as compared to $2.2 million for
the six months ended June 30, 1998, or 24% and 27% of total revenues,
respectively. For the six months ended June 30, 1999, general and administrative
expense decreased 11% from the six months ended June 30, 1998 due primarily to
the effect of an increase in the allowance for doubtful accounts for certain
contracts associated with high collectibility risks made in the six months ended
June 30, 1998
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partially offset by an increase in executive salary and executive recruiting
costs incurred in the six months ended June 30, 1999. Additionally, stock-based
compensation expense was recorded for the issuance of stock options to non-
employees in the six months ended June 30, 1999. General and administrative
expenses as a percentage of revenues decreased for the six months ended June 30,
1999, primarily due 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 six months ended June 30, 1999 as compared to $2.7 million
for the six months ended June 30, 1998, or 6% and 34% of total revenues,
respectively. For the six months ended June 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 six months ended June 30, 1999 from the
six months ended June 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 $115,000 from
$221,000 for the six months ended June 30, 1999 and 1998, respectively, due to
lower average invested cash balances in the six months ended June 30, 1999.
Provision for income taxes. The Company did not record a provision for
income taxes for the six months ended June 30, 1999 and 1998.
Liquidity and Capital Resources
Operating activities for the six months ended June 30, 1999 provided $0.8
million of cash. For the six months ended June 30, 1998, operating activities
generated cash of less than $0.1 million. The net cash generated by the
operating activities of the Company for the six months ended June 30, 1999 was
the result of the cash received from the amendment to the Global Strategic
Alliance Agreement, offset by the Company's net loss and an increase in
receivables. A significant portion of this cash was deferred.
Our investing activities for the six months ended June 30, 1998 consisted
primarily of purchases and sales of short-term investments and property and
equipment. Short-term investment purchases and sales did not occur during the
six months ended June 30, 1999. For the six months ended June 30, 1998, total
short-term investments purchases totaled $5.4 million and total sales totaled
$4.0 million. Capital expenditures for the six months ended June 30, 1999 and
for 1998 were $94,000 and $192,000, 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 $313,000 and $253,000 for the six
months ended June 30, 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 June 30, 1999, we had $8.6 million in cash and cash equivalents and $1.7
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 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.
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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 July 31, 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 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 June 30, 1999, we had an
accumulated deficit of approximately $26.2 million. Although we achieved net
operating profits in the quarters ended March 31, 1995, 1996 and 1997, June 30,
1996,
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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, 1999 and June 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. 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 products. Our
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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 to a Software Application
Solutions Business. During this transition, which is still underway, we are
moving from providing software development services to developing and selling
software application 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 application framework 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 June 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
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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.
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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
BlueGill and Xenos. Our RemitVision software application solution 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 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
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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 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 September 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
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systems for Year 2000 compatibility. 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,
operating results and financial condition.
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
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could develop, identify, license and integrate equivalent software. Such delays
could significantly harm our business, operating results and financial
condition.
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.
The NASDAQ Is Continuing to Monitor the Company's Common Stock. On July 8,
1999, the Company was moved to the Nasdaq SmallCap Market. The Company's common
stock will be listed on the Nasdaq SmallCap Market via an exception from the net
tangible asset requirement. The Company has met the net tangible asset
requirement of $2.0 million for the SmallCap Market as of March 31, 1999, and
believes that it will continue to meet this requirement in the future.*
However, the Nasdaq Listing Qualifications Panel has determined that in
conjunction with the Company's move from the National Market to the SmallCap
Market, the Company must achieve a net tangible asset requirement of $3.9
million on or before November 15, 1999. For the duration of the exception, the
Company's Nasdaq symbol will be IACPC. In the event the Company is deemed to
have met the terms of the exception, it shall continue to be listed on the
Nasdaq SmallCap Market. If at some future date the Company's securities should
cease to be listed on the Nasdaq SmallCap Market, the Company may be listed on
the OTC-Bulletin Board. While the Company believes that it can meet the
conditions set forth by Nasdaq, there can be no assurance to that effect. The
Company plans to appeal the decision of the Nasdaq Listing Qualifications Panel
and to request reinstatement to the Nasdaq National Market.*
20
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 16, 1999, at the annual stockholders' meeting, a quorum of
stockholders of the Company approved the following proposals: (1) election of
the Board of Directors; (2) ratification and approval of an amendment to the
Company's 1996 Stock Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 1,000,000 shares; and (3) ratification of
the appointment of Ernst & Young LLP to serve as the Company's independent
auditors for the ensuing year.
Proposal 1. Election of Directors.
