<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 June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File 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 June 30, 1999 was 9,698,106.
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION........................................ 1
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998...................................... 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 ......... 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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.............................. 7
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 4: Submission of Matters to a Vote of Security Holders the Annual
Meeting of Stockholders of the Company was Held on
May 25, 1999 .......................................... 28
Item 5: Other Information .............................................. 28
Item 6: Exhibits and Reports on Form 8-k................................ 29
SIGNATURES............................................................... 29
2
<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>
June 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short term investments........................ $ 2,014 $ 11,649
Accounts receivable, net............................... 20,383 16,487
Other current assets................................... 1,860 1,985
---------- ----------
Total current assets................................ 24,257 30,121
Equipment, net............................................ 4,549 3,134
Other assets, net ....................................... 3,778 3,983
---------- ----------
$ 32,584 $ 37,238
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations........ 344 73
Accounts payable and accrued liabilities............... 10,877 11,412
Deferred revenues...................................... 5,008 4,341
---------- ----------
Total current liabilities........................... 16,229 15,826
---------- ----------
Other long-term liabilities............................... 884 490
---------- ----------
Shareholders' equity:
Common stock, no par value; 9,698,106 and 9,697,088
shares outstanding at June 30, 1999 and December
31, 1998................................................. 55,255 54,691
Shares to be issued in connection with acquisition........ - 564
Cumulative translation adjustment......................... (320) (63)
Accumulated deficit....................................... (39,464) (34,270)
---------- ----------
Total shareholders' equity.......................... 15,471 20,922
---------- ----------
$ 32,584 $ 37,238
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
License Fees........................... $ 6,640 $ 7,408 $11,671 $12,723
Service and maintenance................ 6,463 5,739 13,732 10,517
-------- ------- ------- -------
Total revenues....................... 13,103 13,147 25,403 23,240
-------- ------- ------- -------
Cost of revenues:
Cost of license fees................... 62 90 226 211
Cost of services and maintenance....... 4,210 3,791 9,087 6,379
-------- ------- ------- -------
Total cost of revenues............... 4,272 3,881 9,313 6,590
-------- ------- ------- -------
Gross profit............................. 8,831 9,266 16,090 16,650
-------- ------- ------- -------
Operating expenses:
Sales and marketing.................... 5,440 4,757 11,373 8,672
Product development.................... 2,970 2,006 5,938 3,712
General and administrative............. 1,696 1,322 3,048 2,421
Provision for doubtful accounts ....... 476 762 811 962
Acquired product development costs..... - - - 7,658
-------- ------- ------- -------
Total operating expenses 10,582 8,847 21,170 23,425
-------- ------- ------- -------
Operating income (loss).................. (1,751) 419 (5,080) (6,775)
Other income ............................ 3 270 66 537
-------- ------- ------- -------
Income (loss) before provision for
income taxes........................... (1,748) 689 (5,014) (6,238)
Provision for income taxes............... 65 60 180 154
-------- ------- ------- -------
Net income (loss)........................ (1,813) 629 (5,194) (6,392)
-------- ------- ------- -------
Income (loss) applicable to common
shareholders............................. $ (1,813) $ 629 $(5,194) $(6,392)
======== ======= ======= =======
Basic net income (loss) per share........ (.19) .07 (.54) (.67)
======== ======= ======= =======
Shares used in computing basic net
income (loss) per share.................. 9,698 9,670 9,698 9,497
======== ======= ======= =======
Diluted net income (loss) per share...... (.19) .06 (.54) (.67)
======== ======= ======= =======
Shares used in computing diluted
earnings per share....................... 9,698 10,063 9,698 9,497
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ................................................... $(5,194) $(6,392)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 1,183 614
Provision for doubtful accounts ..................... 811 962
Charge for acquired product development costs........ - 7,658
Changes in operating assets and liabilities, exclusive
of effects of acquisitions:
Accounts receivable ................................. (4,707) (4,195)
Other current assets................................. 125 (706)
Other assets, net.................................... (120) (315)
Accounts payable and accrued liabilities............. (535) 156
Deferred revenues.................................... 667 (74)
Other long-term liabilities.......................... (130) (68)
------- -------
Net cash used in operations................. (7,900) (2,360)
------- -------
Cash Flows from Investing Activities:
Acquisition of equipment.................................... (1,297) (893)
Cash paid in connection with acquisitions
and related deal costs .................................. - (2,884)
------- -------
Net cash used in investing activities................ (1,297) (3,777)
------- -------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options..................... - 655
Repayment of capital lease obligations...................... (181) (56)
------- -------
Net cash provided by (used in) financing activities.. (181) 599
------- -------
Effect of exchange rate changes............................... (257) 3
------- -------
Net Decrease in Cash and Cash Equivalents..................... (9,635) (5,535)
------- -------
Cash and Cash Equivalents, beginning of period................ 11,649 24,271
------- -------
Cash and Cash Equivalents, end of period...................... $ 2,014 $18,736
======= =======
Supplemental Disclosure of Non-cash Activities:
Issuance of common stock in connection with acquisitions...... - 3,383
Equipment acquired pursuant to capital lease obligations ..... 973 -
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
<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.("IMA") 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, as amended, 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.
In May 1999 IMA formed buyingedge.com as a vehicle to roll out its new
internet marketing technology. IMA transferred certain technology and other
assets to buyingedge.com in exchange for 7,990,000 shares of its common stock
which, at the time of exchange, represented 94% of the outstanding common stock
of buyingedge.com.
The articles of incorporation for buyingedge.com provide for the issuance
of 20,000,000 shares of common stock and 5,500,000 shares of Series A Preferred
Stock (see Note 7). In connection with the transfer of technology noted above,
as well as the contribution of certain other technology from a third party,
buyingedge.com issued 8,500,000 shares of common stock. In addition,
buyingedge.com has reserved 4,816,183 shares of its common stock for issuance
under its 1999 Stock Option Plan, of which 1,555,000 options were issued prior
to June 30,1999 at an exercise price of $.50 per share.
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 were accounted for under the purchase method of accounting
and the aggregate purchase price was originally 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 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.
6
<PAGE>
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):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- -------- -------- -------
<S> <C> <C> <C> <C>
Basic/Diluted income (loss) per share:
Net income (loss) applicable to
common shareholders...................... (1,813) 629 (5,194) (6,392)
====== ====== ====== ======
Basic net income (loss) per share........ (.19) .07 (.54) (.67)
====== ====== ====== ======
Weighted average shares outstanding...... 9,698 9,670 9,698 9,497
====== ====== ====== ======
Diluted net income (loss) per share...... (.19) .06 (.54) (.67)
====== ====== ====== ======
Weighted average shares outstanding...... 9,698 10,063 9,698 9,497
====== ====== ====== ======
</TABLE>
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
the six months ended June 30, 1999 and 1998.
5. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. For the
six months ended June 30, 1999, there was a cumulative translation adjustment
loss of $257,000, compared to a cumulative translation adjustment gain of $3,000
during the six months ended June 30, 1998. Accordingly, the comprehensive loss
for the six months ended June 30, 1999 and 1998 is $5.5 million and $6.4
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 three reportable segments: enterprise call center
software solutions, professional services and buyingedge.com (See Note 7). 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 buyingedge.com segment provides a centrally hosted electronic
marketplace where buyers will be able to reach a wide range of sellers (vendors)
in may different product segments. 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
7
<PAGE>
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.
<TABLE>
<CAPTION>
For The Quarter Ended June 30, 1999
-----------------------------------
(in thousands)
Enterprise Call Professional buying-
Center Software Services edge.com Consolidated
--------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues 6,640 6,463 - 13,103
Cost of Sales 62 4,210 - 4,272
Product Development 2,460 - 510 2,970
Depreciation & Amortization 344 288 36 668
Other Income(Expense), net 2 1 - 3
------- ------- ------- -------
Segment Loss (345) (511) (957) (1,813)
======= ======= ======= =======
<CAPTION>
For The Quarter Ended June 30, 1998
--------------------------------------
(in thousands)
Enterprise Call Professional buying-
Center Software Services edge.com Consolidated
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 7,408 5,739 - 13,147
Cost of Sales 90 3,791 - 3,881
Product Development 2,006 - - 2,006
Depreciation & Amortization 194 140 - 334
Other Income(Expense), net 157 113 - 270
------ ------- ------- -------
Segment Income (Loss) 1,562 (933) - 629
====== ======= ======= =======
<CAPTION>
For The Six Months Ended June 30, 1999
--------------------------------------
(in thousands)
Enterprise Call Professional buying-
Center Software Services edge.com Consolidated
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 11,671 13,732 - 25,403
Cost of Sales 226 9,087 - 9,313
Product Development 5,123 - 815 5,938
Depreciation & Amortization 634 513 36 1,183
Other Income(Expense), net 37 29 - 66
------- ------- ------- -------
Segment Loss (2,377) (1,512) (1,305) (5,194)
======= ======= ======= =======
<CAPTION>
For The Six Months Ended June 30, 1998
--------------------------------------
(in thousands)
Enterprise Call Professional buying-
Center Software Services edge.com Consolidated
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 12,723 10,517 - 23,240
Cost of Sales 211 6,379 - 6,590
Product Development 3,712 - - 3,712
Depreciation & Amortization 351 263 - 614
Other Income(Expense), net 306 231 - 537
Acquired Product development costs 7,658 - - 7,658
------- ------- ------- -------
Segment Loss (5,420) (972) - (6,392)
======= ======= ======= =======
</TABLE>
7. Subsequent Events
On August 12, 1999, buyingedge.com (see Note 1) issued 5,319,149 shares of
Series A Preferred Stock (Series A) for $1.88 per share for aggregate gross
proceeds of $10,000,000. The $10,000,000 is to be used solely to fund the
activities
8
<PAGE>
of buyingedge.com.
In connection with the issuance of the Series A, IMA issued to the holders
of the Series A a warrant to purchase 621,056 shares of IMA common stock at
$4.00 per share through August 12, 2002. In addition, IMA issued to the holders
of the Series A an option to purchase 1,612,903 shares of IMA common stock at a
per share purchase price of $6.20 through August 12, 2002, provided that the
holders of the Series A simultaneously redeem the Series A to buyingedge.com.
The rights and privileges of the Series A are as follows:
Dividends. The Series A will accrue dividends at a rate of 9% per annum
compounded on an annual basis. The cumulative dividends shall be paid upon
a liquidation event, as defined, or upon redemption.
Redemption. If the Series A is not converted into common stock, the holder
can demand that buyingedge.com redeem such holder's shares in three annual
equal installments commencing August 12, 2004. The redemption price shall
be at the $1.88 purchase price per share plus all accrued but unpaid
dividends.
Conversion. Holders of the Series A are entitled to convert such shares
into common stock of buyingedge.com at a rate of $1.88 per share, with such
conversion rate subject to adjustment, as defined. Each share of Series A
shall automatically convert upon an initial public offering with gross
proceeds of not less than $20 million and a per share offering price of not
less than $7.52.
