<PAGE>
UNITED STATES
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 March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File 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 400
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.
X YES NO
--- ---
The number of shares of the Registrant's Common Stock, no par value, outstanding
on March 31, 1999 was 9,697,088.
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION.............................................. 1
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998................................................ 1
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998....................... 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998....................... 3
Notes to Condensed Consolidated Financial Statements............. 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk............ 26
PART II. OTHER INFORMATION............................................ 27
Item 2: Changes in Securities and Use of Proceeds............................. 28
Item 6: Exhibits and Reports on Form 8-k...................................... 29
SIGNATURES..................................................................... 29
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short term investments........................ $ 7,432 $ 11,649
Accounts receivable, net............................... 16,607 16,487
Other current assets................................... 2,399 1,985
-------- --------
Total current assets................................ 26,438 30,121
Equipment, net............................................ 3,155 3,134
Other assets, net ....................................... 4,082 3,983
-------- --------
$ 33,675 $ 37,238
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations........ 96 73
Accounts payable and accrued liabilities............... 9,954 11,412
Deferred revenues...................................... 5,611 4,341
-------- --------
Total current liabilities........................... 15,661 15,826
-------- --------
Other long-term liabilities............................... 617 490
-------- --------
Shareholders' equity:
Common stock, no par value; 9,697,088 shares outstanding
at March 31, 1999 and December 31, 1998................ 54,691 54,691
Shares to be issued in connection with acquisition........ 564 564
Cumulative translation adjustment......................... (208) (63)
Accumulated deficit....................................... (37,650) (34,270)
-------- --------
Total shareholders' equity.......................... 17,397 20,922
-------- --------
$ 33,675 $ 37,238
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- ---------
<S> <C> <C>
Revenues:
License fees............................... $ 5,031 $ 5,315
Services and maintenance................... 7,269 4,778
-------- ---------
Total revenues........................... 12,300 10,093
-------- ---------
Cost of revenues:
Cost of license fees....................... 164 121
Cost of services and maintenance........... 4,877 2,588
-------- ---------
Total cost of revenues................... 5,041 2,709
Gross profit................................ 7,259 7,384
Operating expenses:
Sales and marketing....................... 5,933 3,915
Product development....................... 2,968 1,706
General and administrative................ 1,352 1,099
Provision for doubtful accounts........... 335 200
Acquired product development costs........ - 7,658
--------- ---------
Total operating expenses.............. 10,588 14,578
--------- ---------
Operating loss.............................. (3,329) (7,194)
Other income................................ 63 267
--------- ---------
Loss before provision for income taxes...... (3,266) (6,927)
Provision for income taxes.................. 115 94
--------- ---------
Net loss.................................... (3,381) (7,021)
--------- ---------
Loss applicable to common shareholders...... $ (3,381) $ (7,021)
========= =========
Diluted/Basic net loss per share............ $ ( .35) $ (0.75)
========= =========
Shares used in computing diluted and basic
Loss per share. 9,697 9,324
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
Cash Flows from Operating Activities:
Net loss.............................................. $ (3,381) $ (7,021)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 515 280
Provision for doubtful accounts...................... 335 200
Charge for acquired product development costs........ -- 7,658
Changes in operating assets and liabilities,
exclusive of effects of acquisitions:
Accounts receivable.................................. (455) (1,179)
Other current assets................................. (414) (756)
Other assets, net.................................... (258) (105)
Accounts payable and accrued liabilities............. (1,456) 47
Deferred revenues.................................... 1,269 1,216
Other long-term liabilities.......................... 65 (24)
-------- --------
Net cash provided by (used in) operations......... (3,780) 316
======== ========
Cash Flows from Investing Activities:
Acquisition of equipment.............................. (252) (352)
Cash paid in connection with acquisitions
and related deal costs............................. -- (1,832)
-------- --------
Net cash used in investing activities............. (252) (2,184)
======== ========
Cash Flows from Financing Activities:
Proceeds from exercise of stock options............... -- 645
Repayment of capital lease obligations................ (40) (35)
-------- --------
Net cash provided by (used in) financing
activities..................................... (40) 610
-------- --------
Effect of Exchange Rate Changes........................ (145) 33
-------- --------
Net Decrease in Cash and Cash Equivalents.............. (4,217) (1,225)
Cash and Cash Equivalents, beginning of period......... 11,649 24,271
-------- --------
Cash and Cash Equivalents, end of period............... $ 7,432 $ 23,046
======== ========
Supplemental Disclosure of Non-cash Activities:
Issuance of common stock in connection with
acquisitions......................................... -- 3,383
Equipment acquired pursuant to capital lease
obligation......................................... 126 --
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
<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 (together, the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange 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, 1998.
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 was initially valued at $9.4 million,
consisting 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 $600,000 of
transaction costs. 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 aggregate purchase price was subsequently adjusted to $8.7
million by the Company during its fiscal quarter ended June 30, 1998 to reflect
the as adjusted net assumed liabilities of $3.6 million and the as adjusted
transaction costs of $400,000.
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 original $9.4
million aggregate purchase price, $7.7 million was allocated to acquired product
development costs and charged to operations at the date of acquisition, $700,000
was allocated to purchased software to be amortized over three years and $1.0
million was allocated to goodwill to be amortized over seven years. The Company
subsequently adjusted its initial valuation of acquired product development
costs and reduced the amount allocated by approximately $700,000 to reflect
certain adjustments in the valuation methodology resulting from a reallocation
of a portion of future cash flows from the acquired product development to the
purchased
4
<PAGE>
software. The adjustment to increase the value of the purchased software and to
decrease the value of acquired product development costs were recorded by the
Company during its fiscal quarter ended December 31, 1998. As a result of the
purchase price and allocation adjustments noted above, of the final adjusted
aggregate purchase price of approximately $8.7 million, $7.0 million, was
allocated to acquired product development costs and charged to operations, $1.4
million was allocated to purchased software and $300,000 was allocated to
goodwill. Of the $7.0 million allocated to acquired product development costs,
approximately $5.2 million related to MIS technologies and approximately $1.8
million related to TSI technologies.
3. Earnings (Loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128) establishes standards for computing and presenting earnings per
share. Under SFAS 128, earnings per share is computed both under the basic and
dilutive methods. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding; dilutive earnings per share is computed by giving effect to all
dilutive potential common share equivalents that were outstanding during the
period. Dilutive common share equivalents include stock options, warrants and
convertible preferred stock. The calculation of basic and diluted earnings loss
per share are as follows (in thousands except per share amounts):
Quarter Ended March 31,
1999 1998
------- -------
(unaudited)
Basic/Diluted earnings loss per share:
Net loss applicable to common shareholders....... $(3,381) $(7,021)
======= =======
Weighted average shares outstanding.............. 9,697 9,324
======= =======
Basic/Diluted loss per share..................... $ (0.35) $ (0.75)
======= =======
4. Revenue Recognition
As of January 1, 1998, the Company adopted Statement of Position 97-2,
Software Revenue Recognition, 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
5
<PAGE>
the quarters ended March 31, 1998 and 1999.
