<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number: 001-13211
INFORMATION MANAGEMENT ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1289928
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
One Corporate Drive, Suite 414
Shelton, Connecticut 06484
(203) 925-6800
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registration (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
The number of shares of the Registrant's Common Stock, no par value, outstanding
on August 5, 1998 was 9,674,892.
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INFORMATION MANAGEMENT ASSOCIATES, INC.
FORM 10-Q
TABLE OF CONTENTS
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<S> <C> <C>
PART I. FINANCIAL INFORMATION........................................ 1
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997............................................ 1
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1998 and 1997..... 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997...................... 3
Notes to Condensed Consolidated Financial Statements......... 4
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 5
Item 3 Quantitative and Qualitative Disclosure About Market Risk.... 14
PART II. OTHER INFORMATION............................................ 15
Item 1 Legal Proceedings............................................ 15
Item 2 Changes in Securities and Use of Proceeds.................... 15
Item 4 Submission of Matters to a Vote of Security Holders.......... 16
Item 5 Other Information............................................ 16
Item 6 Exhibits and Reports on Form 8-K............................. 16
SIGNATURES................................................................ 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,736 $ 24,271
Accounts receivable, net.................................. 19,385 14,815
Other current assets...................................... 2,298 1,420
-------- --------
Total current assets.................................... 40,419 40,506
Equipment, net............................................. 2,736 2,279
Goodwill................................................... 993 -
Purchased software......................................... 659 -
Other assets, net.......................................... 1,566 1,137
-------- --------
46,373 43,922
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations........... 176 232
Accounts payable and accrued liabilities.................. 5,937 4,375
Deferred revenues......................................... 3,860 1,686
-------- --------
Total current liabilities 9,973 6,293
-------- --------
Other long-term liabilities................................ 531 599
-------- --------
Shareholders' equity:
Common stock, no par value; 9,674,892 shares outstanding
at June 30, 1998 and 9,236,037 shares outstanding
at December 31, 1997...................................... 54,586 51,102
Shares to be issued in connection with acquisition......... 564 -
Cumulative translation adjustment.......................... (108) (101)
Accumulated deficit........................................ (19,173) (13,971)
-------- --------
Total shareholders' equity.............................. 35,869 37,030
-------- --------
$ 46,373 $ 43,922
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
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INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees................................................ $ 7,408 $4,677 $12,723 $ 8,479
Service and maintenance..................................... 6,279 4,021 11,057 7,676
------- ------ ------- -------
Total revenues............................................ 13,687 8,698 23,780 16,155
------- ------ ------- -------
Cost of revenues:
Cost of license fees........................................ 90 70 211 141
Cost of services and maintenance............................ 3,674 2,307 6,262 4,259
------- ------ ------- -------
Total cost of revenues.................................... 3,764 2,377 6,473 4,400
------- ------ ------- -------
Gross profit................................................. 9,923 6,321 17,307 11,755
------- ------ ------- -------
Operating expenses:
Sales and marketing......................................... 4,917 3,042 8,832 5,690
Product development......................................... 1,841 1,564 3,547 3,096
General and administrative.................................. 1,556 1,223 2,855 2,315
Acquired product development costs.......................... - - 7,658 -
------- ------ ------- -------
Total operating expenses.................................. 8,314 5,829 22,892 11,101
------- ------ ------- -------
Operating income (loss)...................................... 1,609 492 (5,585) 654
Interest income (expense).................................... 270 (210) 537 (467)
------- ------ ------- -------
Income (loss) before provision for income taxes.............. 1,879 282 (5,048) 187
Provision for income taxes................................... 60 12 154 102
------- ------ ------- -------
Net income (loss)............................................ 1,819 270 (5,202) 85
Accretion of preferred stock dividends....................... - (197) - (388)
------- ------ ------- -------
Income (loss) applicable to common shareholders.............. $ 1,819 $ 73 $(5,202) $ (303)
======= ====== ======= =======
Basic net income (loss) per share............................ .19 .02 (.55) (.07)
======= ====== ======= =======
Shares used in computing basic net income (loss) per share... 9,670 4,293 9,497 4,293
======= ====== ======= =======
Diluted net income (loss) per share.......................... .18 .02 (.55) .07)
======= ====== ======= =======
Shares used in computing diluted earnings per share.......... 10,063 4,293 9,900 4,293
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
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INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1998 1997
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<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................ $(5,202) $ 85
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.............................. 614 719
Charge for acquired product development costs.............. 7,658 -
Changes in operating assets and liabilities, exclusive of
effects of acquisitions:
Accounts receivable, net................................... (3,773) (1,683)
Other current assets....................................... (706) (386)
Other assets, net.......................................... (315) (447)
Accounts payable and accrued liabilities................... (494) 680
Deferred revenues.......................................... (74) 666
Other long-term liabilities................................ (68) (32)
------- -------
Net cash used in operations......................... (2,360) (398)
------- -------
Cash Flows from Investing Activities:
Acquisition of equipment..................................... (893) (882)
Cash paid in connection with acquisitions.................... (2,013) -
Payment of acquisition related deal costs.................... (871) -
------- -------
Net cash used in investing activities................... (3,777) (882)
------- -------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options...................... 655 -
Repayment of capital lease obligations....................... (56) (136)
------- -------
Net cash provided by financing activities............... 599 (136)
------- -------
Effect of exchange rate changes............................... 3 (89)
------- -------
Net Decrease in Cash and Cash Equivalents..................... (5,535) (1,505)
------- -------
Cash and Cash Equivalents, beginning of period................ 24,271 3,073
------- -------
Cash and Cash Equivalents, end of period...................... $18,736 $ 1,568
======= =======
Supplemental Disclosure of Non-cash Activities:
Accretion of Series A preferred stock in lieu of dividends... $ - $ 209
Accretion of Series B preferred stock in lieu of dividents... - 179
Issuance of common stock in connection with acquisitions..... 3,383 -
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
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<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by Information Management Associates, Inc. and its wholly owned
subsidiaries Information Management Associates Limited and IMA Software
Australia Pty Ltd (collectively, the "Company"),without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed consolidated
financial statements and the notes thereto should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1997.
The unaudited information has been prepared on the same basis as the annual
financial statements, and in the opinion of the Company's management, reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of the results for any future periods.
2. Business Acquisitions
On March 30, 1998, the Company acquired substantially all of the net assets of
Marketing Information Systems, Inc. ("MIS") and Telemar Software International,
LLC ("TSI") ("the Acquisitions"), each of which markets proprietary call center
software focused on the IBM AS/400 user market.
The aggregate purchase price of $9.4 million consisted of $1.3 million of
cash, 254,841 shares of common stock valued at $3.4 million, $4.1 million of net
assumed liabilities and $585,000 of transaction costs. Of the 254,841 shares,
42,508 shares (valued at $564,000) have been placed in escrow and will be
released from escrow no later than March 30, 1999, subject to the satisfactory
collection of accounts receivable and the absence of any indemnification claims.