Liquidation. In the case of a liquidation, dissolution or winding up of
buyingedge.com, the holders of the Series A shall be entitled to receive a
liquidation value of $1.88 per share plus all accrued but unpaid dividends.
Certain transactions resulting in a change of ownership of 50% or more are
treated as a liquidation.
Voting. Each holder of Series A shall be entitled to the number of votes
equal to the number of shares of common stock into which such shares are
convertible.
On August 12, 1999, IMA also issued a $5,000,000 Senior Subordinated
Convertible Promissory Note (the Convertible Note) which bears interest at 9%
per annum. The Convertible Note is repayable at IMA's option any time during the
nine months ended April 30, 2000 at a value equal to the face value of the Note
plus any accrued but unpaid interest. If the Note is not redeemed by IMA prior
to April 30, 2000, or if IMA is in default under the Note and such default is
not cured within 20 business days, it will automatically be converted into the
number of shares IMA Series C Preferred Stock (Series C) that would convert into
19.9% of IMA's issued and outstanding common stock on August 12, 1999, and the
balance of any outstanding indebtedness under the Note which is not converted
thereby shall be converted into a Senior Subordinated Promissory Note due one
year from the date of conversion and bearing interest at 12% per annum. In
connection with the issuance of the Convertible Note, IMA also issued warrants
to acquire 425,000 shares of IMA common stock at an exercise price per share
equal to the closing price of IMA's common stock on August 12, 1999. The
exercise price of the warrants is subject to adjustment pursuant to certain
anti-dilution provisions. The warrants are exercisable through August, 2007.
In connection with the issuance of the Convertible Note, IMA amended its
Certificate of Incorporation to designate 5,000 shares of its preferred stock as
Series C Preferred Stock without par value and with a stated value of $1,000 per
share. The rights and privileges of the Series C are as follows:
Redemption. Upon the effective date of a change in control, as defined, the
holders of the Series C will convert such shares into shares of IMA common stock
at a conversion price calculated as the lower of the average closing price of
IMA for the 20 days following the issuance of the Convertible Note, the average
closing price of IMA for the 20 days preceding the conversion date or $4.00, all
of which conversion rates are subject to adjustment pursuant to certain anti-
dilution provisions (the Conversion Price), or will elect to redeem such shares
at their carrying value.
Conversion. Holders of the Series C are entitled to convert such shares
into common stock of IMA at a the Conversion Price.
Liquidation. In the case of a liquidation, dissolution or winding up
of IMA, the holders of the Series C shall be entitled to receive a
liquidation value of $1,000 per share.
Voting. Each holder of Series C shall be entitled to the number of votes
equal to the number of shares of common stock into which shares are
convertible. In addition, certain actions related to future equity
offerings or transactions which could involve a significant sale of assets
or change in control, as defined, would require a vote of at least 67% of
the Series C.
9
<PAGE>
On August 12, 1999, IMA signed a commitment letter for an $8 million
secured revolving credit facility from an institutional lender. The amount
available to be drawn under this loan will be capped at $2.0 million until
certain performance and financial covenants are met. The initial interest rate
will be 3.5% over the cost of 30 day commercial paper. The term of this
revolving credit facility is two years. The lender will receive a secured
interest in the unencumbered assets of IMA and its' subsidiaries except for the
assets of buyingedge.com inc. The closing of the line of credit is subject to
certain conditions, including the execution of definitive financing documents.
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 six months ended June 30, 1998 and
1999.
The Company has invested in the design and concepts of buyingedge.com (See
Notes 1 and 7), which is a centrally hosted electronic marketplace where buyers
will be able to reach a wide range of sellers (vendors) in many different
product segments. A production web environment was launched in the second
quarter of 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 six months ended June 30, 1999, United
States and international revenues were approximately 64.1% and 35.9% of total
revenues, respectively.
Expenses as a percentage of revenues were affected by lower than expected
revenue recognition in the first six months of 1999. The Company is reviewing
all aspects of its business to find additional revenue growth opportunities and
operating expense reductions.
Although the Company has experienced significant growth in revenues during
the past three years, the Company does not believe prior growth is necessarily
indicative of future operating results. In addition, the Company expects
increased competition and intends to continue to invest in its business. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis. Future operating results will depend on many factors, including demand
for the Company's products, the level of product competition, competitor
pricing, the size and timing of significant orders, changes in pricing policies
by the Company or its competitors, the ability of the Company to develop,
introduce and market new products on a timely basis and changes in levels of
operating expenses.
RESULTS OF OPERATIONS
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, 1999 and 1998.
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------- ---------- ---------- -----------
1999 1998 1999 1998
---------- ---------- ---------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
License fees......................... 50.7 % 56.3 % 45.9 % 54.7 %
Services and maintenance............. 49.3 % 43.7 % 54.1 % 45.3 %
------ ------ ------ ------
Total revenues..................... 100.0 % 100.0 % 100.0 % 100.0 %
------ ------ ------ ------
Cost of revenues:
License fees......................... 0.5 % 0.7 % 0.9 % 0.9 %
Service and maintenance.............. 32.1 % 28.8 % 35.8 % 27.4 %
------ ------ ------ ------
Total cost of revenues............. 32.6 % 29.5% 36.7 % 28.3 %
------ ------ ------ ------
Gross profit........................... 67.4 % 70.5 % 63.3 % 71.7 %
------ ------ ------ ------
Operating expenses:
Sales and marketing.................. 41.5 % 36.2 % 44.8 % 37.3 %
Product development.................. 22.7 % 15.3 % 23.4 % 16.4 %
General and administrative........... 12.9 % 10.0 % 12.0 % 10.4 %
Provision for doubtful accounts ..... 3.6 % 5.8 % 3.2 % 4.1 %
Acquired product development costs... - - - 33.0 %
------ ------ ------ ------
Total operating expenses............... 80.7 % 67.3 % 83.4 % 101.2 %
------ ------ ------ ------
Operating income (loss)................ (13.3)% 3.2 % (20.0)% (29.2)%
Interest income (expense).............. - 2.0 % 0.3 % 2.3 %
------ ------ ------ ------
Income (loss) before provision for
income taxes........................... (13.3)% 5.2 % (19.7)% (26.9)%
Provision for income taxes............. 0.5 % 0.5 % 0.7 % 0.7 %
------ ------ ------ ------
Net income (loss)...................... (13.8)% 4.7 % (20.4)% (27.6)%
====== ====== ====== ======
</TABLE>
The following table sets forth each component of revenue, the cost of such
revenue expressed as a percentage of such revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cost of license fees................... 0.9% 1.2% 1.9% 1.7%
Cost of services and maintenance....... 65.1% 66.1% 66.2% 60.7%
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 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 10.8%
from $7.4 million, or 54.2% of total revenues, in the quarter ended June 30,
1998 to $6.6 million, or 50.7% of revenues, in the quarter ended June 30, 1999.
Domestic license revenue decreased 53.6% percent from $4.8 million in the
quarter ended June 30, 1998 to $2.2 million in the quarter ended June 30, 1999.
The decrease in domestic license revenue was primarily attributable to a
decrease in the number of orders from 19 in the quarter ended June 30, 1998 to
14 in the quarter ended June 30, 1999 and a 37% decrease in the average deal
size. International license revenue increased approximately $1.8 million or 69%
from $2.6 million in the quarter ended June 30, 1998 to $4.4 million in the
quarter ended June 30, 1999. The increase in international license revenue is
primarily attributable to a 91% increase in the average deal size, from $77,000
in the quarter ended June 30, 1998 to $147,000 in the quarter ended June 30,
1999. License revenue resulting from the MIS and TSI acquisitions decreased
98.6% from $900,000 for the quarter ended June 30, 1998 to $12,500 in the
quarter ended June 30, 1999. Substantially all of the license fee
revenue for the three months ended June 30, 1999 was from two customers.
11
<PAGE>
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 14% from $5.7 million, or 43.7%
of total revenues, in the quarter ended June 30, 1998 to $6.5 million, or 49.3%
of total revenues, in the quarter ended June 30, 1999. The increase in services
and maintenance revenues was primarily attributable to the company's expanded
role at several existing customers.
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 decreased 31.1% from $90,000, or 1.2% of the
related license revenues, in the quarter ended June 30, 1998 to $62,000, or 0.9%
of the related license revenues, in the quarter ended June 30, 1999. The
decrease in the cost of license fees was primarily attributable to a decrease in
third party software shipments due to product mix.
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 11% from $3.8 million, or 66.1% of service
and maintenance revenues, in the quarter ended June 30, 1998 to $4.2 million, or
65.1% of service and maintenance revenues, in the quarter ended June 30, 1999.
The percentage of cost to revenue decreased due to increased service revenue and
management's efforts to increase efficiency of current staff and control costs,
such as salary and travel expenditures. The increase in cost of services and
maintenance in the quarter ended June 30, 1999 was primarily attributable to a
$450,000 increase in third party consulting costs. The Company continues to
evaluate the use of third party consultants and although utilization of internal
consulting staff is preferred, there are circumstances that justify the use of
third party consultants based on expertise in a specific industry, technical
knowledge or the availability of internal consulting staff. Third party
consulting costs have been reduced from $1.2 million in the quarter ended March
31, 1999 to $450,000 in the quarter ended June 30, 1999. Also, client services
staff decreased by 31 people or approximately 20% from March 31, 1999 to June
30, 1999.
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 12.5% from $4.8 million, or 36.2% of
revenues, in the quarter ended June 30, 1998 to $5.4 million, or 41.5% of
revenues, in the quarter ended June 30, 1999. The increase in sales and
marketing expenses for the quarter ended June 30, 1999, is primarily
attributable to increased compensation and benefit expenditures. Sales and
marketing expenses also increased due to enhanced advertising, trade shows and
promotions. However, overall sales and marketing expenditure has declined from
$5.9 million in the quarter ended March 31, 1999 to $5.4 million in the quarter
ended June 30, 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 Sales and Marketing staff decreased by 23 people, or
approximately 19%, from March 31, 1999 to June 30, 1999. 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 and development costs associated with
buyingedge.com. Product development expenses increased 50% from $2.0 million, or
15.3% of revenues, in the quarter ended June 30, 1998 to $3.0 million, or 22.7%
of revenues, in the quarter ended June 30, 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 EDGE InterAct (previously referred to by the company as
ChannelEDGE) and buyingedge.com initiatives and further development efforts
resulting from the in-process development products acquired from MIS and TSI.
Product development costs associated with buyingedge.com were approximately
$510,000 for the quarter ended June 30, 1999. Both new hires and third party
outside consultants are working on new product development. Product development
expenses have remained even for the first two quarters of 1999.