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
quarter ended March 31, 1999, there was a cumulative translation adjustment of
$145,000, compared to a cumulative translation adjustment of $33,000 during the
quarter ended March 31, 1998. Accordingly, the comprehensive loss for the
quarters ended March 31, 1999 and 1998 is $3.5 million and $7.0 million
respectively.
6. Business Segment Information:
Effective for the year ended December 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131) which requires disclosure of
financial and descriptive information about the Company's reportable operating
segments. The operating segments reported below are the segments for which
separate financial information is available and for which operating profit
(loss) amounts are evaluated regularly by senior management in deciding how to
allocate resources and in assessing performance.
The Company operates two reportable segments: enterprise call center
software solutions and professional services. The Company's reportable segments
are strategic business units that offer different products and services. They
are managed separately, based on the fundamental differences in their
operations. The enterprise call center software solution provides software
licenses of the Company's software products. The professional services provides
the professional consulting services, implementation, training and maintenance
related to the Company's enterprise call center software solutions. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Expenses related to general
corporate functions such as Information Technology, Finance and Human Resources,
and general and administrative costs such as depreciation, rent and utilities
are allocated to the reportable segments based on relative headcount or relative
usage. Income tax provision (benefit) is allocated to the reportable segments in
deriving segment profit (loss) based on each segment's pro rata income or loss
before income tax provision (benefit). The Company has no intersegment sales and
transfers, and does not allocate assets to the operating segments.
6
<PAGE>
For The Quarter Ended March 31, 1999
--------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues 5,031 7,269 12,300
Cost of Sales 164 4,877 5,041
Product Development 2,968 -- 2,968
Depreciation & Amortization 290 225 515
Other Income(Expense), net 35 28 63
------- ------- -------
Segment Loss (2,380) (1,001) (3,381)
======= ======= =======
For The Quarter Ended March 31, 1998
--------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues 5,315 4,778 10,093
Cost of Sales 121 2,588 2,709
Product Development 1,706 -- 1,706
Depreciation & Amortization 157 123 280
Other Income(Expense), net 149 118 267
Acquired Product development
costs 7,658 -- 7,658
------- ------- -------
Segment Loss (6,982) (39) (7,021)
======= ======= =======
The Company also operates in two major geographic areas: United States and
International. The United States charges the International segment a 50% royalty
on license fees recognized, which approximates the royalty fee charged to
unaffiliated resellers. In addition, certain direct costs incurred by the United
States segment, primarily related to research and development and customer
support costs, are charged to the International segment. The elimination in the
identifiable assets is for intercompany receivables (in thousands).
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATION CONSOLIDATED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Quarter Ended March 31, 1999 9,496 3,407 (603) 12,300
Revenues. ========= ========= ======== =========
Loss from operations (1,986) (1,395) -- (3,381)
========= ========= ======== =========
Identifiable assets 36,301 6,369 (8,995) 33,675
========= ========= ======== =========
Quarter Ended March 31, 1998
Revenues 7,293 4,202 (1,403) 10,092
========= ========= ======== =========
Income (loss) from operations (3,611) (3,410) -- (7,021)
========= ========= ======== =========
Identifiable assets 46,481 7,283 (6,242) 47,522
========= ========= ======== =========
</TABLE>
7
<PAGE>
The following table summarizes the Company's revenues by major worldwide
regions (in thousands):
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1999
-------- --------
United States $ 5,890 8,853
Canada 65 683
Mexico and Latin America 702 506
Europe 3,229 1,595
Pacific Rim 207 663
======== ========
10,093 12,300
======== ========
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-Q.
The following discussion contains forward-looking statements and the Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Factors That May Affect Future Results".
OVERVIEW
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size and large-scale telephone call centers.
The Company generates revenues from licensing the rights to use its software
products directly to end users and indirectly through sublicense fees from
resellers. The Company also generates revenues from sales of software
maintenance contracts, and from consulting and training services performed for
customers who license its products. 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 quarter ended March 31, 1999.
The Company markets its products in the United States through a direct sales
organization and certain resellers. The Company markets its products outside the
United States in Europe, the Pacific Rim, Canada, Mexico and Latin America
through remarketing and distribution relationships which it supplements with a
direct sales force in certain regions. The Company maintains offices in the
United Kingdom, France, Germany and Australia to support its international sales
and service activities. For the quarter ended March 31, 1999, United States and
international revenues were approximately 72% and 28% of total revenues,
respectively.
Expenses as a percentage of revenues were affected by lower than expected
revenue recognition in the first quarter of 1999. The Company is reviewing all
aspects of its business to find additional revenue growth opportunities and
operating expense reductions. The Company also has made progress in increasing
the productivity in its sales organization and continues to expand its domestic
and international channel sales program.
Although the Company has experienced significant growth in revenues during the
past three years, the Company does not believe prior growth is necessarily
8
<PAGE>
indicative of future operating results. In addition, the Company expects
increased competition and intends to continue to invest in its business. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis. Future operating results will depend on many factors, including demand
for the Company's products, the level of product competition, competitor
pricing, the size and timing of significant orders, changes in pricing policies
by the Company or its competitors, the ability of the Company to develop,
introduce and market new products on a timely basis and changes in levels of
operating expenses.
9
<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 ended March 31, 1999 and 1998.
Three Months Ended
March 31,
1999 1998
----------- -----------
(unaudited) (unaudited)
Revenues:
License fees................................. 40.9% 52.7%
Services and maintenance..................... 59.1 47.3
----------- -----------
Total revenues............................. 100.0 100.0
----------- -----------
Cost of revenues:
License fees................................. 1.3 1.2
Services and maintenance..................... 39.7 25.6
----------- -----------
Total cost of revenues..................... 41.0 26.8
----------- -----------
Gross profit.................................. 59.0 73.2
----------- -----------
Operating expenses:
Sales and marketing.......................... 48.2 38.8
Product development.......................... 24.1 16.9
General and administrative................... 11.1 10.9
Bad debt expense............................. 2.7% 2.0%
Acquired product development costs........... - 75.9
----------- -----------
Total operating expenses................... 86.1 144.5
----------- -----------
Operating loss................................ (27.1) (71.3)
Other income.................................. .5 2.6
----------- -----------
Loss before provision for income taxes........ (26.6) (68.7)
Provision for income taxes.................... 0.9 0.9
----------- -----------
Net loss...................................... (27.5)% (69.6)%
=========== ===========
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
March 31,
1999 1998
------ -------
Cost of license fees............................. 3.3% 2.3%
Cost of services and maintenance................. 67.1% 54.2%
10
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
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 decreased 6.0%
from $5.3 million, or 52.7% of total revenues, in the quarter ended March 31,
1998 to $5.0 million, or 40.9% of revenues, in the quarter ended March 31, 1999.