<TABLE>
<CAPTION>
Director For Withheld
-------- --- --------
<S> <C> <C>
Kevin D. Moran 8,740,557 25,423
Stewart K. P. Gross 8,708,379 57,601
Randy Katz 8,708,379 57,601
Henry Kressel 8,708,379 57,601
Timothy F. McCarthy 8,740,557 25,423
John Oltman 8,740,657 25,323
Chakravarthi V. Ravi 8,694,312 71,668
</TABLE>
Proposal 2. Ratification and approval of an amendment to the Company's 1996
Stock Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 1,000,000 shares.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
5,710,843 169,276 99,426
</TABLE>
Proposal 3. Ratification of Appointment of Independent Auditors.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
8,702,006 52,112 11,862
</TABLE>
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 June 30, 1999:
10.1 Offer Letter dated April 22, 1999 and Employment Agreement
between the Registrant and Leslie J. Alvarez, dated May 19, 1999.
27.1 Financial Data Schedule (electronic filing only).
b. Reports on Form 8-K
-------------------
The Company filed a report on Form 8-K during the three months
ended June 30, 1999.
21
<PAGE>
IA CORPORATION I
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IA CORPORATION I
Date: August 9, 1999 /s/ Leslie J. Alvarez
-------------------------------------------
Leslie J. Alvarez
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<PAGE>
Exhibit 10.01
April 22, 1999
Leslie J. Alvarez
2750 Northside Drive
Atlanta, GA 30305
Dear Ms. Alvarez:
On behalf of IA Corporation, I am pleased to offer you employment as our Chief
Financial Officer. You will be reporting to Kevin Moran, Chairman, President
and Chief Executive Officer at a starting salary of $175,000 per year. In
addition, you are eligible for 40% bonus. The bonus amount is dependent on
individual performance. During 1999, IA will guarantee $50,000 bonus payment.
In addition, you will be granted a $20,000 signing bonus to be distributed five
(5) days upon receipt of signed agreement. Upon employment you will become
eligible for IA's stock option grants of 100,000 shares, which are granted at
the end of the quarter in which you begin working. The strike price will be
determined by the closing price of the stock on May 10, 1999. The share options
will vest over a three (3) year period with 30% after year 1, 30% after year 2,
and 40% after year three.
IA will also work with you to include "change of control" provisions in your
agreement.
Consistent with California law, your employment will be "at will" and is
contingent upon your execution of the enclosed Employee Agreement. Should you
accept this offer, you will become eligible for our benefits plans, the details
of which are described in the enclosed materials. We would like you to begin
work on May 10, 1999. Please contact my assistant Deborah Knoroski at (510)
450-6849 for new hire/benefits processing details.
The Immigration and Reform Act of 1986 require employers to verify the identity
and employment eligibility of all new hires within three (3) business days of
hire. To assist us in complying with this requirement, please bring the
appropriate documents, as indicated on the enclosed Employment Eligibility Form,
with you on your first day. The normal starting time is 8:00 - 5:00. Upon your
arrival on your first day, please ask for Deborah Knoroski.
We hope you will accept this offer and welcome you in advance to IA Corporation.
Kindly acknowledge acceptance of this offer by signing below and returning the
original along with the executed Employee Agreement to me.
Sincerely,
/s/ Kevin D. Moran
Kevin D. Moran
Chairman, President and Chief Executive Officer
KM:dk
Accepted by:
/s/ Leslie J. Alvarez 4/25/99
- ---------------------- ------------------------
Name Date
<PAGE>
EMPLOYEE AGREEMENT
------------------
Effective:
Agreement between Leslie Alvarez, hereafter referred to as Employee and IA
Corporation, hereinafter referred to as Employer.
Employer and Employee agree as follows:
1. Employment, Complete Agreement, and Modification
------------------------------------------------
Employer will employ Employee, and Employee will be employed by Employer on
the terms and conditions hereafter set forth. This Agreement supersedes all
previous correspondence, promises, representations, and agreements, if any,
either written or oral. No provision of this Agreement may be modified
except by a writing signed by both Employer and Employee. This Agreement
consists of six (6) pages and Attachment A.
2. Termination of Employment
-------------------------
Either party may terminate this Agreement at any time during the duration
of employment, for any reason whatsoever or for no reason and without
cause, upon the giving of two (2) weeks notice to the other. However,
Employer may terminate this Agreement without prior notice during the first
ninety (90) days of employment, and without notice after the ninety (90)
days if Employee has misappropriated company property or funds. No policies
or procedures of Employer or benefits provided by Employer, whether oral or
written, express or implied, formal or informal, are intended, nor shall
they be construed, to limit the right or ability of Employer or Employee to
terminate this Agreement as set forth above. In the event Employee is
terminated due to a reduction in force, severance pay, if applicable, will
not reduce Employee's right to prior notice required under this paragraph.