General and Administrative. General and administrative expenses represent
the costs of executive, finance and administrative support personnel, the
portion of occupancy
12
<PAGE>
expenses allocable to administration, and unallocated corporate expenses such as
fees for legal and auditing services. General and administrative expenses
increased 31% from $1.3 million, or 10.0% of revenues, in the quarter ended June
30, 1998 to $1.7 million, or 12.9% of revenues, in the quarter ended June 30,
1999. The increase in general and administrative expenses in the quarter ended
June 30, 1999 was due to the addition of accounting and administrative staff and
legal expenditures associated with an arbitration that was concluded in the
second quarter of 1999. A portion of the legal fees associated with the
arbitration was reimbursed by the Company's insurance carrier. General and
administrative expenditures have increased from $1.5 million in the quarter
ended March 31, 1999 to $1.8 million in the quarter ended June 30, 1999 due to
legal expenditures. 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
decreased from $762,000 for the quarter ended June 30, 1998 to $476,000 for the
quarter ended June 30, 1999. The decrease is based on management's periodic
review and assessment of accounts receivable and benefits that have been
realized in connection with the Company's enhanced credit and collections
policies and procedures.
Acquired Product Development Costs. There was no acquisition activity
during the three months ended June 30, 1999 and 1998.
Other Income (Expense). Other income (expense) consists of interest expense
on equipment financing less interest earned on short term investments. Other
income decreased by $267,000 from $270,000 in the quarter ended June 30, 1998 to
$3,000 in the quarter ended June 30, 1999. Specifically, 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 $13.9 million at June 30, 1998 to $1.4 million at
June 30, 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 $60,000 in the quarter ended June 30, 1998 to $65,000 in the quarter ended
June 30, 1999. At June 30, 1999, the Company had approximately $15.2 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 $5.2 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 $3.8 million which can be utilized to offset
future taxable income and which have no expiration.
The Company's Initial Public Offering ("IPO") 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.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues
License Fees. Total license fees decreased 7.9% from $12.7 million, or
54.7% of total revenues, in the six months ended June 30, 1998 to $11.7 million,
or 45.9% of revenues, in the six months ended June 30, 1999. Domestic license
revenue decreased 25% percent from $7.2 million in the six months ended June 30,
1998 to $5.4 million in the six months ended June 30, 1999. The decrease in
domestic license revenue was primarily attributable to a decrease in the number
of orders from 31 in the six months ended June 30, 1998 to 29 in the six months
ended June 30, 1999 and a 21.3% decrease in the average transaction deal size.
International license revenue increased approximately $880,000 or 16% from $5.5
million in the six months ended June 30, 1998 to $6.3 million in the six months
ended June 30, 1999. The increase in international license revenue is primarily
attributable to a 19% increase in the number of orders, from 64 in the six
months ended June 30, 1998 to 76 in the six months ended June 30, 1999. License
revenue resulting from the MIS and TSI acquisitions decreased 74% from $984,000
for the six months ended June 30, 1998 to $252,000 in the six months ended June
30, 1999. Approximately 50% of domestic license fee revenues for the six months
ended June 30, 1999 was derived from two customers.
13
<PAGE>
Services and Maintenance. Services and maintenance revenues increased by
30.5% from $10.5 million, or 45.3% of total revenues, in the six months ended
June 30, 1998 to $13.7 million, or 54.1% of total revenues, in the six months
ended June 30, 1999. The increase in services and maintenance was primarily
attributable to the Company's expanded role at several existing customers.
Cost of Revenues
Cost of License Fees. Cost of license fees increased 7% from $211,000, or
1.7% of the related license revenues, in the six months ended June 30, 1998 to
$226,000, or 1.9% of the related license revenues, in the six months ended June
30, 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. The cost of services and maintenance
increased 42.2% from $6.4 million, or 60.7% of service and maintenance revenues,
in the six months ended June 30, 1998 to $9.1 million, or 66.2% of service and
maintenance revenues, in the six months ended June 30, 1999. The increase in
cost of services and maintenance in the six months ended June 30, 1999 was
primarily attributable to a $1.6 million increase in third party consulting
costs. The Company continues to evaluate the use of third party consultants, and
although utilization of internal consulting staff is preferred, there are
circumstances that justify the use of third party consultants based on expertise
in a specific industry, technical knowledge or the availability of internal
consulting staff. Third party consulting costs have been reduced from $2.2
million in the six months ended December 31, 1998 to $1.8 million in the six
months ended June 30, 1999. Also, client services staff decreased by
approximately 28 people, or 19%, from December 31, 1998 to June 30, 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 31.1% from $8.7
million, or 37.3% of revenues, in the six months ended June 30, 1998 to $11.4
million, or 44.8% of revenues, in the six months ended June 30, 1999. The
increase in sales and marketing expenditures for the six months ended June 30,
1999, is primarily attributable to the Company's efforts to expand market
coverage and visibility. The increase in sales and marketing expenses is
primarily attributable to compensation and benefit expenditures. In addition,
sales and marketing expenses increased due to enhanced advertising, trade shows
and promotions. However, overall sales and marketing expenditure has declined
from $12.5 million in the six months ended December 31, 1998 to $11.4 million in
the six months ended June 30, 1999. This decrease was primarily the result of
reduced staff, 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. Sales and Marketing
staff decreased by 13 people, or approximately 12%, from December 31, 1998 to
June 30, 1999.
Product Development. Product development expenses increased 60% from $3.7
million, or 16.4% of revenues, in six months ended June 30, 1998 to $5.9
million, or 23.4% of revenues, in the six months ended June 30, 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 EDGE InterAct and buyingedge.com
initiatives and further development efforts resulting from the in-process
development products acquired from MIS and TSI. Product development costs
associated with buyingedge.com were approximately $815,000 for the six months
ended June 30, 1999. Both new hires and third party outside consultants are
working on new product development. Product development expenses have increased
from $5.5 million in the six months ended December 31, 1998 to $5.9 million in
the six months ended June 30, 1999. This increase is primarily the result of
increased compensation, benefits and third party consultant and amortization of
software. The Company expects product development expenses to decline as a
percentage of revenue in the future.
General and Administrative. General and administrative expenses increased
33.3% from $2.4 million, or 10.4% of revenues, in the six months ended June 30,
1998 to $3.0 million, or 12.0% of revenues, in the six months ended June 30,
1999. The increase in general and administrative expenses in the six months
ended June 30, 1999 was due to the addition of accounting and administrative
staff to support the growth of the Company's business and legal expenses related
to an arbitration that was concluded in the second quarter of 1999. A portion of
the legal fees associated with the arbitration was reimbursed by the Company's
insurance carrier. General and administrative expenditures have declined from
$3.6 million in the six months ended December 31, 1998 to $3.1 million in the
six months ended June 30, 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
14
<PAGE>
percentage of revenue in the future.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased from $962,000 for the six months ended June 30, 1998 to $811,000 for
the six months ended June 30, 1999. The decrease is based on management's
periodic review and assessment of accounts receivable and benefits that have
been realized in connection with the Company's enhanced credit and collections
policies and procedures.
Acquired Product Development Costs. Acquired product development costs
resulted from the March 30, 1998 acquisitions of MIS and TSI (See Note 2). There
was no similar acquisition activity during the six months ended June 30, 1999.
Other Income (Expense). Other income (expense) consists of interest expense
on debt and equipment financing less interest earned on short term investments.
Other income decreased by $471,000 from $537,000 in the six months ended June
30, 1998 to $66,000 in the six months ended June 30, 1999. Specifically,
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 $13.9 million at June 30, 1998 to $1.4
million at June 30, 1999.
Provision for Income Taxes. Provision for income taxes consists of foreign
and state income and withholding taxes. The provision for income taxes increased
17% from $154,000 for the six months ended June 30, 1998 to $180,000 in the six
months ended June 30, 1999.
Liquidity and Capital Resources
At June 30, 1999, the Company had $2.0 million in cash and $20.4 million in
accounts receivable. For the six months ended June 30, 1999, the company used
$7.9 million of cash for operating activities. The net cash use of $7.9 million
from operations resulted primarily from the net loss of $5.2 million, an
increase in accounts receivable of $4.7 million and a decrease in accounts
payable and accrued expenses of $535,000, offset by depreciation and
amortization of $1.2 million, provision for losses on accounts receivable of
$811,000, and an increase in deferred revenue of $667,000. 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.
For the six months ended June 30, 1999, the Company's primary investing
activities consisted of $1.3 million of purchases of computers, leasehold
improvements and office equipment to support the Company's newly leased
facilities in Chicago, Illinois and Irvine, California and for buyingdedge.com
inc. operations.
For the six months ended June 30, 1999, the Company's primary financing
activity consisted of reducing capital lease obligations by approximately
$181,000.
On August 12, 1999, the Company signed a Senior Subordinated Convertible
Promissory Note and Warrant Purchase Agreement (the "Agreement") with Wand
Equity Portfolio Fund II L.P. and Wand Affiliates Fund L.P. (collectively
"Wand"). Pursuant to the terms of the Agreement, Wand purchased from the Company
a 9% Senior Subordinated Convertible Promissory Note (the "Note") in the
principal face amount of $5,000,000 due April 30, 2000. The Company currently
expects to finalize a secured credit facility in the third quarter of 1999. See
"Part I, Note 7 -Subsequent Events."
The Company anticipates that its current cash and cash equivalents, together
with cash provided by operations, the proceeds of the $5,000,000 Note issued to
Wand, and borrowings under a credit facility or equity investment will be
sufficient to meet the Company's projected working capital and other cash
requirements, 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.
In addition, on August 12, 1999, IMA's wholly-owned subsidiary,
buyingedge.com inc. entered into a Series A Preferred Stock Purchase Agreement
("buyingedge Agreement") with CMG@Ventures III, LLC, @Ventures III, L.P.,
@Ventures Investors, @Ventures Foreign Fund III, L.P., Wand Equity Portfolio
Fund II L.P. and Wand Affiliates Fund L.P. (collectively the "Investors"), to
purchase 5,319,149 shares of buyingedge's Series A Preferred Stock for an
aggregate purchase price of $10,000,000. Pursuant to agreements with the
Investors, the amount invested in buyingedge.com will not be available to IMA
except pursuant to
15
<PAGE>
certain services agreements between IMA and buyingedge.com. See "Part I, Note
7 - Subsequent Events" for a description of the $5,000,000 Note financing and
the buyingedge preferred stock financing.
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.
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 is
continuing its transaction testing to evaluate compliance of the overall system
infrastructure and expects to finalize this testing by the end of the third
quarter of 1999. 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 third 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 $225,000 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 $175,000. 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 third quarter of 1999.
While the Company expects to incur additional expenses to complete 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.
16
<PAGE>
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 by the end of the third 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 by the end of the third 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.
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 six months of 1999. As of June 30, 1999, we had an
accumulated deficit of $39.5 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;
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. 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
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.
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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.