Domestic license revenue increased 26% percent from $2.5 million in the quarter
ended March 31, 1998 to $3.1 million in the quarter ended March 31, 1999. The
increase in domestic license revenue was primarily attributable to an increase
in the number of orders from 12 in the quarter ended March 31, 1998 to 15 in
the quarter ended March 31, 1999 and a 7% increase in the average deal size.
International license revenue decreased approximately $900,000 or 32.5% from
$2.8 million in the quarter ended March 31, 1998 to $1.9 million in the quarter
ended March 31, 1999. The decrease in international license revenue is primarily
attributable to a 57% decline in the average deal size, from $95,000 in the
quarter ended March 31, 1998 to $41,000 in the quarter ended March 31, 1999.
License revenue resulting from the MIS and TSI acquisitions increased 91% from
$127,000 for the quarter ended March 31, 1998 to $243,000 in the quarter ended
March 31, 1999.
Services and Maintenance. Service 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 by 52.1% from $4.8 million,
or 47.3% of total revenues, in the quarter ended March 31, 1998 to $7.3 million,
or 59.1% of total revenues, in the quarter ended March 31, 1999. The increase in
services and maintenance was primarily attributable to the company's expanded
role at several existing customers such as Texas Utilities Service, Inc.,
Precision Response Corporation, Aspect Telecommunications and United States
Cellular Corporation.
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 35.5% from $121,000, or
2.3% of the related license revenues, in the quarter ended March 31, 1998 to
$164,000, or 3.3% of the related license revenues, in the quarter ended March
31, 1999. The increase in the cost of license fees was primarily attributable to
an increase in the volume of third party products included in the company's
product line and resold by the Company.
Cost of Services and Maintenance. Cost of services and maintenance
consists primarily of salaries, bonuses, benefits for company personnel, third
party consulting costs 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 88% from $2.6 million,
or 54.2% of service and maintenance revenues, in the quarter ended March 31,
1998 to $4.9 million, or 67% of service and maintenance revenues, in the quarter
ended March 31, 1999. The increase in cost of services and maintenance in the
quarter ended March 31, 1999 was primarily attributable to a $1.1 million
increase in third party consulting costs. The Company is in the process of
significantly reducing its use of third party consultants and expects to
minimize the use of such consultants by the Company and maximize the utilization
of current staff. Third party consulting costs have been reduced from $1.6
million in the quarter ended December 31, 1998 to $1.2 million in the quarter
ended March 31, 1999. Also, client services staff increased by 41 persons from
March 31, 1998 to March 31, 1999.
11
<PAGE>
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 51.5% from $3.9 million, or 38.8% of
revenues, in the quarter ended March 31, 1998 to $5.9 million, or 48.2% of
revenues, in the quarter ended March 31, 1999. The increase in sales and
marketing expenses for the quarter ended March 31, 1999, is primarily
attributable to the Company's efforts to expand market coverage and visibility.
Accordingly, sales and marketing expenditures increased due to the hiring of
32 additional sales and marketing personnel during the period ended March 31,
1998 to March 31, 1999. The new employees created substantial additional costs,
such as increased compensation to attract and retain qualified personnel. Sales
and marketing expenses also increased due to enhanced advertising, trade shows
and promotions. However, overall sales and marketing expenditure has declined
from $6.7 million in the quarter ended December 31, 1998 to $5.9 million in the
quarter ended March 31, 1999. This decrease was primarily the result of improved
cost control measures such as a strict purchase order policy, detailed review of
actual versus budgeted expenditures, and a strict control over external
marketing costs. The Company expects sales and marketing costs to decline as a
percentage of revenue in the future.
Product Development. Product development expenses consist primarily of
salaries, bonuses, other related personnel expenses, consulting fees, and
amortization of purchased software. Product development expenses increased 74%
from $1.7 million, or 16.9% of revenues, in quarter ended March 31, 1998 to $3.0
million, or 24.1% of revenues, in the quarter ended March 31, 1999. The increase
in product development expense was primarily due to an increase in salaries and
benefits related to the hiring of new software development staff, amortization
of purchased software, an increase in third party consulting expense, the
continuing development of the Company's software products, including spending on
the Company's new ChannelEDGE and buyingedge.com initiatives and further
development efforts resulting from the in-process development products acquired
from MIS and TSI. Both new hires and third party outside consultants are working
on new product development. Product development expenses have declined from $3.4
million in the quarter ended December 31, 1998 to $3.0 million in the quarter
ended March 31, 1999. This decrease was primarily the result of improved cost
control measures such as a strict purchase order policy and detailed review of
actual versus budgeted expenditures. The Company expects Product Development
expenses to decline as a percentage of revenue in the future.
General and Administrative. General and administrative expenses represent
the costs of executive, finance and administrative support personnel, the
portion of occupancy expenses allocable to administration, unallocated corporate
expenses such as fees for legal and auditing services. General and
administrative expenses increased 30% from $1.3 million, or 12.9% of revenues,
in the quarter ended March 31, 1998 to $1.7 million, or 13.7% of revenues, in
the quarter ended March 31, 1999. The increase in general and administrative
expenses in the quarter ended March 31, 1999 was due to the addition of
accounting and administrative staff to support the growth of the Company's
business. General and administrative expenditures have declined from $1.9
million in the
12
<PAGE>
quarter ended December 31, 1998 to $1.4 million in the quarter ended March 31,
1999. Through improved cost control efforts, such as a strict purchase order
policy and a detailed review of actual versus budgeted expenses, the Company
expects general and administrative costs to decline as a percentage of revenue
in the future.
Provision for doubtful accounts. The provision for doubtful accounts
increased from $200,000 for the quarter ended March 31, 1998 to $335,000 for the
quarter ended March 31, 1999. The increase is based on management's review of
several factors, such as increased revenues and review and assesment of accounts
receivable.
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 during the three months ended March 31, 1999.
Other Income (Expense). Other income (expense) consists of interest expense
on debt and equipment financing less interest earned on short term investments.
Interest income decreased by $202,000 from $274,000 in the quarter ended March
31, 1998 to $72,000 in the quarter ended March 31, 1999. Interest income
decreased due to diminished income earned on investments from the remaining
proceeds of the Company's initial public offering of common stock. Short-term
investments decreased from $18.0 million at March 31, 1998 to
$1.2 million at March 31, 1999.
