SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 001-13211
INFORMATION MANAGEMENT ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1289928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Drive, Suite 414
Shelton, CT 06484
(Address and Zip Code of principal executive offices)
(203) 925-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
(Title of Class) no par value
per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 27, 1998: $43,963,100
Number of shares outstanding as of February 27, 1998: 9,400,570
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its Annual Meeting of
Stockholders presently scheduled for May 14, 1998 are incorporated by reference
into Part III of this report.
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TABLE OF CONTENTS
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 14
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 17
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 36, F-1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36, F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 36, 37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 37
ITEM 11. EXECUTIVE COMPENSATION 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 37
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PART I
ITEM 1. BUSINESS
THE COMPANY
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size to large-scale telephone call centers. The EDGE TeleBusiness software
is a suite of applications and tools that enable businesses to automate
telebusiness activities (telemarketing, telesales, account management, customer
service and customer support) on an enterprise-wide basis. The Company
complements its EDGE products by offering its clients professional consulting,
technical support and maintenance services. EDGE has been licensed to over 225
customers in a range of industries, including teleservices outsourcing,
telecommunications and financial services. Customers include AT&T Corp.,
Belgacom, S.A., Bose Corporation, ING Bank, N.V., Lloyd's Bank Plc, SITEL
Corporation, Sprint PCS, United Parcel Service General Services Co. and Wells
Fargo Bank, N.A.
The Company's EDGE products are designed to provide superior functionality,
flexibility, integration, scalability and speed of deployment. Based upon an
open systems software architecture, EDGE supports multiple hardware platforms,
operating environments, database management systems, network topologies, desktop
standards, and legacy system and computer-telephony middleware. The Company's
products and services enable call center agents to effectively manage customer
relationships through the use of the telephone, e-mail, the World Wide Web,
documents and fax. The Company's products provide call center agents with
real-time data and guidance needed to manage increasingly complex processes for
selling products and servicing customers. For example, EDGE offers scripting to
support order- taking, cross-selling and up-selling, enables agents to track and
resolve customer service problems and facilitates the collection of valuable
customer information that can be disseminated on an enterprise-wide basis. The
Company's professional consulting, technical support and maintenance services
include application development, systems integration, systems and database
design and construction and software training. The Company believes that these
services significantly differentiate the Company from its competitors and
complement its EDGE products to provide a total solution for mid-size and
large-scale call centers.
INDUSTRY BACKGROUND
Competitive pressures have intensified across many industries as a result of
increased global competition, deregulation, rapid technological change and
higher customer expectations. Businesses are expanding their use of telephony-
based customer interaction, from initial sales and marketing activities to post-
sales service and support, as a key component of their competitive efforts to
increase sales, reduce costs, enhance customer service, distinguish their
products and services and receive and process valuable customer
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information. Effective customer interaction can increase revenue, build customer
loyalty and improve customer acquisition and retention while reducing costs.
In recent years, telephony-based customer interaction has become a strategic
business weapon driven by decreased telecommunications costs associated with
deregulation, the proliferation of toll-free 800 numbers and the introduction of
new computing and telecommunications technologies, all of which have enabled
businesses to develop an efficient and interactive communications medium with
its existing and prospective customers.
High-volume, telephony-based customer interaction activities are conducted
through call centers that are typically designed and equipped with special
telecommunications and computer hardware and software. Common examples of call
centers are the customer service or sales centers for outbound and inbound
telemarketing, telesales, account management, customer service and support. Call
centers can range in size from tens to thousands of sales or service agents. The
Company defines small, mid-size and large-scale call centers based upon the
number of agents dedicated to telephony-based activities in the call center.
Small call centers typically have up to 50 agents, while mid-size call centers
have from 50 to 250 agents and large-scale centers over 250 agents.
Initial applications of technology for call centers were primarily telephony-
based and included such devices as high capacity telephone switches, predictive
dialers, automatic call distributors and interactive voice response units. These
technologies offered point solutions addressing only certain functions of call
center management and the customer interaction process. As call centers
progressed, organizations implemented solutions based on software used with
legacy systems in an effort to improve the effectiveness and efficiency of call
centers and customer interaction processes. These solutions were typically
internally developed and mainframe-based and as such, were generally inflexible,
expensive to maintain and difficult to deploy throughout a decentralized
organization. Moreover, these systems did not fully integrate and leverage
improvements in telephony technology, resulting in technology infrastructures
that could not provide comprehensive customer interaction and call center
management throughout the organization and across business processes.
Enterprises are seeking to exploit emerging technologies to improve the
effectiveness and efficiency of their telebusiness operations. Distributed
client/server computing environments have become increasingly commonplace, built
upon a foundation of relational database platforms, object-oriented technology
and wide deployment of network solutions. Customer interaction software
solutions today must leverage emerging technology and offer the functionality
necessary to support the broad spectrum of call center and customer interaction
functions and integrate these functions with other business processes in the
organization. Additionally, businesses are seeking customer interaction
solutions which can be deployed and updated rapidly throughout the organization,
are scalable to meet the needs of growing businesses, and seamlessly integrate
and leverage telephony technology. Call center customer interaction solutions
will also need to support
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and incorporate emerging customer interaction channels and computing platforms,
such as the Internet and corporate-based intranets.
THE IMA SOLUTION
The EDGE suite of software applications and tools, coupled with the Company's
comprehensive service offerings, represent a total solution designed to enable
businesses to increase their productivity and revenue-generating capabilities by
improving the effectiveness of their interaction with customers through
telephone call centers.
The IMA solution incorporates five design tenets: functionality, flexibility,
integration, scalability and speed of deployment.
Functionality. Customer calls are often three to five minute events which, when
handled effectively, can have a dramatic impact on a business's ability to
acquire and retain customers. The Company's products are designed to enable the
user to more effectively manage the telephone conversation with the customer
before, during and after the call by automating numerous call center activities,
providing real-time access to customer information, and providing features such
as intelligent scripting, contact management, time management, work flow
management, voice/data management and other conversation management aids. In
addition, EDGE provides comprehensive call center reporting tools which enable
managers and supervisors to efficiently and effectively manage call center
agents and marketing campaigns.
Flexibility. EDGE includes an integrated development environment that enables a
business to rapidly develop or change applications relating to specific sales,
marketing or service activities without disrupting live operations. EDGE allows
a call center manager to tailor scripts, screen displays and workflow processes.
The ability to change applications allows clients to adapt call center
operations quickly in response to changing business needs such as new product
sales or marketing campaigns, special customer service programs or crisis
management events.
Integration. EDGE is designed to integrate seamlessly with other technologies to
improve call center productivity. With its component-based open architecture,
EDGE can be integrated with a wide variety of computer and telephony-based
technologies and products, including telephony devices (voice response units,
predictive dialers, automatic call distributors and private branch exchange
technology), relational databases, legacy systems, other third-party desktop
applications and facsimile technology.
Scalability. The Company's products are scalable from small single-site
departmental networks to multi-site global implementations without significantly
increasing the risk of system degradation. EDGE has been deployed in client
configurations consisting of more than 1,000 users handling over 1,000,000 calls
per month.
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Speed of Deployment. The EDGE integrated development environment allows
businesses to rapidly develop and deploy call center customer interaction
software solutions on an enterprise-wide basis. The ability to swiftly develop
and deploy applications enables the Company's clients to implement sales,
marketing and service programs quickly in response to changes in the business
environment.
PRODUCTS AND SERVICES
The EDGE suite of products is based on a distributed, multi-tier client/server
open architecture which allows for the distinct separation of presentation,
application and database layers. This architecture provides the system
performance and scalability that is critical for mid-size and large-scale call
centers and permits hardware, relational database and operating system
independence to preserve and leverage existing information technology
investments. EDGE currently supports Windows 3.X, Windows 95, Windows NT
workstation clients, a wide variety of server platforms, including Unix and
Windows NT, as well as database support for Microsoft SQL Server.
EDGE COMPONENT ARCHITECTURE
The EDGE Component Architecture is comprised of a Business Application Framework
based on an integrated development environment and is augmented by an external
technology layer designed to provide seamless integration with third-party
products.
BUSINESS APPLICATION FRAMEWORK
EDGE business applications are constructed by linking together component objects
in a building block approach to enable the user to perform functions required in
a call center ranging from simple individual tasks to complex business
processes. EDGE component objects include Call Center Objects, Customer
Interaction Software Objects and Industry Objects.
Call Center Objects. Call Center Objects perform discrete functions that are
used by a call center agent at many different points before, during and after a
customer conversation. Call center managers and supervisors also utilize Call
Center Objects to help manage call center operations and personnel. More than 75
ready-to-use Call Center Objects are available with the EDGE product, the most
common of which are:
. Intelligent Scripting--Provides dynamic screen presentation and
navigational routing based on defined business rules, historical customer
data and other input derived from the customer conversation.
. Queue Management--Provides for administration, prioritization, security and
processing of user and system workflow activities such as calling
campaigns, call backs, appointments, to-do's, incidents, personal schedules
and tasks.
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. Telephony Functions--Allows control of all telephone-related functions and
interfaces such as automatic call distributors, voice response units and
predictive dialers through the application.
. Call List Processing--Provides importing, manipulation, sorting, selecting
and loading of calls into prioritized lists, which can be managed by user,
group, time of day and quota levels.
. Call Center Reporting--Provides ongoing operational results for management
analysis of call center activity in a variety of categories, including by
agent, group, department, campaign, list and time period.
. Customer Management--Allows for user-defined searching, selection and
modification of customer and company information, including system and
user-defined data.
Customer Interaction Software Objects. Customer Interaction Software Objects
contain a higher level of functionality than Call Center Objects and assist in
the performance of more complex customer interaction processes. At present,
these objects are developed by the client or by the Company's client services
organization by combining Call Center Objects to create customer-specific
applications using the EDGE integrated development environment. The Company has
developed packaged versions of commonly used Customer Interaction Software
Objects, which it markets as the AdvantEDGE Application Suite. The AdvantEDGE
applications that the Company currently markets include:
. Account Management--Supports call center agents during free-form
conversations with customers. Critical customer information such as
contacts, corporate hierarchy and profiles is combined with corporate
information such as product, lead source and objection handling and is
displayed in a timely manner.
. Lead Management--Provides closed-loop lead tracking for users to manage
leads and prospects through a sales qualification process by providing list
import and segmentation facilities, lead profiling and scoring, results
tracking and management reporting.
. Telesales--Provides graphical, interactive telephone sales and order
capture utilizing intelligent prompts for objection handling, cross-
selling, up-selling, product and service information, campaign based
pricing and order and inventory file integration.
. Customer Support/Case Processing--Allows a user to track and resolve
customer inquiries or cases in single call or multiple step resolution
environments, providing closed looped case management with fast path entry,
problem determination and resolution support, predefined workflows by type
and category, escalation with proactive alerts and on-line status reports.
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. Event and Seminar Management--Allows a user to create, manage and maintain
the registration of attendees of an event or seminar, track event
information by occurrence, schedule, location and mileage proximity.
Industry Objects. Industry Objects are applications that combine Call Center
Objects and Customer Interaction Software Objects to perform complex, typically
enterprise-wide business processes according to the requirements of the
particular industry in which the business operates. The Company has historically
utilized its consulting services and support organization to provide individual
customers with Industry Objects, but expects to package Industry Objects in the
future as discrete product offerings for the Company's targeted industries.
INTEGRATED DEVELOPMENT ENVIRONMENT
The EDGE integrated graphical development environment is used to tailor EDGE
applications to meet a client's specific needs. The primary components supported
within the integrated development environment include:
Client/Server Development. The Company's EDGE TeleBusiness Workstation (ETW)
provides a client/server graphical development tool for accessing and
integrating business application framework objects and external technologies
into end user applications.
Desktop Integration. The desktop integration component provides integration
capabilities between EDGE applications and third-party software applications
running on the desktop. The Company's Graphical EDGE Operations (GEO) product
allows EDGE to support Windows on the desktop. The Company has developed and is
currently testing a product to support Internet browsers.
Workflow Management. The workflow management component allows a user to develop
elaborate workflow routing within the call center and enables creation,
prioritization, processing and tracking of multiple customer interaction
activities coordinated on a "just in time" basis between the client, its call
enter and its customer. The workflow management component integrates agent and
task scheduling with a variety of inbound and outbound customer touch points.
Legacy System Access. The legacy system access component is a suite of
development tools which allows a user to access and update legacy system
information. Legacy system information or other data may be viewed or updated
from the same graphical presentation as local call center operations and
management data.
Telephony. The telephony component is a series of development tools which permit
a client to quickly establish a telephony interface to a particular private
branch exchange, predictive dialer or voice response unit, providing, for
example, the capability to capture automatic number identification/direct number
identification services and route the call and relevant data to a particular
agent, or to transfer voice/data from one agent to another.
Business Rules. The business rules component utilizes an intuitive graphical
user interface which allows rapid integration of client business processes and
practices into an application. This component enables a client to define the
critical processes and tasks for
<PAGE>
qualifying, selling and servicing the client's customers. These rules become the
basis of a client's customer interaction process. Business rules embody specific
procedures and policies for handling each customer event in a manner consistent
with the best business practices established by each client.
EXTERNAL TECHNOLOGY LAYER
The EDGE external technology layer consists of components that are designed to
enable clients to link to a variety of external technologies on a real-time
basis.
Desktop Links. The EDGE client component links to other desktop applications
through support of dynamic data exchange (DDE), dynamic library links (DLL) and
object linking and embedding (OLE). The Company has developed support capability
for Microsoft's Active X.
Relational Database. EDGE supports Oracle, Informix and Sybase relational
databases. Existing corporate data stored in these relational databases may be
accessed and updated along with the setup and definition of new databases for
management of call center data. As part of its Windows NT support strategy, the
Company has developed support capability for Microsoft SQL Server.
Legacy Gateway. EDGE supports a variety of legacy system links and data access
options, including 3270 access, HLLAPI, LU 6.2, IBM's MQ Series messaging
middleware, UNIX InterProcess Communication (IPC) and TCP/IP Sockets.
Computer Telephony Integration. EDGE supports a variety of commonly used
telephony technology, including private branch exchanges, predictive dialers,
voice response units and telephony-middleware. Functionality provided through
these telephony links include automatic number identification, direct number
identification services, screen notification, voice/data transfer and
conference, outbound preview dial, automated agent logon/logoff, agent
available/unavailable, call hold, retrieve, answer and disconnect and host-based
routing.
Internet Technology. The Company has developed products that support the most
commonly used Internet and corporate-based intranets through Microsoft's
Internet Explorer browser, Netscape's Navigator browser and Javascript as well
as integration to Microsoft's Active X.
CLIENT SERVICES
The Company believes that its client services are a significant differentiating
factor in its target markets and are an important component of EDGE deployments.