The value of the common stock was determined based on the average trading price
of the Company's common stock for the two days prior to, the day of, and the two
days after, the date that the terms of the Acquisitions were announced.
The Acquisitions have been accounted for under the purchase method of
accounting and the aggregate purchase price was allocated to the acquired assets
and assumed liabilities based on their estimated value. Of the aggregate
purchase price, $7.7 million was allocated to acquired product development costs
and charged to operations at the date of acquisition, $719,000 was allocated to
purchased software and will be amortized over three years and $1.0 million was
allocated to goodwill and will be amortized over seven years. The estimated
fair values are subject to further refinement; however, the Company does not
expect that the final allocation of the purchase price will differ materially
from the preliminary allocation included above.
3. Earnings (Loss) Per Share
The Company has adopted the provisions of Statement of Financial Accounting
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 income (loss)
per share. Under SFAS 128, income (loss) per share is computed both under the
basic and dilutive methods. Basic income (loss) per share is computed by
dividing income (loss) available to common shareholders by the weighted average
number of common shares outstanding; dilutive income (loss) 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 income (loss) 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.
The calculation of diluted income (loss) per share for the six months ended June
30, 1998 does not include stock options as the effect on diluted income (loss)
per share would have been antidilutive. The calculation of diluted income
(loss) per share for the three months and six months ended June 30, 1997 does
not include the exercise of stock options, the conversion of Series A and Series
B preferred stock or the conversion of the redeemable common stock warrants as
the effect on diluted income (loss) per share would have been antidilutive.
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The calculation of basic and diluted income (loss) per share are as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Basic/Diluted income (loss) per share:
Net income (loss) applicable to common shareholders... 1,819 73 (5,202) (303)
====== ===== ====== =====
Basic net income (loss) per share..................... .19 .02 (.55) (.07)
====== ===== ====== =====
Weighted average shares outstanding................... 9,670 4,293 9,497 4,293
====== ===== ====== =====
Diluted net income (loss) per share................... .18 .02 (.55) (.07)
====== ===== ====== =====
Weighted average shares outstanding................... 10,063 4,293 9,900 4,293
====== ===== ====== =====
</TABLE>
4. Revenue Recognition
As of January 1, 1998, the Company adopted Statement of Position 97-2,
Software Revenue Recognition (SOP 97-2), which was effective for transactions
that the Company entered into after December 31, 1997. The adoption of SOP 97-2
did not have a material adverse affect on the revenues or earnings of the
Company for the six months ended June 30, 1998.
5. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income. For
the six months ended June 30, 1998, there was no material difference between
reported net loss and comprehensive net loss.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
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 Company's EDGE TeleBusiness
software ("EDGE") 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.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the condensed
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Form 10-Q. Statements in the following discussion 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 certain factors, including those set forth under "Factors That May Affect
Future Results" and elsewhere in this Form 10-Q
-5-
<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 for the three months
and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License fees..................................... 54.1% 53.8% 53.5% 52.5%
Services and maintenance......................... 45.9% 46.2% 46.5% 47.5%
----- ----- ----- -----
Total revenues................................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenues:
License fees..................................... 0.7% 0.8% 0.9% 0.9%
Service and maintenance.......................... 26.8% 26.5% 26.3% 26.4%
----- ----- ----- -----
Total cost of revenues......................... 27.5% 27.3% 27.2% 27.3%
----- ----- ----- -----
Gross profit...................................... 72.5% 72.7% 72.8% 72.7%
----- ----- ----- -----
Operating expenses:
Sales and marketing.............................. 35.9% 35.0% 37.2% 35.2%
Product development.............................. 13.4% 18.0% 14.9% 19.2%
General and administrative....................... 11.4% 14.0% 12.0% 14.3%
Acquired product development costs............... - - 32.2% -
----- ----- ----- -----
Total operating expenses....................... 60.7% 67.0% 96.3% 68.7%
----- ----- ----- -----
Operating income (loss)........................... 11.8% 5.7% (23.5%) 4.0%
Interest income (expense)......................... 1.9% (2.5%) 2.3% (2.9%)
----- ----- ----- -----
Income (loss) before provision for income taxes... 13.7% 3.2% (21.2%) 1.1%
Provision for income taxes........................ 0.4% 0.1% 0.7% 0.6%
----- ----- ----- -----
Net income (loss)................................. 13.3% 3.1% (21.9%) 0.5%
===== ===== ===== =====
</TABLE>
The following table sets forth each component of revenue, the cost of such
revenue expressed as a percentage of such revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of license fees......................... 1.2% 1.5% 1.7% 1.7%
Cost of services and maintenance............. 58.5% 57.4% 56.6% 55.5%
</TABLE>
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<PAGE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues
License Fees. 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. Total license fees increased 58.4%
from $4.7 million, or 53.8% of total revenues, in the quarter ended June 30,
1997 to $7.4 million, or 54.1% of total revenues, in the quarter ended June 30,
1998. The increase in license fees was primarily attributable to an increase in
the average size of initial customer licenses, increased market awareness and
acceptance of the Company's software products, increased productivity resulting
from expansion of the Company's sales and marketing organization and license
fees from the Acquisitions, from which there were no revenues in 1997.
Services and Maintenance. Services and maintenance revenues derive from
professional services associated with the implementation and deployment of the
Company's software products and maintenance fees for ongoing customer support.
Services and maintenance revenues increased 56.2% from $4.0 million, or 46.2% of
total revenues, in the quarter ended June 30, 1997 to $6.3 million, or 45.9% of
total revenues, in the quarter ended June 30, 1998. The increase in services
and maintenance was primarily attributable to the significant increase in
software licenses.
Cost of Revenues
Cost of License Fees. Cost of license fees consists primarily of the
costs of media packaging, documentation, third party software and software
production personnel. Cost of license fees increased 28.6% from $70,000 or 1.5%
of the related license revenues, in the quarter ended June 30, 1997 to $90,000,
or 1.2% of the related license revenues, in the quarter ended June 30, 1998. The
increase in the cost of license fees was primarily attributable to an increase
in the cost of third party products resold by the Company.
Cost of Services and Maintenance. Cost of services and maintenance
consists primarily of salaries, bonuses, benefits and other costs related to the
installation, implementation, training and maintenance support of the Company's
software products. The cost of services and maintenance increased 59.2% from
$2.3 million, or 57.4% of service and maintenance revenues, in the quarter ended
June 30, 1997 to $3.7 million, or 58.5% of service and maintenance revenues, in
the quarter ended June 30, 1998. The increase was primarily attributable to an
increase in salary, benefits and overhead related to the hiring of new client
services staff to perform increased service requests from customers.