Provision for Income Taxes. Provision for income taxes consists of foreign
and state income and withholding taxes. The provision for income taxes increased
from $94,000 in the quarter ended March 31, 1998 to $114,000 in the quarter
ended March 31, 1999. At March 31, 1999, the Company had approximately $13.8
million of U.S. Federal net operating loss carryforwards, of which approximately
$4.05 million resulted from the exercise of non-qualified stock options, and
approximately $4.6 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 2019
and the state net operating loss carryforwards expire through 2004.
In addition, the Company has United Kingdom net operating loss
carryforwards of approximately $4.5 million which can be utilized to offset
future taxable income and which have no expiration.
The Company's Initial Public Offering resulted in a change in ownership, as
defined by Federal income tax laws and regulations. As a result of this change
in ownership, the amount of pre IPO 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.
Liquidity and Capital Resources
At March 31, 1999, the Company had $7.4 million in cash and $16.6 million in
accounts receivable. For the three months ended March 31, 1999, the company
incurred a net cash outlay of $3.8 million from operating activities. The net
cash outlay of $3.8 million from operations resulted primarily from the net loss
of $3.4 million, offset by depreciation and amortization of $515,000, provision
for losses on accounts receivable of $335,000, and an increase in deferred
revenue of $1.3 million. Accounts payable was reduced by $1.5 million and other
current assets declined by $414,000. 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.
13
<PAGE>
For the three months ended March 31, 1999, the Company's primary investing
activities consisted of $378,000 of purchases of computers, leasehold
improvements and office equipment to support the Company's newly leased
facilities in Chicago, Illinois and Irvine, California.
For the three months ended March 31, 1999, the Company's primary
financing activity consisted of reducing capital lease obligations by
approximately $40,000.
In March 1999, the Company obtained a commitment from a commercial bank to
provide a $7.5 million senior secured revolving credit facility. Although the
Company and the bank that issued the commitment have continued discussions
regarding such credit facility, the Company has also initiated discussions with
other banks and institutional lenders with respect to obtaining a secured credit
facility. The Company currently expects to finalize a secured credit facility in
the third quarter of 1999.
The Company is also considering seeking equity financing for the purpose of
funding its various business initiatives, including the development and
marketing of new products such as ChannelEdge and buyingedge.com. The Company
currently expects that any equity financing related to buyingedge.com would be
through a subsidiary of the Company.
The Company anticipates that its current cash and cash equivalents, together
with cash provided by operations and borrowings under a credit facility or
equity investment will be sufficient to meet the Company's projected working
capital and other cash requirements for the foreseeable future but there can be
no assurance that the Company will be able to generate sufficient cash to meet
its requirements from those sources. The Company's future operating and capital
requirements will depend on numerous factors including the collection of
accounts receivable, the internal research and development programs, advances in
technology, and the strategic alliances or investments that the Company may
consider. In the event that the Company were unable to meet its needs for cash
from the sources described above, the Company would need to obtain equity or
debt financing or reduce its operating expenses and capital expenditures. There
can be no assurance that equity or debt financing would be available to the
Company on favorable terms or at all.
Year 2000 Compliance
The following Year 2000 discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believe",
"expects", "estimates" and other similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it and its significant
distributors, customers and suppliers will complete the implementation and
compliance phases of the Year 2000 Plan, as well as its Year 2000 contingency
plans; its estimated costs related to the Year 2000 Plan; and the Company's
belief that its internal systems and equipment will be Year 2000 compliant in a
timely manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause these differences include, but are not
limited to, the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date sensitive
lines of code or to replace embedded chips in affected systems or equipment;
unanticipated delays or expenses related to remediation; and the actions of
independent third-parties with respect to Year 2000 problems.
14
<PAGE>
The statements in the following section include "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
The Year 2000 problem refers to the inability of software to process
date information later than December 31, 1999. Date codes in many software
programs are abbreviated to allow only two digits for the year. Software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. When that happens, some software
will not work at all and other software will suffer critical calculation and
other processing errors. Hardware and other products with embedded chips may
also experience problems.
The Company believes that its current version of EDGE, TELEMAR and MSM
products are Year 2000 compliant. In addition, the Company tracks the version of
its products that each of its customers uses. The Company has sent a letter to
all customers advising them of the availability of its Year 2000 compliant
products.
The Company believes that all current versions of its products will meet
basic functionality requirements, however, because all specific customer
situations and uses cannot be anticipated, IMA may be faced with warranty and
other claims as a result of the Year 2000 transition. The impact of such
customer claims could have a material adverse impact on the Company's results of
operations and financial condition.
Some customers may have written applications using the Company's
products. The Company, in its consulting capacity, also has written such
applications. The Company believes that most applications written by it are Year
2000 compliant. The Company does not know, and has no meaningful way of
determining, whether the applications written by customers are Year 2000
compliant.
The Company is in the process of completing a comprehensive evaluation of
its internal systems and equipment that addresses both information technology
systems ("IT") (i.e. business systems and the software development environment)
and non-IT systems, (i.e. elevators, building security and HVAC systems)
including hardware, software and firmware. The Company has begun to upgrade
certain critical systems to meet with Year 2000 requirements. The Company will
be conducting transaction testing in the first half of 1999 to evaluate
compliance of the overall system infrastructure. The Company will consider the
need for remediation plans as it continues to assess the Year 2000 risk. The
Company expects to complete its evaluation by the end of the second quarter of
1999. The Company's inability to remediate non-compliant systems in its
infrastructure could have a material adverse affect on the Company's results of
operations and financial condition.
The costs incurred to date related to upgrading the Company's products to
be Year 2000 compliant were approximately $200,000 and have been funded from
operating cash flows and have not been separately accounted for partly because
the responsibilities and costs were distributed throughout the organization and
represent a small percentage of total operating costs. Expenses associated with
evaluation of the Company's internal systems for Year 2000 problems have been
approximately $150,000. The Company originally had expected to complete its
evaluation by the end of the first quarter of 1999. Staff reorganization and
relocation of the Company's Irvine office, has caused the Company to revise this
estimate. The Company now expects to complete an estimate of the anticipated
cost of upgrading internal systems by the end of the second quarter of 1999.
While the Company expects to incur additional expenses to complete
15
<PAGE>
these upgrades, it does not believe the implementation of the Year 2000 programs
discussed above will have a material adverse impact on the Company's financial
condition or results of operations. The Company believes that it has sufficient
funds to satisfy costs incurred to date and future Year 2000 compliance costs.
The Company has initiated the development of a comprehensive Year 2000
contingency plan to address situations that may result if the Company is unable
to achieve Year 2000 readiness of its critical systems. The contingency plan is
expected to be completed during the second quarter of 1999.