The Company provides consulting and maintenance and technical support services
to its customers, including custom application development, systems integration,
systems design and construction, database design, installation, skills training,
custom documentation, client
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help desk and software training. The Company has developed a comprehensive and
standard methodology to provide continuity through a project from the initial
sale to implementation of its applications. The Company's client services
organization helps to develop and maintain long-term customer relationships by
applying specialized knowledge of industry needs, business processes and
technology to help design and provide the customer with a highly functional and
flexible solution. The Company's client service department works with strategic
consulting and systems integration companies to identify and provide services
for large-scale service projects. The Company principally relies on distributors
and remarketers to provide consulting and client support services to its
international customers. As of December 31, 1997, the Company employed 95
employees in its client services organization. Services and maintenance revenues
as a percentage of total revenues were 54.5%, 50.4% and 47.4% in 1995, 1996 and
1997, respectively. The Company provides the following services:
Consulting Services. The Company provides a comprehensive range of professional
services for its customers including project management, business consulting,
application development, implementation and integration of the Company's
products with the customer's existing systems. In addition, the Company offers
training programs to meet the specific needs of its customers. The Company
maintains a large consulting services staff with extensive experience in the
implementation and deployment of complex customer interaction solutions. The
demand for the Company's consulting services has increased as the Company's
product offerings have been accepted for large-scale installations. Consulting
services fees are determined on a time and expense basis and training fees are
generally charged on a per class or per student basis.
Maintenance and Technical Support Services. The Company's maintenance and
technical support services staff provides clients with telephone and on-line
support of the Company's products. These support services include access to
technical support via the Company's telephone help-desk, customer support Web
site and e-mail. The Company offers several product support plans, including a 7
day/24 hour plan, which are generally offered for an annual fee based upon a
percentage of the license fee. The Company also provides its customers with
software upgrades, account management services, technical bulletins, status
reports and ongoing communication regarding new features and products under
development.
CUSTOMERS AND APPLICATIONS
As of December 31, 1997, the EDGE suite of products had been licensed to over
225 customers with more than 30,000 total users. In 1997, no customer accounted
for 10% or more of the Company's total revenue. In 1996, United Parcel Service
General Services Co. accounted for 10% of the Company's total revenue. In 1995,
Zurich Insurance Company accounted for approximately 23.7% of the Company's
total revenues.
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SALES AND MARKETING
The Company markets its software and services in the United States through a
direct sales organization. The Company's sales representatives are focused by
industry expertise and geographical location. To support its sales efforts, the
Company conducts marketing programs including advertising, telemarketing, direct
mail, seminars, public relations and trade shows. As of December 31, 1997, the
Company's sales and marketing organization covering the United States consisted
of 61 employees.
The Company's direct sales force employs a consultative sales process, working
closely with prospective customers to understand and define their needs and to
determine how those needs are best addressed by the Company's product offerings
as well as complementary technology and services offered by strategic systems
integration and technology companies. In addition to pursuing sales
opportunities with new customers, the Company works closely with its existing
customer base to gain knowledge of their industries, and focuses on selling new
and enhanced products specifically tailored to such existing customers'
requirements, as well as licensing its products to additional users within a
customer. Because customer interaction software applications are highly visible
within an organization, the Company's sales efforts are generally directed to
the senior management of a customer.
The Company also works closely with strategic consulting and systems integration
companies such as Aspect Telecommunications Corporation, Ernst & Young LLP and
IBM to increase market awareness and acceptance of the Company's products. The
Company has worked jointly with each of these companies by providing software
and services as part of a total customer software and systems project in which
the consulting or systems integration company also provides services, software
or hardware and may be responsible for the overall coordination of the project.
These relationships have led to the Company's introduction into strategic
accounts, increased account penetration and reduced sales cycle length. A key
part of the Company's strategy is to expand and enhance its existing
relationships with leading consulting and systems integration companies to
capture additional market share.
The Company markets its software internationally in Europe, the Pacific Rim,
Canada, Mexico and Latin America through remarketing and distribution
relationships which it supplements with a direct sales force in certain regions.
The Company's principal remarketers and distributors include Aspect
Telecommunications Corporation (worldwide), Datapoint (U.K.) Limited (Europe),
TeleDynamics BV (Holland), NCR Corporation (France, Canada, Turkey and Southeast
Asia), Kawasaki Steel Systems R&D Corporation (Japan), Locus Corporation
(Korea), TKM Communications, Inc. (Canada), Communicacoes, Processamento e
Mecanismos de Automacao Ltda. (Brazil), Mitsucon Commercial Ltda (Brazil) and
Sixtra Chile S.A.(Six Bell) (Chile). As of December 31, 1997, the Company had a
direct sales force consisting of ten sales and marketing professionals covering
Europe from its London, England office, and three sales professionals focused on
Mexico and Latin America. The Company is seeking to expand its existing
international distribution network including its indirect distribution channels
and direct sales force in order to take advantage of international growth
opportunities.
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PRODUCT DEVELOPMENT
The Company believes that to maintain its competitive advantage it must enhance
existing applications, introduce new products and features into the market on a
regular basis to keep pace with technological advances, meet changing customer
requirements and respond to competitors' products. To meet these goals, the
Company has invested in developing a comprehensive product development process
to define and evaluate rigorous requirements for product functionality and
quality. The Company's research and development engineers work closely with its
marketing and support personnel and its customers to design enhancements and new
products to assure that product evolution reflects developments in the
marketplace and trends in client requirements.
The Company intends to continue its product research and development efforts in
order to meet the complex and changing requirements of mid-size and large- scale
call centers. The Company is making long-term investments to enhance the
componentization and object orientation of EDGE's underlying architecture. The
Company is utilizing emerging industry standards such as Microsoft COM/DCOM,
CORBA compliant object technology, Java language and supporting Java technology.
The Company believes that these investments will provide a number of important
benefits including the ability to migrate easily to new components in the future
in a "plug and play" mode, to shield business objects and customer applications
from the underlying technology infrastructure, and to seamlessly integrate with
other business applications that adhere to the same standards.
As of December 31, 1997, the Company's product development staff consisted of 56
employees. In addition, the Company augments its internal research and
development organization with the services of an outside consulting firm. The
Company's total expenses for product development for the years ended December
31, 1995, 1996, and 1997 were $6.8 million, $6.4 million, and $6.2 million
respectively, and represented 28.6%, 24.3% and 16.9% of total revenues in these
periods, respectively. The Company expects that it will continue to commit
substantial resources to product development in the future.
COMPETITION
The market for telemarketing, telesales and customer service software is
intensely competitive, rapidly evolving and highly sensitive to new product
introductions or enhancements and marketing efforts by industry participants.
The Company competes with a large number of competitors ranging from internal
information systems departments to packaged software application vendors. The
Company believes that as the United States and international software markets
continue to grow, a number of new vendors will enter the market and existing
competitors and new market entrants will attempt to develop applications
targeting additional markets.
Management believes that it competes in most of its markets with the internal
information systems departments of potential customers who desire to develop
their own customer
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interaction software rather than acquire software from a
third-party vendor such as the Company. The Company believes that the principal
software companies with which it competes are The Vantive Corporation, Clarify
Inc., Scopus Technology, Inc. and Siebel Systems, Inc. The Company also competes
on occasion with systems integration firms. Among the Company's current and
potential competitors are also a number of large hardware and software companies
that may develop or acquire products that compete with the Company's products.
Competitors have established and may in the future establish cooperative
relationships or alliances which may increase their ability to provide superior
software solutions or services. In addition, consolidation within the call
center customer interaction software industry could create new or stronger
competitors. Increased competition resulting from new entrants, call center
customer interaction software industry consolidation, cooperative relationships
or alliances could result in price reductions, reduced operating income or loss
of market share, any of which could materially adversely affect the Company's
business, operating results or financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources, generate higher
revenues and have greater name recognition than the Company. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by it or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
client requirements. There can be no assurance that the Company will be able to
compete effectively against current or future competitors or that competitive
pressures faced by the Company would not materially and adversely affect its
business, operating results or financial condition.
The Company believes that the principal competitive factors in its industry
include product performance and functionality, flexibility, ease of use,
adherence to open standards, scalability, ability to integrate external data
sources, speed of deployment, client service, customer support and price.
Although the Company believes that it currently competes favorably with respect
to such factors, there can be no assurance that it will be able to maintain its
competitive position against current and potential competitors, especially those
with greater financial, technical, marketing, service, support and other
resources than the Company, or that competitive pressures will not materially
and adversely affect the Company's business, operating results and financial
condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, nondisclosure agreements and technical measures to protect its
proprietary rights. The Company typically enters into confidentiality or license
agreements with its employees, distributors, clients and potential clients, and
limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that these steps will be
adequate to deter misappropriation or independent third-party development of its
technology or to prevent an unauthorized third party from obtaining or using
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect or enforce proprietary rights to the same
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extent as do the laws of the United States. Policing unauthorized use of the
Company's products is difficult and, while the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
Although the Company believes that its products and technology do not infringe
on any existing proprietary rights of others, the use of patents to protect
software has increased, and there can be no assurance that third parties will
not assert infringement claims in the future or, if infringement claims are
asserted, that such claims will be resolved in the Company's favor. The Company
expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms favorable to
the Company or at all, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any infringement
claims resolved against the Company could have a material adverse effect upon
the Company's business, operating results and financial condition. In addition,
litigation may be necessary in the future to protect the Company's trade secrets
or other intellectual property rights, or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has entered into agreements with a small number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that customers have a limited, non-exclusive right
to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. The escrow agreements, and any that the
Company may enter into in the future, may increase the possibility of
misappropriation by third parties. In addition, the Company utilizes a
third-party contractor for selected product development projects which may also
increase the possibility of misappropriation by third parties.
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal, state
and foreign law. The Federal Telephone Consumer Protection Act required the
Federal Communications Commission to create regulations protecting residential
telephone subscribers from unwanted telephone solicitations. Certain states have
enacted similar laws limiting access to telephone subscribers who object to
receiving solicitations. Although compliance with these laws may limit the
potential use of the Company's products, the Company's products can be
programmed to operate in compliance with these laws through the use of
appropriate calling lists and calling campaign time parameters. There can be no
<PAGE>
assurance, however, that future legislation further restricting telephone
solicitation practices, if enacted, would not materially adversely affect the
Company.
EMPLOYEES
As of December 31, 1997, the Company employed 250 employees, consisting of 56
employees in research and development, 71 employees in sales and marketing, 70
employees in consulting services, 25 employees in client support services and 28
employees in finance and administration. Of these, 28 are located in Europe and
the remainder are located in the United States. None of these employees is
covered by any collective bargaining agreements. The Company believes that its
relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters in Shelton, Connecticut, which
consists of approximately 25,000 square feet of office space. The lease for the
Shelton, Connecticut office has a term ending on March 31, 2004. In addition,
the Company maintains an office in Irvine, California with a lease for
approximately 26,000 square feet of office space. The lease for the Irvine,
California office has a term ending on January 19, 2001. In support of its
direct sales and service and support operations, the Company leases offices in
three other locations in the United States, as well as an office in London,
England. These offices comprise between 1,200 and 6,000 square feet each and
have lease terms ending between February 28, 1999 and April 30, 2001.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation in the normal course of
business relating to claims arising out of its operations. The Company is not
currently involved in any litigation which, in management's opinion, would have
a material adverse effect on its business, operating results or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ------------------------- --- -----------------------------------------------
Albert R. Subbloie, Jr. 37 President, Chief Executive Officer
Gary R. Martino 37 Chairman of the Board, Chief Financial
Officer,
Treasurer and Assistant Secretary
Andrei Poludnewycz 38 Executive Vice President-Technology, Secretary
Paul G. Frederick 38 Senior Vice President-Client Services
James E. Anderson 52 Vice President-International Operations
David G. Caldeira 41 Vice President-Products Division
Michael P. McGroarty 37 Vice President and General Counsel, Assistant
Secretary
Paul J. Schmidt 38 Vice President-Application Development
Kian Saneii 33 Vice President-Worldwide Marketing
Eric Montgomery 43 Vice President-Sales
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the executive officers of the Company.
Mr. Subbloie has been the President and Chief Executive Officer of the
Company since its incorporation in 1990. Prior to incorporation of the Company,
Mr. Subbloie was a founding partner of the Company's predecessor, Information
Management Associates (the "Partnership") with Messrs. Martino and Poludnewycz,
which engaged in the business of consulting and development of computer
software. From 1982 to 1984, Mr. Subbloie was employed with the consulting
division of Arthur Andersen & Co., a professional accounting firm ("Arthur
Andersen"), and specialized in distribution and manufacturing consulting.
Mr. Martino has been an officer of the Company since its incorporation in
1990 and has served as Treasurer, Chief Financial Officer and Assistant
Secretary. Prior to incorporation of the Company, Mr. Martino was also a
founder of the Partnership with Messrs. Subbloie and Poludnewycz. From 1982 to
1984, Mr. Martino was employed with the consulting division of Arthur Andersen
and specialized in financial application consulting.
<PAGE>
Mr. Poludnewycz has been an officer of the Company since its incorporation
in 1990 and has served as Secretary of the Company since its incorporation in
1990. From 1992 to 1994, he served as Executive Vice President-Products Division
and subsequently served as Executive Vice President-Technology. Prior to
incorporation of the Company, Mr. Poludnewycz was a founding partner of the
Partnership with Messrs. Subbloie and Martino. From 1982 to 1984, Mr.
Poludnewycz was employed with the consulting division of Arthur Andersen and
specialized in developing computer applications for the mid-range hardware
platforms of IBM.
Mr. Frederick has served as Senior Vice President-Client Services of the
Company since 1995. Prior to joining the Company, he was employed from 1991 to
1995, most recently as associate partner, with a division of Andersen Consulting
LLP ("Andersen Consulting") which specialized in large scale systems
integration. Mr. Frederick's primary responsibilities with Andersen Consulting
included project and practice management.
Mr. Anderson served as Vice President-Business Development of the Company
from 1994 to 1995 and has since served as Vice President-International
Operations. From 1970 to 1994, Mr. Anderson was employed by IBM as a software
product planning manager, a branch sales manager and the Worldwide Market
Development Manager for IBM's CallPath product.
Mr. Caldeira has been employed with the Company in several capacities since
its incorporation 1990. He served as Vice President-Sales from 1990 to 1992 and
as Vice President-Business Development from 1992 to 1994. He has served in his
present position of Vice President-Products Division since 1994. Mr. Caldeira
joined the Partnership in 1989 as a Regional Sales Manager and was formerly
employed as a Senior Manager with the consulting division of Arthur Andersen
where he specialized in systems for mid-size companies.
