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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 001-13211
INFORMATION MANAGEMENT ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1289928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Drive, Suite 400
Shelton, CT 06484
(Address and Zip Code of principal executive offices)
(203) 925-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
(Title of Class) no par value
per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 10, 1999: $13,260,912
Number of shares outstanding as of March 10, 1999: 9,697,088
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its Annual Meeting of
Stockholders presently scheduled for May 25, 1999 are incorporated by reference
into Part III of this report.
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ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31
1994 1995 1996 1997 1998
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations:
Revenues:
License fees 7,393 10,825 13,022 19,295 24,903
Total Services
and maintenance 10,959 12,984 13,255 17,377 24,190
------- ------- ------- ------- --------
Total revenues 18,352 23,809 26,277 36,672 49,093
Cost of revenues:
License fees 462 700 709 304 356
Services and
maintenance 6,268 8,225 7,191 9,428 17,420
------- ------- ------- ------- --------
Total cost of 6,730 8,925 7,900 9,732 17,776
------- ------- ------- ------- --------
revenues
Gross profit 11,622 14,884 18,377 26,940 31,317
Operating expenses:
Sales and marketing 5,857 6,844 8,055 12,580 21,419
Product development 6,106 6,802 6,382 6,190 9,266
General and
administrative 2,095 2,896 3,569 4,147 5,338
Provision for doubtful
accounts 608 928 319 637 6,782
Acquired product
development costs - - - - 6,988
One time settlement
charges - - - - 2,163
Total operating
expenses 14,656 17,470 18,315 23,554 51,956
Operating income (loss) (3,034) (2,586) 62 3,386 (20,639)
Other income (expense) (917) (1,100) (1,079) 18 810
------- ------- ------- ------- --------
Income (loss) before
provision for income taxes (3,951) (3,686) (1,017) 3,404 (19,829)
Provision for income taxes 132 100 30 231 470
------- ------- ------- ------- --------
Net income (loss)
per share $(4,083) $(3,786) $(1,047) $ 3,173 $(20,299)
======= ======= ======= ======= ========
Basic $ (1.14) $ (1.18) $ (.44) $ .43 $ (2.12)
======= ======= ======= ======= ========
Diluted $ (1.14) $ (1.18) $ (.44) $ .38 $ (2.12)
======= ======= ======= ======= ========
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December 31
1994 1995 1996 1997 1998
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents $ 446 $ 1,543 $ 3,073 $ 4,816 $ 8,558
Working capital
(deficit) (3,619) (1,233) 1,210 34,213 14,295
Total assets 12,150 12,519 17,281 43,922 37,238
Short-term debt 5,499 3,871 5,444 232 73
Long-term debt 1,423 3,042 2,803 136 58
Senior redeemable
convertible preferred
stock - 4,751 9,431 - -
Redeemable common stock
warrants 1,517 2,480 2,865 - -
Total shareholders'
equity (deficit) (4,200) (9,295) (10,906) 37,030 20,922
Results of Operations
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998.
Year Ended December 31
1996 1997 1998
Consolidated Statement of Operations Data:
Revenues:
License fees: 49.6% 52.6% 50.7%
Services and maintenance: 50.4 47.4 49.3
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License fees 2.7 0.8 0.7
Services and maintenance 27.4 25.7 35.5
----- ----- -----
Total cost of revenues 30.1 26.5 36.2
----- ----- -----
Gross profit 69.9 73.5 63.8
----- ----- -----
Operating expenses:
Sales and marketing 30.7 34.3 43.6
Product development 24.3 16.9 18.9
General and administrative 13.6 11.3 10.9
Provision for doubtful accounts 1.2 1.7 13.8
Acquired product development costs - - 14.2
One time settlement charges - - 4.4
----- ----- -----
Total operating expenses 69.8 64.2 105.8
----- ----- -----
Operating income (loss) 0.1 9.3 (42.0)
Other income (expense) (4.1) - 1.6
----- ----- -----
Income (loss) before provision for income taxes (4.0) 9.3 (40.4)
Provision for income taxes - 0.6 1.0
Net income (loss) (4.0)% 8.7% (41.4)%
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The following table sets forth for each component of revenue, the cost of such
revenue expressed as a percentage of such revenue for the periods indicated.
Year Ended December 31
1996 1997 1998
Cost of license fees 5.4% 1.6% 1.4%
Cost of service and maintenance: 54.3% 54.3% 72.0%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
The following discussion contains forward-looking statements and the Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Factors That May Affect Future Results".
OVERVIEW
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size and large-scale telephone call centers.
The Company 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 year ended December 31, 1998.
Revenues from software license agreements are recognized upon the delivery of
the software to the customer if there are no significant post-delivery
obligations and collection is probable. Service revenues consist of
professional consulting, implementation and training services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of the Company's software products. Revenues from consulting and
training services are recognized as services are performed. The Company enters
into transactions which include both license and service elements. As such
service elements do not include more than minor alteration of the software, the
license fees are recognized upon delivery and the service revenues are
recognized when performed.
Software maintenance fees are recognized ratably over the term of the
maintenance period. If software maintenance fees are provided for in the
license fee or at a discount in a license agreement, a portion of the license
fee equal to the fair market value of these amounts is allocated to software
maintenance revenue based on the value established by independent sales of such
maintenance service to customers.
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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. In 1998, United States and international revenues were
approximately 64% and 36% of total revenues, respectively.
Although the Company has experienced significant growth in revenues during the
past three years, the Company does not believe prior growth is necessarily
indicative of future operating results. In addition, the Company expects
increased competition and intends to continue to invest in its business. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis. Future operating results will depend on many factors, including demand
for the Company's products, the level of product competition, competitor
pricing, the size and timing of significant orders, changes in pricing policies
by the Company or its competitors, the ability of the Company to develop,
introduce and market new products on a timely basis and changes in levels of
operating expenses.
RESULTS OF OPERATION
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Revenues
Total revenues increased 33.9% from $36.7 million in 1997 to $49.1 million in
1998.
License Fees. License fee revenues consist of revenues from initial licenses
for the Company's software products and license upgrades to existing customers
for additional users or modules. Total license fees increased 29.1% from $19.3
million, or 52.6% of total revenues, in the year ended December 31, 1997 to
$24.9 million, or 50.7% of total revenues, in the year ended December 31, 1998.
The increase in license fees was primarily attributable to an increase in the
number of licenses sold. International license revenue increased approximately
$3.6 million or 56.9% from $6.3 million in 1997 to $9.9 million in 1998. The
Company also generated license fees in 1998 from the products acquired in the
Acquisitions, from which there were no revenues in 1997.