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 61.6% from $3.0 million, or 35.0% of
revenues, in the quarter ended June 30, 1997 to $4.9 million, or 35.9% of
revenues, in the quarter ended June 30, 1998. The increase in sales and
marketing expenses was primarily related to the hiring of additional sales and
marketing personnel, increased commissions expense as a result of higher sales
levels and increased marketing activities, including advertising, trade shows
and promotional 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. Product development expenses increased
17.7% from $1.6 million, or 18.0% of revenues, in the quarter ended June 30,
1997 to $1.8 million, or 13.4% of revenues, in the quarter ended June 30, 1998.
The increase in product development expense in the quarter ended June 30, 1998
was primarily due to the hiring of new software development staff.
General and Administrative. General and administrative expenses
represent the costs of executive, finance and administrative support personnel,
the portion of occupancy expenses all allocable to administration, unallocated
corporate expenses such as fees for legal and auditing services and bad debt
expense. General and administrative expenses increased 27.2% from $1.2 million,
or 14.0% of revenues, in the quarter ended June 30, 1997 to $1.6 million, or
11.4% of revenues, in the quarter ended June 30, 1998. The increase in general
and administrative expenses in the quarter ended June 30, 1998 was due to the
addition of accounting, administrative and legal staff to support the growth of
the Company's business and an increase in legal and accounting fees.
Other Income (Expense). Other income (expense) consists of interest
expense on debt and equipment financing less interest earned on short-term
investments. Interest income increased by $248,000 from $37,000 in the quarter
ended June 30, 1997 to $285,000 in the quarter ended June 30, 1998 while
interest expense decreased from $247,000 in the quarter ended June 30, 1997 to
$15,000 in the quarter ended June 30, 1998. Interest income increased due to
income earned on investments from proceeds of the Company's initial public
offering of common stock ("IPO") and interest expense decreased due to the pay
off of debt with proceeds from the IPO.
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Provision For Income Taxes. Provision of income taxes consists of foreign
and state income and withholding taxes. The provision for income taxes
increased from $12,000 in the quarter ended June 30, 1997 to $60,000 in quarter
ended June 30, 1998. At June 30, 1998, the Company had approximately $7.6
million of U.S. Federal net operating loss carryforwards, of which approximately
$4.5 million resulted from the exercise of non-qualified stock options, and
approximately $1.4 million of state net operating loss carryforwards which can
be used, subject to certain limitations, to offset future taxable income, if
any. When realized, the tax benefits of the portion of the net operating losses
attributed to the exercise of stock options will be credited directly to paid in
capital. These U.S. Federal net operating loss carryforwards expire through
2002.
In addition, the Company has United Kingdom net operating loss
carryforwards of approximately $850,000, which can be utilized to offset future
taxable income and which have no expiration.
The Company's IPO resulted in a change of 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 $4.7
million.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues
License Fees. Total license fees increased 50.1% from $8.5 million,
or 52.5% of total revenues, for the six months ended June 30, 1997, to $12.7
million, or 53.5% of total revenues, for the six months ended June 30, 1998. The
increase in license fees is primarily attributable to an increase in the
number and average size of customer licenses, increased market awareness and
acceptance of the products, increased productivity resulting from expansion of
the Company's sales and marketing organization and license fees from the
Acquisitions, from which there were no revenues in 1997.
Services and Maintenance. Services and maintenance revenues
increase 44.0% from $7.7 million, or 47.5% of total revenues, in the six months
ended June 30, 1997 to $11.1 million or 46.5% of total revenues, for the six
months ended June 30, 1998. The increase in services and maintenance revenues
was primarily attributable to the significant increase in software licenses.
Cost of Revenues
Cost of license fees increased 49.6%, from $141,000 or 1.7% of the
related license revenues, in the six months ended June 30, 1997 to $211,000 or
1.7% of the related license revenues, for the six months ended June 30, 1998.
The increase in cost of license fees was primarily attributable to an increase
in the cost of third party products resold by the Company.
Cost of Services and Maintenance. The cost of services and maintenance
increased 47.0% from $4.3 million, or 55.5% of service and maintenance revenues,
in the six months ended June 30, 1997 to $6.3 million, or 56.6% of service and
maintenance revenues, for the six months ended June 30, 1998. The increase was
primarily attributable to an increase in salary, benefits and overhead related
to the hiring of new client services staff to perform increased service requests
from customers.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 55.2% from
$5.7 million, or 35.2% of revenues, in the six months ended June 30, 1997 to
$8.8 million, or 37.1% of revenues, for the six months ended June 30, 1998. The
increase in sales and marketing expenses was primarily related to the hiring of
additional sales and marketing personnel, increased commissions expense as a
result of higher sales levels and increased marketing activities, including
advertising, trade shows and promotional expenses.
Product Development. Product development expenses increased 14.6% from
$3.1 million, or 19.2% of revenues, for the six months ended June 30, 1997 to
$3.5 million, or 14.9% of revenues, for the six months ended June 30, 1998.
The product development expense was primarily due to the hiring of new software
development staff.
General and Administrative. General and administrative expenses increased
23.3% from $2.3 million, or 14.3% of revenues, for the six months ended June 30,
1997 to $2.8 million, or 12.0% of revenues, for the six months ended June 30,
1998. The increase in general and administrative expenses during these periods
was primarily due to the addition of accounting, administrative and legal staff
to support the growth of the company's business during these periods.
Acquired Product Development Costs. Acquired product development costs
resulted from the March 30, 1998 acquisitions of MIS and TSI. There was no
similar acquisition activity for the six months ended June 30, 1997.
-8-
<PAGE>
Interest Income (Expense). Interest income (expense) consists of interest
expense on debt and equipment financing less interest earned on short term
investments. Interest income increased by $478,000 from $81,000 in the six
months ended June 30, 1997 to $559,000 in the six months ended June 30, 1998
while interest expense decreased from $548,000 in the six months ended June 30,
1997 to $22,000 in the six months ended June 30, 1998. Interest income
increased due to interest earned on investments from proceeds of the Company's
IPO and interest expense decreased due to the pay off of debt with proceeds from
the IPO.
Provision For Income Taxes. Provision for income taxes consists of foreign
and state income and withholding taxes. The provision for income taxes
increased 51% from $102,000 for the six months ended June 30, 1997 to $154,000
for the six months ended June 30, 1998.
Liquidity and Capital Resources
At June 30, 1998, the Company had $18.7 million in cash and $19.4
million in accounts receivable. For the six months ended June 30, 1998, the
Company used net cash of $2.4 million from operating activities. The net cash of
$2.4 million used in operations resulted primarily from the net loss of $5.2
million, offset by the $7.7 million non-cash charge for acquired product
development costs related to the acquisitions of MIS and TSI and depreciation
and amortization of $614,000, reduced by an increase of $3.8 million in accounts
receivable, an increase of $706,000 in other current assets and a decrease of
$494,000 in accounts payable and accrued liabilities. The fluctuations in
operating assets and liabilities were primarily due to the timing of operating
activities, including the timing of orders, collections of accounts receivable
and the payment of accounts payable.