Mr. McGroarty joined the Company in 1996 as Vice President and General
Counsel, and also serves as an Assistant Secretary. From 1990 to 1996, Mr.
McGroarty was an attorney with the law firm of Fulbright & Jaworski L.L.P.
Mr. Schmidt has served as an officer of the Company since its incorporation
in 1990. From 1990 to 1994, he served as Vice President-Client Services. From
1995 to 1997 he served as Vice President-Applied Technologies and since 1997 he
has served as Vice President-Application Development. From 1985 to 1990, Mr.
Schmidt was employed as a Vice President at the Partnership and specialized in
client services. From 1982 to 1985, Mr. Schmidt worked for Andersen Consulting
and specialized in financial, distribution and manufacturing consulting.
<PAGE>
Mr. Saneii has served as Vice President-Worldwide Marketing since July
1997. Prior to joining the Company, Mr. Saneii was employed by FileNet
Corporation, a business process automation firm, as Marketing Manager from
February 1996 to July 1997. From February 1995 to February 1996, Mr. Saneii
served as President of Business Process Innovation, a consulting firm
specializing in the application of imaging and workflow technologies. From 1987
to 1994, Mr. Saneii was Vice President, Corporate Development at DIS Research, a
systems integration firm specializing in the application of imaging and workflow
technologies.
Mr. Montgomery has served as Vice President-Sales since December 1997.
Prior to joining the Company, Mr. Montgomery was employed for eight years by
Hyperion Software, a provider of enterprise software and analytical
applications, most recently as Senior Sales Director.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Since July 30, 1997, the Common Stock has been traded on the NASDAQ
National Market under the symbol "IMAA." There was no established public trading
market for the Common Stock prior to the Company's initial public offering on
July 30, 1997.
The high and low closing sales prices of the Company's common stock, as
reported on the NASDAQ National Market for each quarter since the Company's July
30, 1997 initial public offering, are as follows:
Common Stock
------------
1997 High Low
------ ------
Fourth Quarter $14.75 $ 9.375
Third Quarter (Since July 30, 1997) 13.50 10.25
Second Quarter N/A N/A
First Quarter N/A N/A
The Company believes that there are approximately 45 holders of record for
the Common Stock at March 1, 1998. The Company believes that there are in excess
of 300 beneficial holders of the Common Stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
Use of Proceeds
On July 30, 1997, the Company's Registration Statement on Form S-1 (File No.
333-22923) became effective. The net proceeds from the offering were $32.4
million. The Company disclosed the use of proceeds through September 30, 1997 on
the Company's Form 10-Q for the period ending September 30, 1997. Except as
noted below, no information has
<PAGE>
changed with respect to the use of proceeds. The following are the use of
offering proceeds from the effective date (July 30, 1997) through December 31,
1997:
Repayment of indebtedness $ 7,400,000
Working capital 3,700,000
Temporary investments 21,000,000
Acquisition of Equipment 300,000
-----------
Total $32,400,000
===========
The Company used $250,000 of the net offering proceeds to repay in full a note
payable to Wand/IMA Investments, L.P., a beneficial owner of more than the ten
percent of the issued and outstanding shares of common stock of the Company.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
1993 1994 1995 1996 1997
(in thousands, except per share data)
Consolidated Statements of
Operations:
<S> <C> <C> <C> <C> <C>
Revenues:
License fees:
EDGE product line $ 5,550 $ 4,703 $ 8,368 $ 12,180 $19,295
Telemar product line 1,916 2,690 2,457 842 --
Total license fees 7,466 7,393 10,825 13,022 19,295
Services and
maintenance:
EDGE product line 2,209 7,872 10,342 11,643 17,377
Telemar product line 3,276 3,087 2,642 1,612 --
Total services 5,485 10,959 12,984 13,255 17,377
and maintenance
Total revenues 12,951 18,352 23,809 26,277 36,672
Cost of revenues:
License fees 165 462 700 709 304
Services and 2,108 6,268 8,225 7,191 9,428
maintenance
Total cost of 2,273 6,730 8,925 7,900 9,732
revenues
Gross profit 10,678 11,622 14,884 18,377 26,940
Operating expenses:
Sales and marketing 3,694 5,857 6,844 8,055 12,580
Product development 4,356 6,106 6,802 6,382 6,190
General and 2,862 2,693 3,824 3,878 4,784
administrative
Write-off of 2,228 -- -- -- --
acquired software
Total operating 13,140 14,656 17,470 18,315 23,554
expenses
Operating income (loss) (2,462) (3,034) (2,586) 62 3,386
Other income (expense) (381) (917) (1,100) (1,079) 18
Income (loss) before (2,843) (3,951) (3,686) (1,017) 3,404
provision for income
taxes
Provision for income 112 132 100 30 231
taxes
Net income (loss) $(2,955) $(4,083) $(3,786) $ (1,047) $ 3,173
Net income (loss)
per share
Basic $ (.76) $ (1.14) $ (1.18) $ (.44) $ .43
======= ======= ======= ======== =======
Diluted $ (.76) $ (1.14) $ (1.18) $ (.44) $ .38
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31
1993 1994 1995 1996 1997
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents $ 1,395 $ 446 $ 1,543 $ 3,073 $ 4,816
Working capital 63 (3,619) (1,233) 1,210 34,213
(deficit)
Total assets 9,613 12,150 12,519 17,281 43,922
Short-term debt 2,962 5,499 3,871 5,444 232
Long-term debt 1,926 1,423 3,042 2,803 136
Senior redeemable -- -- 4,751 9,431 --
convertible preferred
stock
Redeemable common stock 1,058 1,517 2,480 2,865 --
warrants
Total shareholders' (871) (4,200) (9,295) (10,906) 37,030
equity (deficit)
</TABLE>
<PAGE>
Results of Operations
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statement of operations data for the years
ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
License fees:
EDGE product line 35.2% 46.4% 52.6%
Telemar product line 10.3 3.2 --
Total license fees 45.5 49.6 52.6
Services and maintenance:
EDGE product line 43.4 44.3 47.4
Telemar product line 11.1 6.1 --
Total services and maintenance 54.5 50.4 47.4
Total revenues 100.0 100.0 100.0
Cost of revenues:
License fees 2.9 2.7 0.8
Services and maintenance 34.5 27.4 25.7
Total cost of revenues 37.4 30.1 26.5
Gross profit 62.6 69.9 73.5
Operating expenses:
Sales and marketing 28.7 30.7 34.3
Product development 28.6 24.3 16.9
General and administrative 16.1 14.8 13.0
Total operating expenses 73.4 69.8 64.2
Operating income (loss) (10.8) 0.1 9.3
Other income (expense) (4.6) (4.1) --
Income (loss) before provision for income taxes (15.4) (4.0) 9.3
Provision for income taxes 0.4 -- 0.6
Net income (loss) (15.8)% (4.0)% 8.7%
</TABLE>
The following table sets forth for each component of revenue, the cost of such
revenue expressed as a percentage of such revenue for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Cost of license fees 6.5% 5.4% 1.6%
Cost of service and maintenance 63.3% 54.3% 54.3%
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
The following discussion contains forward-looking statements and the Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Factors That May Affect Future Results".
OVERVIEW
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size and large-scale telephone call centers.
The Company's revenue is derived from two sources: software license fees for the
use of the Company's software products, and services and maintenance fees for
implementation, consulting, support and training related to the Company's
software products. For all periods presented herein, the Company has recognized
license fee revenues in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition" issued by the American Institute of Certified
Public Accountants. License fee revenues consist of revenues from initial
licenses for the Company's software products and license upgrades to existing
customers for additional users or modules. The Company recognizes initial
license fee revenues upon licensing and delivery of the software, if the
software is not subject to customer acceptance or post-delivery obligations. If
the license is subject to customer acceptance or post-delivery obligations, the
license fee revenues are deferred until customer acceptance has occurred or the
post-delivery obligations have been met.
The second component of the Company's revenues derives from professional
services associated with the implementation and deployment of the Company's
software products and maintenance fees for ongoing customer support. The
Company's professional consulting, technical support and maintenance services
include application development, systems integration, systems and database
design and construction and software training. The Company recognizes revenue
from professional services as such services are performed. Annual maintenance
fees are charged as a percentage of the license fee, and are recognized ratably
over the term of the maintenance agreement, which is usually twelve months. The
maintenance agreements are renewable at the discretion of the customer and
subject to change annually.
The Company markets its products in the United States through a direct sales
organization. The Company markets its products outside the United States in
Europe, the Pacific Rim, Canada, Mexico and Latin America through remarketing
and distribution relationships which it supplements with a direct sales force in
certain regions. The Company established sales and support operations in the
United Kingdom in 1990 to broaden its European
<PAGE>
distribution capabilities. In 1997, United States and international revenues
were approximately 73% and 27% of total revenues, respectively.
Although the Company has experienced significant growth in revenues during the
past three years, the Company does not believe prior growth is necessarily
indicative of future operating results. In addition, the Company expects
increased competition and intends to continue to invest in its business. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis. Future operating results will depend on many factors, including demand
for the Company's products, the level of product competition, competitor
pricing, the size and timing of significant orders, changes in pricing policies
by the Company or its competitors, the ability of the Company to develop,
introduce and market new products on a timely basis and changes in levels of
operating expenses.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total revenues increased 39.6% from $26.3 million in 1996 to $36.7 million in
1997.
License Fees. Total license fees increased 48.2% from $13.0 million, or 49.6% of
total revenues in 1996 to $19.3 million, or 52.6% of total revenues in 1997.
EDGE license fees increased 58.4% from $12.2 million in 1996 to $19.3 million in
1997. The increase in EDGE license fees was primarily attributable to increases
in both the number of license transactions and the average price per customer
license, which the Company believes was primarily the result of greater market
awareness and acceptance of the EDGE products and expansion of the Company's
sales and marketing organization. Telemar license fees decreased from $842,000
in 1996 to $0 in 1997 due to the sale of the Telemar product line to Telemar
Software International LLC ("TSI") in September 1996.
Services and Maintenance. Services and maintenance revenues increased 31.1% from
$13.3 million, or 50.4% of total revenues in 1996 to $17.4 million, or 47.4% of
total revenues in 1997. EDGE services and maintenance revenues increased 49.2%
from $11.6 million in 1996 to $17.4 million in 1997. The increase in EDGE
services and maintenance revenues was primarily attributable to increased demand
for services and maintenance and the significant increase in EDGE software
licenses in 1997. Telemar services and maintenance revenues decreased from $1.6
million in 1996 to $0 in 1997 due to the sale of the Telemar product line in
September 1996.
Cost of Revenues
Cost of revenues increased 23.2% from $7.9 million in 1996 to $9.7 million in
1997.
<PAGE>
Cost of License Fees. Cost of license fees is comprised of the costs of media
packaging, documentation, third party software and software production
personnel. Cost of license fees decreased 57.1% from $709,000, or 5.4% of total
license fees in 1996 to $304,000, or 1.6% of total license fees in 1997. The
higher cost of license fees in 1996 was attributable to the cost of other
vendors' products resold by the Company in connection with the Telemar product
line.
Cost of Services and Maintenance. The cost of services and maintenance consists
of salaries, wages, benefits and other costs related to installation,
implementation, training, and maintenance support of the Company's software
products. The cost of services and maintenance increased 31.1% from $7.2
million, or 54.3% of services and maintenance revenues in 1996 to $9.4 million,
or 54.3% of services and maintenance revenues in 1997. The increase in cost of
services and maintenance was primarily attributable to additional personnel
hired to meet customer needs for services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
commissions, salaries, bonuses and other related expenses for sales and
marketing personnel, as well as marketing, advertising and promotional expenses.
Sales and marketing expenses increased 56.2% from $8.1 million, or 30.7% of
total revenues in 1996 to $12.6 million, or 34.3% of total revenues in 1997.
This increase was primarily attributable to the hiring of additional sales and
marketing personnel, increased print advertisements, participation in trade
shows, travel expenses and other sales and marketing expenses.
Product Development. Product development expenses consist primarily of salaries,
bonuses, other related personnel expenses and consulting fees, as well as the
cost of facilities and equipment. Costs related to product development are
expensed as incurred. Product development expenses decreased 3.0% from $6.4
million, or 24.3% of total revenues in 1996 to $6.2 million, or 16.9% of total
revenues in 1997. However, product development expenses related to EDGE
increased 16.5% from $5.3 million to $6.2 million. The reduction in total
product development expenses was attributable to the sale of the Telemar product
line in September 1996, after which no Telemar product development expenses were
incurred.
General and Administrative. General and administrative expenses represent the
costs of executive, finance and administrative support personnel, the portion of
occupancy expenses allocable to administration, unallocated corporate expenses
such as fees for legal and auditing services and bad debt expense. The Company's
general and administrative expenses increased 23.4% from $3.9 million, or 14.8%
of total revenues in 1996 to $4.8 million, or 13.0% of total revenues in 1997.
This increase was generally attributable to increases in general and
administrative costs associated with higher business volume, including the
hiring of administrative personnel, the leasing of additional office space,
higher legal and accounting expenses and an increase in the Company's accounts
receivable reserve.
<PAGE>
Other Income
Interest Expense. Interest expense consists of interest on debt and equipment
financing less interest earned on cash, short term investments, notes receivable
from officers and the promissory note entered into in connection with the sale
of Telemar. Net interest expense decreased 93.0% from $1.2 million in 1996 to
$82,000 in 1997 primarily as a result of the completion of the Company's initial
public offering of Common Stock in August 1997, the repayment of all of the
Company's outstanding indebtedness with the proceeds of the offering and the
investment of the remaining proceeds in interest bearing securities. Interest
income was $641,000 and interest expense was $723,000 in 1997.
Other
In connection with the sale of Telemar, the Company received a promissory note
from TSI in the principal amount of $650,000 (the "TSI Note") payable in five
equal annual installments commencing October 1997 and which bears interest at
8.0% per annum. At the time of issuance, the Company fully reserved for the TSI
Note because collectibility, based on the start-up nature of TSI operations, was
not ascertainable at the time of sale. The Company will recognize gain in an
amount equal to payments on the TSI Note as such payments, if any, are received.
The Company had other income of $100,000 in 1997 due to the receipt of a payment
of $100,000 on the promissory note received in connection with the sale of
Telemar, compared with other income of $92,000 in 1996, which was attributable
to a gain on the sale of Telemar assets.