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
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
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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
. 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
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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 or the
failure of buyingedge.com to achieve market acceptance could materially and
adversely affect our business, operating results or financial condition.
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
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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.
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
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.
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.
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
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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
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.
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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 licenses 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 expanding
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency risk. The Company's exposure to foreign currency risks is
relatively low because of the way the Company conducts its international
business and this risk is not deemed to be material. The primary reason for the
low level of exposure to foreign currency fluctuations is that the Company
generally requires payment from its international customers outside the United
Kingdom, Europe and Australia in U.S. dollars. In the United Kingdom and Europe,
the Company generally requires payment from its international customers in
pounds sterling. The Company's financial instruments that are exposed to foreign
currency risks are primarily accounts receivable and accounts payable of the
United Kingdom Subsidiary. The carrying amounts of these financial instruments
approximate fair value. In addition, the Company has no debt denominated in any
foreign currency. The impact of increases or decreases in foreign currency
exchange rates on the Company's revenues is offset in part by the corresponding
impact on the Company's expenses payable in such currencies. For the six months
ended June 30, 1999, the Company had a cumulative translation adjustment loss of
$257,000.
Because of the historically low level of currency risks, the Company has
not previously engaged in foreign currency hedging programs. However, as
revenues from international operations have grown, the Company has been
monitoring its exchange rates. As part of our monitoring of currency risks, the
Company will consider using foreign currency option contracts and
forward contracts in the future to hedge a portion of our exposure on
anticipated transactions and firm commitment transactions if we determine that
such actions are appropriate and cost-effective. There can be no assurance that
the Company's monitoring of foreign currency exposures or future hedging
activities, if any, will substantially reduce the impact of fluctuations in
currency exchange rates on its results of operations and financial position.
On January 1, 1999, certain member states of the European Economic
Community fixed their respective currencies to a new currency, the Single
European Currency ("Euro"). On that day the Euro became a functional legal
currency within these countries. During the three years beginning on January 1,
1999, business in these countries will be conducted both in the existing
national currency, such as the French Fanc or the Deutsche Mark, as well as the
Euro. Although we will continue to evaluate the impact of the Euro introduction
over time, based on presently available information we do not presently expect
that introduction and use of the Euro will materially increase our exposure to
foreign currency risks.
Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits and taxable fixed rate obligations of
corporations. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances and are invested
in short-term time deposits of the local operating bank.
Interest income on the Company's investments is carried in "Other income
(expense)." The Company accounts for its investment instruments in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the
cash equivalents and short-term investments are treated as available-for-sale
under SFAS 115.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. The Company's investment securities are
held for purposes other than trading. The investment securities had maturities
of less than one year. The weighted-average interest rate on investment
securities at June 30, 1999 was approximately 4.5%. The fair value of securities
held at June 30, 1999 was $1.4 million.
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 were arbitrated in May, 1999. The
Company prevailed on its claims at the arbitration and was awarded
approximately $396,000 plus late charges of 1.5% per month on the
outstanding consulting services balance of approximately $187,000. APAC's
counterclaims were denied in their entirety.
(b) On May 19, 1999 the Company filed a Demand for Arbitration with the
American Arbitration Association in Peoria, Illinois asserting that Affina
Corporation f/k/a Ruppman Marketing Technologies, Inc. ("Ruppman") breached
its written software license agreement and consulting services agreements
with the Company by failing to make payment in the amounts of $893,150 in
software license and maintenance fees and $636,931.43 in consulting
services fees (Information Management Associates, Inc. v. Affina
Corporation f/k/a Ruppman Marketing Technologies, Inc., No. 51Y 117
00225399)(the "Demand"). On or about June 24, 1999, Ruppman filed its
answer to the Demand denying all claims made by the Company and filed a
counterclaim alleging negligent misrepresentation, breach of contract,
breach of express warranties and violations of the Illinois Consumer and
Deceptive Practices Act (the "Counterclaim"). On or about July 23, 1999 the
Company responded to the Counterclaim denying all claims made therein and
raising several special defenses. On or about August 6, 1999, Ruppman
amended its counterclaim, dismissing its claims under the Illinois Consumer
and Deceptive Practices Act and adding a claim for violation of the
Connecticut Unfair Practices Act. The Company believes that it will prevail
in its claims set forth in the Demand. The Company believes that Ruppman's
Counterclaim is without merit and intends to vigorously oppose the
Counterclaim. Nevertheless, the final outcome of any legal proceeding is
subject
24
<PAGE>
to a great many variables and cannot be predicted with any degree of
certainty. In the event that the Counterclaim is ultimately decided in
favor of Ruppman, damages and associated costs 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) The Company's Certificate of Incorporation has been amended to create an
authorized series of 5,000 shares of preferred stock, no par value, designated
as Series C Convertible Preferred Stock ("Preferred Stock"). The Preferred Stock
is issuable upon conversion of the $5,000,000 Senior Subordinated Convertible
Promissory Note (the "Convertible Note") issued on August 12, 1999. No shares of
Preferred Stock have been issued.
The rights and privileges of the Preferred Stock are as follows:
Redemption. Upon the effective date of a change in control, as defined, the
holders of the Preferred Stock will convert such shares into shares of IMA
common stock at a conversion price calculated as the lower of the average
closing price of IMA common stock for the 20 days following the issuance of the
Convertible Note, the average closing price of IMA common stock for the 20 days
preceding the conversion date or $4.00, all of which conversion rates are
subject to adjustment pursuant to certain anti-dilution provisions (the
Conversion Price), or will elect to redeem such shares at their carrying value.
Conversion. Holders of the Preferred Stock are entitled to convert such
shares into common stock of IMA at the Conversion Price.
Liquidation. In the case of a liquidation, dissolution or winding up
of IMA, the holders of the Preferred Stock shall be entitled to receive a
liquidation value of $1,000 per share.
Voting. Each holder of Preferred Stock shall be entitled to the number of
votes equal to the number of shares of common stock into which shares are
convertible. In addition, certain actions related to future equity
offerings or transactions which could involve a significant sale of assets
or change in control, as defined, would require a vote of at least 67% of
the Preferred Stock.
(b) The Preferred Stock, if and when issued, would have a liquidation preference
of $1,000 per share before any amount is paid to holders of common stock and
have the other rights and preferences described in paragraph (a) of this Item 2.
(c) The Company sold the Convertible Note and a Common Stock Purchase Warrant
(the "Warrant") to purchase 425,000 shares of common stock at a price equal to
$3.63 per share, to Wand Equity Portfolio Fund II L.P. and Wand Affiliates Fund
L.P. (collectively "Wand") for an aggregate purchase of $5,000,000 in cash. The
Company also issued warrants to purchase an aggregate of 621,056 shares of
common stock at a price of $4.00 per share (together with the warrant, the
"Warrants") and an option to purchase an aggregate of 1,619,903 shares of common
stock at a price of $6.20 per share (the "Option") to Wand and to certain other
investors including CMG @ Ventures III, LLC, @ Ventures III L.P., @ Ventures
Investors, @ Ventures Foreign Fund III, L.P., Madrona Investment Group LLC and
Amicus Capital LLC.
(d) The Company issued the Convertible Note, the Warrants and the option
pursuant to the exemption contained in Section 4(2) of the of the Securities Act
of 1933, as amended, and Rule 506 of Regulation D thereunder.
(e) The Convertible Note is convertible into Preferred Stock at a conversion
price of $1,000 per share. The Preferred Stock is convertible into common stock
of the Company at the Conversion Price described in paragraph (a) of this
Item 2. The Warrants and the Option are exercisable at the prices indicated in
paragraph (c) above.
(f) a. Not Applicable.
b. Not Applicable.
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, as
amended, 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, as amended.
(2) The Company used the net offering proceeds through June 30,
1999 as follows:
(a) approximately $7.4 million for repayment of indebtedness;
(b) approximately $16.2 million for working capital;
(c) approximately $2.2 million for one time settlement charges;
(d) approximately $3.3 million for the acquisition of
equipment;
(e) approximately $1.6 million for the acquisition of assets of
MIS and TSI; and
(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.
Item 4: Submission of Matters to a Vote of Security Holders at the
Annual Meeting of Shareholders of the Company was held on May
25, 1999 (the "Annual Meeting").
Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There
was no solicitation in opposition to Management's nominee
Albert R. Subbloie, Jr. Mr. Subbloie was elected with 8,324,954
votes in favor and 74,865 votes against subject to the
Company's Bylaws, as a Director of the Company for a three-year
term or until election and qualification of his successor.
The various terms of office of David Callard, Thomas Hill, Gary
R. Martino, Donald P. Miller and Paul J. Schmidt continued
after the Annual Meeting.
In addition, the Company's shareholders voted to approve the
Company's 1999 Employee and Consultant Stock Option Plan with
6,051,645 votes in favor of the proposal, 221,870 votes against
the proposal and 11,600 votes abstaining.
25
<PAGE>
Item 5: Other Information
Subordinated Note Financing
- ---------------------------
On August 12, 1999, the Company entered into a Senior Subordinated
Convertible Promissory Note and Warrant Purchase Agreement (the "Agreement")
with Wand Equity Portfolio Fund II L.P. and Wand Affiliates Fund L.P.
(collectively "Wand"). Affiliates of Wand currently own approximately 30% of the
Company's outstanding common stock and a principal of Wand serves on the
Company's Board of Directors. Pursuant to the terms of the Agreement, Wand will
purchase from the Company a 9% Senior Subordinated Convertible Promissory Note
(the "Note") in the principal face amount of $5,000,000. On April 30, 2000, the
Note's maturity date, any principal outstanding and, at the option of the holder
of the Note, any accrued and unpaid interest payable under the Note that has not
been paid, shall be converted into fully paid and nonassessable shares of Series
C Convertible Preferred Stock ("Preferred Stock") of the Company. The Preferred
Stock votes on an as-converted basis with the common stock. At the option of the
holder, the Preferred Stock can be converted into common stock of the Company.
The voting power, the Preferred Stock and the number of shares of common stock
into which the Preferred Stock is convertible is limited to 19.9% of the
Company's issued and outstanding common stock as of August 12, 1999. If there is
any remaining principal balance after conversion into Preferred Stock, such
principal balance will be converted into a one year promissory note due one year
from the date of issuance and bearing interest at 12% annually.
In connection with the issuance of the Note, the Company amended its
Certificate of Incorporation to designate 5,000 shares of its preferred stock as
Series C Covertible Preferred Stock without par value and having a stated value
of $1,000 per share. The rights and privileges of the Preferred Stock are as
follows:
Redemption. Upon the effective date of a change of control (as defined), the
----------
holders of Preferred Stock have the right to redeem such shares or convert such
shares into common stock at the Conversion Price (as defined below).