Employee's employment is and shall be "at will". Except as otherwise agreed
in writing or as otherwise provided in this Agreement, upon termination of
employment neither Employer nor Employee shall have any further obligation
to each other.
3. Duties and Compensation
-----------------------
Employee shall perform any and all duties now or hereafter assigned to
Employee by Employer, as well as other tasks whether or not assigned by
Employer, for a salary as may from time to time be fixed by Employer.
Employee's salary will constitute the full and exclusive monetary
consideration and compensation for all services performed by Employee, and
for the performance of all his or her promises and obligations hereunder.
Employee's salary may be increased or decreased from time to time by
Employer, in Employer's sole discretion, without violating this Agreement.
Page 1
<PAGE>
4. Other Compensation
------------------
Any additional compensation awarded to Employee (whether by way of bonus
payment, opportunity to acquire stock, or any other form of additional
compensation) shall rest in the sole discretion of the Board of Directors
of Employer, and Employee shall not earn or accrue any right to any such
additional compensation by reason of his or her employment hereunder.
Employee's other compensation may be increased or decreased by Employer, in
Employer's sole discretion without violating this Agreement.
5. Rules and Regulations
---------------------
Employee will abide by Employer's rules and regulations, and practices
concerning vacation, sick leave, and other terms and conditions of
employment, as they may from time to time be adopted or modified.
6. Employee Benefit Plans
----------------------
Employer may adopt, or continue in force, benefit plans for the benefit of
all of its employees or only certain of its employees. Such benefit plans
may include, as examples only, group life insurance, medical insurance,
401K, and profit sharing plans. Employer, in its sole discretion, may
increase or decrease the benefits provided by such plan or plans or
terminate any or all such plans at any time, and may choose not to adopt
any additional plans, without violating this Agreement. Employee's rights
under any benefit plans now in force or later adopted by Employer shall be
governed solely by the terms of such plans.
7. Expenses
--------
Employer will reimburse Employee for all substantiated reasonable travel
and out-of-pocket expenses incurred in accordance with Employer's travel
policy.
If Employer pays for relocation of Employee, and Employee resigns the
employ of Employer within one (1) year of such relocation, Employee shall,
within ten (10) days of his or her resignation, pay to Employer any moving
expenses related to such relocation previously paid or reimbursed by
Employer.
8. Noncompetition by Employee during Employment
--------------------------------------------
During his or her employment, Employee shall not, directly or indirectly,
engage or participate in any business that is in competition with the
business of Employer. This prohibition shall not include ownership by
Employee of less than one percent (1%) of the outstanding stock in a
publicly traded corporation.
9. Duty to Devote Full Time and Avoid Conflict of Interest
-------------------------------------------------------
Page 2
<PAGE>
During his or her employment, Employee shall devote full-time efforts to
his or her duties as an Employee of the Employer. Employee will not,
directly or indirectly, engage or participate in any activities during the
period of employment in conflict with the best interests of Employer.
10. Inventions Belong to Employer
-----------------------------
Employee shall promptly disclose and assign to Employer all of Employee's
right, title and interest in and to any and all ideas, inventions,
discoveries or creations which are or may become legally protectable or
recognized improvements, including but not limited to computer programs,
algorithms, methods, manufacturing techniques, writings and other works of
authorship, illustrations and pictures which Employee solely or jointly has
or may in the future have conceived, made or reduced to practice or
developed, in whole or part, during work time, unless the idea, invention,
creation or discovery (1) does not use Employer's equipment, supplies,
facilities or trade secret information; (2) was developed entirely on
Employee's own time without the use of Employer's equipment, supplies or
facilities; (3) does not relate to the business of Employer or to
Employer's actual or demonstrably anticipated research or development; and
(4) does not result from work Employee performs for Employer. Employee will
assign to Employer inventions or creations created or discovered by
Employee, or jointly by Employee and a co-employee or co-employees, on
Employee's or their time if the same relate to the business of Employer or
to its actual or demonstrably anticipated research or development or which
results from any work performed by Employee for Employer. The foregoing
Agreement is binding upon Employee's heirs, representatives and assignees.
Pursuant to the above, Employee will execute and deliver to Employer or its
attorneys without additional compensation, but without expense to Employee,
any and all instruments including United States and foreign patent
applications, instruments to secure priority rights under the International
Convention for the Protection of Industrial Property, applications for
securing or registering any property rights assigned herein, and will
perform any and all lawful acts which in the judgment of Employer or its
attorneys may be necessary or desirable to secure or maintain for the
benefit of Employer, patents or other proprietary rights in the Unites
States and all foreign counties with respect to the property rights to be
assigned herein.