Provision for Income Taxes. Provision for income taxes consists of foreign and
state income and withholding taxes. The increase in provision for income taxes
is primarily attributable to an increase in international withholding taxes. At
December 31, 1997, the Company had approximately $8.6 million of U.S. Federal
net operating loss carryforwards of which approximately $3.4 million resulted
from the exercise of nonqualified stock options, and approximately $2.5 million
of state net operating loss carryforwards, which can be used, subject to certain
limitations, to offset future taxable income. When realized, the tax benefits of
the portion of the net operating losses attributable to the exercise of stock
options will be credited directly to paid in capital. The U.S. Federal net
operating loss carryforwards expire through 2011 and the stated net operating
loss carryforwards expire through 2002. The Company's initial public offering
resulted in a change in ownership, as defined by Federal income tax laws and
regulations. As a result of this change in ownership, the amount of U.S. Federal
net operating loss carryforwards which can be utilized to offset Federal taxable
income has an annual limitation of approximately $4,700,000.
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Total revenues increased 10.4% from $23.8 million in 1995 to $26.3 million in
1996.
License Fees. Total license fees increased 20.3% from $10.8 million, or 45.5% of
total revenues, in 1995 to $13.0 million, or 49.6% of total revenues, in 1996.
EDGE license fees increased 45.6% from $8.4 million in 1995 to $12.2 million in
1996. The increase in EDGE license fees was primarily attributable to an
increase in the average size of customer licenses, increased market awareness
and acceptance of the EDGE products, and increased productivity resulting from
expansion of the Company's sales and marketing organization. Telemar license
fees decreased 65.7% from $2.5 million in 1995 to $842,000 in 1996. The decrease
in Telemar license fees was due to a decrease in demand for Telemar software and
the sale of the Telemar product line in September 1996.
Services and Maintenance. Services and maintenance revenues increased 2.1% from
$13.0 million, or 54.5% of total revenues, in 1995 to $13.3 million, or 50.4% of
total revenues, in 1996. EDGE services and maintenance revenues increased 12.6%
from $10.3 million in 1995 to $11.6 million in 1996. The increase in EDGE
services and maintenance revenue of $1.3 million was primarily attributable to
the significant increase in EDGE software licenses, all of which involved a
consulting services component, offset in part by the substantial completion of
several service projects in 1995. Telemar services and maintenance revenues
decreased 39.0% from $2.6 million in 1995 to $1.6 million in 1996. The decrease
in Telemar services and maintenance revenue was due to decreased demand for
Telemar software and the sale of the Telemar product line on September 1, 1996.
Cost of Revenues
Cost of revenues decreased 11.5% from $8.9 million in 1995 to $7.9 million in
1996.
Cost of License Fees. Cost of license fees increased 1.3% from $700,000, or 6.5%
of total license fees, in 1995 to $709,000, or 5.4% of total license fees, in
1996.
Cost of Services and Maintenance. The cost of services and maintenance decreased
12.6% from $8.2 million, or 63.3% of services and maintenance revenues, in 1995
to $7.2 million, or 54.3% of services and maintenance revenues, in 1996. The
improvement in services and maintenance margin was primarily due to a reduction
in the cost of subcontractors used to supplement the Company's internal client
services organization from $2.5 million in 1995 to $500,000 in 1996, offset in
part by an increase in personnel costs of $1.1 million from 1995 to 1996. In
1995, approximately $650,000 of the $2.5 million of subcontractor costs was
attributable to third party subcontractor fees for services provided in
connection with a customer installation pursuant to the terms of a fixed price
<PAGE>
services contract entered into in December 1993 for which no corresponding
revenue was realized. Since 1993 the Company has not entered into any large
fixed price contracts.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 17.7% from $6.8
million, or 28.7% of total revenues, in 1995 to $8.1 million, or 30.7% of total
revenues, in 1996. This increase was primarily attributable to the hiring of
additional sales and marketing personnel as well as increased print advertising,
participation in trade shows, travel expenses and other sales and marketing
expenses.
Product Development. Product development expenses decreased 6.2% from $6.8
million, or 28.6% of total revenues, in 1995 to $6.4 million, or 24.3% of total
revenues, in 1996. The reduction of product development expenses in absolute
dollars was primarily attributable to the sale of the Telemar product line on
September 1, 1996, after which no Telemar product development expenses were
incurred. The absolute dollar amount of product development expenses related to
EDGE increased from $5.1 million in 1995 to $5.3 million in 1996, although the
amount of such investment as a percentage of EDGE revenues declined slightly.
General and Administrative. The Company's general and administrative expenses
increased from $3.8 million, or 16.1% of revenues, in 1995 to $3.9 million, or
14.8% of revenues, in 1996. The relatively consistent expense levels from 1995
to 1996 reflect primarily an increase in personnel costs offset by a decrease in
the provision for doubtful accounts.
Other Income (Expense)
Interest Expense. Interest expense increased 53.3% from $764,000 in 1995 to
$1,171,000 in 1996 primarily as a result of the accrual of interest on the Term
Note of $391,000 and interest paid on monies borrowed from certain executive
officers of $110,000 offset by a reduction in the principal amounts outstanding
under capital leases and subordinated indebtedness.
Other Items. The Company incurred expenses of $113,000 in 1995 in connection
with losses relating to the disposal of certain office equipment and the sale of
an office building in Trumbull, Connecticut, which had been leased by the
Company and with respect to which the Company had guaranteed the repayment of a
mortgage loan. In 1996, the Company realized a gain of $92,000 in connection
with the sale of Telemar and certain related assets and liabilities to TSI. The
Company incurred a one-time expense of $223,000 in 1995 in connection with its
early termination of an office lease in Fountain Valley, California because
space available at the premises no longer met the Company's needs.
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, the Company had $4.8 million in cash, $19.5 million in
short term investment and $14.8 million in accounts receivable. For the twelve
months ended December 31, 1997, the Company used net cash of $2.0 million in
operating activities, which was primarily attributable to net income of $3.2
million, depreciation, amortization and other non-cash charges of $1.4 million
and a decrease in notes receivable from officers of $548,000 offset by an
increase in accounts receivable of $4.3 million, an increase in other current
assets of $1.2 million and a decrease in accounts payable and accrued expenses
of $1.0 million. The fluctuations in operating assets and liabilities were due
primarily to the timing of operating activities, including the timing of orders,
collections of accounts receivable and the payment of accounts payable.
For the twelve months ended December 31, 1997, the Company's primary investing
activities consisted of net purchases of short-term investments of approximately
$19.5 million and $1.4 million of purchases of computer and office equipment to
support the Company's expanding employee base.
In August 1997, the Company completed its initial public offering of 3,900,000
shares of its common stock, of which 2,800,000 shares were issued and sold by
the Company and 1,100,000 shares were sold by certain selling shareholders,
which provided net proceeds to the Company, after underwriting discounts and
expenses, of $32.4 million. The Company used $7.4 million to repay in full the
principal indebtedness under the Loan and Security Agreement dated October 26,
1995, as amended between the Company and People's Bank. In addition, the Company
used $250,000 of the net proceeds of the offering to repay in full a note
payable to Wand/IMA Investments, L.P. For the twelve months ended December 31,
1997, the Company made capital equipment lease repayments of $269,000.
The Company anticipates that the proceeds from its initial public offering,
together with other existing sources of working capital, will be sufficient to
meet the Company's projected working capital and other cash requirements for the
foreseeable future. The Company's future operating and capital requirements will
depend on numerous factors, including the Company's internal research and
development programs, the level of resources the Company devotes to marketing
and sales activities, advances in technology and the successful development and
introduction of new products.
Effect of Recent Accounting Pronouncements
In 1997 the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130), which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. In 1997 the FASB also issued Statement
of Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131), which requires a new model for
segment reporting. The adoption of SFAS
<PAGE>
130 and SFAS 131 is required in 1998. The adoption of these standards will not
impact the Company's results from operations or financial position.
Impact of Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two-digit date
position which represents the year (e.g., '95 is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., '99) could be the
maximum date value these systems will be able to accurately process. Management
is in the process of working with its products to assure that the Company's
products are year 2000 compliant. The Company also is in the process of
analyzing its own systems and requirements. Based on information currently
available, management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in product
development or computer system improvements to be year 2000 compliant. To the
extent the Company's systems are not fully year 2000 compliant, there can be no
assurance that potential systems interruptions or the cost necessary to update
software would not have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects.
Factors That May Affect Future Results
In addition to the other information in this Form 10-K, readers should carefully
consider the following factors in evaluating the Company and its business.
Statements in this Form 10-K which express "belief", "anticipation" or
"expectation", as well as other statements which are not historical fact, and
statements as to product compatibility, design, features, functionality and
performance insofar as they may apply prospectively, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and the Company's actual results could differ materially from those
expressed in these forward-looking statements as a result of numerous factors,
including those set forth below, and elsewhere in this Form 10-K.
History Of Operating Losses; Uncertainty Of Future Operating results. The
Company incurred significant net operating losses in each of 1992, 1993, 1994
and 1995 and had an accumulated deficit of $14.0 million as of December 31,
1997. The Company's operating history makes the prediction of future operating
results difficult or impossible. Accordingly, although the Company has recently
experienced revenue growth, such growth should not be considered indicative of
future revenue growth, if any, or of future operating results. There can be no
assurance that any of the Company's business strategies
<PAGE>
will be successful or that the Company will be able to achieve or sustain
profitability on a quarterly or annual basis in the future.
Fluctuations In Quarterly Performance. The Company's quarterly operating results
have varied significantly in the past and may vary significantly in the future
depending upon a number of factors, many of which are beyond the Company's
control. These factors include, among others, the ability of the Company to
develop, introduce and market new and enhanced versions of its products on a
timely basis; the demand for the Company's products; the lengthy sales cycle for
full implementation of its products; the size, timing and contractual terms of
significant orders; the timing and significance of product enhancements and new
product announcements by the Company or its competitors; changes in the
Company's business strategies; budgeting cycles of its potential customers;
customer order deferrals in anticipation of enhancements or new products;
changes in the mix of products and services sold; changes in the amount of
revenue attributable to domestic and international sales; changes in foreign
currency exchange rates; the level of product and price competition;
cancellations or non-renewals of licenses or maintenance agreements; investments
to develop marketing and distribution channels; or changes in the level of
operating expenses. The Company is dependent upon obtaining orders in any given
quarter for delivery in that quarter in order to achieve its quarterly revenue
objectives. The timing of revenue recognition can be affected by many factors,
including the timing of contract execution and delivery, post-delivery
obligations and customer acceptance. A significant portion of the Company's
revenues in any quarter is typically derived from non-recurring, large license
fees received from a relatively small number of customers. Although particular
customers may vary from quarter to quarter, the Company expects that sales to a
limited number of customers will continue to account for a significant
percentage of its revenue in any quarter for the foreseeable future. Therefore,
the loss, deferral or cancellation of a contract, or a failure of a customer to
honor its contractual obligations (and for which the Company's reserves and
allowances may be inadequate), could have a significant impact on the Company's
operating results in a particular quarter. Conversely, to the extent that
significant sales occur earlier than expected, operating results for subsequent
three months may be adversely affected. In addition, the Company's business has
experienced and is expected to continue to experience seasonality, with stronger
demand during the three months ending in June and December than during the three
months ending in March and September, and a substantial portion of orders being
received in the last month or weeks of any given quarter.
Due to the foregoing factors, quarterly revenues and operating results are not
predictable with any significant degree of accuracy. The Company's expense
levels are based in significant part on the Company's expectations as to future
revenues and are therefore relatively fixed for the short term. If revenue
levels are below expectations, the Company's business, operating results, and
financial conditions are likely to be materially adversely affected. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the Company
will be able to achieve or sustain profitability on a quarterly or annual basis
in the future. Due
<PAGE>
to all of the foregoing factors, it is likely that in some future quarter the
Company's total revenues or operating results will be below the expectations of
public market analysts and investors. In such event, or in the event that
adverse conditions prevail or are perceived to prevail generally or with respect
to the Company's business, the price of the Company's common stock would likely
be materially adversely affected.
Product Concentration. Substantially all of the Company's revenues are
attributable to the licensing of EDGE and the provision of professional
consulting, technical support and maintenance services relating to EDGE. As a
result, factors adversely affecting the pricing of or demand for EDGE products
and services, such as competition or technological changes, could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's future financial performance will depend, in
significant part, on the continued market acceptance of its EDGE products and
the successful development, introduction and client acceptance of new and
enhanced versions of EDGE products. There can be no assurance that the Company
will continue to be successful in developing and marketing EDGE.
Lengthy Sales And Implementation Cycles; Post Delivery Obligations. The
licensing and implementation of the Company's products generally involves a
significant commitment of resources by customers and often requires the Company
to provide a significant level of education to prospective customers regarding
the use of the Company's products. As a result, the Company's sales process is
often subject to delays associated with lengthy customer approval processes that
typically accompany significant capital expenditures. For these and other
reasons, the sales cycle associated with the license of the Company's products
is often lengthy and may be subject to a number of significant delays over which
the Company has little or no control. In addition, the time required to
implement the Company's products can vary significantly with the needs of its
customers and generally extends for several months or, for larger, more complex
implementations, multiple quarters.
Depending on the contract terms and conditions, licensing fees are recognized
upon delivery of the product of no customer acceptance conditions or significant
post-delivery obligations remain and collection of the resulting receivable is
probable. However, if post-delivery obligations exist, or if the product is
subject to customer acceptance, revenue will be deferred until no significant
Company obligations exist or acceptance has occurred. In the past, some
customers have failed to honor their contractual obligations by delaying
payments of a portion of license fees until implementation was complete and in
some cases have disputed the license and consulting fees charged. There can be
no assurance that the Company will not experience delays, cancellations or
disputes regarding payment in the future, which could have a material adverse
effect on the Company's business, operating results and financial condition and
cause its quarterly operating results to vary significantly in the future.
Dependence On Proprietary Technology. The Company's success and ability to
compete is dependent in part upon proprietary technology. The Company relies
primarily on a
<PAGE>
combination of copyright and trademark laws, trade secrets, nondisclosure
agreements and technical measures to protect its proprietary rights. The Company
typically enters into confidentiality or license agreements with its employees,
distributors, clients and potential clients, and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that these steps will be adequate to deter
misappropriation or independent third-party development of its technology or to
prevent an unauthorized third party from obtaining or using information that the
Company regards as proprietary. In addition, the laws of some foreign countries
do not protect or enforce proprietary rights to the same extent as do the laws
of the United States. Policing unauthorized use of the Company's products is
difficult and, while the Company is unable to determine the extent to which
piracy of its software product exists, software piracy can be expected to be a
persistent problem. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. Although the
Company believes that its products and technology do not infringe on any
existing proprietary rights of others, the use of patents to protect software
has increased, and there can be no assurance that third parties will not assert
infringement claims in the future or, if infringement claims are asserted, that
such claims will be resolved in the Company's favor. The Company expects that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in the Company's industry segment
grows and the functionality of products in different industry segments overlaps.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms favorable to the Company or at all,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Any infringement claims resolved against the
Company could have a material adverse effect upon the Company's business,
operating results and financial condition. In addition, litigation may be
necessary in the future to protect the Company's trade secrets or other
intellectual property rights, or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has entered into agreements with a small number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that customers have a limited, non-exclusive right
to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. The escrow agreements, and any that the
Company may enter into in the future, may increase the possibility of
misappropriation by third parties. In addition, the Company utilizes a
third-party contractor for selected product development projects which may also
increase the possibility of misappropriation by third parties.