The Company also is in the process of conducting a review of its critical
suppliers to determine that the suppliers' operations and the products and
services they provide are Year 2000 compliant or that an alternative source for
this critical product or service is available. The Company originally estimated
that this review would be completed in the first quarter of 1999. Slower than
expected responses from its critical suppliers, however, has caused the Company
to revise this estimate. The Company now believes the review of its suppliers
will be complete during the second quarter of 1999. The Company has no practical
means to verify the information provided by these independent third parties and
is still pursuing those key distributors and vendors who may not yet have
responded. Based upon this assessment and where practicable, the Company will
attempt to mitigate its risks with respect to any suppliers that may not meet
the requirements, including seeking alternative suppliers. However, there can be
no assurance that the Company will not experience disruptions in its ability to
conduct business because of Year 2000 problems experienced by the Company's
distributors or vendors, such problems remain a possibility and could have an
adverse impact on the Company's results of operations and financial condition.
Some commentators have predicted significant litigation regarding Year
2000 Compliance issues, and the Company is aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether, or to what extent, the Company may be affected. However, at
this time the Company believes that the existence of earlier versions of its
products that are not Year 2000 compliant is not likely to have a material
adverse effect on the Company or its operations. To the extent that its key
distributors or vendors experience problems relative to achieving Year 2000
compliance, the Company could suffer unanticipated revenue losses.
In addition, the Company does not currently have meaningful information
Concerning the Year 2000 compliance status of its customers. As is the case with
other software companies, if significant numbers of the Company's current or
future customers fail to achieve Year 2000 compliance it could have a material
adverse effect on the Company.
Factors That May Affect Future Results
References in this section to the "Company," "Information Management Associates,
Inc.," "IMA," "we," "us," and "our" refer to Information Management Associates,
Inc.
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.
16
<PAGE>
History of Operating Losses; Uncertainty of Future Operating Results. We
incurred significant net operating losses in each of 1992, 1993, 1994, 1995 and
1998 and the first quarter of 1999. As of March 31, 1999, we had an accumulated
deficit of $37.7 million. Given our operating history, we cannot predict our
future operating results with any certainty. You should not consider our recent
revenue growth as indicative of future revenue growth or operating results. We
cannot assure you that our business strategies will be successful, nor can we
assure you that we will achieve or sustain profitability on a quarterly or
annual basis.
Fluctuations in Quarterly Performance. Our quarterly operating results have
varied significantly in the past and may continue to do so depending on several
factors, many of which are beyond our control. These factors include, among
others:
. our ability to develop, introduce and market new and enhanced versions
of our products on a timely basis;
. demand for our products;
. the lengthy sales cycle for full implementation of our products;
. the size, timing and contractual terms of significant orders;
. the timing and significance of product enhancements and new product
announcements by us or our competitors;
. changes in our business strategies;
. the budgeting cycles of our potential customers;
. customer order deferrals in anticipation of enhancements or new
products;
. changes in the mix of products and services we sell;
. changes in the amount of our revenue attributable to domestic and
international sales;
. changes in foreign currency exchange rates;
. product and price competition;
. cancellations or non-renewals of licenses or maintenance agreements;
. investments to develop marketing and distribution channels; and
. changes in the level of our operating expenses.
To achieve our quarterly revenue objectives, we depend upon obtaining orders in
that quarter for delivery in that quarter. The timing of our revenue recognition
is affected by the amount of contracts executed and delivered, whether the
contract contains post delivery obligations and when our customers accept the
product. We derive a significant portion of our revenues in any quarter from
non-recurring, large license fees paid to us by a relatively small number of
customers. We expect this trend to continue for the foreseeable future.
Therefore, if a customer defers, cancels or fails to honor its contractual
obligations, our operating results could be materially adversely affected in a
given quarter. On the other hand, significant sales occurring earlier than
expected may adversely affect subsequent quarters. In addition, we have
experienced and expect to continue to experience stronger demand during the
quarters ending in June and December than during the quarters ending in March
and September. We receive a substantial portion of our orders in the last months
or weeks of any given quarter.
Because of the factors stated above, we are not able to predict our
quarterly revenues and operating results with any significant degree of
accuracy. If revenue levels fall below expectations, the shortfall would likely
materially adversely affect our business, operating results and financial
condition. As a result, we believe that you should not rely on period-to-period
comparisons of our results of operations as meaningful indicators of future
performance. We cannot assure you that we will be able to achieve or sustain
profitability on a quarterly or annual basis. We expect that in some future
17
<PAGE>
quarter or quarters our total revenues or operating results will not meet the
expectations of public market analysts and investors. Our failure to meet
expectations or adverse conditions prevailing or appearing to prevail generally
or with respect to our business will likely materially adversely affect our
Common Stock price.
Ability to Integrate Acquisitions. We completed the acquisitions of
substantially all of the assets of Marketing Information Systems, Inc. ("MIS")
and Telemar Software International, LLC ("TSI") on March 30, 1998 for an
aggregate purchase price of $8.7 million. Each has product lines that focused on
the IBM AS/400 market, a platform to which IMA's flagship product EDGE has only
recently been introduced. Failure to successfully integrate the acquired product
lines, and the employees, distributors, and customers of the acquired businesses
could have a material adverse effect on our business, operating results and
financial condition.
Product Concentration. Although we now receive some revenues from MIS and
TSI products, licensing of EDGE and the provision of professional consulting,
technical support and maintenance services relating to EDGE, account for
substantially all of our revenues. We do not expect this to change in the
foreseeable future. Accordingly, 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 our business, operating results
and financial condition. Our future financial performance will depend, in
significant part, on the continued market acceptance of our EDGE products
including its new and enhanced versions. We cannot assure you that we will
continue to successfully develop and market EDGE.
Lengthy Sales and Implementation Cycles; Post-Delivery Obligations. The
following factors over which we may have little or no control may significantly
delay our sales cycle:
. significant commitment of customer resources for licensing and
implementing our products;
. significant level of education required by prospective customers
regarding the use of our products;
. lengthy customer approval process typically associated with
significant capital expenditures; and
. implementation of our products generally extends for several months
and for larger, more complex implementations, multiple quarters.
We recognize licensing fees upon delivery of the product only if:
. we have no significant post-delivery obligations;
. our customer has no acceptance conditions; and
we believe that we can collect the resulting receivable.
If any of the above conditions do not exist, we defer the revenue until all of
the conditions are satisfied.
Previously, when we have provided consulting services to implement certain
larger projects, some customers have not honored their obligations by delaying
payments of a portion of license fees until we completed implementation or
disputing the consulting fees charged for implementation. We may experience
delays, cancellations or disputes in the future. If these occur, they could have
a material adverse effect on our business, operating results and financial
condition. They could also cause our quarterly operating results to vary
significantly.