For the six months ended June 30, 1998, the Company's primary
investing activities consisted of $2.0 million related to the acquisitions of
MIS and TSI, payment of acquisition related deal costs of $871,000 and purchases
of computer and office equipment of $893,000 to support the Company's expanding
employee base.
For the six months ended June 30, 1998, the Company's primary
financing activities consisted of the exercise of employee stock options which
provided cash proceeds of $655,000.
The Company anticipates that its current cash and cash equivalents
together with cash provided by operations 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, the successful development and
introduction of new products and any acquisitions or strategic alliances or
investments which the Company may consider.
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 the 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. There
can be no assurance, however, 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-Q, readers should
carefully consider the following factors in evaluating the Company and its
business. Statements in this Form 10-Q 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-Q.
-9-
<PAGE>
History of Operating Losses; Uncertainty of Future Operating Results.
The Company incurred significant net operating losses in each of 1992, 1993,
1994, 1995 and the first six months of 1998 and had an accumulated deficit of
$19.2 million as of June 30, 1998. 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 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 included, 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 of 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. Moreover, to the extent that significant sales occur
earlier than expected, operating results for subsequent quarters 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 condition 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 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.
Ability to Integrate Acquisitions. The Company completed the acquisition
of substantially all of the assets of MIS and TSI on March 30, 1998 for an
aggregate purchase price of $9.4 million. MIS and TSI each have product lines
which are focused on the IBM AS/400 market, which has not been the market to
which the Company's EDGE products have been primarily directed. If the Company
fails to successfully integrate the product lines, employees, distributors and
customers of MIS and TSI, the Company's business, operating results and
financial condition could be materially adversely affected.
Product Concentration. Substantially all of the Company's revenues during
1997 and the six months ended June 30, 1998 were attributable to the licensing
of EDGE and the provision of professional consulting, technical support and
maintenance services relating to EDGE. The Company currently expects that the
licensing of EDGE products and the provision of such related services will
account for the majority of its revenues for the foreseeable future. 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.
-10-
<PAGE>
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 if 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 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. 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. The 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.
-11-
<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 a 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 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.
-12-
<PAGE>
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.
Management of Growth. The Company recently experienced 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.
-13-
<PAGE>
Risks Associated With International Operations. International operations
accounted for approximately 26%, 27% and 38% of total revenues for the years
ended December 31, 1996 and 1997, and the six months ended June 30, 1998,
respectively. The Company intends to expand its international sales activity,
which will require significant management attention and financial resources and
will require the Company to establish additional foreign operations and hire
additional personnel. As of June 30, 1998 the Company employed 44 employees who
are based in Europe. 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 enforcement of contractual
obligations and intellectual property rights, potentially adverse tax
consequences, increased costs associated with maintaining international
marketing efforts, costs of localizing products for foreign markets, tariffs,
duties and other trade barriers, adverse changes in regulatory requirements,
possible recessionary economies outside of 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 Company's filings with the Securities and Exchange Commission.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
-14-
<PAGE>
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
On August 6, 1997, Rockwell International Corporation, Rockwell
Semiconductor Systems, Inc. and Rockwell Telecommunications, Inc.
(collectively, "Rockwell") filed a two count complaint against the
Company. (Rockwell International Corporation, Rockwell Semiconductor
Systems, Inc. and Rockwell Telecommunications, Inc. v Information
Management Associates, Inc., 97 CH 809). The complaint alleges trade
secret misappropriation and tortious interference with contract in
connection with the Company's provision of a call center solution to
United States Cellular Corporation ("USCC"), one of Rockwell's former
customers. The complaint seeks preliminary and permanent injunctive
relief, in addition to monetary damages. On August 7, 1997, Rockwell and
the Company entered into a court mandated agreed order wherein the
Company agreed not to use any of the documents that were delineated in
the complaint or any derivatives thereof. Thereafter, Rockwell alleged
that the Company had violated the August 7, 1997 order and claimed that
the call centers being implemented by the Company at USCC are based upon
and derived from alleged Rockwell trade secrets. After a hearing held
from June 8 through June 19, 1998 the court issued a preliminary
injunction against the Company requiring the Company immediately to cease
and desist from any further work at the USCC call centers. The court also
found the Company to be in civil contempt of court for violating the
August 7, 1997 agreed court order. A hearing regarding the remedy for the
Company's contempt of court presently is set for October 5, 1998 and a
jury trial on the merits of Rockwell's complaint is set for March 1,
1999. The Company has filed a notice of appeal of the preliminary
injunction order and a motion to stay enforcement of the order pending
resolution of the Company's appeal. This motion to stay currently is
pending with the Appellate Court.
The Company has substantially completed implementation of the USCC
software, and has been fully paid for the software and substantially paid
for the services provided. The Company believes that Rockwell's claims
are without merit and intends to vigorously oppose them. Nevertheless,
the final outcome of any legal proceeding is subject to a great many
variables and cannot be predicted with any degree of certainty. In the
event that this litigation were ultimately decided in favor of Rockwell,
damages, injunctive relief and associated legal fees and costs could have
a material adverse effect on results of the Company's operations.
Item 2: Changes in Securities and Use of Proceeds
a. Not Applicable.
b. Not Applicable.
c. Not Applicable
d. Use of Proceeds
(1) On July 30, 1997, the Company's Registration Statement on
Form S-1 (the "Registration Statement"), File No. 333-22923,
with respect to its initial public offering of common stock
was declared effective by the Securities and Exchange
Commission. The use of proceeds from the offering was
described in the Company's Form 10-Q for the quarter ended
September 30, 1997 and the Company's Form 10-K for the year
ended December 31, 1997. Except as noted below, no
information has changed with respect to the use of proceeds
from the information set forth in the Company's Form 10-K.
(2) The Company used the net offering proceeds through June 30,
1998 as follows:
(a) approximately $7.4 million for repayment of
indebtedness;
(b) approximately $6.1 million for working capital;
(c) approximately $14.8 million for temporary investments
primarily in commercial paper;
(d) approximately $1.2 million for the acquisition of
equipment; and
(e) approximately $2.9 million for the acquisition of assets
of MIS and TSI.
Each of these amounts is a reasonable estimate of the amount of
the net offering proceeds set forth above so applied. The use of
proceeds does not represent a material change in the use of
proceeds described in the prospectus included in the Registration
Statement.
-15-
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on May 14, 1998.
Proxies for that annual were solicited pursuant to Regulation 14 under the
Securities and Exchange Act of 1934, there was no solicitation in opposition to
the management's nominees as listed in the Proxy Statement and all of such
nominees were elected.
The following persons were duly elected, subject to the Company's Bylaws, as
Directors of the Company for a three-year term or until election and
qualification of their respective successors.
