SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 2 ON
FORM 10-Q/A
(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
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (203) 925-6800
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.
This Form 10-Q/A amends Part I Item 1 -- Financial Information and Part I Item 2
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations of Information Management Associates, Inc.'s Form 10-Q to reflect a
revision of operating expenses for the three and six months ended June 30, 1998.
See Note 1 of Notes to Condensed Consolidated Financial Statements for a
discussion of the restatement.
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC.
FORM 10-Q/A
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..............................................1
ITEM 1. FINANCIAL STATEMENTS...............................................1
1. Restatement........................................................4
2. Basis of Presentation.....................................4
3. Business Acquisitions.....................................4
4. Earnings (Loss) Per Share.................................5
5. Revenue Recognition.......................................6
6. Comprehensive Income......................................6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1998 1997
(unaudited)
(as restated; see note 1)
ASSETS
Current assets:
Cash and cash equivalents..............................$18,736 $24,271
Accounts receivable, net............................... 18,845 14,815
Other current assets................................... 2,298 1,420
------- -------
Total current assets................................. 39,879 40,506
Equipment, net........................................... 2,736 2,279
Goodwill................................................. 993 -
Purchased software....................................... 659 -
Other assets, net........................................ 1,566 1,137
------- -------
45,833 43,922
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations........ 176 232
Accounts payable and accrued liabilities............... 6,587 4,375
Deferred revenues...................................... 3,860 1,686
------- -------
Total current liabilities............................ 10,623 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 (20,363) (13,971)
------- -------
Total shareholders' equity 34,679 37,030
------- -------
$ 45,833 $ 43,922
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(as restated; see note 1)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
License Fees........................... 7,408 $ 4,677 $12,723 $ 8,479
Service and maintenance................ 5,739 4,021 10,517 7,676
------ ------- ------- -------
Total revenues....................... 13,147 8,698 23,240 16,155
------ ------- ------- -------
Cost of revenues:
Cost of license fees................... 90 70 211 141
Cost of services and maintenance....... 3,974 2,307 6,562 4,259
------ ------- ------- -------
Total cost of revenues............... 4,064 2,377 6,773 4,400
------ ------- ------- -------
Gross profit............................. 9,083 6,321 16,467 11,755
------ ------- ------- -------
Operating expenses:
Sales and marketing.................... 5,007 3,042 8,922 5,690
Product development.................... 2,006 1,564 3,712 3,096
General and administrative............. 1,651 1,223 2,950 2,315
Acquired product development costs..... - - 7,658 -
Total operating expenses 8,664 5,829 23,242 11,101
------ ------- ------- -------
Operating income (loss).................. 419 492 (6,775) 654
Interest income (expense)................ 270 (210) 537 (467)
------ ------- ------- -------
Income (loss) before provision for
income taxes............................. 689 282 (6,238) 187
Provision for income taxes............... 60 12 154 102
------ ------- ------- -------
Net income (loss)........................ 629 270 (6,392) 85
Accretion of preferred stock dividends
......................................... - (197) - (388)
------ ------- ------- -------
Income (loss) applicable to common
shareholders.............................$ 629 $ 73 $(6,392) $ (303)
====== ======= ======= =======
Basic net income (loss) per share........ .07 .02 (.67) (.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...... .06 .02 (.67) (.07)
====== ======= ======= =======
Shares used in computing diluted
earnings per share....................... 10,063 4,293 9,497 4,293
====== ======= ======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (as restated; see note 1)
(In thousands)
Six Months Ended
June 30,
----------------
1998 1997
-------- -------
Cash Flows from Operating Activities:
Net income (loss)........................................... $(6,392) $ 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............................. (3,233) (1,683)
Other current assets................................. (706) (386)
Other assets, net.................................... (315) (447)
Accounts payable and accrued liabilities............. 156 680
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 dividends.. - 179
Issuance of common stock in connection with acquisitions...... 3,383 -
The accompanying notes are an integral part of these
condensed consolidated financial statements
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Restatement
The accompanying restated condensed consolidated financial statements
recognize the restatement of second quarter results to reflect $650,000 of
operating expenses that were originally recorded as charges against reserves
established in the recording of the purchase cost of Marketing Information
Systems, Inc. ("MIS") and Telmar Software International, LLC ("TSI") as of
March 31, 1998. Upon further analysis, it was determined that these costs did
not meet the criteria of EITF 95-3, Recognition of Liabilities in Connection
with a Business Combination and accordingly have been recognized as operating
expenses in the restated financial statements for the quarter ended June 30,
1998. The $650,000 recognized as operating expenses in the second quarter
consisted of $300,000 of service and maintenance expense, $90,000 of sales and
marketing expense, $165,000 of product development expense and $95,000 of
general administrative expense. Accordingly, the restated balance sheet
reflects $650,000 of additional accrued liabilities.