Services and Maintenance. Services and maintenance revenues derive from
professional services associated with the implementation and deployment of the
Company's software products and maintenance fees for ongoing customer support.
Services and maintenance revenues increased 39.2% from $17.4 million, or 47.4%
of total revenues, in the year ended December 31, 1997 to $24.2 million, or
49.3% of total revenues, in the year ended December 31, 1998. The increase in
services and maintenance was attributable to the increase in software licenses,
the significant new service revenue attributable to several new major customers
such as Texas Utilities Services Inc., Lloyds TSB Bank and Dai Tokyo Royal
Insurance and continuing professional service work from existing customers such
as United Parcel Service General Services Co., and Humana Inc.
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Cost of Revenues
Cost of License Fees. Cost of license fees consists primarily of the costs of
media packaging, documentation, third-party software and software production
personnel. Cost of license fees increased 17.1% from $304,000 or 1.6% of the
related license revenues, in the year ended December 31, 1997 to $356,000, or
1.4% of the related license revenues, in the year ended December 31, 1998. The
fluctuations in the cost of license fees is primarily attributable to the
increase in the amount of third-party products resold by the Company due to the
increase in license fees.
Cost of Services and Maintenance. Cost of services and maintenance consists
primarily of salaries, bonuses, benefits, 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 84.8% from $9.4 million, or 54.3% of service and maintenance revenues,
in the year ended December 31, 1997 to $17.4 million, or 72% of service and
maintenance revenues, in the year ended December 31, 1998. The increases in the
dollar amount of costs of services and maintenance and the amount of these costs
as a percentage of revenues were primarily attributable to an increase in third
party consulting costs which are, in certain instances, billed to the customer
on a pass through basis and increases in salary, benefits and overhead related
to the hiring of new client services staff. The increase in third party
consulting costs resulted primarily from the Company's efforts to work more
cooperatively with these third party consultants with the expectation that these
vendors would provide the Company with leads and introductions into larger
software transactions.
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 70.3% from $12.6 million, or 34.3% of
revenues, in the year ended December 31, 1997 to $21.4 million, or 43.6% of
revenues, in the year ended December 31, 1998. The increase in sales and
marketing expenses was primarily related to the hiring of 40 additional sales
and marketing personnel, increased commissions as a result of higher license
revenues, increased use of outside third party consultants for sales and
marketing efforts and increased marketing activities, including advertising,
trade shows and promotional expenses. The Company may expand its sales and
marketing staff over the next twelve months.
Product Development. Product development expenses consist primarily of
salaries, bonuses, other related personnel expenses and consulting fees, as well
as the cost of facilities and equipment. Product development expenses increased
49.7% from $6.2 million, or 16.9% of revenues, in the year ended December 31,
1997 to $9.3 million, or 18.9% of revenues, in the year ended December 31, 1998.
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,
an increase in third party consulting expense, the continuing development of the
Company's software products, including spending on the Company's new ChannelEDGE
and BuyingEDGE.com, and further development efforts resulting from the
in-process development projects acquired from MIS and TSI. Both new hires and
third party outside consultants are working on new product development.
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General and Administrative. General and administrative expenses represent the
costs of executive, finance and administrative support personnel, the portion of
occupancy expenses allocable to administration and unallocated corporate
expenses such as fee for legal and auditing services. General and administrative
increased 22.2% from $4 million, or 11.3% of revenues, in the year ended
December 31, 1997 to $5.3 million, or 10.9% of revenues, in the year ended
December 31, 1998. The increase in general and administrative expenses was
primarily due to an increase in salaries and benefits related to additional
staff and support to the Company's growth, external legal and accounting costs
and bank charges.
Provision for doubtful accounts. The provision for doubtful accounts
increased from $637,000 for the year ended December 31, 1997 to $6.8 million
for the year ended December 31, 1998. The increase resulted from a review of the
collectibility of accounts receivable which took into account continued
financial weakness among teleservices outsourcing customers, the Company's rapid
growth in revenues and corresponding growth in accounts receivable and certain
economic uncertainties in markets in which the Company operates, including South
America and Asia Pacific. Approximately 80% of the accounts receivable reserve
increase in 1998 was attributable to teleservices outsourcing customers. In
order to minimize future doubtful accounts reserve increases, the Company has
implemented stricter credit requirements for customers in the teleservices
outsourcing industry.
The 1998 increase in reserves for doubtful accounts was primarily
attributable to reserves of $1.8 million and $3.5 million taken in the third and
fourth quarters of 1998, respectively. The fourth quarter reserves resulted
primarily from the following: (i) in February of 1999, the Company learned that
a teleservices outsourcing customer with a receivable balance of $1.3 million at
September 30, 1998 had become insolvent and therefore the Company reserved 100%
of this receivable in the fourth quarter: (ii) two other teleservices
outsourcing customers with an aggregate receivable balance of $1.7 million at
September 30, 1998 responded negatively to collection efforts in the fourth
quarter and raised defenses or counterclaims that caused the Company to increase
reserves for such accounts by an aggregate of $1,008,000 based on the Company's
reevaluation of the likelihood and cost of collection of such accounts in light
of such responses; and (iii) the Company decided to discontinue collection
efforts with respect to two other significant receivables based upon
circumstances specific to those accounts and increased reserves for such
accounts by an aggregate of $452,000.
Acquired Product Development Costs. Acquired product development costs
resulted from the March 30, 1998 acquisitions of the assets of Marketing
Information Systems, Inc. ("MIS") and Telemar Software International LLC
("TSI"). There was no similar acquisition activity for the year ended December
31, 1997. In connection with the acquisitions of MIS and TSI, the Company
allocated $7.0 million of the purchase price to in process research and
development ("R&D") projects. This allocation represented the estimated fair
value at the date of acquisition based on risk-adjusted cash flows related to
the incomplete products. At the acquisition date, the development of these
projects had not yet reached technological feasibility and the R&D in progress
had no alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
The values assigned to these assets were determined by identifying
significant research projects for which technological feasibility had not been
established, including development, engineering and testing activities
associated with the creation of SalesPath, a new product under development by
MIS, and new releases of MSM and Telemar, which were telemarketing products
marketed by MIS and TSI, respectively. Valuation of development efforts in the
future was excluded from the analysis.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products relate to the completion of all planning,
designing, prototyping, and testing activities that are necessary to establish
that the proposed technologies meet their design specifications including
functional, technical, and economic performance requirements.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in developing
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate.
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Long-term revenue growth was deemed to be reasonable compared to growth
estimates of guideline companies in the same or similar industries facing
similar market risks. An examination of seven guideline companies indicated
that growth estimates ranged from 29% to 53% with an average long-term growth
estimate of 39%. The estimated revenue growth rates for MIS and TSI used in
determining the values of the in-process technologies were 38% and 44%,
respectively. These growth estimates were considered reasonable taking into
consideration the level of sales of the companies in 1997, $4 million and $2.4
million for MIS and TSI, respectively.