Conversion. Holders of Preferred Stock are entitled to convert such shares
----------
into common stock of the company at a conversion price equal to the lower of (i)
the average closing price of common stock for the 20 days following issuance of
the Note; (ii) the average closing price of the company's common stock for the
20 trading days preceeding the conversion date; or (iii) $4.00 (the "Conversion
Price"), which Conversion Price is subject to adjustment pursuant to certain
antidilution provisions.
Liquidation. In the case of liquidation, dissolution or winding up of the
-----------
Company the holders of Preferred Stock shall be entitled to receive a
liquidation value of $1,000 per share.
Voting. Each holder of Preferred Stock shall be entitled to the number of
------
votes equal to the number of shares of common stock into which such Preferred
Stock is convertible. In addition, certain actions related to future equity
offerings or transactions which could involve a significant sale of assets or
change of control (as defined), would require a vote of at least 67% of the
Preferred Stock.
In connection with the issuance of the Note, IMA issued to Wand a Warrant
(the "Warrant") to purchase 425,000 shares of the Company's common stock at a
purchase price equal to the market value on the closing date of the transaction.
This warrant expires on August 12, 2007. The exercise price of the Warrant is
subject to adjustment pursuant to certain anti-dilution provisions.
In connection with the issuance of the Note and the Warrant to Wand, the
Company granted Wand the right to require the Company to register the sale of
the securities issuable upon conversion of the Note and the Warrant and to
include such securities in any registration by the Company of its securities for
sale by the Company or other shareholders. The Company is required to pay all
expenses of such registrations, except for underwriting discounts and commisions
related to sales by the shareholder requesting registration. The Company also
agreed to indemnify the holders of securities included in any such registration
against liabilities arising under the securities laws in connection with such
registration.
buyingedge.com Subsidiary Financing
- -----------------------------------
On August 12, 1999 the Company's 94% owned subsidiary buyingedge.com inc.,
("buyingedge") sold an aggregate of 5,319,149 shares of Series A Preferred Stock
to an investor group the "Investors" pursuant to a Series A Preferred Stock
Purchase Agreement ("buyingedge Agreement") dated August 12, 1999. The Investors
include CMG@Ventures III, LLC, @Ventures III, L.P., @Ventures Investors,
@Ventures Foreign Fund III, L.P., Wand Equity Portfolio Fund II L.P. and Wand
Affiliates Fund L.P. In connection with the issuance of the Series A Preferred
Stock, IMA issued to the Investors a warrant entitling the Investors to purchase
up to a total of 621,056 shares of the Company's common Stock at an exercise
price of $4.00 per share. The warrants may be exercised at any time prior to
5:00 p.m. Eastern Time on August 12, 2002. In addition, at the closing the
Company issued an option to the Investors entitling them to acquire up to an
aggregate of 1,612,903 shares of the Company's common Stock at a purchase price
of $6.20 per share, provided that the Investors simultaneously redeem their
Series A Preferred Stock for a redemption price equal to the initial purchase
price thereof. This option expires on August 12, 2002.
The rights and privileges of the Series A Preferred Stock are as Follows:
Dividends. The Series A Preferred Stock will accrue dividends at a rate of
9% per annum compounded on an annual basis. The cumulative dividends shall
be paid upon a liquidation event, as defined, or upon redemption.
Redemption. If the Series A Preferred Stock is not converted into common
stock, the holder can demand that buyingedge.com redeem such holder's
shares in three annual equal installments commencing August 12, 2004. The
redemption price shall be at the $1.88 purchase price per share plus all
accrued but unpaid dividends.
Conversion. Holders of the Series A Preferred Stock are entitled to convert
such shares into common stock of buyingedge.com at a rate of $1.88 per
share, with such conversion rate subject to adjustment, as defined. Each
share of Series A Preferred Stock shall automatically convert upon an
initial public offering with gross proceeds of not less than $20 million
and a per share offering price of not less than $7.52.
Liquidation. In the case of a liquidation, dissolution or winding up of
buyingedge.com, the holders of the Series A Preferred Stock shall be
entitled to receive a liquidation value of $1.88 per share plus all accrued
but unpaid dividends. Certain transactions resulting in a change of
ownership of 50% or more are treated as a liquidation.
Voting. Each holder of Series A Preferred Stock shall be entitled to the
number of votes equal to the number of shares of common stock into which
such shares are convertible.
The buyingedge Certificate of Incorporation requires that the Board of
Directors of buyingedge be comprised of five members, and that the holders of
Series A Preferred Stock have the right to elect two of the five directors. The
holders of buyingedge common stock and Series A Preferred Stock voting together
have the right to elect the remaing three directors. The board of buyingedge
will initially include Albert R. Subbloie, Jr., Gary R. Martino and two
directors designated by the holders of Series A Preferred Stock.
buyingedge is prohibited under the financing documents from paying
dividends on common stock unless all accrued but unpaid dividends on the Series
A Preferred Stock have been paid. The buyingedge financing documents entitle
the holder os Series A Preferred Stock to various voting and other rights,
including: (i) the right to approve changes to the certificate of incorporation
or bylaws of buyingedge; (ii) and dissolution, consolidation or merger of
buyingedge or any transaction that would result in a change of more than 50% in
the ownership of buyingedge; (iii) the issuance of any senior securities; (iv)
size of the Board of Directors; and (vii) borrowing or grants of security
interests in excess of $1,000,000.
buyingedge, the holders of Series A Preferred Stock, the Company the other
holder of buyingedge common stock entered into a Rights Agreement pursuant to
which buyingedge granted demand and piggyback registration rights to all such
holders. buyingedge is required to pay all expenses in connection with any such
registrations except for underwriting discounts and commissions with respect to
shares sold by holders requesting registration. buyingedge also agreed to
indemnify the holders against liabilities arising under the securities laws with
respect to any such registration. The Rights Agreement also contains certain
affirmative and negative covenants, including covenants relating to financial
reporting, the specification of certain matters to be approved by the Board of
Directors of buyingedge (including at least one of the directors appointed by
the holders of Series A Preferred Stock), a prohibition on transactions with
affiliates without approval of the directors appointed by the holders of Series
A Preferred Stock, certain limitations on the granting of stock options and
restrictions on management compensation.
The Company also entered into a Right of First Refusal Agreement with the
holders of Series A Preferred Stock and buyingedge which gives buyingedge the
right of first refusal to purchase any Series A Preferred Stock or common stock
of buyingedge proposed to be transferred by the Company or the holders of Series
A Preferred Stock and gives the Company and the holders of Series A Preferred
Stock mutual rights of first refusal with respect to any such proposed transfers
if buyingedge does not first purchase such securities.
In connection with the formation and financing of buyingedge, the Company
entered into certain agreements with buyingedge pursuant to which the Company
provides buyingedge with the use of office space and certain administrative
services, including, accounting and legal. The use of office space and
administrative services are charged to buyingedge at cost using an allocation
of costs based on headcount. The Company also permits buyingedge employees to
participate in certain employee benefit plans of the Company, including health
insurance plans. The Company and buyingedge have also entered into a Software
Licensing, Marketing and Non-competition Agreement pursuant to which buyingedge
and the Company have agreed to promote the other party's products and services
and refrain from certain competitive activities.
Line of Credit Financing
- ------------------------
The Company also obtained a commitment from an institutional lender for a
line of credit up to $8 million subject to certain conditions including entering
into definitive financing documents. The Company currently expects that the line
of credit financing will be completed by September 30, 1999. See "Part I Note
7 - Subsequent Events" for a description of the line of credit commitment.
Chief Financial Officer
- -----------------------
The Company has hired John A. Piontkowski, CPA as its new Chief Financial
Officer. Mr. Piontkowski will replace Mr. Gary R. Martino who will be focusing
the vast majority of his time on his role as Chief Executive Officer of
buyingedge.com. Mr. Martino will remain the Chairman of the Board of the
Company. Mr. Piontkowski spent 13 years at Price Waterhouse prior to moving
to the private sector. He has held a number of senior positions with private and
public companies, most recently as the Executive Vice President and Chief
Financial Officer of Smith Corona Corporation.
Vice President of Marketing
The Company elected Glenda O'Neill vice president of marketing as of July
30, 1999. Kian Saneii resigned his position as senior vice president of global
marketing effective July 30, 1999.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended Certificate
10.2 Information Management Associates, Inc.
1999 Employee and Consultant Stock Option Plan
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
Not Applicable.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: August 16, 1999 /s/ Albert R. Subbloie, Jr. President, Chief Executive
---------------------------
Albert R. Subbloie, Jr. Officer and Director
(Principal Executive
Officer)
Dated: August 16, 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)
</TABLE>
27
<PAGE>
EXHIBIT 10.1
CERTIFICATE OF AMENDMENT
1. The name of the Corporation is Information Management Associates,
Inc. (the "Corporation").
2. The Certificate of Incorporation of the Corporation is amended
pursuant to Connecticut General Statutes (S) 33-666 through a
resolution duly adopted by the Board of Directors of the
Corporation (the "Board") on August 12, 1999 as set forth below:
RESOLVED, that pursuant to authority expressly granted to and vested in the
Board by provisions of the Certificate of Incorporation of the Corporation
(the "Certificate of Incorporation"), the issuance of a series of preferred
stock, without par value, which shall consist of 5,000 shares of preferred
stock out of the 500,000 shares of preferred stock that the Corporation
authorized in Paragraph 4 of the Certificate of Incorporation which the
Corporation has authority to issue, is authorized, and the powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions
thereof, set forth in the Certificate of Incorporation which may be
applicable to the preferred stock) are fixed by adding the following to
Paragraph 4 thereof as follows:
DESIGNATION, PREFERENCES AND SPECIAL RIGHTS OF
SERIES C CONVERTIBLE PREFERRED STOCK
1. Designation and Number. The designation of such series of the
----------------------
preferred stock authorized by this resolution shall be the "Series C Convertible
Preferred Stock" (the "Convertible Preferred Stock"). The total number of shares
of the Convertible Preferred Stock shall be 5,000. The Convertible Preferred
Stock is issuable in whole shares only.
2. Stock Splits. The Corporation may not effect a stock split (whether
------------
by dividend or otherwise), reverse stock split, reclassification or other
similar event with respect to the common stock, without par value (the "Common
Stock"), of the Corporation or the Convertible Preferred Stock unless it effects
at the same time an identical stock split, reverse stock split, reclassification
or other similar event with respect to both the Common Stock and the Convertible
Preferred Stock.
3. Dividends.
---------
(a) Holders of shares of the Convertible Preferred Stock shall not be
entitled to receive any dividends with respect to such shares, except as
provided in paragraph 3(b).
(b) If the Board declares dividends payable to the holders of Common
Stock, and the holders of the Convertible Preferred Stock approve the dividend
in accordance with paragraph 8 hereof, then the holders of Convertible Preferred
Stock shall be entitled to share equally, share for
<PAGE>
share, as if such shares of Convertible Preferred Stock had been converted to
shares of Common Stock in accordance with paragraph 7, in such dividends.