2. 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.
3. Business Acquisitions
On March 30, 1998, the Company acquired substantially all of the net assets
of MIS and 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.
4. 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.
The calculation of basic and diluted income (loss) per share are as
follows (in thousands except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- -------
Basic/Diluted income (loss) per share:
Net income (loss) applicable to
common shareholders....................... 629 73 (6,392) (303)
====== ====== ====== ======
Basic net income (loss) per share......... .07 .02 (.67) (.07)
====== ====== ====== ======
Weighted average shares outstanding....... 9,670 4,293 9,497 4,293
====== ====== ====== ======
Diluted net income (loss) per share....... .06 .02 (.67) (.07)
====== ====== ====== ======
Weighted average shares outstanding.......10,063 4,293 9,497 4,293
====== ====== ====== ======
5. 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.
6. 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. The accompanying Consolidated Financial Statements recognize the
restatement of second quarter revenues. See Note 1 to the Consolidated Financial
Statements for a discussion of the restatement. 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.
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.
Three Months Ended Six Months Ended
June 30, June 30,
---------- ---------- ---------- -----------
1998 1997 1998 1997
---------- ---------- ---------- -----------
(unaudited)(unaudited)(unaudited)(unaudited)
---------- ---------- ---------- -----------
Revenues:
License fees......................... 56.3% 53.8% 54.7% 52.5%
Services and maintenance............. 43.7% 46.2% 45.3% 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.............. 30.2% 26.5% 28.2% 26.4%
------ ------ ------ ------
Total cost of revenues............. 30.9% 27.3% 29.1% 27.3%
------ ------ ------ ------
Gross profit........................... 69.1% 72.7% 70.9% 72.7%
------ ------ ------ ------
Operating expenses:
Sales and marketing.................. 38.1% 35.0% 38.4% 35.2%
Product development.................. 15.3% 18.0% 16.0% 19.2%
General and administrative........... 12.6% 14.0% 12.7% 14.3%
Acquired product development costs... - - 33.0% -
Total operating expenses........... 65.9% 67.0% 100.1% 68.7%
------ ------ ------ ------
Operating income (loss)................ 3.2% 5.7% (29.2%) 4.0%
Interest income (expense).............. 2.0% (2.5%) 2.3% (2.9%)
------ ------ ------ ------
Income (loss) before provision for
income taxes........................... 5.2% 3.2% (26.9%) 1.1%
Provision for income taxes............. 0.5% 0.1% 0.7% 0.6%
Net income (loss)...................... 4.7% 3.1% (27.6%) 0.5%
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:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
Cost of license fees................... 1.2% 1.5% 1.7% 1.7%
Cost of services and maintenance....... 69.2% 57.4% 62.4% 55.5%
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 56.3% 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 42.7% from $4.0 million, or 46.2% of
total revenues, in the quarter ended June 30, 1997 to $5.7 million, or 43.7% 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 72.3% from
$2.3 million, or 57.4% of service and maintenance revenues, in the quarter ended
June 30, 1997 to $4.0 million, or 69.2% 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 and
additional service and maintenance expenses relating to obligations that arose
in connection with the acquisition of MIS and TSI.
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 64.6% from $3.0 million, or 35.0% of
revenues, in the quarter ended June 30, 1997 to $5.0 million, or 38.1% 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
28.3% from $1.6 million, or 18.0% of revenues, in the quarter ended June 30,
1997 to $2.0 million, or 15.3% 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 and additional
product development expenses relating to technologies acquired from MIS and TSI.
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 35.0% from $1.2 million,
or 14.0% of revenues, in the quarter ended June 30, 1997 to $1.7 million, or
12.6% 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.
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 54.7% 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 increased 37.0%
from $7.7 million, or 47.5% of total revenues, in the six months ended June 30,
1997 to $10.5 million or 45.3% 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 54.1% from $4.3 million, or 55.5% of service and maintenance revenues,
in the six months ended June 30, 1997 to $6.6 million, or 62.4% 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 56.8% from $5.7
million, or 35.2% of revenues, in the six months ended June 30, 1997 to $8.9
million, or 38.4% 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 19.9% from $3.1
million, or 19.2% of revenues, for the six months ended June 30, 1997 to $3.7
million, or 16.0% 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
27.4% from $2.3 million, or 14.3% of revenues, for the six months ended June 30,
1997 to $2.9 million, or 12.7% 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.
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 $18.8 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 $6.4 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 $3.2 million in accounts receivable, an
increase of $706,000 in other current assets, offset by an increase of $156,000
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.
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 $20.4
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.
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.
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.
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.
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.
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: November 2, 1998 /s/ Gary R. Martino Chairman of the Board of
-------------------------- Directors, Chief Financial
Gary R. Martino Officer, Treasurer and
Director (Principal
Financial Accounting
Officer)