Selling, general and administrative expenses and profitability estimates
were determined based on historical indications, anticipated business changes in
the near term, as well as an analysis of the guideline companies.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and several studies of investment
rates of return. Due to the nature of the forecast and the risks associated
with the projected growth, profitability and developmental projects, a discount
rate of 30% was appropriate for the business enterprises of both MIS and TSI,
25% for the existing products and technology, and 32.5 to 35% for the in-process
R&D. Because the in-process projects were such an integral part of each business
enterprise, only a moderate increase in the discount rate for the in-process
technology was deemed appropriate.
These discount rates were commensurate with MIS' and TSI's market positions,
the uncertainties in the economic estimates described above, the inherent
uncertainty surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the profitability levels of such
technology, and the uncertainty of technological advances that were unknown at
the time of acquisition.
Selection of an appropriate discount rate for each project was based on
perceived risk related to each individual project taking into consideration the
nature of the R&D effort and the stage of development. The risk of MIS achieving
the revenue from SalesPath was deemed higher than the risk of achieving revenue
from in-process releases of MSM since the MSM in-process releases were based on
an existing product. While SalesPath inherently had a higher technical risk
since it was a completely new platform, at the date of acquisition the Company
believed that this risk was lessened by the market's move away from an AS/400
based product. Further, at the date of acquisition, SalesPath had been estimated
to be greater than 80% complete, which decreased the risk of not completing the
project successfully.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results.
MIS' and TSI's in-process research and development value is comprised of two
individual on-going projects for each company. Completion dates for the projects
in progress were anticipated to occur over the two years after the acquisition
at which dates the Company expected to begin generating the economic benefits
from the technologies. Funding for such projects was expected to be obtained
from internally generated sources.
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As of December 31, 1998, development of the new releases of the Telemar
product were approximately on schedule with Telemar 6.1 having been released in
November 1998. 1998 revenues from the Telemar suite of products were not
materially different from the forecast revenues.
As of December 31, 1998, development of the new version of the MSM product
was approximately on schedule with MSM 400 having been released in September
1998. 1998 revenues from the MSM suite of products were significantly lower than
had been forecast in the valuation model.
The Company believes that the acquired SalesPath technologies are of no
material value. Although these technologies were believed to be valuable at the
time of acquisition, following the acquisition, the Company discontinued the
development of SalesPath as a stand-alone product for several reasons, including
increased demand by the Company's customers for more integrated customer
interaction software and increases in the projected time and expense to complete
development of SalesPath on a stand-alone basis. Primarily for these reasons,
the Company instead elected to pursue development of a sales force automation
component as part of its EDGE suite of products. Although the Company will
incorporate certain concept and design elements of the SalesPath technologies
into its EDGE sales force automation product, these elements are not believed to
have significant value because they will not materially reduce development time
or expense. See Note 3 to the Financial Statements.
Research and development expenses allocable to the in-process projects
related to the new releases of Telemar and MSM were not materially different
than forecast. Research and development expenses prior to the decision to
discontinue development were also not materially different than forecast.
Research and development for SalesPath as a stand-alone product were
discontinued in early August 1998.
If Telemar and MSM 400 projects are unsuccessful, the sales and profitability
of the Company may be adversely affected in future periods. Commercial results
will be subject to uncertain market events and risks, which are beyond the
Company's control, such as trends in technology, government regulations, market
size and growth, and product introduction or other actions by competitors.
One Time Settlement Charge. The one time settlement charge reflects the
total cost of the settlement of litigation against the Company by Rockwell
International Corporation, including the payment of $1.75 million to Rockwell
and approximately $413,000 in legal fees, court costs, disbursements and
expenses. This one time settlement charge represented 4.4% of revenues for the
year ended December 31, 1998.
Other Income (Expense). Other income (expense) was $18,000 for the year
ended December 31, 1997 compared to $810,000 for the year ended December
31, 1998. Other income (expense) consists primarily of interest earned
on short-term investments less interest expense on debt and equipment financing.
Interest income increased by $198,000 from $641,000 in the year ended
December 31, 1997 to $839,000 in the year ended December 31, 1998 while
interest expense decreased by $688,000 from $723,000 in the year ended
December 31, 1997 to $35,000 in the year ended December 31, 1998.
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Provision For Income Taxes. Provision for income taxes consists of foreign
and state income and withholding taxes. The provision for income taxes increased
from $231,000 in the year ended December 31, 1997 to $470,000 in year ended
December 31, 1998. At December 31, 1998, the Company had approximately $13.0
million of U.S. Federal net operating loss carryforwards, of which approximately
$4.1 million resulted from the exercise of non-qualified stock options, and
approximately $4.0 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. The U.S. Federal net operating loss carryforwards expire through 2018
and the State net operating loss carryforwards expire through 2003.
In addition, the Company has United Kingdom net operating loss carryforwards
of approximately $3.5 million, which can be utilized to offset future taxable
income and which have no expiration.
The Company has recorded a full valuation allowance against its deferred tax
assets, including those resulting from net operating loss carryforwards, as a
result of uncertainties regarding the realization of the asset. Such
uncertainties result from cumulative losses in recent years and the lack of a
sufficiently quantifiable backlog given the Company's selling cycle and the
industry in which the Company operates. As the future realization of deferred
tax assets is primarily contingent upon the Company's ability to generate future
taxable income, and given the limited history of generating such taxable income,
the Company does not believe it appropriate to recognize a net deferred tax
asset based on forecasted operating results.
The IPO resulted in a change of ownership, as defined by Federal income tax
laws and regulations. As a result of this change in ownership, the amount of
U.S. Federal net operating loss carryforwards generated prior to the IPO which
can be utilized to offset Federal taxable income has an annual limitation of
approximately $4.7 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total revenues increased 39.6% from $26.3 million in 1996 to $36.7 million in
1997.
License Fees. Total license fees increased 48.2% from $13.0 million, or 49.6% of
total revenues in 1996 to $19.3 million, or 52.6% of total revenues in 1997.
EDGE license fees increased 58.4% from $12.2 million in 1996 to $19.3 million in
1997. The increase in EDGE license fees was primarily attributable to increases
in both the number of license transactions and the average price per customer
license, which the Company believes was primarily the result of greater market
awareness and acceptance of the EDGE products and expansion of the Company's
sales and marketing organization. Telemar license fees decreased from $842,000
in 1996 to $0 in 1997 due to the sale of the Telemar product line to TSI in
September 1996.