<TABLE>
<CAPTION>
NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED UNVOTED
<S> <C> <C> <C> <C>
Paul J. Schmidt 8,696,855 12,600 -0- -0-
Donald P. Miller 8,696,855 12,600 -0- -0-
Thomas F. Hill 8,690,743 18,712 -0- -0-
</TABLE>
The term of office of each of the following Directors of the Company continued
after the annual meeting.
NAME
Albert R. Subbloie, Jr.
Gary R. Martino
Andrei Poludnewycz
David J. Callard
In addition, the Company's stockholders voted as follows with respect to the
proposals presented at the meeting (i) a proposal to approve the Company's 1998
Employee and Consultant Stock Option Plan was approved with 6,437,407 votes
cast in favor of the proposal, 944,149 votes against the proposal, 14,430
abstentions and 1,313,469 unvoted, and (ii) a proposal to ratify the
appointment of Arthur Andersen LLP as the Company's independent auditors was
approved with 8,688,469 votes cast in favor of the proposal, 8,700 votes
against the proposal, 12,286 abstentions and -0- unvoted.
Item 5: Other Information
On May 21, 1998, the Commission adopted changes to Rule 14a-4, which
governs the Company's use of its discretionary proxy voting authority with
respect to shareholder proposals not sought to be included in the Company's
Proxy Statement. New Rule 14a-4(c)(1) provides that if the proponent of such a
proposal fails to notify the Company at least 45 days prior to the month and
day of the mailing of the Company's prior year proxy statement (i.e., March 1,
1999), then the management proxies would be permitted, without any discussion
of the proposal in the proxy statement, to use their discretionary voting
authority to vote proxies with respect to such proposal when it is raised at
the annual meeting. Accordingly, with respect to any shareholder proposal for
the 1999 annual meeting, notice of such proposal must be received by the
Company on or before March 1, 1999. Shareholder proposals for the 1999 annual
meeting received after that will be subject to the management proxies'
discretionary voting authority in accordance with Rule 14a-4(c)(1).
Item 6: Exhibits and Reports on Form 8-K
(a) 99 - 1998 Employee and Consultant Stock Option Plan.
(b) No reports on 8-K were filed by the Company
for the Quarter ended June 30, 1998.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 12, 1998 /s/ Albert R. Subbloie, Jr. President, Chief
--------------------------- Executive
Albert R. Subbloie, Jr. Officer and Director
(Principal Executive
Officer)
Dated: August 12, 1998 /s/ Gary R. Martino Chairman of the
----------------------------- Board of Directors,
Gary R. Martino Chief Financial
Officer, Treasurer
and Director (Principal
Financial and
Accounting Officer)
-17-
<PAGE>
EXHIBIT 99
INFORMATION MANAGEMENT ASSOCIATES, INC.
1998 EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
I. ESTABLISHMENT OF PLAN; DEFINITIONS
1. Purpose. The purpose of the Information Management Associates, Inc. 1998
Employee and Consultant Stock Option Plan is to provide an incentive to
Employees and Consultants of Information Management Associates, Inc. (the
"Corporation") and its Affiliates who are in a position to contribute
materially to the long-term success of the Corporation and/or its Affiliates,
to increase their interest in the welfare of the Corporation and its
Affiliates, and to aid in attracting and retaining Employees and Consultants
of outstanding ability.
2. Definitions. Unless the context clearly indicates otherwise, the
following terms shall have the meanings set forth below:
a. "Affiliate" shall mean any parent or subsidiary of the Corporation
which meets the requirements of Section 425 of the Code.
b. "Board" shall mean the Board of Directors of the Corporation.
c. "Cause" shall mean repeated failure to properly perform assigned
duties, gross negligence, insubordination, commission of a felony, or any
act injurious to the Corporation involving dishonesty or breach of any duty
of confidentiality or loyalty.
d. "Change of Control" shall mean a change of control of the Corporation
of a nature that would be required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934
(the "Exchange Act"), whether or not the Corporation is subject to the
Exchange Act at such time; provided, however, that without limiting the
generality of the foregoing, a "Change of Control" will in any event be
deemed to occur if and when (i) there shall be consummated (x) any
consolidation, reorganization or merger of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant to
which shares of the Stock would be converted into cash, securities or other
property, other than a merger of the Company in which holders of the Stock
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger, or
(y) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the assets
of the Corporation, or (ii) the shareholders of the Corporation shall
approve any plan or proposal for liquidation or dissolution of the
Corporation, or (iii) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Exchange Act, including any "group" (as defined in
Section 13(d)(3) of the Exchange Act) (other than the Grantee or any group
controlled by the Grantee)) shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of thirty percent (30%) or
more of the outstanding Stock (other than pursuant to a plan or arrangement
entered into by such person and the Corporation) and such person discloses
its intent to effect a change of the control or ownership of the Company in
any filing with the Securities and Exchange Commission ("SEC") or (iv)
within any twenty-four (24) month period beginning on or after May 14,
1998, the persons who were directors of the Corporation immediately before
the beginning of such period (the "Incumbent Directors") shall cease (for
any reason other than death, disability or retirement) to constitute at
least a majority of the Board or the board of directors of any successor to
the Corporation, provided that, any director who was not a director as of
May 14, 1998 shall be deemed to be an Incumbent Director if such director
was elected to the Board by, or on the recommendation of or with the
approval of, at least two-thirds of the directors who then qualified as
Incumbent Directors either actually or by prior operation of this
definition unless such election, recommendation or approval was the result
of any actual or threatened election contest of the type contemplated by
Regulation 14a-11 promulgated under the Exchange Act or any successor
provision.
e. "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
<PAGE>
f. "Consultant" shall mean any consultant of the Corporation or any of
its Affiliates.
g. "Corporation" shall mean Information Management Associates, Inc., a
Connecticut corporation.
h. "Disability" shall mean a medically determinable physical or mental
condition which causes an Employee to be unable to engage in any
substantial gainful activity and which can be expected to result in death
or to be of long, continued and indefinite duration.
i. "Employee" shall mean any employee, including officers, of the
Corporation or any of its Affiliates, as determined under the Code and the
Treasury Regulations thereunder.
j. "Fair Market Value" shall mean on any date, (i) if the Stock is not
listed on a national securities exchange or quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"),
the fair market value of the Stock on that date as determined by the Board,
or (ii) if the Stock is listed on a national securities exchange or is
quoted on Nasdaq, the closing price reported on the composite tape for
issues listed on such exchange at the close of business on the day next
preceding such date, or the closing price or the average of the closing
dealer "bid" and "asked" prices of the Stock at the close of business on
the day next preceding the date of grant as quoted by Nasdaq, or if no
trades shall have been reported for such date, on the next preceding date
on which there were trades reported; provided that if no quotations shall
have been made within the 10 business days preceding such date, the Fair
Market Value shall be determined by the Board as provided in clause (i)
above.
k. "Grantee" shall mean an Employee or Consultant granted a Stock Option
under this Plan.
l. "Incentive Stock Option" shall mean an option granted pursuant to the
Incentive Stock Option provisions as set forth in Part II of this Plan.