<PAGE>
Dependence On Indirect Marketing And Distribution Channels; Potential Conflicts.
The Company maintains co-marketing relationships with consulting and systems
integration companies to expand the visibility of its products in the United
States and internationally and distributes its products outside the United
States through remarketers and distributors. Such co-marketers, remarketers and
distributors are not under the direct control of the Company and install and
support the product lines of a number of companies. In addition, the co-
marketers, remarketers and distributors are not subject to any minimum purchase
requirements and can discontinue marketing the Company's products at any time
without cause. The consulting and systems integration companies may also sell or
co-market potentially competitive products. Accordingly, the Company must
compete for the focus and sales efforts of these third party entities.
Additionally, selling through indirect channels may limit the company's contacts
with its customers, potentially hindering its ability to accurately forecast
sales and revenue, evaluate customer satisfaction and recognize emerging
customer requirements. There can be no assurance that co-marketers, remarketers
and distributors will continue to distribute or recommend the Company's products
or do so successfully, or that the Company will succeed in increasing the use of
these indirect channels profitably. There can also be no assurance that one or
more of these companies will not begin to market products in competition with
the Company. The termination of one or more of these relationships or the
failure of the Company to establish additional relationships could adversely
affect the Company's business, operating results and financial condition.
The Company's strategy of marketing its products directly to end-users and
indirectly through remarketers and distributors may result in distribution
channel conflicts. The Company's direct sales efforts may compete with those of
its indirect channels and, to the extent different resellers target the same
customers, resellers may also come into conflict with each other. Although the
Company has attempted to manage its distribution channels in a manner to avoid
potential conflicts, there can be no assurance that distribution channel
conflicts will not materially adversely affect its relationships with existing
remarketers and distributors or adversely affect its ability to attract new
remarketers and distributors.
Need To Expand Marketing And Distribution Channels. The Company sells its
products both through its direct sales organization and through remarketers and
distributors. Part of the Company's strategy is to increase its use of
remarketers and distributors to sell its products internationally and to expand
its existing co-marketing relationships and establish new relationships with
other consulting and systems integration companies. The Company is also seeking
to expand its existing international direct sales force in order to take
advantage of international growth opportunities. The Company's ability to
achieve revenue growth in the future will depend on its success in recruiting
and training sufficient direct sales personnel and attracting and retaining
qualified remarketers and distributors. The Company has at times experienced and
continues to experience difficulty in recruiting qualified personnel, and there
can be no assurance that the Company will be able to expand successfully its
direct sales force or other remarketing and distribution channels or that any
such expansion will result in an increase in revenues. Any failure by the
Company to
<PAGE>
expand its direct sales force or other remarketing and distribution channels
could materially and adversely affect the Company's business, operating results
and financial condition.
Emerging Markets For Call Center Customer Interaction Software; Dependence On
Increased Use Of Products By Existing Customers. The market for call center
customer interaction software is relatively new and is characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The Company's future financial performance will depend in large part on
continued growth in the number of organizations adopting call center customer
interaction software products on an enterprise-wide basis and on the number of
applications and software components developed for such use. There can be no
assurance that the call center customer interaction software market will
continue to grow. If this market fails to grow, or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition could be materially and adversely affected.
In addition, certain of the Company's larger customers have licensed the
Company's software on an incremental basis and there can be no assurance that
the Company's customers will expand their use of the Company's software on an
enterprise-wide basis or license new or enhanced software products introduced by
the Company. The failure of the Company's software to perform according to
customer expectations or otherwise to be deployed on an enterprise-wide basis
could have a material adverse effect on the ability of the Company to increase
revenues from existing customers.
Rapid Technological Change. The call center customer interaction software market
is characterized by rapid technological change, frequent introductions of new
products, changes in customer demands and evolving industry standards, any of
which can render existing products obsolete and unmarketable. As a result, the
Company's position in its existing markets or other markets that it may enter
could diminish rapidly by product advancements. The life cycles of the Company's
products are difficult to estimate. The Company's product development and
testing efforts are expected to require, from time to time, substantial
investments by the Company and there can be no assurance that it will have
sufficient resources to make the necessary investments. The Company's customers
have adopted a wide variety of hardware, software, database and networking
platforms, and as a result, to gain broad market acceptance, the Company must
continue to support and maintain its products on a variety of such platforms.
The Company's future success will depend on its ability to address the
increasingly sophisticated needs of its customers by supporting existing and
emerging hardware, software, database and networking platforms and by developing
and introducing enhancements to its existing products and new products on a
timely basis that keep pace with technological developments, changing customer
requirements and evolving industry standards. The success of the Company's
products may also depend, in part, on its ability to introduce products which
are compatible with the Internet, and on the broad acceptance of the Internet.
<PAGE>
Management of Growth. The Company is currently experiencing a period of rapid
growth that could place a significant strain on its management and other
resources. The Company anticipates that continued growth, if any, will require
it to recruit, hire, train and retain a substantial number of new and highly
skilled product development, managerial, finance, sales and marketing and
support personnel. Competition for such personnel is intense and the Company
expects that such competition will continue for the foreseeable future. There
can be no assurance that the Company will be successful at hiring or retaining
such personnel. The Company's ability to compete effectively and to manage
future growth, if any, will depend on its ability to continue to implement and
improve operational, financial and management information systems on a timely
basis and to expand, train, motivate and manage its work force. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's operations. If the Company's management is
unable to manage growth effectively, the quality of the Company's products and
its business, operating results and financial condition could be materially
adversely affected.
Competition. The market for telemarketing, telesales and customer service
software is intensely competitive, rapidly evolving and highly sensitive to new
product introductions or enhancements and marketing efforts by industry
participants. The Company competes with a large number of competitors ranging
from internal information systems departments to packaged software application
vendors. The Company believes that as the United States and international
software markets continue to grow, a number of new vendors will enter the market
and existing competitors and new market entrants will attempt to develop
applications targeting additional markets. Competitors have established and may
in the future establish cooperative relationships or alliances which may
increase their ability to provide superior software solutions or services. In
addition, consolidation within the call center customer interaction software
industry could create new or stronger competitors.
Increased competition resulting from new entrants, consolidation of the call
center customer interaction software industry, cooperative relationships or
alliances could result in price reductions, reduced operating income or loss of
market share, any of which could materially adversely affect the Company's
business, operating results or financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources, generate higher
revenues and have greater name recognition than the Company. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by it or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
client requirements. There can be no assurance that the Company will be able to
compete effectively against current or future competitors or that competitive
pressures faced by the Company would not materially and adversely affect its
business, operating results or financial condition.
Risks Associated With International Operations. International operations
accounted for approximately 38%, 26% and 27% of total revenues for 1995, 1996
and 1997, respectively. The Company intends to expand its international sales
activity, which will
<PAGE>
require significant management attention and financial resources and will
require the Company to establish additional foreign operations and hire
additional personnel. As of December 31, 1997 the Company employed 28 employees
who are based in Europe. The Company has an office located in London, England.
There can be no assurance that the Company will be able to maintain or increase
international market demand for its products and, to the extent the Company is
unable to do so, its business, operating results or financial condition could be
materially adversely affected. The Company's international sales are currently
denominated in U.S. dollars with respect to sales outside of the United Kingdom
and Europe, and generally in pounds sterling with respect to sales in the United
Kingdom and Europe. An increase in the value of the U.S. dollar or pound
sterling relative to other currencies could make the Company's products more
expensive and, therefore, potentially less competitive in foreign markets.
Currently, the Company does not employ currency hedging strategies to reduce
this risk. In addition, the Company's international business may be subject to a
variety of other risks, including potentially longer payment cycles and
difficulties in collecting international accounts receivable, difficulties in
enforcement of contractual obligations and intellectual property rights,
potentially adverse tax consequences, increased costs associated with
maintaining international market efforts, costs of localizing products for
foreign markets, tariffs, duties and other trade barriers, adverse changes in
regulatory requirements, possible recessionary economies outside the United
States and political and economic instability. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international sales and, consequently, on its business, operating results or
financial condition.
Increased Use Of Third-Party Development Tools. The Company's EDGE products
include application development tools which are used to build and modify
applications. If third-party application development tools become more widely
used as a result of technological advances or customer requirements, the Company
could be required to make greater use of third-party tools in the future, and to
enter into license arrangements with such third parties, which could result in
higher royalty payments, a loss of product differentiation and delays. Such
effects or the inability of the Company to enter into commercially reasonable
licenses could have a material adverse effect on the Company's business,
operating results or financial condition.
In addition to the "Factors That May Affect Future Results" mentioned above, the
Company's business entails a variety of additional risks, which are set forth in
the "Risk Factors" section of the Company's Form S-1 Registration Statement
filed with the Securities and Exchange Commission, which became effective July
30, 1997 (Registration No. 333-22923).
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Public Accountants.............................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.......................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997............ F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997............ F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the Period from January 1, 1995
through December 31, 1997.......................................................................... F-6
Notes to Consolidated Financial Statements............................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Information Management Associates,
Inc.:
We have audited the accompanying consolidated balance sheets of Information
Management Associates, Inc. (a Connecticut corporation) and subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Information
Management Associates, Inc. and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 30, 1998
F-2
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1996 1997
------------------ ------------------
(in thousands, except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 3,073 $ 4,816
Short-term investments.......................................................... - 19,455
Accounts receivable, net of allowance for doubtful accounts of
$482 in 1996 and $630 in 1997.................................................. 10,473 14,815
Other current assets............................................................ 232 1,420
-------- --------
Total current assets......................................................... 13,778 40,506
Equipment, net................................................................... 2,222 2,279
Notes receivable from officers and employees..................................... 572 24
Other assets, net 709 1,113
-------- --------
$ 17,281 $ 43,922
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit............................................................. $ 4,860 $ -
Current maturities of term note payable to bank................................. 83 -
Current maturities of obligations under capital leases.......................... 251 232
Current maturities of subordinated note payable to shareholder.................. 250 -
Accounts payable................................................................ 2,308 1,738
Accrued sales tax payable....................................................... 823 242
Accrued compensation............................................................ 1,166 1,597
Other accrued liabilities....................................................... 1,122 798
Deferred revenues............................................................... 1,705 1,686
-------- --------
Total current liabilities.................................................... 12,568 6,293
-------- --------
Term note payable to bank, less current maturities included above................ 2,417 -
-------- --------
Obligations under capital leases, less current maturities included above......... 386 136
-------- --------
Other long-term liabilities...................................................... 520 463
-------- --------
Commitments and Contingencies (Note 12)
Series A senior redeemable convertible preferred stock, $1,000 stated
value; 4,500 shares authorized, issued and outstanding at December 31, 1996
(liquidation value of $5,169 at December 31, 1996)............................ 5,145 -
Series B senior redeemable convertible preferred stock, $1,000 stated
value; 4,350 shares authorized, issued and outstanding at December 31, 1996
(liquidation value of $4,408 at December 31, 1996).............................. 4,286 -
-------- --------
Total preferred stock........................................................ 9,431 -
-------- --------
Redeemable common stock warrants................................................. 2,865 -
-------- --------
Shareholders' equity (deficit):
Common stock, no par value; 20,000,000 authorized shares, 4,293,379 and
9,236,037 shares issued and outstanding at December 31, 1996 and 1997........... 5,795 51,102
Cumulative translation adjustment................................................ (9) (101)
Accumulated deficit.............................................................. (16,692) (13,971)
-------- --------
Total shareholders' equity (deficit) (10,906) 37,030
-------- --------
$ 17,281 $ 43,922
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
----------------- ----------------- ---------------
<S> <C> <C> <C>
(in thousands, except share and per share amounts)
Revenues:
License fees............................................... $10,825 $13,022 $19,295
Services and maintenance................................... 12,984 13,255 17,377
------- ------- -------
Total revenues.......................................... 23,809 26,277 36,672
------- ------- -------
Cost of revenues:
Cost of license fees....................................... 700 709 304
Cost of services and maintenance........................... 8,225 7,191 9,428
------- ------- -------
Total cost of revenues.................................. 8,925 7,900 9,732
------- ------- -------
Gross profit 14,884 18,377 26,940
------- ------- -------
Operating expenses:
Sales and marketing........................................ 6,844 8,055 12,580
Product development........................................ 6,802 6,382 6,190
General and administrative................................. 3,824 3,878 4,784
------- ------- -------
Total operating expenses................................ 17,470 18,315 23,554
------- ------- -------
Operating income (loss)..................................... (2,586) 62 3,386
------- ------- -------
Other income (expense):
Interest expense........................................... (794) (1,219) (723)
Interest income............................................ 30 48 641
Other...................................................... (336) 92 100
------- ------- -------
Total other income (expense)............................ (1,100) (1,079) 18
------- ------- -------
Income (loss) before provision for income taxes............. (3,686) (1,017) 3,404
Provision for income taxes.................................. 100 30 231
------- ------- -------
Net income (loss)........................................... (3,786) (1,047) 3,173
Accretion of preferred stock dividends...................... (275) (452) (452)
Increase in fair market value of redeemable common
stock warrants............................................. (965) (385) -
------- ------- -------
Net income (loss) available to common shareholders.......... $(5,026) $(1,884) $ 2,721
======= ======= =======
Net income (loss) per share:
Basic...................................................... $(1.18) $(.44) $.43
======= ======= =======
Diluted.................................................... $(1.18) $(.44) $.38
======= ======= =======
Weighted average shares used in computing net
income (loss) per share:
Basic...................................................... 4,255 4,258 6,371
======= ======= =======
Diluted.................................................... 4,255 4,258 7,714
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
(in thousands)
Cash Flows from Operating Activities:
Net income (loss)..................................................... $(3,786) $(1,047) $ 3,173
Adjustments to reconcile net income (loss) to net cash
used in operations:..................................................