Services and Maintenance. Services and maintenance revenues increased 31.1% from
$13.3 million, or 50.4% of total revenues in 1996 to $17.4 million, or 47.4% of
total revenues in 1997. EDGE services and maintenance revenues increased 49.2%
from $11.6 million in 1996 to $17.4 million in 1997. The increase in EDGE
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services and maintenance revenues was primarily attributable to increased demand
for services and maintenance and the significant increase in EDGE software
licenses in 1997. Telemar services and maintenance revenues decreased from $1.6
million in 1996 to $0 in 1997 due to the sale of the Telemar product line in
September 1996.
Cost of Revenues
Cost of revenues increased 23.2% from $7.9 million in 1996 to $9.7 million in
1997.
Cost of License Fees. Cost of license fees is comprised of the costs of media
packaging, documentation, third party software and software production
personnel. Cost of license fees decreased 57.1% from $709,000, or 5.4% of total
license fees in 1996 to 304,000, or 1.6% of total license fees in 1997. The
higher cost of license fees in 1996 was attributable to the cost of other
vendors' products resold by the Company in connection with the Telemar product
line.
Cost of Services and Maintenance. The cost of services and maintenance consists
of salaries, wages, benefits and other costs related to installation,
implementation, training, and maintenance support of the Company's software
products. The cost of services and maintenance increased 31.1% from $7.2
million, or 54.3% of services and maintenance revenues in 1996 to $9.4 million,
or 54.3% of services and maintenance revenues in 1997. The increase in cost of
services and maintenance was primarily attributable to additional personnel
hired to meet customer needs for services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
commissions, salaries, bonuses and other related expenses for sales and
marketing personnel, as well as marketing, advertising and promotional expenses.
Sales and marketing expenses increased 56.2% from $8.1 million, or 30.7% of
total revenues in 1996 to $12.6 million, or 34.3% of total revenues in 1997.
This increase was primarily attributable to the hiring of additional sales and
marketing personnel, increased print advertisements, participation in trade
shows, travel expenses and other sales and marketing expenses.
Product Development. Product development expenses consist primarily of salaries,
bonuses, other related personnel expenses and consulting fees, as well as the
cost of facilities and equipment. Costs related to product development are
expensed as incurred. Product development expenses decreased 3.0% from $6.4
million, or 24.3% of total revenues in 1996 to $6.2 million, or 16.9% of total
revenues in 1997. However, product development expenses related to EDGE
increased 16.5% from $5.3 million to $6.2 million. The reduction in total
product development expenses was attributable to the sale of the Telemar product
line in September 1996, after which no Telemar product development expenses were
incurred.
General and Administrative. General and administrative expenses represent the
costs of executive, finance and administrative support personnel, the portion of
occupancy expenses allocable to administration, unallocated corporate expenses
such as fees for legal and auditing services. The Company's general and
administrative expenses increased 16.5% from $3.6 million, or 13.6% of total
revenues in 1996 to $4.2 million, or 11.3% of total revenues in 1997. This
increase was generally attributable to increases in general and
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administrative costs associated with higher business volume, including the
hiring of administrative personnel, the leasing of additional office space,
higher legal and accounting expenses.
The provision for doubtful accounts increased from $319,000 for the year ended
December 31, 1996 to $637,000 for the year ended December 31, 1997. The increase
is based on management's review of several factors, such as increased revenues
and review and assessment of accounts receivable.
Other Income
Interest Expense. Interest expense consists of interest on debt and equipment
financing less interest earned on cash, short term investments, notes receivable
from officers and the promissory note entered into in connection with the sale
of Telemar. Net interest expense decreased 93.0% from $1.2 million in 1996 to
$82,000 in 1997 primarily as a result of the completion of the Company's initial
public offering of Common Stock in August 1997, the repayment of all of the
Company's outstanding indebtedness with the proceeds of the offering and the
investment of the remaining proceeds in interest bearing securities. Interest
income was $641,000 and interest expense was $723,000 in 1997.
Other
In connection with the sale of Telemar, the Company received a promissory note
from TSI in the principal amount of $650,000 (the "TSI Note") payable in five
equal annual installments commencing October 1997 and which bears interest at
8.0% per annum. At the time of issuance, the Company fully reserved for the TSI
Note because collectibility, based on the start-up nature of TSI operations, was
not ascertainable at the time of sale. This note was paid off in connection with
the aquisition of TSI by the Company in March 1998. The Company had other income
of $100,000 in 1997 due to the receipt of a payment of $100,000 on the
promissory note received in connection with the sale of Telemar, compared with
other income of $92,000 in 1996, which was attributable to a gain on the sale of
Telemar assets.
Provision for Income Taxes. The increase in provision for income taxes is
primarily attributable to an increase in international withholding taxes. At
December 31, 1997, the Company had approximately 8.6 million of U.S. Federal net
operating loss carryforwards of which approximately 3.4 million resulted from
the exercise of nonqualified stock options, and approximately $2.5 million of
state net operating loss carryforwards.
Liquidity and Capital Resources
At December 31, 1998, the Company had $11.6 million in cash and cash
equivalents and $16.5 million in accounts receivable. For the year ended
December 31, 1998, the Company used net cash of $7.5 million from operating
activities. The net cash of $7.5 million used in operations resulted primarily
from the net loss of $20.3 million, offset by the $7.0 million non-cash charge
for acquired product development costs related to the acquisitions of MIS and
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TSI, depreciation and amortization of $1.8 million and an increase of $3.1
million in accounts payable and accrued liabilities and reduced by an increase
of $975,000 in accounts receivable. The fluctuations in operating assets and
liabilities were primarily due to increases in accounts receivable reserves by
approximately $6.5 million in 1998, the timing of orders, collections of
accounts receivable and the payment of accounts payable.
For the year ended December 31, 1998, the Company's primary investing
activities consisted of net proceeds from short term investments of
approximately $16.4, use of $2.3 million for purchases of computer and
office equipment to support the Company's expanding employee base, use of $1.7
million related to a minority equity investment and $1.6 million of cash paid in
connection with the acquisitions of MIS and TSI and related deal costs.
For the year ended December 31, 1998, the Company's primary financing
activities consisted of the exercise of employee stock options which provided
cash proceeds of $665,000.
In March 1999, the Company obtained a commitment from a commercial bank to
provide a $7.5 million senior secured revolving credit facility bearing interest
at a floating rate based on several rate alternatives (the "Credit Facility").