m. "Non-Qualified Stock Option" shall mean an option granted pursuant to
the Non-Qualified Stock Option provisions as set forth in Part III of this
Plan.
n. "Option Period" shall mean the term of the Stock Option as fixed by
the Board.
o. "Plan" shall mean the Information Management Associates, Inc. 1998
Employee and Consultant Stock Option Plan as set forth herein and as
amended from time to time.
p. "Stock" shall mean authorized but unissued shares of the Common Stock
of the Corporation, no par value, or reacquired shares of the Corporation's
Common Stock.
q. "Stock Option" shall mean an option, which shall include Non-Qualified
Stock Options and Incentive Stock Options, granted pursuant to the Plan to
purchase shares of Stock.
r. "Stock Option Agreement" shall mean the written instrument evidencing
the grant of one or more Stock Options under the Plan and which contains
the terms and conditions applicable to such grant.
s. "Ten Percent Shareholder" shall mean an Employee or Consultant who at
the time a Stock Option is granted owns stock possessing more than ten
percent (10%) of the total combined voting power of all stock of the
Corporation or of its Affiliates.
3. Shares of Stock Subject to the Plan. There are hereby reserved for
issuance under the Plan 800,000 shares of Stock. Subject to the provisions of
Paragraph 1 of Part IV, the Stock which may be issued pursuant to Stock
Options authorized to be granted under the Plan and the Stock which is subject
to outstanding but unexercised Stock Options under the Plan shall not exceed
800,000 shares of Stock in the aggregate. If a Stock Option shall expire and
terminate for any reason, in whole or in part, without being exercised, the
number of shares of Stock as to which such expired or terminated Stock Option
shall not have been exercised may again become available for the grant of
Stock Options.
There shall be no terms and conditions in a Stock Option which provide that
the exercise of an Incentive Stock Option reduces the number of shares of
Stock for which an outstanding Non-Qualified Stock Option may be exercised;
and there shall be no terms and conditions in a Stock Option which provide
that the exercise of a Non-Qualified Stock Option reduces the number of shares
of Stock for which an outstanding Incentive Stock Option may be exercised.
<PAGE>
4. Administration of the Plan. The Plan shall be administered by the Board.
Subject to the express provisions of the Plan, the Board shall have authority
to grant Stock Options under the Plan, to interpret the Plan, to prescribe,
amend, and rescind rules and regulations relating to it, to determine the
terms and provisions of Stock Option Agreements, and to make all other
determinations necessary or advisable for the administration of the Plan. Any
controversy or claim arising out of or related to the Plan shall be determined
unilaterally by and at the sole discretion of the Board. Any determination,
decision or action of the Board in connection with the construction,
interpretation, administration, implementation or maintenance of the Plan
shall be final, conclusive and binding upon all Grantees and all person(s)
claiming under or through any Grantees. In addition, the Board shall have the
authority to delegate any of its duties and responsibilities under the Plan to
such committee(s) as it shall determine including any such delegation
necessary for the Plan's compliance with the requirements of Rule 16b-3
promulgated by the SEC, as amended ("Rule 16b-3") and Section 162(m) of the
Code.
5. Amendment or Termination. The Board may, at any time, alter, amend,
suspend, discontinue, or terminate the Plan; provided, however, that such
action shall not adversely affect the right of Grantees to Stock Options
previously granted.
6. Effective Date and Duration of the Plan. The Plan shall become effective
on May 14, 1998, subject to the approval by the shareholders of the
Corporation. The Plan shall terminate ten years from the date it becomes
effective, and no Stock Option may be granted under the Plan thereafter, but
such termination shall not affect any Stock Option theretofore granted.
II. INCENTIVE STOCK OPTION PROVISIONS
1. Granting of Incentive Stock Options.
a. Only Employees of the Corporation or its Affiliates shall be eligible
to receive Incentive Stock Options under the Plan.
b. When granting an Incentive Stock Option, the Board shall determine the
purchase price of the Stock subject thereto, provided, that the purchase
price of each share of Stock subject to an Incentive Stock Option shall not
be less than 100% of the Fair Market Value of a share of the Stock on the
date the Incentive Stock Option is granted; and provided, further, that the
purchase price of each share of Stock subject to an Incentive Stock Option
granted to a Ten Percent Shareholder shall not be less than 110% of the
Fair Market Value of a share of the Stock on the date the Incentive Stock
Option is granted.
c. No Incentive Stock Option shall be exercisable more than ten years
from the date the Incentive Stock Option was granted; provided, however,
that an Incentive Stock Option granted to a Ten Percent Shareholder shall
not be exercisable more than five years from the date the Incentive Stock
Option was granted.
d. The Board shall determine and designate from time to time those
Employees who are to be granted Incentive Stock Options and specify the
number of shares subject to each Incentive Stock Option.
e. Notwithstanding any other provisions hereof, the aggregate Fair Market
Value (determined at the time the option is granted) of the Stock with
respect to which Incentive Stock Options are exercisable for the first time
by the Employee during any calendar year (under all such plans of the
Corporation and its Affiliates) shall not exceed $100,000.
f. The Board, in its sole discretion, shall determine whether any
particular Incentive Stock Option shall become exercisable in one or more
installments, specify the installment dates, and, within the limitations
herein provided, determine the total period during which the Incentive
Stock Option is exercisable. Further, the Board may make such other
provisions as may appear generally acceptable or desirable to the Board or
necessary to qualify its grants under the provisions of Section 422 of the
Code.
g. The Board may grant at any time new Incentive Stock Options to an
Employee who has previously received Incentive Stock Options or other
options whether such prior Incentive Stock Options or other options are
still outstanding, have previously been exercised in whole or in part, or
are canceled in connection with the issuance of new Incentive Stock
Options. The purchase price of the new Incentive Stock Options may be
established by the Board without regard to the existing Incentive Stock
Options or other options.
<PAGE>
h. During any calendar year, no Employee may be granted Incentive Stock
Options with respect to more than 200,000 shares of Stock.
2. Exercise of Incentive Stock Options. The purchase price of Stock subject
to an Incentive Stock Option shall be payable on exercise of the option in
cash or by check, bank draft or postal or express money order. The Board, in
its discretion, may permit a Grantee to make partial or full payment of the
purchase price by the surrender of Stock owned by the Grantee prior to the
date of exercise. Shares of Stock surrendered in payment of the purchase price
as provided above shall be valued at the Fair Market Value thereof on the date
of exercise. Surrender of such stock shall be evidenced by delivery of the
certificate(s) representing such shares in such manner, and endorsed in such
form, or accompanied by stock powers endorsed in such form, as the Board may
determine.
In the absence of any other action by the Board, all Incentive Stock Options
shall become exercisable in equal installments over a period of four years
calculated from the date of grant.