4. Liquidation. The shares of Convertible Preferred Stock shall rank
-----------
prior to the shares of Common Stock and any and all other classes of stock of
the Corporation, so that, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), the holders of the Convertible Preferred Stock shall be entitled
to receive out of the assets of the Corporation available for distribution to
its stockholders, whether from capital, surplus or earnings, before any
distribution is made to holders of shares of Common Stock or any other class of
stock, liquidating distributions in an amount per share (the "Liquidation
Preference") equal to $1,000 per share of Convertible Preferred Stock, plus all
dividends declared but unpaid thereon to the date of final distribution. If,
upon any liquidation, dissolution or winding up of the Corporation, the amounts
payable with respect to the Convertible Preferred Stock are not paid in full,
the holders of the Convertible Preferred Stock will share ratably in any such
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled. After payment of the full amount of the Liquidation
Preference to the holders of shares of Convertible Preferred Stock, if there is
any further distribution of assets by the Corporation, after payment to the
holders of shares of Common Stock of an amount equal to the Liquidation
Preference, the holders of shares of Convertible Preferred Stock and the holders
of shares of Common Stock shall be entitled to share equally, share for share,
in any further distribution of assets by the Corporation.
5. Redemption or Conversion upon a Change of Control. Upon the effective
-------------------------------------------------
date of a "Change of Control," each holder of the Convertible Preferred Stock
shall elect to cause the Corporation to redeem its Convertible Preferred Stock
or to convert its Convertible Preferred Stock into shares of Common Stock in
accordance with paragraph 7 hereof. "Change of Control" shall mean: (a) a sale
of all or substantially all of the Corporation's assets; or (b) a transaction
involving a (i) sale of equity securities or (ii) merger or other combination
which results in all existing shareholders prior to such a transaction owning
less than 50% (assuming conversion of the Convertible Preferred Stock) of the
voting equity securities of the Company or its successor immediately after the
transaction. Other than in the event of a Change of Control, the Corporation
shall not be entitled to redeem, and the holder shall not be entitled to cause
the Corporation to redeem, any or all of the Convertible Preferred Stock.
6. Voting Rights.
-------------
(a) The holders of Convertible Preferred Stock shall be entitled to
the number of votes equal to the number of whole shares of Common Stock into
which the shares of Convertible Preferred Stock held by such holder are
convertible (as adjusted from time to time pursuant to Section 7 hereof), at
each meeting of stockholders of the Corporation (and written actions of
stockholders in lieu of meetings) with respect to any and all matters presented
to the stockholders of the Corporation for their action or consideration. Except
as provided by law and by the provisions of subsection 6(b) below, holders of
Convertible Preferred Stock shall vote together with the holders of Common Stock
as a single class.
(b) So long as shares of the Convertible Preferred Stock are
outstanding, consent of the holders of 67% of the Convertible Preferred Stock
shall be required for the Corporation to (i)
2
<PAGE>
create any preferred stock of convertible debt (which shall include debt with
warrants) with rights or privileges senior to or pari passu with the Convertible
---- -----
Preferred Stock, (ii) create any preferred stock or convertible debt at an
effective equity or conversion price less than the Conversion Price, (iii)
declare any dividends or other distributions on its Common Stock or repurchase
or redeem any outstanding equity securities, (iv) create, increase or decrease
the amount of the Convertible Preferred Stock or increase, decrease or change
the par value of the Convertible Preferred Stock or any other rights,
preferences or terms thereof, or (v) any proposed transaction which, if
consummated, would result in a Change of Control.
7. Conversion.
----------
(a) Each share of Convertible Preferred Stock may be converted at any
time, at the option of the holder thereof, into a certain number of fully paid
and non-assessable shares of Common Stock of the Corporation as determined by
dividing $1000 by the "Conversion Price" set forth in paragraph 7(b).
(b) "Conversion Price" shall mean the lesser of (i) the average
closing per share price of Common Stock for the 20 trading days following August
12, 1999, (ii) the average closing per share price of Common Stock for the 20
trading days preceding the earlier of the date upon which the shares of
Convertible Preferred Stock are issued or April 30, 2000, or (iii) $4.00 per
share of Common Stock.
(c) Such option to convert shares of Convertible Preferred Stock into
shares of Common Stock may be exercised by, and only by, surrendering for such
purpose to the Corporation certificates representing the shares to be converted,
duly endorsed or accompanied by proper instruments of transfer, if so required
by the Corporation. At the time of such surrender, the person exercising such
option to convert shall be deemed to be the holder of the shares of Common Stock
issuable upon such conversion, notwithstanding that the stock transfer books of
the Corporation may then be closed or that certificates representing such shares
of Common Stock shall not then be actually delivered to such person.
(d) Adjustment of Conversion Price. The Conversion Price is subject
------------------------------
to adjustment from time to time as follows:
(i) In case the Corporation shall pay or make a dividend or
other distribution on any Common Stock of the Corporation in Common Stock, the
Conversion Price in effect at the opening of business on the business day
following the record date fixed for determining the holders of Common Stock
entitled to receive such dividend or other distribution shall be reduced by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding at the close of
business on the record date fixed for such determination plus the total number
of shares of Common Stock constituting such dividend or other distribution and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding at the close of business on the record date fixed for such
determination, such increase to become effective immediately after the opening
of business on the business day following the record date fixed for such
determination, such reduction to become effective immediately after the opening
of business on the business day following the record date fixed for such
determination.
3
<PAGE>
For the purposes of this subparagraph, the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Corporation. The Corporation will not pay any dividend or make any distribution
on shares of Common Stock held in the treasury of the Corporation.
(ii) In case the Corporation shall issue rights, warrants or other
securities convertible into Common Stock to all holders of its Common Stock,
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Conversion Price on the record date for determining the
holders of Common Stock entitled to receive such rights, warrants or convertible
securities, the Conversion Price in effect at the opening of business on the
business day following such record date shall be equal to such subscription
price. For the purposes of this subparagraph, the number of shares of Common
Stock at any time outstanding shall not include shares held in the treasury of
the Corporation. The Corporation will not pay any dividend or make any
distribution on shares of Common Stock held in the treasury of the Corporation.
(iii) In case the Corporation shall issue any shares of Common Stock
(including any rights, warrants or other securities convertible into Common
Stock, but excluding a shares issued as a dividend or distribution or upon a
stock split or combination) without consideration or for a price per share less
than the Conversion Price on the date of and immediately prior to such issuance,
the Conversion Price in effect at the opening of business on the business day
following such date shall be equal to such subscription price.
(iv) In case the outstanding shares of the Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the business day following the date upon
which such subdivision becomes effective shall be proportionately reduced and
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the business day following the date upon which
such combination becomes effective shall be proportionately increased, such
increase or reduction, as the case may be, to become effective immediately after
the opening of business on the business day following the date upon which such
subdivision or combination becomes effective.
(e) Notice of Adjustments of Conversion Price. Whenever the
-----------------------------------------
Conversion Price is adjusted as herein provided, the Corporation shall compute
the adjusted Conversion Price in accordance with Section 4(d) and shall deliver
to the shareholder a certificate setting forth the adjusted Conversion Price and
showing in reasonable detail the facts upon which such adjustment is based.
(f) The term "Common Stock," as used in this section, shall mean
Common Stock of the character authorized at the date of the initial issuance of
the Convertible Preferred Stock or, in case of a reclassification or exchange of
such Common Stock, shares of the stock into or for which such Common Stock shall
be reclassified or exchanged and all provisions of this Section shall be applied
appropriately thereto and to any stock resulting from any subsequent
reclassification or exchange thereof.
4
<PAGE>
IN WITNESS WHEREOF, this Certificate of Amendment is executed this 12th day of
August 1999.
/s/ Albert R. Subbloie, Jr
---------------------------
Albert R. Subbloie, Jr.
President
5
<PAGE>
EXHIBIT 10.2
INFORMATION MANAGEMENT ASSOCIATES, INC.
1999 EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
I. Establishment of Plan; Definitions
1. Purpose. The purpose of the Information Management Associates, Inc. 1999
Employee and Consultant Stock Option Plan is to provide an incentive to
Employees and Consultants of Information Management Associates, Inc. (the
"Corporation") and its Affiliates who are in a position to contribute
materially to the long-term success of the Corporation and/or its Affiliates,
to increase their interest in the welfare of the Corporation and its
Affiliates, and to aid in attracting and retaining Employees and Consultants
of outstanding ability.
2. Definitions. Unless the context clearly indicates otherwise, the
following terms shall have the meanings set forth below:
a. "Affiliate" shall mean any parent or subsidiary of the Corporation
which meets the requirements of Section 425 of the Code.
b. "Board" shall mean the Board of Directors of the Corporation.
c. "Cause" shall mean repeated failure to properly perform assigned
duties, gross negligence, insubordination, commission of a felony, or any
act injurious to the Corporation involving dishonesty or breach of any duty
of confidentiality or loyalty.
d. "Change of Control" shall mean a change of control of the Corporation
of a nature that would be required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934
(the "Exchange Act"), whether or not the Corporation is subject to the
Exchange Act at such time; provided, however, that without limiting the
generality of the foregoing, a "Change of Control" will in any event be
deemed to occur if and when (i) there shall be consummated (x) any
consolidation, reorganization or merger of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant to
which shares of the Stock would be converted into cash, securities or other
property, other than a merger of the Company in which holders of the Stock
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger, or
(y) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the assets
of the Corporation, or (ii) the shareholders of the Corporation shall
approve any plan or proposal for liquidation or dissolution of the
Corporation, or (iii) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Exchange Act, including any "group" (as defined in
Section 13(d)(3) of the Exchange Act) (other than the Grantee or any group
controlled by the Grantee)) shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of thirty percent (30%) or
more of the outstanding Stock (other than pursuant to a plan or arrangement
entered into by such person and the Corporation) and such person discloses
its intent to effect a change of the control or ownership of the Company in
any filing with the Securities and Exchange Commission, or (iv) within any
twenty-four (24) month period beginning on or after May 25, 1999, the
persons who were directors of the Corporation immediately before the
beginning of such period (the "Incumbent Directors") shall cease (for any
reason other than death, disability or retirement) to constitute at least a
majority of the Board or the board of directors of any successor to the
Corporation, provided that, any director who was not a director as of May
25, 1999 shall be deemed to be an Incumbent Director if such director was
elected to the Board by, or on the recommendation of or with the approval
of, at least two-thirds of the directors who then qualified as Incumbent
Directors either actually or by prior operation of this definition unless
such election, recommendation or approval was the result of any actual or
threatened election contest of the type contemplated by Regulation 14a-11
promulgated under the Exchange Act or any successor provision.
e. "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
20
<PAGE>
f. "Consultant" shall mean any consultant of the Corporation or any of
its Affiliates.