Depreciation and amortization......................................... 948 1,155 1,404
Loss on disposal of property and equipment............................ 113 - -
Gain on sale of product line.......................................... - (92) -
Amortization of restricted stock awards............................... 10 10 10
Changes in Operating Assets and Liabilities:
Accounts receivable.................................................. 399 (3,001) (4,342)
Other current assets................................................. (236) 143 (1,188)
Notes receivable from officers and employees......................... 76 (378) 548
Other assets, net.................................................... (182) (502) (492)
Accounts payable..................................................... (288) (480) (570)
Accrued sales tax payable............................................ 145 603 (581)
Accrued compensation................................................. 537 109 431
Other accrued liabilities............................................ 123 370 (324)
Deferred revenues.................................................... (10) (128) (19)
Other long-term liabilities.......................................... 260 (52) (57)
------- ------- ---------
Net Cash Used In Operations........................................ (1,891) (3,290) (2,007)
------- ------- ---------
Cash Flows from Investing Activities:
Acquisition of equipment.............................................. (951) (1,001) (1,419)
Proceeds from sale of building........................................ 677 - -
Proceeds from short-term investment maturities........................ - - 352,106
Purchases of short-term investments................................... - - (371,515)
------- ------- ---------
Net Cash Used In Investing Activities.............................. (274) (1,001) (20,828)
------- ------- ---------
Cash Flows from Financing Activities:
Proceeds from sale of common stock, net of issuance costs $4,049...... - 231 32,350
Proceeds from exercise of stock options............................... - - 151
Proceeds from employee stock purchase plan............................ - - 48
Net proceeds from sale of preferred stock............................. 4,475 4,228 -
(Repayment of) proceeds from bank term loan........................... 2,500 - (2,500)
Repayment of advances from shareholders............................... (1,008) - -
(Repayment of) net proceeds from bank line of credit.................. (1,000) 1,860 (4,860)
Repayment of obligations under capital leases......................... (1,376) (539) (269)
Proceeds from sale leaseback.......................................... - 509 -
Repayment of subordinated note payable to shareholder................. (250) (500) (250)
------- ------- ---------
Net Cash Provided By Financing Activities.......................... 3,341 5,789 24,670
------- ------- ---------
Effect of Exchange Rate Changes........................................ (79) 32 (92)
------- ------- ---------
Net Increase in Cash and Cash Equivalents.............................. 1,097 1,530 1,743
Cash and Cash Equivalents, beginning of period......................... 446 1,543 3,073
------- ------- ---------
Cash and Cash Equivalents, end of period............................... $ 1,543 $ 3,073 $ 4,816
======= ======= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.............................. $ 714 $ 877 $ 671
Cash paid during the period for income taxes.......................... - 16 90
Supplemental Disclosure of Noncash Activities:
Accretion of Series A preferred stock in lieu of dividends............ 275 394 244
Accretion of Series B preferred stock in lieu of dividends............ - 58 208
Increase in fair market value of redeemable common
stock warrants....................................................... 965 385 -
Equipment acquired pursuant to capital lease obligation............... 113 - -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------------- TRANSLATION ACCUMULATED
SHARES AMOUNT ADJUSTMENT DEFICIT TOTAL
--------- -------- ------------- ------------- ---------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995............................. 4,255,197 $ 5,544 $ 38 $ (9,782) $ (4,200)
Amortization of restricted stock awards............. - 10 - - 10
Change in fair market value of redeemable
common stock warrants.............................. - - - (965) (965)
Accretion of Series A preferred stock dividends..... - - - (275) (275)
Equity adjustment from foreign currency translation. - - (79) - (79)
Net loss............................................ - - - (3,786) (3,786)
--------- ------- ----- -------- --------
Balance, December 31, 1995........................... 4,255,197 5,554 (41) (14,808) (9,295)
Sale of common stock................................ 32,400 231 - - 231
Exercise of common stock options.................... 5,782 - - - -
Amortization of restricted stock awards............. - 10 - - 10
Change in fair market value of redeemable
common stock warrants.............................. - - - (385) (385)
Accretion of Series A preferred stock dividends..... - - - (394) (394)
Accretion of Series B preferred stock dividends..... - - - (58) (58)
Equity adjustment from foreign currency translation. - - 32 - 32
Net loss............................................ - - - (1,047) (1,047)
--------- ------- ----- -------- --------
Balance, December 31, 1996........................... 4,293,379 5,795 (9) (16,692) (10,906)
Sale of common stock, net of issuance costs of 2,800,000 32,350 - - 32,350
$4,049.............................................
Exercise of common stock options.................... 187,957 151 - - 151
Employee stock purchase plan........................ 5,841 48 - - 48
Amortization of restricted stock awards............. - 10 - - 10
Conversion of redeemable common stock warrants...... 416,699 2,865 - - 2,865
Conversion of Series A preferred stock.............. 920,433 5,389 - - 5,389
Conversion of Series B preferred stock.............. 611,728 4,494 - - 4,494
Accretion of Series A preferred stock dividends..... - - - (244) (244)
Accretion of Series B preferred stock dividends..... - - - (208) (208)
Equity adjustment from foreign currency translation. - - (92) - (92)
Net income.......................................... - - - 3,173 3,173
--------- ------- ----- -------- --------
Balance, December 31, 1997........................... 9,236,037 $51,102 $(101) $(13,971) $ 37,030
========= ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Information Management Associates, Inc. and subsidiary (the Company) are
primarily engaged in the development, marketing and support of software that
automates customer interaction including telemarketing, telesales, contact
management, sales, marketing and customer service functions of business
organizations in a variety of industries. The Company markets its software
products in North and South America as well as Western Europe, Asia, Australia
and New Zealand.
In July 1997, the Company completed its initial public offering of its
common stock which provided proceeds of $32.4 million, net of related
underwriting discounts and expenses (see Note 9).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned foreign
subsidiary, Information Management Associates Limited, which is located in the
United Kingdom. All material intercompany balances and transactions have been
eliminated in consolidation.
Foreign currency transactions. The functional currency of the Company's
subsidiary is the local currency. Accordingly, the Company applies the current
rate method to translate the subsidiary's financial statements into U.S.
dollars. Translation adjustments are included as a separate component of
shareholders' equity (deficit) in the accompanying consolidated financial
statements.
Cash and cash equivalents. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. As of December 31, 1996 and 1997, the Company's cash and cash
equivalents are deposited with primarily two financial institutions.
Short-term investments. The Company accounts for investments in accordance
with Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified as "held to maturity," "available for sale" or
"trading", and the securities in each classification be accounted for at either
amortized cost or fair market value, depending upon their classification.
Included in the accompanying 1997 balance sheet are short-term corporate bonds
that have original maturities of less than six months, and which are recorded at
amortized cost plus accrued interest which approximates fair value.
Equipment. Equipment is recorded at cost and is depreciated or amortized,
using the straight-line method, over their estimated useful lives of three to
ten years.
At December 31, 1996 and 1997, property and equipment, net, consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
Equipment..................................................... $2,606 $4,036
Furniture and fixtures........................................ 1,499 1,676
Leasehold improvements........................................ 451 595
Equipment under capital lease................................. 931 854
------ ------
5,487 7,161
Less--Accumulated depreciation and amortization............... 3,265 4,882
------ ------
$2,222 $2,279
====== ======
</TABLE>
Expenditures for repairs and maintenance are charged against income as
incurred while renewals and betterments are capitalized.
F-7
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Software development costs. The Company expenses research and development
costs as incurred. The Company has evaluated the establishment of technological
feasibility of its products in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed. The Company defines technological feasibility as
the completion of a working model. The Company sells products in a market that
is subject to rapid technological change, new product development and changing
customer needs. The Company has concluded that technological feasibility is not
established until the development stage of the product is nearly complete. The
time period during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short and, consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations. Therefore, the
Company has charged all such costs to research and development in the period
incurred.
Revenue recognition. The Company generates revenues from licensing the
rights to use its software products directly to end users and indirectly through
sublicense fees from resellers. The Company also generates revenues from sales
of software maintenance contracts, and from consulting and training services
performed for customers who license its products.
Revenues from software license agreements are recognized upon the delivery
of the software to the customer if there are no significant post-delivery
obligations and collection is probable. Service revenues consist of professional
consulting, implementation and training services performed on a time-and-
materials basis under separate service arrangements related to the
implementation of the Company's software products. Revenues from consulting and
training services are recognized as services are performed. The Company enters
into transactions which include both license and service elements. As such
service elements do not include more than minor alteration of the software, the
license fees are recognized upon delivery and the service revenues are
recognized when performed.
Software maintenance fees are recognized ratably over the term of the
maintenance period. If software maintenance fees are provided for in the license
fee or at a discount in a license agreement, a portion of the license fee equal
to the fair market value of these amounts is allocated to software maintenance
revenue based on the value established by independent sales of such maintenance
services to customers.
Cost of license revenues consists primarily of the cost of media on which
the product is delivered and third party software products which are resold by
the Company. Cost of service and maintenance revenues consists primarily of
salaries, benefits, subcontracted consulting costs and allocated overhead costs
related to consulting personnel and the customer support group.
Deferred revenues primarily relate to post-contract customer support which
has been paid by customers prior to the performance of the services.
Earnings Per Share. The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) and the
Securities and Exchange Commission Staff Accounting Bulletin 98 (SAB 98),
effective December 31, 1997. SFAS 128 established new standards for computing
and presenting earnings per share. Under SFAS 128, earnings per share is
computed both under the basic and dilutive methods. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding; dilutive earnings per share is
computed by giving effect to all dilutive potential common share equivalents
that were outstanding during the period. Dilutive common share equivalents
include stock options, warrants and convertible preferred stock. SAB 98
eliminates the requirement to include in earnings per share the dilutive effect
of certain stock options granted during the twelve months preceding an initial
public offering, calculated using the treasury stock method and the initial
public offering price. Had SAB 98 not been adopted, the pro forma basic and
diluted earnings per share for the years ended December 31, 1996 and 1995 would
have been $(1.10) and $(.41) per share, respectively, and the pro forma basic
and diluted earnings per share for the year ended December 31, 1997 would have
been $.41 and $.37 per share, respectively.
F-8
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Previously issued earnings per share have been restated to reflect the
provisions of SFAS 128 and the Securities and Exchange Commission Staff
Accounting Bulletin 98.
The calculation of basic and diluted earnings per share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ -----------------
Basic earnings per share:
- -------------------------
<S> <C> <C> <C>
Net income (loss) applicable to common shareholders.......... $(5,026) $(1,884) $2,721
======= ======= ======
Weighted average shares outstanding.......................... 4,255 4,258 6,371
======= ======= ======
Basic earnings per share..................................... $ (1.18) $ (.44) $ .43
======= ======= ======
Diluted earnings per shares:
- ----------------------------
Net income (loss)............................................ $(3,786) $(1,047) $3,173
Accretion of Series A preferred stock dividends.............. - (394) -
Accretion of Series B preferred stock dividends.............. (275) (58) (208)
Increase in fair market value of redeemable common
stock warrants............................................. (965) (385) -
------- ------- ------
$(5,026) $(1,884) $2,965
======= ======= ======
Weighted average shares outstanding.......................... 4,255 4,258 6,371
Weighted average shares resulting from exercise of options,
calculated in accordance with the treasury stock method.... - - 397
Weighted average shares resulting from conversion of
redeemable common stock warrants........................... - - 409
Weighted average shares resulting from conversion of
Series A preferred stock..................................... - - 537
------- ------- ------
4,255 4,258 7,714
======= ======= ======
Diluted earnings per share................................... $ (1.18) $ (.44) $ .38
======= ======= ======
</TABLE>
The 1995 and 1996 calculations of diluted earnings per share do not include
the exercise of stock options (see Note 9), the conversion of Series A and
Series B preferred stock (see Note 7) or the conversion of the redeemable common
stock warrants (see Note 8), as the effect on diluted earnings per share would
have been antidilutive. The 1997 calculation of diluted earnings per share does
not include the conversion of the Series B preferred stock as the effect on
diluted earnings per share would have been antidilutive.
Income taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. This statement requires the Company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and the tax basis of
the assets and liabilities and the net operating loss carryforwards available
for tax reporting purposes, using applicable tax rates for the years in which
the differences are expected to reverse.
F-9
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Long-lived assets. Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of (SFAS 121). This
statement requires a company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
Concentration of credit risk. Financial instruments which potentially
subject the Company to concentration of credit risk consists principally of cash
and trade receivables. As of December 31, 1996, one customer accounted for 10%
of accounts receivable. No one customer accounted for greater than 10% of
accounts receivable as of December 31, 1997.
Use of estimates in the preparation of financial statements. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications. Certain reclassifications have been made to the 1995 and
1996 consolidated financial statements in order for them to be presented in
conformity with the 1997 consolidated financial statements.
Recently issued accounting standards. In 1997 the FASB issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
In 1997 the FASB also issued Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information (SFAS
131), which requires a new model for segment reporting. The adoption of SFAS
130 and SFAS 131 is required in 1998. The adoption of these standards will not
impact the Company's results from operations or financial position.
In October 1997, the AICPA issued Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), which changes the requirements for revenue
recognition effective for transactions that the Company will enter into
beginning January 1, 1998. The Company does not believe that the adoption of
SOP 97-2 will have a material impact on its financial position or results of
operations.
(3) RESTRUCTURING OF OPERATIONS
Effective September 1, 1996, the Company sold its assets related to the
Telemar product line to a third party buyer, Telemar Software International, LLC
(TSI) (see Note 17). TSI also assumed certain liabilities of the Company
related to the Telemar product line. As a result of the sale, the Company was
relieved of liabilities in excess of assets sold and, accordingly, recognized a
net gain of approximately $92,000 in 1996. Concurrent with the sale, certain
employees who were dedicated to the Telemar product line were terminated by the
Company and rehired by TSI.
In connection with the sale, TSI also gave the Company a promissory note in
the principal amount of $650,000, payable in five equal annual installments of
$130,000 and bearing annual interest at 8.0%. The Company fully reserved for
the note receivable at the date of sale because collectibility, based on the
start up nature of TSI operations, was not ascertainable. The note is secured
by substantially all of the assets of TSI. In 1997, the Company received a
$100,000 payment from TSI which, upon receipt, was recorded as other income in
the accompanying 1997 financial statements.
F-10
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) BANK INDEBTEDNESS
In February 1997, the Company entered into an amended Loan and Security
Agreement (the Credit Agreement) with a bank. The Credit Agreement consisted of
a $6,000,000 line of credit and a $2,500,000 Term Note Payable (the Term Note).
The Credit Agreement was further amended on March 17, 1997 (the March 1997
Amendment) to extend the maturity date of the line of credit to February 1,
1998. Upon the closing of the initial public offering (see Note 9), the Company
repaid the outstanding principal balance plus accrued interest on the Line of
Credit and Term Note. At December 31, 1997, there were no outstanding
borrowings under the Line of Credit.
Borrowings under the Line of Credit bear interest at prime (8.5% at December
31, 1997) plus 1.0% and are limited to 75% of qualified accounts receivable, as
defined.
The Term Note was originally payable in equal monthly installments of
$41,667 commencing November 1, 1997. In addition to an 11.0% per annum interest
which was payable on a current basis, the Company was required to accrue
additional interest based upon a formula which approximated 9.0% (the Additional
Interest). The Company was accruing for the Additional Interest, and at December
31, 1996, approximately $233,000 was included in accrued liabilities in the
accompanying consolidated 1996 balance sheet. The Additional Interest was also
repaid upon the closing of the initial public offering.