18
<PAGE>
Dependence on Proprietary Technology. Our success and ability to compete
depends in part upon proprietary technology. We rely primarily on a combination
of copyright and trademark laws, trade secrets, nondisclosure agreements and
technical measures to protect our proprietary rights. We typically enter into
confidentiality or license agreements with our employees, distributors, clients
and potential clients and limit access to and distribution of our software,
documentation and other proprietary information. We cannot assure you that these
steps will adequately deter misappropriation or independent third-party
development of our technology. Also, the laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the United States.
We have placed, and may continue to place, our source code in escrow for the
benefit of a small number of our customers. The escrow agreements permit these
customers to use the source code on a limited, non-exclusive basis if: (i) we
initiate bankruptcy proceedings or bankruptcy proceedings are initiated against
us; (ii) we cease to do business; or (iii) we fail to meet our support
obligations. In addition, we use third-party contractors for selected product
development projects. The escrow of source code and the use of a third-party
contractor may increase the possibility of misappropriation by third parties.
As the number of products and competitors in our industry segment grows and
the functionality of products in different segments overlaps, we expect that
software product developers increasingly will be subject to infringement claims.
The use of patents to protect software has increased. We believe that our
products and technology do not infringe on any existing proprietary rights.
Nevertheless, we cannot assure you that third parties will not assert successful
infringement claims. The following could have a material adverse effect upon our
business, operating results and financial condition:
. any infringement claim against us, even if unfounded, resulting in diversion
of our time and resources, costly litigation and product shipment delays;
. any infringement claim that results in the necessity that we enter into a
royalty or licensing agreements which may not be available on terms favorable
to us;
. any infringement claim resolved against us;
. litigation to protect our trade secrets or other intellectual property rights
or to determine the validity and scope of the proprietary rights of others
resulting in substantial costs and diversion of resources.
Dependence on Indirect Marketing and Distribution Channels; Potential
Conflicts. In addition to our own marketing efforts, we maintain relationships
with consulting and systems integration companies to increase our domestic and
international visibility. In addition to our direct sales force, we distribute
our products domestically and internationally through remarketers and
distributors. We do not maintain exclusive relationships with any of the
consultants, systems integration companies, remarketers or distributors. They
are not under our direct control. They have no minimum purchase obligations and
they may terminate their relationship with us at any time without cause. In
addition, they are free to co-market and distribute potentially competitive
products. Accordingly, we must compete for the focus and sales efforts of these
third party entities. Also, selling through indirect channels may limit our
contacts with our customers, hindering our ability to accurately forecast sales
and revenue, determine contract terms, evaluate customer credit, evaluate
customer satisfaction and recognize emerging customer needs. We cannot assure
you that co-marketers, remarketers and distributors will continue successfully
to distribute or recommend the Company's products. We may not continue to
succeed in increasing the use of these indirect channels profitably. Also, one
19
<PAGE>
or more of these companies may begin to market products in competition with us,
which may adversely affect our business, operating results and financial
condition.
Our strategy of marketing our products directly to end-users and indirectly
through remarketers and distributors may result in conflicts between our direct
sales efforts and third party indirect sales efforts; and conflicts between and
among some of our resellers targeting the same customers. These conflicts could
materially adversely affect our relationships with existing remarketers and
distributors and may adversely affect our ability to attract new remarketers and
distributors.
Need to Expand Marketing and Distribution Channels. As part of our
international strategy, we intend to increase our use of remarketers and
distributors and to expand our existing co-marketing relationships and establish
new relationships with other consulting and systems integration companies. Also,
we seek to expand our international direct sales force to take advantage of
international growth opportunities. Our ability to achieve revenue growth
depends on successful implementation of this strategy. We have experienced, and
continue to experience, difficulty in recruiting and retaining qualified
personnel. We cannot assure you that we will successfully expand our direct or
indirect sales force. Even if we are successful, we cannot assure you that such
sales force expansion will result in increased revenues. Failure to expand our
sales force could materially and adversely affect our 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. It is characterized by:
. ongoing technological developments;
. frequent new product announcements and introductions;
. evolving industry standards; and
. changing customer requirements.
Our future financial performance depends 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. We cannot assure you that the call
center customer interaction software market will continue to grow. Failure of
this market to grow, or market growth slower than our current expectations could
materially adversely affect our business, operating results and financial
condition.
Also, some of our larger customers have licensed our software on an
incremental basis and we cannot assure you that these customers will expand
their use of our software on an enterprise-wide basis or license new or enhanced
software products as we introduce them to the market. If our customers do not
deploy our software on an enterprise-wide basis because the software has not met
their expectations or for other reasons, our business, operating results and
financial condition could be materially and adversely affected.
Rapid Technological Change. Any of the following factors which are present in
the call center customer interaction software market could render our existing
products obsolete and unmarketable:
. rapid technological change;
. frequent introductions of new products;
. changes in customer demands; and
20
<PAGE>
. evolving industry standards.
These factors could rapidly diminish our position in existing and future
markets. We expect to make substantial investments from time to time in our
product development and testing although we cannot assure you that we will have
sufficient resources to make the necessary investments.
Our customers have adopted a wide variety of hardware, software, database and
networking platforms. To gain broad market acceptance, we must continue to
support and maintain our products on a variety of such platforms and develop and
introduce enhancements to our existing products and new products on pace with
technological developments, changing customer requirements and evolving industry
standards. Our future success depends on our ability to address the increasingly
sophisticated needs of our customers. Our success may also depend, in part, on
our ability to introduce products that are compatible with the Internet, and on
the broad acceptance of the Internet as a viable customer interaction channel.
We cannot assure you that the Internet will become a viable customer interaction
channel or that the demand for Internet-related products and services will
increase in the future.
We also cannot assure you that we will be successful in developing and
marketing enhancements to our products that respond to technological
developments, changing customer requirements or evolving industry standards. We
may experience difficulties that could delay or prevent the successful
development, introduction and sale of such enhancements. Our enhancements may
not adequately meet the requirements of the marketplace and achieve any
significant degree of market acceptance. Product enhancement and new product
delays or failure to achieve market acceptance when released could materially
and adversely affect our business, operating results or financial condition. In
addition, the introduction or announcement of new product offerings or
enhancements by us, our competitors or major hardware, systems or software
vendors may cause customers to defer or forego licensing of our products, which
could have a material adverse effect on our business, operating results and
financial condition.
We also cannot assure you that we will be successful in the development and
implementation of any of our new software products, specifically our
buyingedge.com product for purchasing goods and services over the Internet. Our
strategy regarding the buyingedge.com system will rely on several sources of
revenue. We can not assure you that the buyingedge.com product will achieve any
degree of market acceptance among consumers or manufacturers and service
providers. Internet purchasing is a rapidly evolving area of commerce with rapid
technological changes and the frequent introduction of new products and
services. These technological changes and increased competition in the Internet
commerce area could render the buyingedge.com product obsolete and rapidly
diminish the Company's ability to establish a position in existing or future
markets. We can not assure you that competitors will not develop products
comparable or superior to ours or adapt more quickly than we do to new
technologies, evolving industry trends or the changing needs of consumers.