Borrowings will be limited to the lesser of $7.5 million or 80% of eligible
accounts receivable. The Credit Facility will mature two years after the closing
date and will be secured by all of the Company's assets. The Credit Facility
will contain certain affirmative and negative financial covenants. The closing
of the Credit Facility is subject to execution of a definitive credit agreement
and other customary conditions. The Company expects to formalize the Credit
Facility with the bank in April 1999.
The Company anticipates that its current cash and cash equivalents together
with cash provided by operations and borrowings under the Credit Facility will
be sufficient to meet the Company's projected working capital and other cash
requirements for the foreseeable future but there can be no assurance that the
Company will be able to generate sufficient cash to meet its requirements from
these sources. The Company's future operating and capital requirements will
depend on numerous factors, including the collection of accounts receivable, the
level of resources the Company devotes to marketing and sales activities and
internal research and development programs, advances in technology, the
successful development and introduction of new products and any acquisitions or
strategic alliances or investments which 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.
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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.
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The Company believes that all current versions of its products will meet
basic functionality requirements, however, because all specific customer
situations and uses cannot be anticipated, IMA may be faced with warranty and
other claims as a result of the Year 2000 transition. The impact of such
customer claims could have a material adverse impact on the Company's results of
operations and financial condition.
Some customers may have written applications using the Company's products.
The Company, in its consulting capacity, also has written such applications. The
Company believes that most applications written by it are Year 2000 compliant.
The Company does not know, and has no meaningful way of determining, whether the
applications written by customers are Year 2000 compliant.
The Company is in the process of completing a comprehensive evaluation of its
internal systems and equipment that addresses both information technology
systems ("IT") (i.e. business systems and the software development environment)
and non-IT systems, (i.e. elevators, building security and HVAC systems)
including hardware, software and firmware. The Company has begun to upgrade
certain critical systems to meet with Year 2000 requirements. The Company will
be conducting transaction testing in the first half of 1999 to evaluate
compliance of the overall system infrastructure. The Company will consider the
need for remediation plans as it continues to assess the Year 2000 risk. The
Company expects to complete its evaluation by the end of the second quarter of
1999. The Company's inability to remediate non-compliant systems in its
infrastructure could have a material adverse affect on the Company's results of
operations and financial condition.
The costs incurred to date related to upgrading the Company's products to be
Year 2000 compliant were approximately $200,000 and have been funded from
operating cash flows and have not been separately accounted for partly because
the responsibilities and costs were distributed throughout the organization and
represent a small percentage of total operating costs. Expenses associated with
evaluation of the Company's internal systems for Year 2000 problems have been
approximately $100,000. The Company originally had expected to complete its
evaluation by the end of the first quarter of 1999. Staff reorganization and
relocation of the Company's Irvine office, has caused the Company to revise
this estimate. The Company now expects to complete an estimate of the
anticipated cost of upgrading internal systems by the end of the second quarter
of 1999. While the Company expects to incur additional expenses to complete
these upgrades, it does not believe the implementation of the Year 2000 programs
discussed above will have a material adverse impact on the Company's financial
condition or results of operations. The Company believes that it has sufficient
funds to satisfy costs incurred to date and future Year 2000 compliance costs.
The Company has initiated the development of a comprehensive Year 2000
contingency plan to address situations that may result if the Company is unable
to achieve Year 2000 readiness of its critical systems. The contingency plan is
expected to be completed during the second quarter of 1999.
The Company also is in the process of conducting a review of its critical
suppliers to determine that the suppliers' operations and the products and
services they provide are Year 2000 compliant or that an alternative source for
this critical product or service is available. The Company originally estimated
that this review would be completed in the first quarter of 1999. Slower than
expected responses from its critical suppliers, however, has caused the Company
to revise this estimate. The Company now believes the review of its suppliers
will be complete during the second quarter of 1999. The Company has no practical
means to verify the information provided by these independent third parties and
is still pursuing those key distributors and vendors who may not yet have
responded. Based upon this assessment and where practicable, the Company will
attempt to mitigate its risks with respect to any suppliers that may not meet
the requirements, including seeking alternative suppliers. However, there can be
no assurance that the Company will not experience disruptions in
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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-K which express "belief", "anticipation" or
"expectation", as well as other statements which are not historical fact, and
statements as to product compatibility, design, features, functionality and
performance insofar as they may apply prospectively, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and the Company's actual results could differ materially from those
expressed in these forward-looking statements as a result of numerous factors,
including those set forth below, and elsewhere in this Form 10-K.
History of Operating Losses; Uncertainty of Future Operating Results. We
incurred significant net operating losses in each of 1992, 1993, 1994, 1995 and
1998. As of December 31, 1998, we had an accumulated deficit of $34.3 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
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announcements by us or our competitors;
. changes in our business strategies;
. the budgeting cycles of our potential customers;
. customer order deferrals in anticipation of enhancements or new
products;
changes in the mix of products and services we sell;
. changes in the amount of our revenue attributable to domestic and
international sales;
. changes in foreign currency exchange rates;
. product and price competition;
. cancellations or non-renewals of licenses or maintenance agreements;
investments to develop marketing and distribution channels; and
. changes in the level of our operating expenses.
To achieve our quarterly revenue objectives, we depend upon obtaining orders in
that quarter for delivery in that quarter. The timing of our revenue recognition
is affected by the amount of contracts executed and delivered, whether the
contract contains post delivery obligations and when our customers accept the
product. We derive a significant portion of our revenues in any quarter from
non-recurring, large license fees paid to us by a relatively small number of
customers. We expect this trend to continue for the foreseeable future.
Therefore, if a customer defers, cancels or fails to honor its contractual
obligations, our operating results could be materially adversely affected in a
given quarter. On the other hand, significant sales occurring earlier than
expected may adversely affect subsequent quarters. In addition, we have
experienced and expect to continue to experience stronger demand during the
quarters ending in June and December than during the quarters ending in March
and September. We receive a substantial portion of our orders in the last months
or weeks of any given quarter.
Because of the factors stated above, we are not able to predict our
quarterly revenues and operating results with any significant degree of
accuracy. If revenue levels fall below expectations, the shortfall would likely
materially adversely affect our business, operating results and financial
condition. As a result, we believe that you should not rely on period-to-period
comparisons of our results of operations as meaningful indicators of future
performance. We cannot assure you that we will be able to achieve or sustain
profitability on a quarterly or annual basis. We expect that in some future
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 $8.6 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
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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 if:
. we have no significant post-delivery obligations;
. our customer has no acceptance conditions; and
we believe that we can collect the resulting receivable.
If any of the above conditions do not exist, we will 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
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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 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.
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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.