(5) OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under capital leases which expire at
varying dates through 2000.
The following is a schedule of future minimum lease payments for capital
leases as of December 31, 1997 and thereafter, (in thousands):
<TABLE>
<S> <C>
1998..................................................................... $273
1999..................................................................... 85
2000..................................................................... 48
----
406
Less--Amount representing interest....................................... 38
----
Present value of future minimum lease payments........................... 368
Less--Current maturities................................................. 232
----
$136
====
</TABLE>
In February 1996, the Company sold certain equipment and simultaneously
leased back the equipment under a Master Lease Agreement (the Lease Agreement).
The Lease Agreement was accounted for as a financing lease and accordingly the
proceeds from the sale were reflected as a debt obligation which is being
amortized over the term of the lease. In connection with the Lease Agreement,
the Company issued to the lessor warrants to purchase 6,750 shares of common
stock at a price of $4.89 per share which was based upon the sale price of the
Company's securities in the last transaction prior to the time the financing
arrangement was negotiated. In accordance with the terms and conditions of the
capital lease, the Company has a repurchase option whereby the equipment can be
repurchased at fair market value, as defined. As the equipment was sold at its
net book value there was no gain or loss as a result of the Lease Agreement.
(6) SUBORDINATED NOTE PAYABLE TO SHAREHOLDER
The Subordinated Note Payable to Shareholder (the Shareholder Note) was
payable in four annual, equal installments of $250,000, commencing in December
1994 and bore interest at 12.0% per annum. The installments of $250,000 due in
December 1994 and 1995 were paid in 1995 and 1996, respectively. As of December
31, 1996 and 1997, the balance of the Shareholder's Note was $250,000 and $0,
respectively. The outstanding principal balance of the Shareholder Note was
repaid with proceeds from the initial public offering (see Note 9).
F-11
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March 1995, the Company issued the Series A preferred, with a stated
value of $1,000, to certain common shareholders for proceeds of approximately
$4,475,000, net of issuance costs of approximately $25,000. In November 1996,
the Company issued the Series B preferred, with a stated value of $1,000, to
certain common shareholders for proceeds of approximately $4,228,000, net of
issuance costs of approximately $122,000. In connection with the initial public
offering the Series A and Series B Preferred Stock, plus accrued dividends, were
converted into shares of common stock (see Note 9).
Dividends. The Series A preferred and Series B preferred accrued dividends
at a rate of 8% per annum. As of December 31, 1996, the carrying value of the
Series A and Series B preferred included $669,000 and $58,000, respectively, of
accrued but unpaid dividends.
Conversion. Holders of the Series A preferred and Series B preferred were
entitled to convert such shares into common stock at a rate of $4.89 and $7.11
per share, respectively, with such conversion rate subject to adjustment, as
defined (see above).
(8) REDEEMABLE COMMON STOCK WARRANTS
During 1990 and 1991, the Company issued redeemable warrants to purchase
433,372 shares of common stock, with exercise prices ranging from $.40 per share
to $1.33 per share. In connection with the initial public offering the
redeemable common stock warrants were converted into 416,699 shares of common
stock (see Note 9).
The Company accounted for the initial value of the warrants based on their
fair market values at the time the warrants were originally issued. Subsequent
increases in the fair market value of the warrants, as determined by sales of
the Company's common stock, resulted in adjustments to the carrying value of the
warrants through direct charges to accumulated deficit. As of December 31, 1996,
the redeemable common stock warrants were reflected in the accompanying
consolidated financial statements based on the estimated fair market value of
$7.11 per share.
(9) SHAREHOLDERS' EQUITY
Common stock. In connection with its initial public offering (see below),
the Company amended its Certificate of Incorporation to increase the number of
authorized shares of common stock from 5,000,000 to 20,000,000 and to give
effect to a 2.25-for-1 split of the Company's common stock. The accompanying
financial statements have been restated to reflect this stock split and change
in authorized shares.
In July 1997, the Company completed its initial public offering (IPO) of
3,900,000 shares of its common stock, of which 2,800,000 shares were issued and
sold by the Company and 1,100,000 shares were issued and sold by certain selling
shareholders. As a result of this offering, the Company recorded proceeds of
$32.4 million, net of related underwriting discounts and offering expenses of
$4.1 million. In connection with the offering, the Company's Series A and
Series B preferred stock were converted into 1,532,161 shares of common stock
(see Note 7), 416,699 shares of common stock were issued in connection with the
exercise of the redeemable common stock warrants (see Note 8) and 154,934 stock
options were exercised.
The Company sold 32,400 shares of common stock in December 1996 at a per
share price of $7.11 for aggregate proceeds of approximately $231,000.
F-12
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SHAREHOLDERS' EQUITY--(CONTINUED)
Restricted stock awards. During 1990, the Company granted 160,875 shares of
common stock to certain key employees in consideration of future services to be
performed. The awards require the recipients to be employed or engaged as a
consultant by the Company for seven years in order to retain ownership of the
stock. The related compensation was recognized ratably over the 7-year vesting
period. During each of 1995, 1996 and 1997, $10,000 of compensation expense was
recognized in connection with these restricted stock awards.
Stock option plans. The Company has stock option plans which provide for
the issuance of both incentive and nonqualified stock options. In March 1996,
the Company adopted both the 1996 Employee and Consultant Stock Option Plan,
which provides for the issuance of up to 900,000 shares of common share for both
incentive and nonqualified stock options, and the 1996 Non-Employee Directors'
Stock Option Plan, which provides for the issuance of up to 135,000 shares of
common stock (collectively, The 1996 Plans). Under the provisions of The 1996
Plans, the exercise price of each option shall not be less than 100% of the fair
market value of a share of common stock at the time of grant, as defined, and
the options may vest immediately or over time. The 1996 Plans shall be adjusted
for future changes in the capitalization of the Company or as designated by the
Board of Directors.
Previous to The 1996 Plans, the Company had established a stock option plan
which provided for the issuance of up to 900,000 shares of common stock for both
incentive and nonqualified stock options. Under the provisions of this plan, the
exercise price of each option was not to be less than 100% of the fair market
value of a share of common stock, as defined, and the options could vest
immediately or over time.
The Company has adopted the provisions of Statement of Financial Accounting
Standards, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS 123
requires the measurement of the fair value of stock options or warrants to be
included in the statement of income or disclosed in the notes to financial
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS 123. The Company has
computed the pro forma disclosures required under SFAS 123 for options granted
in 1995, 1996 and 1997 using the Black-Scholes option pricing model prescribed
by SFAS 123. The weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------------- ------------------
<S> <C> <C> <C>
Risk free interest rate.............................. 5.77% 6.15%-6.94% 5.77%-6.30%
Expected dividend yield.............................. None None None
Expected lives....................................... 8 years 8 years 5 years
Expected volatility.................................. 72% 72% 56%
</TABLE>
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net income (loss) and net
income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported.................................................... $(3,786) $(1,047) $3,173
Pro forma...................................................... $(3,806) $(2,563) $2,215
Basic net income (loss) per common share:
As reported.................................................... $ (1.18) $ (.44) $ .43
Pro forma...................................................... $ (1.19) $ (.80) $ .28
Diluted net income (loss) per common share:
As reported.................................................... $ (1.18) $ (.44) $ .38
Pro forma...................................................... $ (1.19) $ (.80) $ .23
</TABLE>
F-13
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SHAREHOLDERS' EQUITY--(CONTINUED)
A summary of the status of the Company's two stock option plans at December
31, 1995, 1996 and 1997 and changes during the years then ended is presented in
the table and narrative below (shares in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
------------ ------------ ------------
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year...... 771,754 $2.48 894,606 $2.97 1,336,349 $4.62
Granted............................. 144,751 5.57 502,875 7.51 409,626 9.56
Exercised........................... - - (5,782) .04 (187,957) 1.13
Expired............................. (21,899) 3.08 (55,350) 4.61 (48,470) 9.81
------- --------- ---------
Outstanding, end of year............ 894,606 2.97 1,336,349 4.62 1,509,548 6.23
======= ========= =========
Exercisable, end of year............ 632,572 2.18 854,282 3.42 896,335 4.74
======= ========= =========
Weighted average fair value
of options granted................. $4.40 $5.80 $6.27
===== ===== =====
</TABLE>
The following table presents weighted average price and life information for
significant option groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE
- --------------------- --------------------- --------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
$.04 91,906 3.8 $ .04 91,906
$2.25-$2.94 68,474 4.9 $ 2.58 68,474
$4.00-$4.89 444,917 6.6 $ 4.14 394,760
$6.22-$7.11 482,951 8.6 $ 6.97 280,451
$8.00 243,000 8.5 $ 8.00 60,744
$10.50-$11.75 117,800 9.8 $11.43 -
$13.00 60,500 9.6 $13.00 -
--------- -------
1,509,548 896,335
========= =======
</TABLE>
Stock purchase plan. On March 1, 1997, the Board of Directors approved the
adoption of an employee stock purchase plan designed to allow eligible employees
of the Company to purchase shares of common stock. The Board of Directors has
reserved 450,000 shares of Common Stock to be available under this plan. The
stock purchase plan allows eligible employees the right to purchase common stock
on a quarterly basis at the lower of 85% of the market price at the beginning or
end of each offering period. During 1997 employees purchased 5,841 shares of
common stock for an aggregate purchase price of approximately $48,000.
(10) INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
Current:
Foreign................................... $ 75 $ - $ 199
Federal................................... - - -
State..................................... 25 30 32
----- ----- -----
$ 100 $ 30 $ 231
===== ===== =====
</TABLE>
F-14
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial reporting and income
tax purposes. Gross deferred tax assets of $3,944,000 and $2,653,000, and a
valuation allowance of $3,944,000 and $2,653,000 are included in the deferred
tax balance as of December 31, 1996 and 1997, respectively. A valuation
allowance has been recorded for the deferred tax assets as a result of
uncertainties regarding the realization of the asset.
The approximate tax effects of temporary differences which give rise to
deferred tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1996 1997
------------- -------------- ---------------
<S> <C> <C> <C>
Current:
Allowance for doubtful accounts..................... $ 153 $ 178 $ 243
Accrued vacation and payroll........................ 14 57 65
Loss on sale of property held for sale.............. 40 - -
Other............................................... 174 216 76
Valuation allowance................................. (381) (451) (384)
------- ------- -------
$ 0 $ 0 $ 0
======= ======= =======
DECEMBER 31,
-------------------------------------------
1995 1996 1997
-------- -------- --------
Non-current:
Acquired software................................... $ 188 $ - $ -
Depreciation........................................ (9) 51 71
Deferred compensation............................... 20 23 -
Rental obligations.................................. 167 154 145
Other............................................... 39 - -
Tax effect of net operating losses, excluding
amounts related to stock option exercises.......... 3,373 3,265 2,053
Valuation allowance................................. (3,778) (3,493) (2,269)
-------- -------- --------
$ 0 $ 0 $ 0
======== ======== ========
</TABLE>
The exercise of non-qualified stock options gives rise to compensation which
is included in the taxable income of the applicable employees and deducted by
the Company for federal and state income tax purposes. As a result of the
exercise of nonqualified stock options during 1997, the Company has related net
operating loss carryforwards of $3,350,000 which can be used to offset future
taxable income, if any. When realized, the related tax benefits of these net
operating loss carryforwards will be credited directly to paid in capital.
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Income tax at statutory rate............................. (34)% (34)% 34%
Other.................................................... (3) (3) 1
Net operating loss not benefited......................... 37 37 -
Utilization of net operating loss carryforwards.......... - - (35)
---- ---- ----
0% 0% 0%
==== ==== ====
</TABLE>
F-15
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES--(CONTINUED)
At December 31, 1997, the Company had approximately $8,600,000 of U.S.
Federal net operating loss carryforwards, of which approximately $3,350,000
resulted from the exercise of nonqualified stock options (see above), and
approximately $2,500,000 of state net operating loss carryforwards which can be
used, subject to certain limitations, to offset future taxable income, if any.
These U.S. Federal net operating loss carryforwards expire through 2011 and the
state net operating loss carryforwards expire through 2002.
In addition, the Company has United Kingdom net operating loss carryforwards
of approximately $1,360,000 which can be utilized to offset future taxable
income and which have no expiration.
The Company's initial public offering (see Note 9) resulted in a change in
ownership, as defined by Federal income tax laws and regulations. As a result
of this change in ownership, the amount of U.S. Federal net operating loss
carryforwards which can be utilized to offset Federal taxable income has an
annual limitation of approximately $4,700,000.
(11) RELATED PARTY TRANSACTIONS
Notes receivable from officers and employees at December 31, 1996 and 1997
consists of net advances to shareholders of $572,000 and $24,000, respectively.
Amounts totaling $572,000 were repaid to the Company in connection with the
initial public offering (see Note 9).
Prior to 1997, the Company had entered into agreements with a principal
shareholder and its general partner which provided the Company financial
advisory services. The agreement called for an annual advisory fee to be paid to
this shareholder. In addition, an annual advisory fee was to be paid to an
affiliate of the shareholder until the earlier to occur of January 2, 1998, the
date of an initial public offering of common stock with gross proceeds to the
Company of at least $10.0 million (see Note 9), or the sale by the Company of
substantially all of its stock or assets. Included in the accompanying
consolidated statements of operations are financial advisory fees of $50,000,
$40,000 and $15,000 in 1995, 1996 and 1997, respectively. In addition, the
Company paid $100,000 to an affiliate of this shareholder in November 1996 in
connection with the issuance of Series B preferred stock (see Note 7).
(12) COMMITMENTS AND CONTINGENCIES
Leases. The Company has entered into an agreement to lease its corporate
headquarters. This lease commenced April 1, 1994, and has a term of 10 years.
Total aggregate lease payments of approximately $2,176,000 are being amortized
on a straight-line basis over the term of the operating lease, beginning in
April 1994. Accordingly, approximately $38,000 and $28,000 of deferred rent
expense was recorded during 1996 and 1997, respectively, related to this lease
and is included in other accrued liabilities and other long-term liabilities in
the accompanying consolidated balance sheets.
During 1995, the Company entered into an agreement to lease office space in
Irvine, California, which is used as a sales, service and product development
facility. The lease commenced January 5, 1995, and has a term of 6 years. Under
the terms of the lease, the Company is committed to pay aggregate lease payments
of approximately $2,961,000. In connection with entering into this lease, the
Company terminated the lease for its previous California facility. As a result
of the termination of such lease, the Company incurred a $223,000 lease
termination cost which is reflected as other expense in the accompanying 1995
consolidated statement of operations. The termination charge, which is being
paid in monthly installments of approximately $5,000 through October 31, 1998,
is included in other accrued expenses and other long-term liabilities in the
accompanying consolidated balance sheets.