Though the Company intends to make substantial investments from time to time in
the development and testing of buyingedge.com, we cannot assure you that we will
have sufficient resources to make the necessary investments. We may experience
difficulties that could delay or prevent the successful development,
introduction, and sale of the buyingedge.com product. We can not assure you that
buyingedge.com will adequately meet the requirements of the marketplace and
achieve any degree of market acceptance. buyingedge.com product delays, the
failure to achieve market acceptance could materially and adversely affect our
business, operating results or financial condition.
21
<PAGE>
We depend upon the products of other software vendors, including certain
system software vendors, such as Microsoft Corporation, and relational database
software vendors to remain competitive and respond to technological change.
Design defects in such products or unexpected delays in their introduction,
could materially and adversely affect our business, operating results and
financial condition.
Management of Growth. We recently have experienced rapid growth. This growth
could place a significant strain on our management and other resources. We
anticipate that the growth of our company, if any, will require us to recruit,
hire, train and retain a substantial number of new and highly skilled product
development, managerial, finance, sales and marketing and support personnel. The
market for such personnel is intensely competitive and we expect that such
competition will continue for the foreseeable future. We cannot assure you that
we will be able to hire or retain such personnel.
Our ability to compete effectively and to manage future growth, if any,
depends on our ability to continue to implement and improve operational,
financial and management information systems on a timely basis and to expand,
train, motivate and manage our work force. We cannot assure you of the future
adequacy of our personnel, systems, procedures and controls. Inability to
effectively manage growth and the quality of our products could materially and
adversely affect our business, operating results and financial condition.
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.
Our competitors range from internal information systems departments to packaged
software application vendors. We believe 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. Our segment of the
software industry has experienced consolidation as certain of our larger
competitors have recently acquired other smaller competitors. In addition,
competitors have established and may in the future establish cooperative
relationships or alliances that may increase their ability to provide superior
software solutions or services.
Increased competition resulting from new entrants, consolidation of the
call center customer interaction software industry, cooperative relationships or
alliances could result in new or stronger competitors, price reductions, reduced
operating income or loss of market share, any of which could materially
adversely affect our business, operating results or financial condition. Many of
our current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources. They generate higher
revenues and have greater name recognition. We cannot assure you that our
competitors will not develop products comparable or superior to ours or adapt
more quickly than we do to new technologies, evolving industry trends or
changing client requirements. We cannot assure you that we will compete
effectively against competitors or that competitive pressures will not
materially and adversely affect our business, operating results or financial
condition.
22
<PAGE>
Dependence on Key Personnel. Our business involves the development,
marketing and installation of complex software products and the delivery of
professional services. Our success will depend in large part upon our ability
to attract, retain and motivate highly skilled employees. The market for such
employees is intense and we expect that such competition will continue for the
foreseeable future. We cannot assure you that we will hire or retain such
personnel. Failure to hire and retain sufficient numbers of highly skilled
employees could materially and adversely affect our business, operating results
and financial condition. In addition, the loss of Albert R. Subbloie, Jr., the
President and Chief Executive Officer, or Gary R. Martino, Chairman of the Board
and Chief Financial Officer, or some of our other key personnel could have a
material adverse effect on our business, operating results or financial
condition, including our ability to attract employees and secure and complete
engagements. We maintain key-man life insurance policies with respect to
certain of our executive officers, including Mr. Subbloie and Mr. Martino.
Risk of Product Defects. Software products, particularly new versions,
frequently contain errors, especially when first introduced. We conduct
extensive product testing during product development. Nevertheless, we have at
times delayed commercial release of software until we corrected problems. In
some cases, we have provided enhancements to correct errors in released
software. We could, in the future, lose revenues as a result of software errors
or defects. Despite testing by us and by current and potential customers, future
software or releases after commencement of commercial shipments may include
errors, resulting in
. loss or delay of revenue;
. delay in market acceptance;
. diversion of development resources;
. damage to our reputation; or
. increased service and warranty costs.
Any of these results could materially and adversely affect our business,
operating results and financial condition.
Risks Associated with International Operations. International operations
account for a significant portion of our total revenues and we intend to
continue and expand our international sales activity. Continuation and expansion
of international operations will require significant management attention and
financial resources and will require us to establish additional foreign
operations and hire additional personnel. We may not be able to maintain or
increase international market demand for our products and failure to do so could
materially and adversely affect our business, operating results or financial
condition.
International Currency Risks. We currently denominate our international
sales in U.S. dollars with respect to sales outside of the United Kingdom,
Europe and Australia, 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 our products more
expensive and, therefore, potentially less competitive in foreign markets.
Currently, we have not employed currency hedging strategies to reduce this risk
although we may consider employing hedging strategies in the future based on our
assessment of exposure to fluctuations in foreign currency exchange rates. We
cannot assure you that our assessments of exposure to fluctuations in foreign
currency exchange rates will be accurate or that any hedging strategies we may
use in the future will be effective.
23
<PAGE>
International Operation and Collection Risks. The following risk factors
associated with our international business may have a material adverse effect on
our future international sales and, consequently, on our business, operating
results or financial condition:
. potentially longer payment cycles;
. difficulties in collecting international accounts receivable;
. difficulties in enforcement of contractual obligations and
intellectual property rights;
. potentially adverse tax consequences;
. increased costs associated with maintaining international marketing
efforts;
. increased 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.
Dependence on Licensed Technology. We license, and expect to license in
the future, technology from other companies for use in and with our products.
Our inability to license these products or other necessary products for use in
or with our products could have a material adverse effect on our business,
operating results or financial condition. In addition, the effective
implementation of our products may depend in the future upon the successful
operation of licensed products as an integrated part of, or in conjunction with,
our products. Any undetected errors in such licensed products could impair the
functionality of our products or otherwise delay or prevent the implementation
of an installation or the introduction of new products, and injure our
reputation, which could have a material adverse effect on our business,
operating results or financial condition.
Increased Use of Third-Party Development Tools. Our EDGE products include
application development tools produced by third parties used to build and modify
our applications. Third-party application development tools may become more
widely used as a result of technological advances or customer requirements.
Wider use of third-party applications could require us to make greater use of
third-party tools in the future. This increased use would require us to enter
into license arrangements with such third parties resulting in higher royalty
payments, a loss of product differentiation and delays. Such effects or our
inability to enter into commercially reasonable licenses could have a material
adverse effect on our business, operating results or financial condition.
Dependence on Growth of Client/Server Computing Environment. We market our
products to customers:
. committed or committing their call center systems to client/server
computing environments; or
. converting legacy systems, in part or in whole, to a client/server
computing environment.