g. "Corporation" shall mean Information Management Associates, Inc., a
Connecticut corporation.
h. "Disability" shall mean a medically determinable physical or mental
condition which causes an Employee to be unable to engage in any
substantial gainful activity and which can be expected to result in death
or to be of long, continued and indefinite duration.
i. "Employee" shall mean any employee, including officers, of the
Corporation or any of its Affiliates, as determined under the Code and the
Treasury Regulations thereunder.
j. "Fair Market Value" shall mean on any date, (i) if the Stock is not
listed on a national securities exchange or quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"),
the fair market value of the Stock on that date as determined by the Board,
or (ii) if the Stock is listed on a national securities exchange or is
quoted on Nasdaq, the closing price reported on the composite tape for
issues listed on such exchange on such date, or the closing price or the
average of the closing dealer "bid" and "asked" prices of the Stock on the
date of grant as quoted by Nasdaq, or if no trades shall have been reported
for such date, on the next preceding date on which there were trades
reported; provided that if no quotations shall have been made within the 10
business days preceding such date, the Fair Market Value shall be
determined by the Board as provided in clause (i) above.
k. "Grantee" shall mean an Employee or Consultant granted a Stock Option
under this Plan.
l. "Incentive Stock Option" shall mean an option granted pursuant to the
Incentive Stock Option provisions as set forth in Part II of this Plan.
m. "Non-Qualified Stock Option" shall mean an option granted pursuant to
the Non-Qualified Stock Option provisions as set forth in Part III of this
Plan.
n. "Option Period" shall mean the term of the Stock Option as fixed by
the Board.
o. "Plan" shall mean the Information Management Associates, Inc. 1999
Employee and Consultant Stock Option Plan as set forth herein and as
amended from time to time.
p. "Stock" shall mean authorized but unissued shares of the Common Stock
of the Corporation, no par value, or reacquired shares of the Corporation's
Common Stock.
q. "Stock Option" shall mean an option, which shall include Non-Qualified
Stock Options and Incentive Stock Options, granted pursuant to the Plan to
purchase shares of Stock.
r. "Stock Option Agreement" shall mean the written instrument evidencing
the grant of one or more Stock Options under the Plan and which contains
the terms and conditions applicable to such grant.
s. "Ten Percent Shareholder" shall mean an Employee who at the time a
Stock Option is granted owns stock possessing more than ten percent (10%)
of the total combined voting power of all stock of the Corporation or of
its Affiliates.
3. Shares of Stock Subject to the Plan. There are hereby reserved for
issuance under the Plan 500,000 shares of Stock. Subject to the provisions of
Paragraph 1 of Part IV, the Stock which may be issued pursuant to Stock
Options authorized to be granted under the Plan and the Stock which is subject
to outstanding but unexercised Stock Options under the Plan shall not exceed
500,000 shares of Stock in the aggregate. If a Stock Option shall expire and
terminate for any reason, in whole or in part, without being exercised, the
number of shares of Stock as to which such expired or terminated Stock Option
shall not have been exercised may again become available for the grant of
Stock Options.
There shall be no terms and conditions in a Stock Option which provide that
the exercise of an Incentive Stock Option reduces the number of shares of
Stock for which an outstanding Non-Qualified Stock Option may be exercised;
and there shall be no terms and conditions in a Stock Option which provide
that the exercise of a Non-Qualified Stock Option reduces the number of shares
of Stock for which an outstanding Incentive Stock Option may be exercised.
21
<PAGE>
4. Administration of the Plan. The Plan shall be administered by the Board.
Subject to the express provisions of the Plan, the Board shall have authority
to grant Stock Options under the Plan, to interpret the Plan, to prescribe,
amend, and rescind rules and regulations relating to it, to determine the
terms and provisions of Stock Option Agreements, and to make all other
determinations necessary or advisable for the administration of the Plan. Any
controversy or claim arising out of or related to the Plan shall be determined
unilaterally by and at the sole discretion of the Board. Any determination,
decision or action of the Board in connection with the construction,
interpretation, administration, implementation or maintenance of the Plan
shall be final, conclusive and binding upon all Grantees and all person(s)
claiming under or through any Grantees. In addition, the Board shall have the
authority to delegate any of its duties and responsibilities under the Plan to
such committee(s) as it shall determine including any such delegation
necessary for the Plan's compliance with the requirements of Rule 16b-3
promulgated by the Securities and Exchange Commission, as amended ("Rule 16b-
3") and Section 162(m) of the Code.
5. Amendment or Termination. The Board may, at any time, alter, amend,
suspend, discontinue, or terminate the Plan; provided, however, that such
action shall not adversely affect the right of Grantees to Stock Options
previously granted.
6. Effective Date and Duration of the Plan. The Plan shall become effective
on May 25, 1999, subject to the approval by the shareholders of the
Corporation. The Plan shall terminate ten years from the date it becomes
effective, and no Stock Option may be granted under the Plan thereafter, but
such termination shall not affect any Stock Option theretofore granted.
II. Incentive Stock Option Provisions
1. Granting of Incentive Stock Options.
a. Only Employees of the Corporation or its Affiliates shall be eligible
to receive Incentive Stock Options under the Plan.
b. When granting an Incentive Stock Option, the Board shall determine the
purchase price of the Stock subject thereto, provided, that the purchase
price of each share of Stock subject to an Incentive Stock Option shall not
be less than 100% of the Fair Market Value of a share of the Stock on the
date the Incentive Stock Option is granted; and provided, further, that the
purchase price of each share of Stock subject to an Incentive Stock Option
granted to a Ten Percent Shareholder shall not be less than 110% of the
Fair Market Value of a share of the Stock on the date the Incentive Stock
Option is granted.
c. No Incentive Stock Option shall be exercisable more than ten years
from the date the Incentive Stock Option was granted; provided, however,
that an Incentive Stock Option granted to a Ten Percent Shareholder shall
not be exercisable more than five years from the date the Incentive Stock
Option was granted.
d. The Board shall determine and designate from time to time those
Employees who are to be granted Incentive Stock Options and specify the
number of shares subject to each Incentive Stock Option.
e. Notwithstanding any other provisions hereof, the aggregate Fair Market
Value (determined at the time the option is granted) of the Stock with
respect to which Incentive Stock Options are exercisable for the first time
by the Employee during any calendar year (under all such plans of the
Corporation and its Affiliates) shall not exceed $100,000.
f. The Board, in its sole discretion, shall determine whether any
particular Incentive Stock Option shall become exercisable in one or more
installments, specify the installment dates, and, within the limitations
herein provided, determine the total period during which the Incentive
Stock Option is exercisable. Further, the Board may make such other
provisions as may appear generally acceptable or desirable to the Board or
necessary to qualify its grants under the provisions of Section 422 of the
Code.
22
<PAGE>
g. The Board may grant at any time new Incentive Stock Options to an
Employee who has previously received Incentive Stock Options or other
options whether such prior Incentive Stock Options or other options are
still outstanding, have previously been exercised in whole or in part, or
are canceled in connection with the issuance of new Incentive Stock
Options. The purchase price of the new Incentive Stock Options may be
established by the Board without regard to the existing Incentive Stock
Options or other options.
h. During any calendar year, no Employee may be granted Incentive Stock
Options with respect to more than 200,000 shares of Stock.
2. Exercise of Incentive Stock Options. The purchase price of Stock subject
to an Incentive Stock Option shall be payable on exercise of the option in
cash or by check, bank draft or postal or express money order. The Board, in
its discretion, may permit a Grantee to make partial or full payment of the
purchase price by the surrender of Stock owned by the Grantee prior to the
date of exercise. Shares of Stock surrendered in payment of the purchase price
as provided above shall be valued at the Fair Market Value thereof on the date
of exercise. Surrender of such stock shall be evidenced by delivery of the
certificate(s) representing such shares in such manner, and endorsed in such
form, or accompanied by stock powers endorsed in such form, as the Board may
determine.
In the absence of any other action by the Board, all Incentive Stock Options
shall become exercisable in equal installments over a period of four years
calculated from the date of grant.
3. Termination of Employment. Except as provided otherwise in the applicable
Stock Option Agreement (in which case the provisions of the Stock Option
Agreement shall control over the provisions of this paragraph 3):
a. If a Grantee's employment is terminated, including termination by
reason of retirement at or after age 65, or by reason of Disability (other
than for Cause or voluntary termination prior to retirement at or after age
65 or death) only those Incentive Stock Options held by the Grantee which
were immediately exercisable at the date of the termination of Grantee's
employment shall be exercisable by the Grantee following the termination of
Grantee's employment. Such Incentive Stock Options must be exercised within
three months after such termination of employment (but in no event after
expiration of the Option Period) or they shall be forfeited.
b. If a Grantee's employment is terminated for Cause or if the Grantee
shall have voluntarily terminated employment other than by retirement at or
after age 65, all then outstanding Incentive Stock Options held by the
Grantee shall expire immediately and such Incentive Stock Options shall not
be exercisable after the date of the termination of Grantee's employment.
c. If a Grantee's employment is terminated by death, only those Incentive
Stock Options held by the Grantee which were immediately exercisable at the
date of the Grantee's death shall be exercisable by the representative of
the Grantee's estate or beneficiaries thereof to whom the Incentive Stock
Options have been transferred. Such Incentive Stock Options must be
exercised by the earlier of (i) three months from the date of the Grantee's
death or (ii) the expiration of the Option Period, or they shall be
forfeited.
d. The Board may grant a leave of absence to any Grantee and, for
purposes hereunder, such Grantee shall be deemed to be continued to be
employed with the Corporation or its Affiliates during such leave of
absence.
III. Non-Qualified Stock Option Provisions
1.Granting of Non-Qualified Stock Options.
a. Employees and Consultants of the Corporation or its Affiliates shall
be eligible to receive Non-Qualified Stock Options under the Plan.
23
<PAGE>
b. The Board shall determine and designate from time to time those
Employees and Consultants who are to be granted Non-Qualified Stock Options
and specify the number of shares subject to each Non-Qualified Stock
Option.
c. The Board may grant at any time new Non-Qualified Stock Options to an
Employee or Consultant who has previously received Non-Qualified Stock
Options or other options, whether such prior Non-Qualified Stock Options or
other options are still outstanding, have previously been exercised in
whole or in part, or are canceled in connection with the issuance of new
Non-Qualified Stock Options.
d. When granting a Non-Qualified Stock Option, the Board shall determine
the purchase price of the Stock subject thereto.
e. The Board, in its sole discretion, shall determine whether any
particular Non-Qualified Stock Option shall become exercisable in one or
more installments, specify the installment dates and, within the
limitations herein provided, determine the total period during which the
Non-Qualified Stock Option is exercisable. Further, the Board may make such
other provisions as may appear generally acceptable or desirable to the
Board.
f. No Non-Qualified Stock Option shall be exercisable more than ten years
from the date such option is granted.
g. During any calendar year, no Employee may be granted Non- Qualified
Stock Options with respect to more than 200,000 shares of Stock.