It is understood that the election of whether or not to file a patent
application on any disclosure submitted by Employee and the manner of
preparation and prosecution of any and all United States or foreign patent
applications shall be wholly within the discretion of Employer, and at its
expense. If Employee petitions in writing to Employer for a release of any
rights hereunder granted, Employer will promptly consider and act on such
petition, but is not obligated to release any of its rights.
11. Trade Secrets and Proprietary Information of Employer
-----------------------------------------------------
Employee will have access to, will acquire and become acquainted with
various trade secrets, confidential and proprietary information, relating
to Employer's business, including but not limited to: client, employee,
supplier, and distributor lists, contacts, addresses, information about
employees and employee relations, training manuals and procedures,
recruitment method and procedures, employment contracts, employee
handbooks, information about clients and suppliers, price lists, costs and
expenses, documents, budgets, proposals, financial information, inventions,
patterns,
Page 3
<PAGE>
processes, computer programs, manufacturing, recruitment and distribution
techniques, specifications, tapes and compilations of information, all of
which are owned by Employer, other parties with which Employer does
business ("Third Parties") or clients of Employer and which are used in the
operation of Employer's, Third Parties' and/or a client's business.
Employee shall hold in strictest confidence and shall not (other than as
specifically allowed in writing by Employer) disclose or use any trade
secret or confidential information of Employer, directly or indirectly, or
use them in any way, either during the term of Employee's employment, or at
any time thereafter, except as required by Employer in the course of
Employee's employment. Employee understands that the term "trade secret" or
"confidential information" means all information concerning Employer, Third
Parties and/or clients of Employer, or any parent, subsidiary or affiliate
of Employer, Third Parties, and/or a client (including, but not limited to,
information regarding the peculiarities, preferences and manner of doing
business) that is not generally known to the public. All items referred to
in this paragraph and similar items relating to the business of Employer,
Third Parties and/or a client, whether prepared by Employee or otherwise,
shall remain the exclusive property of Employer, Third Parties and/or
client and shall not be removed from Employer's, Third Parties' and/or
client's premises without prior written consent of Employer. Employee also
agrees that the remedy at law for breach of this paragraph is inadequate
and that Employer, in addition to any other remedy, can seek appropriate
injunctive relief from an appropriate court or arbitrator, at its election.
12. Confidential Information of Clients
-----------------------------------
All ideas, concepts, information, and written material disclosed to
Employee by Employer, or acquired from a client of Employer, and all
financial, accounting, statistical, personnel, and business data and plans
of clients, are and shall remain the sole and exclusive property and
proprietary information of the Employer, or said client, and are disclosed
in confidence by Employer or permitted to be acquired from clients in
reliance on Employee's agreement to maintain them in confidence and not to
use or disclose them to any other person except in furtherance of
Employer's business.
The prohibitions of this paragraph shall not apply to any information which
is later publicly disclosed, or is obtained by Employee in a legal manner
from another source not connected with or related to Employer.
13. Return of Information
---------------------
On or before termination of employment, Employee will return to Employer
all originals and copies of all of any part of:
a. Lists and sources of clients and suppliers;
b. Lists of employees;
c. Proposals to clients or drafts of proposals;
d. Reports, job notes, specifications, and drawings pertaining to
clients; or
Page 4
<PAGE>
e. Any and all other things, equipment, and written materials obtained by
Employee during the course of employment from Employer or from any
client of Employer.
14. Post-Employment Nonsolicitation of Clients
------------------------------------------
It is understood that Employee will learn trade secrets, confidential and
proprietary information as referred to in paragraphs 11 and 12 above. Use
of such trade secrets, confidential and proprietary information will
provide Employee with an unfair advantage over Employer, as compared to a
normally competitive situation. Employee agrees that if he or she solicits
business from Employer's clients and prospective clients, Employee will of
necessity use such trade secrets, proprietary and confidential information,
and such solicitation would be unfair. In recognition of this, Employee
agrees that upon termination of employment, he or she will not engage in
the conduct described below:
a. Employee shall not solicit any clients of Employer (i.e., clients
where at least a project has been conducted in the last two (2)
years), or attempt to take away any business of Employer that is
either under way or about to begin at the termination of employment.
b. For a period of one (1) year following termination of employment,
Employee shall not interfere or compete in any way with any proposal
or other efforts of Employer, already in progress (that is, a proposal
sent to or being then currently developed for a specific existing or
prospective client or clients, or contemplated to be submitted to a
specific existing or prospective client or clients by Employer within
one (1) year) at the termination of employment.
c. For a period of one (1) year following termination of employment,
Employee shall not make use of any of his or her personal
relationships or business contacts developed during the course of
employment with Employer and utilized for business purposes within the
two (2) years prior to termination, for the benefit of himself,
herself or another, in a competitive manner with respect to the
business of Employer.