Our success will depend on further growth in the number of organizations
adopting client/server computing environments. We cannot assure you that the
anticipated client/server computing trends will occur or that we will respond
effectively to the evolving requirements of this market. Failure of the
client/server market to grow, or growth at a rate slower than experienced in the
past, could materially and adversely affect our business, operating results or
financial condition.
Industry Concentration. We derive a substantial portion of our revenues
24
<PAGE>
from customers in the teleservices outsourcing, telecommunications and financial
services industries. We intend to further develop our knowledge of the business
processes and requirements of other industries in order to establish additional
market opportunities. We may not successfully do so. Our failure to increase
our customers among a broader base of varied industries, or a downturn in one or
more of the teleservices outsourcing, telecommunications or financial services
industries could have a material adverse effect on our revenues from that
industry or the collectibility of customer obligations from that industry or
other aspects of our business, operating results or financial condition.
Product Liability. The risk of product liability claims is inherent in the
sale and support of products. Our license agreements with our customers
typically contain provisions designed to limit our exposure to potential product
liability claims. The laws of certain jurisdictions, however, may not enforce
the limitation of liability provisions contained in our license agreements. A
party could bring a successful product liability claim against us, which could
result in a material adverse effect on our business, operating results and
financial condition.
Regulatory Environment. Federal, state and foreign law regulates certain
uses of outbound call processing systems. Our systems can be programmed to
operate in compliance with these laws through the use of appropriate calling
lists and calling campaign time parameters. Compliance with these laws,
however, may limit the potential use of our products. In addition,
future legislation further restricting telephone solicitation practices, if
enacted, could adversely affect us.
Year 2000 Risks. Many computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such Year 2000
requirements. Our failure or inability to identify and correct Year 2000
problems in our products, internal information or other systems, software,
hardware or firmware could have a material, adverse effect on our business,
operating results, and financial condition. We are still reviewing the impact
the Year 2000 issue will have on our internal information systems. We plan to
take necessary actions based on the results of such analyses. If costs related
to Year 2000 are material, our business, operating results, and financial
condition could be materially adversely affected.
In certain cases, we have warranted that the use or occurrence of dates on
or after January 1, 2000 will not adversely affect the performance of our
products with respect to four digit date dependent data or the ability to
create, store, process, and output information related to such data. If any of
our licensees experience Year 2000 problems, those licensees could assert claims
for damages. Such claims, whether or not successful, could materially and
adversely affect our business, operating results and financial condition.
In addition, the purchasing patterns of our customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by us. This may adversely
affect on our business, operating results, and 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.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITAIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 1998.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
(a) On August 20, 1998, the Company filed a two count complaint against APAC
Teleservices, Inc. ("APAC") in the United States District Court for the Northern
District of Illinois asserting claims for breach of contract and unjust
enrichment for APAC's failure to pay $255,772 to the Company for professional
services rendered to APAC (Information Management Associates, Inc. v. APAC
Teleservices, Inc., 98C 5162) (the "Complaint" or the "Federal Action"). On
August 21, 1998, the Company filed a demand for arbitration with the American
Arbitration Association in Chicago, Illinois, asserting that APAC breached its
written agreement with the Company by failing to make payment of $575,983 for
software license and maintenance fees (Information Management Associates, Inc.
v. APAC Teleservices, Inc., No. 51 117 0036498) (the "Demand" or the
"Arbitration"). On October 8, 1998, APAC filed its answer to the Complaint,
denying that it owed the monies claimed by the Company. In connection with the
Demand, APAC also filed a counterclaim seeking an unspecified amount of damages
based on allegations that the Company's software and maintenance services were
deficient (hereinafter referred to as the "Counterclaim"). On October 30, 1998,
the Company responded to the Counterclaim, denying the material allegations,
further denying that APAC had suffered damages, and raising several affirmative
defenses. On November 10, 1998, APAC was granted leave to file a counterclaim in
the Federal Action. On December 9, 1998, APAC filed a counterclaim in the
Federal Action seeking in excess of $400,000 based upon its allegation that the
services performed by the Company were deficient (the "Federal Counterclaim").
The parties have consolidated the Arbitration and the Federal Action and both
matters are scheduled to be arbitrated in May, 1999. The Company believes that
it will prevail in its claims set forth in the Complaint and the Demand. The
Company believes that APAC's Counterclaim and the Federal Counterclaim are
without merit and intends to vigorously oppose both the Counterclaim and the
Federal Counterclaim. 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 the Counterclaim and/or the Federal Counterclaim is
ultimately decided in favor of APAC, damages and associated cost could have a
material adverse effect on results of the Company's operations.
From time to time, the Company is involved in litigation in the normal course of
business relating to claims arising out of its operations. The Company is not
currently involved in any litigation except as discussed above which, in
management's opinion, would have a material adverse effect on its business,
operating results or financial condition.
Item 2: Changes in Securities and Use of Proceeds.
a. Not Applicable.
b. Not Applicable.
27
<PAGE>
c. 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, 1998 and the
Company's Form 10-K for the year ended December 31,
1998. 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
March 31, 1999 as follows:
(a) approximately $7.4 million for repayment of
indebtedness;
(b) approximately $14.1 million for working capital;
(c) approximately $2.2 million for one time settlement
charges;
(d) approximately $3.3 million for the acquisition of
equipment; and
(e) approximately $1.6 million for the acquisition of
assets of MIS and TSI.
(f) approximately $1.7 million for minority investment
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.
28
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
Not Applicable.
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: May 14, 1999 /s/ Albert R. Subbloie, Jr. President, Chief Executive
---------------------------
Albert R. Subbloie, Jr. Officer and Director
(Principal Executive
Officer)
Dated: May 14, 1999 /s/ Gary R. Martino Chairman of the Board of
----------------------------
Gary R. Martino Directors, Chief Financial
Officer, Treasurer and
and Director (Principal
Financial and
Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,432
<SECURITIES> 0
<RECEIVABLES> 20,055
<ALLOWANCES> 3,448
<INVENTORY> 0
<CURRENT-ASSETS> 26,438
<PP&E> 9,716
<DEPRECIATION> 6,651
<TOTAL-ASSETS> 33,675
<CURRENT-LIABILITIES> 15,661
<BONDS> 0
0
0
<COMMON> 55,255
<OTHER-SE> (37,650)
<TOTAL-LIABILITY-AND-EQUITY> 33,675
<SALES> 5,031
<TOTAL-REVENUES> 12,300
<CGS> 164
<TOTAL-COSTS> 5,041
<OTHER-EXPENSES> 10,588
<LOSS-PROVISION> 335
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (3,266)
<INCOME-TAX> 115
<INCOME-CONTINUING> (3,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,381)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