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Our customers have adopted a wide variety of hardware, software, database
and networking platforms. To gain broad market acceptance, we must continue to
support and maintain our products on a variety of such platforms and develop and
introduce enhancements to our existing products and new products on pace with
technological developments, changing customer requirements and evolving industry
standards. Our future success depends on our ability to address the
increasingly sophisticated needs of our customers. Our success may also depend,
in part, on our ability to introduce products that are compatible with the
Internet, and on the broad acceptance of the Internet as a viable customer
interaction channel. We cannot assure you that the Internet will become a
viable customer interaction channel or that the demand for Internet-related
products and services will increase in the future.
We also cannot assure you that we will be successful in developing and
marketing enhancements to our products that respond to technological
developments, changing customer requirements or evolving industry standards. We
may experience difficulties that could delay or prevent the successful
development, introduction and sale of such enhancements. Our enhancements may
not adequately meet the requirements of the marketplace and achieve any
significant degree of market acceptance. Product enhancement and new product
delays or failure to achieve market acceptance when released could materially
and adversely affect our business, operating results or financial condition. In
addition, the introduction or announcement of new product offerings or
enhancements by us, our competitors or major hardware, systems or software
vendors may cause customers to defer or forego licensing of our products, which
could have a material adverse effect on our business, operating results and
financial condition.
We also cannot assure you that we will be successful in the development and
implementation of any of our new software products, specifically our
BuyingEDGE.com product for purchasing goods and services over the Internet. Our
strategy regarding the BuyingEDGE.com system will rely on several sources of
revenue. We can not assure you that the BuyingEDGE.com product will achieve any
degree of market acceptance among consumers or manufacturers and service
providers. Internet purchasing is a rapidly evolving area of commerce with
rapid technological changes and the frequent introduction of new products and
services. These technological changes and increased competition in the Internet
commerce area could render the BuyingEDGE.com product obsolete and rapidly
diminish the Company's ability to establish a position in existing or future
markets. We can not assure you that competitors will not develop products
comparable or superior to ours or adapt more quickly than we do to new
technologies, evolving industry trends or the changing needs of consumers.
Though the Company intends to make substantial investments form time to time in
the development and testing of BuyingEDGE.com, we cannot assure you that we will
have sufficient resources to make the necessary investments. We may experience
difficulties that could delay or prevent the successful development,
introduction, and sale of the BuyingEDGE.com product. We can not assure you
that BuyingEDGE.com will adequately meet the requirements of the marketplace and
achieve any degree of market acceptance. BuyingEDGE.com product delays, the
failure to achieve market acceptance could materially and adversely affect our
business, operating results or financial condition.
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.
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Design defects in such products or unexpected delays in their introduction,
could materially and adversely affect our business, operating results and
financial condition.
Management of Growth. We recently have experienced rapid growth. This
growth could place a significant strain on our management and other resources.
We anticipate that the growth of our company, if any, will require us to
recruit, hire, train and retain a substantial number of new and highly skilled
product development, managerial, finance, sales and marketing and support
personnel. The market for such personnel is intensely competitive and we expect
that such competition will continue for the foreseeable future. We cannot assure
you that we will be able to hire or retain such personnel.
Our ability to compete effectively and to manage future growth, if any,
depends on our ability to continue to implement and improve operational,
financial and management information systems on a timely basis and to expand,
train, motivate and manage our work force. We cannot assure you of the future
adequacy of our personnel, systems, procedures and controls. Inability to
effectively manage growth and the quality of our products could materially and
adversely affect our business, operating results and financial condition.
Competition. The market for telemarketing, telesales and customer service
software is:
. intensely competitive;
. rapidly evolving; and
. highly sensitive to new product introductions or enhancements and
marketing efforts by industry participants.
Our competitors range from internal information systems departments to packaged
software application vendors. We believe that as the United States and
international software markets continue to grow, a number of new vendors will
enter the market and existing competitors and new market entrants will attempt
to develop applications targeting additional markets. Our segment of the
software industry has experienced consolidation as certain of our larger
competitors have recently acquired other smaller competitors. In addition,
competitors have established and may in the future establish cooperative
relationships or alliances that may increase their ability to provide superior
software solutions or services.
Increased competition resulting from new entrants, consolidation of the
call center customer interaction software industry, cooperative relationships or
alliances could result in new or stronger competitors, price reductions, reduced
operating income or loss of market share, any of which could materially
adversely affect our business, operating results or financial condition. Many of
our current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources. They generate higher
revenues and have greater name recognition. We cannot assure you that our
competitors will not develop products comparable or superior to ours or adapt
more quickly than we do to new technologies, evolving industry trends or
changing client requirements. We cannot assure you that we will compete
effectively against competitors or that competitive pressures will not
materially and adversely affect our business, operating results or financial
condition.
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Dependence on Key Personnel. Our business involves the development,
marketing and installation of complex software products and the delivery of
professional services. Our success will depend in large part upon our ability
to attract, retain and motivate highly skilled employees. The market for such
employees is intense and we expect that such competition will continue for the
foreseeable future. We cannot assure you that we will hire or retain such
personnel. Failure to hire and retain sufficient numbers of highly skilled
employees could materially and adversely affect our business, operating results
and financial condition. In addition, the loss of Albert R. Subbloie, Jr., the
President and Chief Executive Officer, or Gary R. Martino, Chairman of the Board
and Chief Financial Officer, or some of our other key personnel could have a
material adverse effect on our business, operating results or financial
condition, including our ability to attract employees and secure and complete
engagements. We maintain key-man life insurance policies with respect to
certain of our executive officers, including Mr. Subbloie and Mr. Martino.
Risk of Product Defects. Software products, particularly new versions,
frequently contain errors, especially when first introduced. We conduct
extensive product testing during product development. Nevertheless, we have at
times delayed commercial release of software until we corrected problems. In
some cases, we have provided enhancements to correct errors in released
software. We could, in the future, lose revenues as a result of software errors
or defects. Despite testing by us and by current and potential customers, future
software or releases after commencement of commercial shipments may include
errors, resulting in
. loss or delay of revenue;
. delay in market acceptance;
. diversion of development resources;
. damage to our reputation; or
increased service and warranty costs.
Any of these results could materially and adversely affect our business,
operating results and financial condition.
Risks Associated with International Operations. International operations
account for a significant portion of our total revenues and we intend to
continue and expand our international sales activity. Continuation and expansion
of international operations will require significant management attention and
financial resources and will require us to establish additional foreign
operations and hire additional personnel. We may not be able to maintain or
increase international market demand for our products and failure to do so could
materially and adversely affect our business, operating results or financial
condition.
International Currency Risks. We currently denominate our international
sales in U.S. dollars with respect to sales outside of the United Kingdom,
Europe and Australia, and generally in pounds sterling with respect to sales in
the United Kingdom and Europe. An increase in the value of the U.S. dollar or
pound sterling relative to other currencies could make our products more
expensive and, therefore, potentially less competitive in foreign markets.