3. Termination of Employment. Except as provided otherwise in the applicable
Stock Option Agreement (in which case the provisions of the Stock Option
Agreement shall control over the provisions of this paragraph 3):
a. If a Grantee's employment is terminated, including termination by
reason of retirement at or after age 65, or by reason of Disability (other
than for Cause or voluntary termination prior to retirement at or after age
65 or death) only those Incentive Stock Options held by the Grantee which
were immediately exercisable at the date of the termination of Grantee's
employment shall be exercisable by the Grantee following the termination of
Grantee's employment. Such Incentive Stock Options must be exercised within
three months after such termination of employment (but in no event after
expiration of the Option Period) or they shall be forfeited.
b. If a Grantee's employment is terminated for Cause or if the Grantee
shall have voluntarily terminated employment other than by retirement at or
after age 65, all then outstanding Incentive Stock Options held by the
Grantee shall expire immediately and such Incentive Stock Options shall not
be exercisable after the date of the termination of Grantee's employment.
c. If a Grantee's employment is terminated by death, only those Incentive
Stock Options held by the Grantee which were immediately exercisable at the
date of the Grantee's death shall be exercisable by the representative of
the Grantee's estate or beneficiaries thereof to whom the Incentive Stock
Options have been transferred. Such Incentive Stock Options must be
exercised by the earlier of (i) three months from the date of the Grantee's
death or (ii) the expiration of the Option Period, or they shall be
forfeited.
d. The Board may grant a leave of absence to any Grantee and, for
purposes hereunder, such Grantee shall be deemed to be continued to be
employed with the Corporation or its Affiliates during such leave of
absence.
III. NON-QUALIFIED STOCK OPTION PROVISIONS
1. Granting of Non-Qualified Stock Options.
a. Employees and Consultants of the Corporation or its Affiliates shall
be eligible to receive Non-Qualified Stock Options under the Plan.
b. The Board shall determine and designate from time to time those
Employees and Consultants who are to be granted Non-Qualified Stock Options
and specify the number of shares subject to each Non-Qualified Stock
Option.
<PAGE>
c. The Board may grant at any time new Non-Qualified Stock Options to an
Employee or Consultant who has previously received Non-Qualified Stock
Options or other options, whether such prior Non-Qualified Stock Options or
other options are still outstanding, have previously been exercised in
whole or in part, or are canceled in connection with the issuance of new
Non-Qualified Stock Options.
d. When granting a Non-Qualified Stock Option, the Board shall determine
the purchase price of the Stock subject thereto.
e. The Board, in its sole discretion, shall determine whether any
particular Non-Qualified Stock Option shall become exercisable in one or
more installments, specify the installment dates and, within the
limitations herein provided, determine the total period during which the
Non-Qualified Stock Option is exercisable. Further, the Board may make such
other provisions as may appear generally acceptable or desirable to the
Board.
f. No Non-Qualified Stock Option shall be exercisable more than ten years
from the date such option is granted.
g. During any calendar year, no Employee may be granted Non-Qualified
Stock Options with respect to more than 200,000 shares of Stock.
2. Exercise of Non-Qualified Stock Options. The purchase price of Stock
subject to a Non-Qualified Stock Option shall be payable on exercise of the
option in cash or by check, bank draft or postal or express money order. The
Board, in its discretion, may permit a Grantee to make partial or full payment
of the purchase price by the surrender of Stock owned by the Grantee prior to
the date of exercise. Shares of Stock surrendered in payment of the purchase
price as provided above shall be valued at the Fair Market Value thereof on
the date of exercise, surrender of such to be evidenced by delivery of the
certificates(s) representing such shares in such manner, and endorsed in such
form, or accompanied by stock powers endorsed in such form, as the Board may
determine.
In the absence of any other action by the Board, all Non-Qualified Stock
Options shall become exercisable in equal installments over a period of four
years calculated from the date of grant.
3. Termination of Employment. Except as provided otherwise in the applicable
Stock Option Agreement (in which case the provisions of the Stock Option
Agreement shall control over the provisions of this paragraph 3):
a. If a Grantee's employment is terminated, including termination by
reason of retirement at or after age 65 or by reason of Disability (other
than for Cause or voluntary termination prior to retirement at or after age
65 or death), only those Non-Qualified Stock Options held by the Grantee
which were immediately exercisable at the date of the termination of
Grantee's employment shall be exercisable by the Grantee following the
termination of Grantee's employment. Such Non-Qualified Stock Options must
be exercised within three months after such termination of employment (but
in no event after expiration of the Option Period) or they shall be
forfeited.
b. If a Grantee's employment is terminated for Cause or if the Grantee
shall have voluntarily terminated employment other than by retirement at or
after age 65, all then outstanding Non-Qualified Stock Options held by the
Grantee shall expire immediately and such Non-Qualified Stock Options shall
not be exercisable after the date of the termination of Grantee's
employment.
c. If a Grantee's employment is terminated by death, only those Non-
Qualified Stock Options held by the Grantee which were immediately
exercisable at the date of death shall be exercisable by the representative
of the Grantee's estate or beneficiaries thereof to whom the Non-Qualified
Stock Options have been transferred. Such Non-Qualified Stock Options must
be exercised by the earlier of (i) three months from the date of the
Grantee's death or (ii) the expiration of the Option Period, or they shall
be forfeited.
d. The Board may grant a leave of absence to any Grantee and, for
purposes hereunder, such Grantee shall be deemed to continue to be employed
for purposes of continuing such Grantee's employment with the Corporation
or its Affiliates during such leave of absence.
<PAGE>
4. Termination of Consultancy. Except as provided otherwise in the
applicable Stock Option Agreement (in which case the provisions of the Stock
Option Agreement shall control over the provisions of this paragraph 4):
a. If a Grantee's consulting engagement is terminated (other than for
Cause or voluntary termination or death), only those Non-Qualified Stock
Options held by the Grantee which were immediately exercisable at the date
of termination of the Grantee's consulting engagement shall be exercisable
by the Grantee following the termination of the Grantee's consulting
engagement. Such Non-Qualified Stock Options must be exercised within three
months after such termination of the Grantee's consulting engagement (but
in no event after expiration of the Option Period) or they shall be
forfeited.
b. If a Grantee's consulting engagement is terminated for Cause or if the
Grantee shall have voluntarily terminated his or her consulting engagement,
all then outstanding Non-Qualified Stock Options held by the Grantee shall
expire immediately and such Non-Qualified Stock Options shall not be
exercisable after the date of termination of the Grantee's consulting
engagement.
c. If a Grantee's consulting engagement is terminated by death, only
those Non-Qualified Stock Options immediately exercisable at the date of
the Grantee's death shall be exercisable by the representative of the
Grantee's estate or beneficiaries thereof to whom the Non-Qualified Stock
Options have been transferred. Such Non- Qualified Stock Options must be
exercised by the earlier of (i) three months from the date of the Grantee's
death or (ii) the expiration of the Option Period, or they shall be
forfeited.