Notwithstanding the foregoing, the Employee and Employer agree that there
is no restriction on Employee's right, upon termination, to send general
announcements of any new employment or to contact in the same manner all
potential customers of his new employment without selecting or devoting
special attention (as in a, b, or c above or otherwise) to Employer's
clients or prospective clients.
15. No Solicitation of Employees
----------------------------
Employee will not, either during the term of Employee's employment or at
any time thereafter, attempt to solicit or influence any of Employer's
employees to: (a) become employees of, or render services to, any other
employer or business; (b) engage in any activity, business or undertaking
not sponsored by Employer; or (c) engage in any activity contrary to or
conflicting with the interests of Employer, while the Employee is employed
by Employer. Employee agrees that the remedy at law for breach of this
paragraph is inadequate and that Employer, in addition to any other remedy,
can seek appropriate injunctive relief from an appropriate court or
arbitrator, at its election.
Page 5
<PAGE>
16. Injunctive Relief
-----------------
The services of Employee, as well as the trade secrets and the proprietary
and confidential information of Employer are of a special, unique, unusual
and extraordinary nature, which give them a unique value, the loss of which
cannot reasonably or adequately be compensated for in damages in an action
at law. The breach by Employee of any provision of this Agreement would
cause the Employer irreparable injury and damage, the measure of which
could not be adequately measured at law. Employer shall be entitled, as a
matter of right, to injunctive and other equitable relief to prevent the
violation of any provision of this Agreement by Employee. Employee hereby
consents to the granting of such injunctive or other equitable relief. The
exercise by Employer of any of its rights hereunder shall not constitute a
waiver by Employer of any other rights which it may have to damages or
otherwise.
17. Severability
------------
If any term or provision of this Agreement is held to be invalid or
unenforceable, the remaining portions of this Agreement will continue to be
valid and will be performed, construed and enforced to the fullest extent
permitted by law, and the invalid or unenforceable term will be deemed
amended and limited in accordance with the intent of the paries, as
determined from the face of the Agreement, to the extent necessary to
permit the maximum enforceability or validation of the term or provision.
18. Agreement Binding on Others
---------------------------
This Agreement is binding on the heirs, executors, administrators, and
successors-in-interest of the parties hereto.
19. Governing Law
-------------
This Agreement shall be construed and enforced according to the laws of the
State of California, excluding its choice of law rules.
20. Agreement Read, Understood and Fair
-----------------------------------
Employee has carefully read and considered the provisions of this Agreement
and agrees that all of the restrictions set forth are fair and reasonable
and are reasonably required for the protection of the interests of
Employer. Employee acknowledges that the goodwill and value of Employer is
enhanced by these provisions and that said enhancement is desired by
Employee.
For Employer
/s/ Leslie J. Alvarez
_____________________________ ---------------------
Employee Signature
1900 Powell Street, Suite 600
_______________________________ -----------------------------
Title Address
Page 6
<PAGE>
Emeryville, CA 94608
_______________________________ ---------------------
Date City, State, Zip
(510) 450-6802
---------------------
Telephone
###-##-####
---------------------
Social Security #
5/19/99
---------------------
Date
Page 7
<PAGE>
ATTACHMENT A
------------
California Labor Code Section 2870
Application of provision that employee shall assign or offer to assign rights in
invention to employer
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention
to his or her employer shall not apply to an invention that the employee
developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for
those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an
employee to assign an invention otherwise excluded from being required to
be assigned under subdivision (a), the provision is against the public
policy of this state and is unenforceable.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT COMPANY CONDENSED BALANCE SHEET (UNAUDITED) FOR JUNE 30, 1999 AND
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,640
<SECURITIES> 0
<RECEIVABLES> 4,375
<ALLOWANCES> (741)
<INVENTORY> 0
<CURRENT-ASSETS> 12,904
<PP&E> 2,694
<DEPRECIATION> (2,083)
<TOTAL-ASSETS> 13,515
<CURRENT-LIABILITIES> 11,158
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 2,235
<TOTAL-LIABILITY-AND-EQUITY> 13,515
<SALES> 8,276
<TOTAL-REVENUES> 8,276
<CGS> 5,500
<TOTAL-COSTS> 5,500
<OTHER-EXPENSES> 4,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,017)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,107)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