Currently, we have not employed currency hedging strategies to reduce this risk
although we may consider employing hedging strategies in the future based on our
assessment of exposure to fluctuations in foreign currency exchange rates. We
cannot assure you that our assessments of exposure to fluctuations in foreign
currency exchange rates will be accurate or that any hedging strategies we may
use in the future will be effective.
22
<PAGE>
International Operation and Collection Risks. The following risk factors
associated with our international business may have a material adverse effect on
our future international sales and, consequently, on our business, operating
results or financial condition:
. potentially longer payment cycles;
. difficulties in collecting international accounts receivable;
. difficulties in enforcement of contractual obligations and
intellectual property rights;
. potentially adverse tax consequences;
. increased costs associated with maintaining international marketing
efforts;
. increased costs of localizing products for foreign markets;
. tariffs, duties and other trade barriers;
. adverse changes in regulatory requirements;
. possible recessionary economies outside of the United States; and
. political and economic instability.
Dependence on Licensed Technology. We license, and expect to license in
the future, technology from other companies for use in and with our products.
Our inability to license these products or other necessary products for use in
or with our products could have a material adverse effect on our business,
operating results or financial condition. In addition, the effective
implementation of our products may depend in the future upon the successful
operation of licensed products as an integrated part of, or in conjunction with,
our products. Any undetected errors in such licensed products could impair the
functionality of our products or otherwise delay or prevent the implementation
of an installation or the introduction of new products, and injure our
reputation, which could have a material adverse effect on our business,
operating results or financial condition.
Increased Use of Third-Party Development Tools. Our EDGE products include
application development tools produced by third parties used to build and modify
our applications. Third-party application development tools may become more
widely used as a result of technological advances or customer requirements.
Wider use of third-party applications could require us to make greater use of
third-party tools in the future. This increased use would require us to enter
into license arrangements with such third parties resulting in higher royalty
payments, a loss of product differentiation and delays. Such effects or our
inability to enter into commercially reasonable licenses could have a material
adverse effect on our business, operating results or financial condition.
Dependence on Growth of Client/Server Computing Environment. We market our
products to customers:
. committed or committing their call center systems to client/server
computing environments; or
. converting legacy systems, in part or in whole, to a client/server
computing environment.
Our success will depend on further growth in the number of organizations
adopting client/server computing environments. We cannot assure you that the
anticipated client/server computing trends will occur or that we will respond
effectively to the evolving requirements of this market. Failure of the
client/server market to grow, or growth at a rate slower than experienced in the
past, could materially and adversely affect our business, operating results or
financial condition.
23
<PAGE>
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.
In certain cases, we have warranted that the use or occurrence of dates on
or after January 1, 2000 will not adversely affect the performance of our
products with respect to four digit date dependent data or the ability to
create, store, process, and output information related to such data. If any of
our licensees experience Year 2000 problems, those licensees could assert claims
for damages. Such claims, whether or not successful, could materially and
adversely affect our business, operating results and financial condition.
In addition, the purchasing patterns of our customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by us. This may adversely
affect on our business, operating results, and financial condition.
24
<PAGE>
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 7A: 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. For the year ended December 31, 1998, the Company derived 36%
of its revenues from international operations. Further, approximately 24% of
the Company's expenses are payable in other currencies, primarily pounds
sterling. Accordingly, the impact of increases or decreases in foreign currency
exchange rates on the Company's revenues will be offset by the corresponding
impact on the Company's expenses.
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
foreign exchange exposures to assess risks of fluctuations in foreign currency
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 Franc 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
December 31, 1998 was 4.5%. The fair value of securities held at December 31,
1998 was $3.1 million.
25
<PAGE>
PART II: OTHER INFORMATION
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
- --------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Consolidated Balance Sheets as of December 31, 1997
and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Shareholders of
Information Management Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Information
Management Associates, Inc. (a Connecticut corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Information
Management Associates, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Hartford, Connecticut
March 3, 1999
F-2
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share amounts)
1997 1998
-------- -------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4,816 $ 8,558
Short-term investments 19,455 3,091
Accounts receivable, net of allowance
for doubtful accounts of $630 in
1997 and $3,408 in 1998 14,815 16,487
Other current assets 1,420 1,985
------- -------
Total current assets 40,506 30,121
EQUIPMENT, net 2,279 3,134
NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES 24 -
OTHER ASSETS, net 1,113 3,983
------- -------
$43,922 $37,238
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of obligations
under capital leases $ 232 $ 73
Accounts payable 1,738 6,985
Accrued compensation 1,597 2,025
Other accrued liabilities 1,040 2,402
Deferred revenues 1,686 4,341
-------- --------
Total current liabilities 6,293 15,826
-------- --------
OBLIGATIONS UNDER CAPITAL LEASES, less
current maturities included above 136 58
-------- --------
OTHER LONG-TERM LIABILITIES 463 432
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 20,000,000
authorized shares, 9,236,035 and 9,697,088
shares issued and outstanding at December 31,
1997 and 1998 51,102 54,691
Shares to be issued in connection with
acquisition - 564
Cumulative translation adjustment (101) (63)
Accumulated deficit (13,971) (34,270)
-------- --------
Total shareholders' equity 37,030 20,922
-------- --------
$ 43,922 $ 37,238
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
License fees $13,022 $19,295 $ 24,903
Services and maintenance 13,255 17,377 24,190
------- ------- --------
Total revenues 26,277 36,672 49,093
------- ------- --------
Cost of revenues:
Cost of license fees 709 304 356
Cost of services and maintenance 7,191 9,428 17,420
------- ------- --------
Total cost of revenues 7,900 9,732 17,776
------- ------- --------
Gross profit 18,377 26,940 31,317
------- ------- --------
Operating expenses:
Sales and marketing 8,055 12,580 21,419
Product development 6,382 6,190 9,266
General and administrative 3,559 4,147 5,338