IV. GENERAL PROVISIONS
1. Recapitalization Adjustments.
a. In the event of any change in capitalization affecting the Stock,
including, without limitation, a stock dividend or other distribution,
stock split, reverse stock split, recapitalization, consolidation,
subdivision, split-up, spin-off, split-off, combination or exchange of
shares or other form of reorganization or recapitalization, or any other
change affecting the Stock, the Board shall authorize and make such
proportionate adjustments, if any, as the Board deems appropriate to
reflect such change, including, without limitation, with respect to the
aggregate number of shares of Stock for which Stock Options in respect
thereof may be granted under the Plan, the number of shares of Stock
covered by each outstanding Stock Option, and the purchase price per share
of Stock in respect of outstanding Stock Options.
b. Any provision hereof to the contrary notwithstanding, in the event the
Corporation is a party to a merger or other reorganization, outstanding
Stock Options shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Stock Options by the surviving corporation or its
parent, for their continuation by the Corporation (if the Corporation is a
surviving corporation) for accelerated vesting and accelerated expiration
or for settlement in cash.
2. Change of Control. Notwithstanding anything to the contrary contained in
the Plan or in any Stock Option Agreement, upon the occurrence of a Change of
Control, all then outstanding Stock Options shall automatically become fully
and immediately vested and exercisable.
3. General.
a. Each Stock Option shall be evidenced by a Stock Option Agreement.
b. The granting of a Stock Option in any year shall not give the Grantee
any right to similar grants in future years or any right to be retained as
an Employee or Consultant of the Corporation, and all Employees and
Consultants shall remain subject to discharge or removal to the same extent
as if the Plan were not in effect.
c. No Employee or Consultant, and no beneficiary or other person claiming
under or through him, shall have any right, title or interest by reason of
any Stock Option to any particular assets of the Corporation, or any shares
of Stock allocated or reserved for the purposes of the Plan or subject to
any Stock Option except as set forth herein. The Corporation shall not be
required to establish any fund or make any other segregation of assets to
assure the exercise of any Stock Option.
<PAGE>
d. No Stock Option or right under the Plan shall or may be sold,
exchanged, assigned, pledged, encumbered, or otherwise hypothecated or
disposed of except by will or the laws of descent and distribution, and a
Stock Option shall be exercisable during the Grantee's lifetime only by the
Grantee or his conservator.
e. Notwithstanding any other provision of the Plan or agreements made
pursuant thereto, the Corporation's obligation to issue or deliver any
certificate or certificates for shares of Stock under a Stock Option, and
the transferability of Stock acquired by exercise of a Stock Option, shall
be subject to all of the following conditions:
(1) Any registration or other qualification of such shares under any state
or federal law or regulation, or the maintaining in effect of any such
registration or other qualification which the Board shall, in its absolute
discretion upon the advice of counsel, deem necessary or advisable;
(2) The obtaining of any other consent, approval, or permit from any state
or federal governmental agency which the Board shall, in its absolute
discretion upon the advice of counsel, determine to be necessary or advisable;
and
(3) Each stock certificate issued pursuant to a Stock Option shall bear such
legends which the Corporation shall determine, in its absolute discretion, are
necessary or advisable, or which in the opinion of counsel to the Corporation
are required under applicable federal or state securities laws.
f. All payments to Grantees or to their legal representatives shall be
subject to any applicable tax, community property, or other statutes or
regulations of the United States or of any state having jurisdiction
thereof. The Grantee may be required to pay to the Corporation the amount
of any withholding taxes which the Board, in its sole discretion, deems
necessary to be withheld in order to comply with any applicable statutes or
regulations with respect to a Stock Option or its exercise. In the event
that such payment is not made when due, the Corporation shall have the
right to deduct, to the extent permitted by law, from any payment or
settlement of any kind otherwise due to such person all or part of the
amount required to be withheld. If the Board, in its sole discretion,
permits shares of Stock to be used to satisfy any such tax withholding,
such Stock shall be valued based upon the Fair Market Value of such Stock
as of the date the tax withholding is required to be made, such date to be
determined by the Board. The Corporation shall not be required to issue
Stock until such obligations are satisfied.
g. In the case of a grant of a Stock Option to any Employee or Consultant
of an Affiliate of the Corporation, the Corporation may, if the Board so
directs, issue or transfer the shares, if any, covered by the Stock Option
to the Affiliate, for such lawful consideration as the Board may specify,
upon the condition or understanding that the Affiliate will transfer the
shares to the Employee or Consultant in accordance with the terms of the
Stock Option specified by the Board pursuant to the provisions of the Plan.
h. A Grantee entitled to Stock as a result of the exercise of an Option
shall not be deemed for any purpose to be, or have rights as, a shareholder
of the Corporation by virtue of such exercise, except to the extent a stock
certificate is issued therefor and then only from the date such certificate
is issued. No adjustments shall be made for dividends or distributions or
other rights for which the record date is prior to the date such stock
certificate is issued, except as otherwise provided herein. The Corporation
shall issue any stock certificates required to be issued in connection with
the exercise of a Stock Option with reasonable promptness after such
exercise.
i. The grant or exercise of Stock Options granted under the Plan shall be
subject to, and shall in all respects comply with, applicable Connecticut
corporate law relating to such grant or exercise.
j. Should the participation of any Employee or Consultant in the Plan be
subject to Section 16 of the Securities Exchange Act of 1934 or any
successor statute ("Section 16"), it is the express intent of the
Corporation that, notwithstanding anything to the contrary contained in the
Plan, the Plan and Stock Options granted under the Plan shall satisfy and
be interpreted in a manner to achieve the result that the applicable
requirements of Rule 16b-3 shall be satisfied with respect to such
Employees and Consultants, with the result that such Employees and
Consultants shall be entitled to the benefits of Rule 16b-3 or other
applicable
<PAGE>
exemptive rules under Section 16. If any provision of the Plan or of any
Stock Option would otherwise frustrate or conflict with the intent of the
Corporation expressed in the immediately preceding sentence, to the extent
possible, such provision shall be interpreted and deemed amended so as to
avoid such conflict, and, to the extent of any remaining irreconcilable
conflict with such intent, the provision shall, solely with respect to
Employees and Consultants subject to Section 16, be deemed void.
k. It is the express intent of the Corporation that, notwithstanding
anything to the contrary contained in the Plan, the Plan and Stock Options
granted under the Plan shall satisfy and be interpreted in a manner to
achieve the result that Stock Options granted under the Plan shall
constitute "performance-based" compensation within the meaning of Section
162(m) of the Code. If any provision of the Plan or of any Stock Option
would otherwise frustrate or conflict with the intent of the Corporation
expressed in the immediately preceding sentence, to the extent possible,
such provision shall be interpreted and deemed amended so as to avoid such
conflict, and, to the extent of any remaining irreconcilable conflict with
such intent, the provision shall, solely with respect to Employees subject
to Section 162(m) of the Code, be deemed void.
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<PAGE>
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