The Company leases other property and equipment under a number of operating
leases extending for varying periods of time.
F-16
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Operating lease rental expense approximated $1,054,000, $858,000 and
$1,255,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Minimum future rental commitments under all operating leases for each of the
succeeding five years subsequent to December 31, 1997, and thereafter, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ----------------------------------- -----------
<S> <C>
1998............................... $1,226
1999............................... 1,263
2000............................... 1,074
2001............................... 542
2002............................... 520
Thereafter......................... 622
------
$5,247
======
</TABLE>
Litigation. The Company is a party to litigation arising in the normal
course of business. In the opinion of management, no claims are expected to
have a material adverse effect on the Company's operations or financial
position.
(13) EMPLOYEE BENEFIT PLAN
The Company has a voluntary 401(k) plan. All full-time employees who have
completed six months of service are eligible to participate in the plan. The
plan provides for matching contributions and an annual profit sharing
contribution made at the discretion of the Company's Board of Directors. During
1995, 1996 and 1997, $12,000, $33,000 and $57,000, respectively, of matching
contributions were made to the plan by the Company.
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and other accrued liabilities approximate fair
value due to their short maturities. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value of its
capital lease obligations also approximates fair value.
(15) GEOGRAPHIC INFORMATION AND INDUSTRY SEGMENTS
The Company operates in two major geographic areas and a single industry
segment. The United States charges the European segment a 50% royalty on license
fees recognized, which approximates the royalty fee charged to unaffiliated
resellers. In addition, certain direct costs incurred by the United States
segment, primarily related to research and development and customer support
costs, are charged to the European segment. The elimination in the identifiable
assets is for intercompany receivables.
F-17
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) GEOGRAPHIC INFORMATION AND INDUSTRY SEGMENTS--(CONTINUED)
The following tables summarize the Company's activities by geographic area
for 1995, 1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ELIMINATION CONSOLIDATED
------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Revenues............................. $32,345 $6,086 $(1,759) $36,672
======= ====== ======= =======
Income (loss) from operations........ $ 4,239 $ (853) $ - $ 3,386
======= ====== ======= =======
Identifiable assets.................. $44,774 $3,620 $(4,472) $43,922
======= ====== ======= =======
Year Ended December 31, 1996
Revenues............................. $22,762 $4,680 $(1,165) $26,277
======= ====== ======= =======
Income (loss) from operations........ $ 802 $ (740) $ - $ 62
======= ====== ======= =======
Identifiable assets.................. $17,483 $2,648 $(2,850) $17,281
======= ====== ======= =======
Year Ended December 31, 1995
Revenues............................. $20,093 $4,332 $ (616) $23,809
======= ====== ======= =======
Income (loss) from operations........ $(2,520) $ (66) $ - $(2,586)
======= ====== ======= =======
Identifiable assets.................. $11,929 $2,710 $(2,120) $12,519
======= ====== ======= =======
</TABLE>
The following table summarizes the Company's revenues by major worldwide
regions (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States................... $14,792 $19,483 $26,887
Canada.......................... 1,018 546 833
Mexico and Latin America........ 256 277 1,903
Europe.......................... 6,390 4,798 5,552
Pacific Rim..................... 1,353 1,173 1,497
------- ------- -------
$23,809 $26,277 $36,672
======= ======= =======
</TABLE>
(16) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1995, 1996 and 1997, approximately 24%, 8%
and 10% respectively, of the Company's revenues resulted from sales to a single
customer.
F-18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K with respect to the
executive officers of the Company is included in Item 4A of this Form 10-K. The
information required by Item 401 of Regulation S-K with respect to directors of
the Company and information required by Item 405 of Regulation S-K is
incorporated by reference to the Company's definitive proxy statement (the
"Definitive Proxy Statement") which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated by
reference to the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated by
reference to the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated by
reference to the Definitive Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Information Management Associates, Inc.
included in this Form 10-K and have issued our report thereon dated January 30,
1998. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 30, 1998
<PAGE>
SCHEDULE II
INFORMATION MANAGEMENT ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO COST BALANCE AT
OF PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
--------------- ------------------- ----------------- -----------------
Allowance for Doubtful Accounts
<S> <C> <C> <C> <C>
January 1, 1995-December 31, 1995........... $469,980 $ 996,701 $(1,041,353) $425,328
January 1, 1996-December 31, 1996........... $425,328 $ 390,224 $ (333,578) $481,974
January 1, 1997-December 31, 1997........... $481,974 $1,138,614 $ (990,511) $630,077
</TABLE>
<PAGE>
3. EXHIBITS (*denotes filed herewith)(**denotes a management contract
or compensating plan or arrangement)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to the Registrants
Report on Form 10-Q for the quarter ended September 30,
1997, Exhibit 3.1).
3.2 Amended and Restated By-Laws of the Registrant.
(Incorporated by reference to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1997, Exhibit
3.2).
4.1 Specimen Certificate for shares of Common Stock, no par
value, of the Registrant. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 4.1).
10.1 Amended and Restated 1991 Stock Option Plan. (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.1).**
10.2 Original Form of Non-Qualified Stock Option Agreement
(Amended and Restated 1991 Stock Option Plan). (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.2).**
10.3 Amended Form of Non-Qualified Stock Option Agreement
(Amended and Restated 1991 Stock Option Plan). (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.3).**
10.4 1996 Employee and Consultant Stock Option Plan.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.4).**
10.5 Form of Non-Qualified Stock Option Agreement (1996 Employee
and Consultant Stock Option Plan). (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.5).**
<PAGE>
10.6 1996 Non-Employee Directors Stock Option Plan. (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.6).**
10.7 Form of Non-Qualified Stock Option Agreement (1996 Non-
Employee Directors Stock Option Plan). (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.7).**
10.8 Employee Stock Purchase Plan. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 10.8).**
10.9 Note and Warrant Purchase Agreement between the Company and
Wand/IMA Investments, L.P., dated December 21, 1990.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit 10.9).
10.10 Amendment to Note and Warrant Purchase Agreement between
the Company and Wand/IMA Investments, L.P., dated March 1,
1993. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.10).
10.11 Amendment No. 2 to Note and Warrant Agreement between the
Company and Wand/IMA Investments, L.P., dated June 1, 1994.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.11).
10.12 Common Stock Purchase Warrant No. W-3 issued to Thomas F.
Hill, dated December 21, 1990. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 10.12).
10.13 Amendment No. 1 to Common Stock Purchase Warrant No. W-3,
dated June 1, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.13).
10.14 Amendment No. 2 to Common Stock Purchase Warrant No. W-3,
dated November 16, 1994. (Incorporated by reference to the
<PAGE>
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.14).
10.15 Amendment No. 3 to Common Stock Purchase Warrant No. W-3,
dated September 20, 1996. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.15).
10.16 Stock Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated September 4, 1991. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.16).
10.17 Amendment No. 1 to Stock Purchase Agreement dated September
4, 1991 between the Company and Wand/IMA Investments, L.P.,
dated June 1, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.17).
10.18 Stock Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated October 29, 1991. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.18).
10.19 Amendment No. 1 to Stock Purchase Agreement dated October
29, 1991 between the Company and Wand/IMA Investments, L.P.,
dated June 1, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.19).
10.20 Exchange and Note Modification Agreement between the
Company and Wand/IMA Investments, L.P., dated October 29,
1991. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.20).
10.21 Common Stock Purchase Warrant No. W-4 issued to Wand/IMA
Investments, L.P., dated October 29, 1991. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.22).
<PAGE>
10.22 Amendment No. 1 to Common Stock Purchase Warrant No. W-4,
dated June 1, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.23).
10.23 Amendment No. 2 to Common Stock Purchase Warrant No. W-4,
dated November 16, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.24).
10.24 Amendment No. 3 to Common Stock Purchase Warrant No. W-4,
dated September 20, 1996. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.25).
10.25 Common Stock Purchase Warrant No. W-5 issued to Wand
Partners Inc., dated October 29, 1991. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.26).
10.26 Amendment No. 1 to Common Stock Purchase Warrant No. W-5,
dated June 1, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.27).
10.27 Amendment No. 2 to Common Stock Purchase Warrant No. W-5,
dated November 16, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.28).
10.28 Amendment No. 3 to Common Stock Purchase Warrant No. W-5,
dated September 20, 1996. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.29).
10.29 Stock Purchase Agreement between the Company and certain
Purchasers, dated March 26, 1993. (Incorporated by reference
to the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 10.30).
10.30 Stock Purchase Agreement between the Company, certain
Selling Shareholders and Mercury Asset Management plc, dated
June 1, 1994. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.31).
<PAGE>
10.31 Stock Purchase Agreement between the Company, certain
Selling Shareholders and D. Callard, B. Schnitzer and M.
Appelbaum as Purchasers, dated June 1, 1994. (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.32).
10.32 Stock Purchase Agreement between the Company, V. Nesi and
G. Collins, dated November 14, 1994. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.33).
10.33 Stock Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated as of November 16, 1994.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.34).
10.34 Stock Purchase Agreement among the Company, Wand/IMA
Investments, L.P. and Wand/IMA Investments II L.P., dated as
of March 31, 1995. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.35).
10.35 Stock Purchase Agreement among the Company, Wand/IMA
Investments II L.P. and Wand/IMA Investments L.P. III, dated
October 31, 1996. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.36).
10.36 Stock Purchase Agreement among the Company, V. Nesi and G.
Collins, dated December 18, 1996. (Incorporated by reference
to the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 10.37).
10.37 Asset Purchase Agreement between the Company and Telemar
Software International LLC, dated as of July 31, 1996.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.46).
10.38 Sublease between the Company and Telemar Software
International, LLC, dated as of September 1, 1996.
(Incorporated by reference to the Registrant's Registration
<PAGE>
Statement on Form S-1, File Number 333-22923, Exhibit
10.47).
10.39 8% Promissory Note due 2002 from Telemar Software
International, LLC to the Company, dated as of September 1,
1996. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.48).
10.40 Security Agreement between the Company and Telemar Software
International, LLC, dated September 16, 1996. (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.49).
10.41 Lease Agreement between the Company and Robert D. Scinto,
dated as of October 6, 1993. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 10.57).
10.42 First Amendment to Lease Agreement between the Company and
Robert D. Scinto, dated January 30, 1996. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, File Number 333-22923, Exhibit 10.58).
10.43 Full Service Office Lease between the Company and Lakeshore
Towers Limited Partnership Phase I and the Company, dated
November 4, 1994. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.59).
10.44 Amendment to Lease between the Company and Lakeshore Towers
Limited Partners, Phase I, dated July 15, 1996.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.60).
10.45 Letter Agreement among the Company, Wand/IMA Investments,
L.P. and certain Shareholders, dated December 21, 1990.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.62).
<PAGE>
10.46 Amendment to Letter Agreement among the Company, Wand/IMA
Investments, L.P. and certain Shareholders, dated October
29, 1991. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.63).
10.47 Second Amendment to Letter Agreement among the Company,
Wand/IMA Investments, L.P. and certain Shareholders, dated
June 1, 1994. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.64).
10.48 Letter Agreement among the Company, Mercury Asset
Management plc and certain Shareholders, dated as of June 1,
1994. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File Number 333-22923,
Exhibit 10.65).
10.49 Consulting Service Agreement between the Company and Clifton
Myers Enterprises, Inc., dated January 1, 1996.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.68).
10.50 Equipment Lease Agreement between the Company and Tal
Financial Corporation, dated February 1, 1996. (Incorporated
by reference to the Registrant's Registration Statement on
Form S-1, File Number 333-22923, Exhibit 10.69).
10.51 Amendment No. 4 to Common Stock Purchase Warrant No. W-3,
dated April 29, 1997. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.70).
10.52 Amendment No. 4 to Common Stock Purchase Warrant No. W-4,
dated April 29, 1997. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.71).
10.53 Amendment No. 4 to Common Stock Purchase Warrant No. W-5,
dated April 29, 1997. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File Number
333-22923, Exhibit 10.72).
<PAGE>
10.54 Waiver and Consent Agreement, dated November 1, 1996.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File Number 333-22923, Exhibit
10.74).
10.55 Letter Agreement regarding conversion of Preferred Stock
and Warrants, dated July 1, 1997. (Incorporated by reference
to the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 10.75).
21.1 Subsidiaries of the Registrant. (Incorporated by reference
to the Registrant's Registration Statement on Form S-1, File
Number 333-22923, Exhibit 21.1).
*23.1 Consent of Arthur Andersen LLP.
*27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INFORMATION MANAGEMENT ASSOCIATES, INC.
By: /s/ Albert R. Subbloie, Jr.
------------------------------------------
Albert R. Subbloie, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Albert R. Subbloie, Jr. President, Chief March 26, 1998
------------------------------
ALBERT R. SUBBLOIE, JR. Executive Officer
and Director
(Principal
Executive Officer)
/s/ Gary R. Martino Chairman of the March 26, 1998
------------------------------
GARY R. MARTINO Board of
Directors, Chief
Financial Officer,
Treasurer and
Director
(Principal
Financial and
Accounting Officer)
/s/ Paul J. Schmidt Director March 26, 1998
--------------------------------
PAUL J. SCHMIDT
Director March 26, 1998
--------------------------------
THOMAS F. HILL
/s/ Andrei Poludnewycz Director March 26, 1998
------------------------------
ANDREI POLUDNEWYCZ
/s/ Donald P. Miller Director March 26, 1998
---------------------------------
DONALD P. MILLER
/s/ David J. Callard Director March 26, 1998
----------------------------------
DAVID J. CALLARD
<PAGE>
EXHIBIT INDEX
Exhibit 23.1 Consent of Arthur Andersen LLP
Exhibit 27.1 Financial Data Schedule
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-32417.
Arthur Andersen LLP /s/
Hartford, Connecticut
March 25, 1998
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,816
<SECURITIES> 19,455
<RECEIVABLES> 15,445
<ALLOWANCES> 630
<INVENTORY> 0
<CURRENT-ASSETS> 40,506
<PP&E> 7,161
<DEPRECIATION> 4,882
<TOTAL-ASSETS> 43,922
<CURRENT-LIABILITIES> 6,293
<BONDS> 0
0
0
<COMMON> 51,102
<OTHER-SE> (13,971)
<TOTAL-LIABILITY-AND-EQUITY> 37,030
<SALES> 19,295
<TOTAL-REVENUES> 36,672
<CGS> 304
<TOTAL-COSTS> 9,732
<OTHER-EXPENSES> 23,554
<LOSS-PROVISION> 1,139
<INTEREST-EXPENSE> 723
<INCOME-PRETAX> 3,404
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<INCOME-CONTINUING> 3,173
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<NET-INCOME> 3,173
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