2. Exercise of Non-Qualified Stock Options. The purchase price of Stock
subject to a Non-Qualified Stock Option shall be payable on exercise of the
option in cash or by check, bank draft or postal or express money order. The
Board, in its discretion, may permit a Grantee to make partial or full payment
of the purchase price by the surrender of Stock owned by the Grantee prior to
the date of exercise. Shares of Stock surrendered in payment of the purchase
price as provided above shall be valued at the Fair Market Value thereof on
the date of exercise, surrender of such to be evidenced by delivery of the
certificates(s) representing such shares in such manner, and endorsed in such
form, or accompanied by stock powers endorsed in such form, as the Board may
determine.
In the absence of any other action by the Board, all Non-Qualified Stock
Options shall become exercisable in equal installments over a period of four
years calculated from the date of grant.
3. Termination of Employment. Except as provided otherwise in the applicable
Stock Option Agreement (in which case the provisions of the Stock Option
Agreement shall control over the provisions of this paragraph 3):
a. If a Grantee's employment is terminated, including termination by
reason of retirement at or after age 65 or by reason of Disability (other
than for Cause or voluntary termination prior to retirement at or after age
65 or death), only those Non-Qualified Stock Options held by the Grantee
which were immediately exercisable at the date of the termination of
Grantee's employment shall be exercisable by the Grantee following the
termination of Grantee's employment. Such Non-Qualified Stock Options must
be exercised within three months after such termination of employment (but
in no event after expiration of the Option Period) or they shall be
forfeited.
b. If a Grantee's employment is terminated for Cause or if the Grantee
shall have voluntarily terminated employment other than by retirement at or
after age 65, all then outstanding Non-Qualified Stock Options held by the
Grantee shall expire immediately and such Non-Qualified Stock Options shall
not be exercisable after the date of the termination of Grantee's
employment.
c. If a Grantee's employment is terminated by death, only those Non-
Qualified Stock Options held by the Grantee which were immediately
exercisable at the date of death shall be exercisable by the
24
<PAGE>
representative of the Grantee's estate or beneficiaries thereof to whom the
Non-Qualified Stock Options have been transferred. Such Non-Qualified Stock
Options must be exercised by the earlier of (i) three months from the date
of the Grantee's death or (ii) the expiration of the Option Period, or they
shall be forfeited.
d. The Board may grant a leave of absence to any Grantee and, for
purposes hereunder, such Grantee shall be deemed to continue to be employed
for purposes of continuing such Grantee's employment with the Corporation
or its Affiliates during such leave of absence.
4. Termination of Consultancy. Except as provided otherwise in the
applicable Stock Option Agreement (in which case the provisions of the Stock
Option Agreement shall control over the provisions of this paragraph 4):
a. If a Grantee's consulting engagement is terminated (other than for
Cause or voluntary termination or death), only those Non-Qualified Stock
Options held by the Grantee which were immediately exercisable at the date
of termination of the Grantee's consulting engagement shall be exercisable
by the Grantee following the termination of the Grantee's consulting
engagement. Such Non-Qualified Stock Options must be exercised within three
months after such termination of the Grantee's consulting engagement (but
in no event after expiration of the Option Period) or they shall be
forfeited.
b. If a Grantee's consulting engagement is terminated for Cause or if the
Grantee shall have voluntarily terminated his or her consulting engagement,
all then outstanding Non-Qualified Stock Options held by the Grantee shall
expire immediately and such Non-Qualified Stock Options shall not be
exercisable after the date of termination of the Grantee's consulting
engagement.
c. If a Grantee's consulting engagement is terminated by death, only
those Non-Qualified Stock Options immediately exercisable at the date of
the Grantee's death shall be exercisable by the representative of the
Grantee's estate or beneficiaries thereof to whom the Non-Qualified Stock
Options have been transferred. Such Non-Qualified Stock Options must be
exercised by the earlier of (i) three months from the date of the Grantee's
death or (ii) the expiration of the Option Period, or they shall be
forfeited.
IV. General Provisions
1. Recapitalization Adjustments.
a. In the event of any change in capitalization affecting the Stock,
including, without limitation, a stock dividend or other distribution,
stock split, reverse stock split, recapitalization, consolidation,
subdivision, split-up, spin-off, split-off, combination or exchange of
shares or other form of reorganization or recapitalization, or any other
change affecting the Stock, the Board shall authorize and make such
proportionate adjustments, if any, as the Board deems appropriate to
reflect such change, including, without limitation, with respect to the
aggregate number of shares of Stock for which Stock Options in respect
thereof may be granted under the Plan, the number of shares of Stock
covered by each outstanding Stock Option, and the purchase price per share
of Stock in respect of outstanding Stock Options.
b. Any provision hereof to the contrary notwithstanding, in the event the
Corporation is a party to a merger or other reorganization, outstanding
Stock Options shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Stock Options by the surviving corporation or its
parent, for their continuation by the Corporation (if the Corporation is a
surviving corporation) for accelerated vesting and accelerated expiration
or for settlement in cash.
2. Change of Control. Notwithstanding anything to the contrary contained in
the Plan or in any Stock Option Agreement, upon the occurrence of a Change of
Control, all then outstanding Stock Options shall automatically become fully
and immediately vested and exercisable.
25
<PAGE>
3. General.
a. Each Stock Option shall be evidenced by a Stock Option Agreement.
b. The granting of a Stock Option in any year shall not give the Grantee
any right to similar grants in future years or any right to be retained as
an Employee or Consultant of the Corporation, and all Employees and
Consultants shall remain subject to discharge or removal to the same extent
as if the Plan were not in effect.
c. No Employee or Consultant, and no beneficiary or other person claiming
under or through him, shall have any right, title or interest by reason of
any Stock Option to any particular assets of the Corporation, or any shares
of Stock allocated or reserved for the purposes of the Plan or subject to
any Stock Option except as set forth herein. The Corporation shall not be
required to establish any fund or make any other segregation of assets to
assure the exercise of any Stock Option.
d. No Stock Option or right under the Plan shall or may be sold,
exchanged, assigned, pledged, encumbered, or otherwise hypothecated or
disposed of except by will or the laws of descent and distribution, and a
Stock Option shall be exercisable during the Grantee's lifetime only by the
Grantee or his conservator.
e. Notwithstanding any other provision of the Plan or agreements made
pursuant thereto, the Corporation's obligation to issue or deliver any
certificate or certificates for shares of Stock under a Stock Option, and
the transferability of Stock acquired by exercise of a Stock Option, shall
be subject to all of the following conditions:
(1) Any registration or other qualification of such shares under any
state or federal law or regulation, or the maintaining in effect of any
such registration or other qualification which the Board shall, in its
absolute discretion upon the advice of counsel, deem necessary or
advisable;
(2) The obtaining of any other consent, approval, or permit from any
state or federal governmental agency which the Board shall, in its
absolute discretion upon the advice of counsel, determine to be
necessary or advisable; and
(3) Each stock certificate issued pursuant to a Stock Option shall
bear such legends which the Corporation shall determine, in its
absolute discretion, are necessary or advisable, or which in the
opinion of counsel to the Corporation are required under applicable
federal or state securities laws.
f. All payments to Grantees or to their legal representatives shall be
subject to any applicable tax, community property, or other statutes or
regulations of the United States or of any state having jurisdiction
thereof. The Grantee may be required to pay to the Corporation the amount
of any withholding taxes which the Board, in its sole discretion, deems
necessary to be withheld in order to comply with any applicable statutes or
regulations with respect to a Stock Option or its exercise. In the event
that such payment is not made when due, the Corporation shall have the
right to deduct, to the extent permitted by law, from any payment or
settlement of any kind otherwise due to such person all or part of the
amount required to be withheld. If the Board, in its sole discretion,
permits shares of Stock to be used to satisfy any such tax withholding,
such Stock shall be valued based upon the Fair Market Value of such Stock
as of the date the tax withholding is required to be made, such date to be
determined by the Board. The Corporation shall not be required to issue
Stock until such obligations are satisfied.
g. In the case of a grant of a Stock Option to any Employee or Consultant
of an Affiliate of the Corporation, the Corporation may, if the Board so
directs, issue or transfer the shares, if any, covered by the Stock Option
to the Affiliate, for such lawful consideration as the Board may specify,
upon the condition or understanding that the Affiliate will transfer the
shares to the Employee or Consultant in accordance with the terms of the
Stock Option specified by the Board pursuant to the provisions of the Plan.
h. A Grantee entitled to Stock as a result of the exercise of an Option
shall not be deemed for any purpose to be, or have rights as, a shareholder
of the Corporation by virtue of such exercise, except to the
26
<PAGE>
extent a stock certificate is issued therefor and then only from the date
such certificate is issued. No adjustments shall be made for dividends or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as otherwise provided herein.
The Corporation shall issue any stock certificates required to be issued in
connection with the exercise of a Stock Option with reasonable promptness
after such exercise.
i. The grant or exercise of Stock Options granted under the Plan shall be
subject to, and shall in all respects comply with, applicable Connecticut
corporate law relating to such grant or exercise.
j. Should the participation of any Employee or Consultant in the Plan be
subject to Section 16 of the Securities Exchange Act of 1934 or any
successor statute ("Section 16"), it is the express intent of the
Corporation that, notwithstanding anything to the contrary contained in the
Plan, the Plan and Stock Options granted under the Plan shall satisfy and
be interpreted in a manner to achieve the result that the applicable
requirements of Rule 16b-3 shall be satisfied with respect to such
Employees and Consultants, with the result that such Employees and
Consultants shall be entitled to the benefits of Rule 16b-3 or other
applicable exemptive rules under Section 16. If any provision of the Plan
or of any Stock Option would otherwise frustrate or conflict with the
intent of the Corporation expressed in the immediately preceding sentence,
to the extent possible, such provision shall be interpreted and deemed
amended so as to avoid such conflict, and, to the extent of any remaining
irreconcilable conflict with such intent, the provision shall, solely with
respect to Employees and Consultants subject to Section 16, be deemed void.
k. It is the express intent of the Corporation that, notwithstanding
anything to the contrary contained in the Plan, the Plan and Stock Options
granted under the Plan shall satisfy and be interpreted in a manner to
achieve the result that Stock Options granted under the Plan shall
constitute performance-based compensation within the meaning of Section
162(m) of the Code. If any provision of the Plan or of any Stock Option
would otherwise frustrate or conflict with the intent of the Corporation
expressed in the immediately preceding sentence, to the extent possible,
such provision shall be interpreted and deemed amended so as to avoid such
conflict, and, to the extent of any remaining irreconcilable conflict with
such intent, the provision shall, solely with respect to Employees subject
to Section 162(m) of the Code, be deemed void.
27
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