Provision for doubtful accounts 319 637 6,782
Acquired product development costs - - 6,988
One time settlement charges - - 2,163
------- ------- --------
Total operating expenses 18,315 23,554 51,956
------- ------- --------
Operating income (loss) 62 3,386 (20,639)
------- ------- --------
Other income (expense):
Interest expense (1,219) (723) (35)
Interest income 48 641 839
Other 92 100 6
------- ------- --------
Total other income (expense) (1,079) 18 810
------- ------- --------
Income (loss) before provision for
income taxes (1,017) 3,404 (19,829)
Provision for income taxes 30 231 470
------- ------- --------
Net income (loss) (1,047) 3,173 (20,299)
Accretion of preferred stock dividends (452) (452) -
Increase in fair market value of
redeemable common stock warrants (385) - -
------- ------- --------
Net income (loss) available to common
shareholders' $(1,884) $ 2,721 $(20,299)
======= ======= ========
Net income (loss) per share:
Basic $(.44) $.43 $ (2.12)
======= ======= ========
Diluted $(.44) $.38 $ (2.12)
======= ======= ========
Weighted average shares used in computing net
income (loss) per share:
Basic 4,258 6,371 9,588
======= ======= ========
Diluted 4,258 7,714 9,588
======= ======= ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,047) $ 3,173 $(20,299)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization 1,155 1,404 1,784
Provision for doubtful accounts 319 637 6,782
Charge for acquired product development costs - - 6,988
Gain on sale of product line (92) - -
Amortization of restricted stock awards 10 10 -
Changes in operating assets and liabilities:
Accounts receivable (3,320) (4,979) (7,757)
Other current assets 143 (1,188) 564
Notes receivable from officers and employees (378) 548 -
Other assets, net (502) (492) 956
Accounts payable (480) (570) 5,247
Accrued compensation 109 431 428
Other accrued liabilities 973 (905) (2,592)
Deferred revenues (128) (19) 407
Other long-term liabilities (52) (57) (31)
------- --------- --------
Net Cash Used in Operations (3,290) (2,007) (7,523)
------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (1,001) (1,419) (2,323)
Cash paid in connection with acquisition - - (1,632)
and related deal costs
Minority equity investment - - (1,715)
Proceeds from short-term investing maturities - 352,106 83,784
Purchases of short-term investments - (371,515) (67,420)
------- --------- --------
Net Cash Provided by (Used in)
Investing Activities (1,001) (20,828) 10,694
------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of
issuance costs $4,049 231 32,350 -
Proceeds from exercise of stock options - 151 665
Proceeds from employee stock purchase plan - 48 105
Net proceeds from sale of preferred stock 4,228 - -
Repayment of bank term loan - (2,500) -
Net proceeds from (repayment of) bank line
of credit 1,860 (4,860) -
Repayment of obligations under capital leases (539) (269) (237)
Proceeds from sale leaseback 509 - -
Repayment of subordinated note payable to
shareholder (500) (250) -
------- --------- --------
Net Cash Provided by Financing Activities 5,789 24,670 533
------- --------- --------
Effect of exchange rate changes 32 (92) 38
------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,530 1,743 3,742
CASH AND CASH EQUIVALENTS, beginning of period 1,543 3,073 4,816
------- --------- --------
CASH AND CASH EQUIVALENTS, end of period $ 3,073 $ 4,816 $ 8,558
======= ========= ========
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 877 $ 671 $ 24
Cash paid during the period for income taxes 16 90 134
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of Series A preferred stock in
lieu of dividends 394 244 -
Accretion of Series B preferred stock in
lieu of dividends 58 208 -
Increase in fair market value of redeemable
common stock warrants 385 - -
Issuance of common stock in connection with - - 3,383
acquisitions
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Cumulative
Common Stock Translation Accumulated Comprehensive
Shares Amount Adjustment Deficit Total Income
------------ ------ ---------- ------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 4,255,195 $ 5,554 $ (41) $(14,808) $(9,295) $ --
Sale of common stock 32,400 231 - - 231
Exercise of common stock options 5,782 - - - -
Amortization of restricted stock
awards - 10 - - 10
Change in fair market value of
redeemable common stock warrants - - - (385) (385)
Accretion of Series A preferred
stock dividends - - - (394) (394)
Accretion of Series B preferred
stock dividends - - - (58) (58)
Equity adjustment from foreign
currency translation - - 32 - 32 32
Net loss - - - (1,047) (1,047) (1,047)
--------
Comprehensive loss - - - - - $ (1,015)
---------- ------- -------- --------- --------- ========
Balance, December 31, 1996 4,293,377 5,795 (9) (16,692) (10,906)
Sale of common stock, net of
issuance costs of $4,049 2,800,000 32,350 - - 32,350
Exercise of common stock options 187,957 151 - - 151
Employee stock purchase plan 5,841 48 - - 48
Amortization of restricted stock
awards - 10 - - 10
Conversion of redeemable common
stock warrants 416,699 2,865 - - 2,865
Conversion of Series A preferred
stock 920,433 5,389 - - 5,389
Conversion of Series B preferred
stock 611,728 4,494 - - 4,494
Accretion of Series A preferred
stock dividends - - - (244) (244)
Accretion of Series B preferred
stock dividends - - - (208) (208)
Equity adjustment from foreign
currency translation - - (92) - (92) (92)
Net income - - - 3,173 3,173 3,173
--------
Comprehensive income - - - - - $ 3,081
---------- ------- -------- --------- --------- ========
Balance, December 31, 1997 9,236,035 51,102 (101) (13,971) 37,030
Exercise of common stock options 185,295 665 - - 665
Employee stock purchase plan 20,917 105 - - 105
Issuance of Common Stock in
connection with acquisitions, 254,841 3,383 - - 3,383
including 42,508 shares valued
at $564 to be issued
Equity adjustment from foreign
currency translation - - 38 - 38 38
Net loss - - - (20,299) (20,299) (20,299)
--------
Comprehensive loss - - - - - $(20,261)
---------- ------- -------- --------- --------- ========
Balance, December 31, 1998 9,697,088 $55,255 $ (63) $(34,270) $ 20,922
========== ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
- --------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. Nature of Operations:
--------------------
Information Management Associates, Inc. and subsidiaries (collectively, the
Company) are primarily engaged in the development, marketing and support of
software that automates customer interaction including telemarketing,
telesales, contact management, sales, marketing and customer service
functions of business organizations in a variety of industries. The Company
markets its software products in North and South America as well as Western
Europe, Asia, Australia and New Zealand.
In July 1997, the Company completed its initial public offering of its
common stock which provided proceeds of $32.4 million, net of related
underwriting discounts and expenses (see Note 5).
The Company incurred a net loss of approximately $20,300,000 for the year
ended December 31, 1998, and has an accumulated deficit of approximately
$34,270,000 as of December 31, 1998. The market for telemarketing, telesales
and customer service software is intensely competitive, rapidly evolving and
highly sensitive to new product introductions or enhancements and marketing
efforts by industry participants. The Company competes with a large number
of competitors ranging from internal information systems departments to
packaged software application vendors. 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 management's ability to acheive profitable operations and
positive cash flow. Management's plans to address these risks include
marketing and sales efforts to increase revenues, focused research and
development investments and strict controls over discretionary expenditures.
In addition, the Company expects to formalize a line of credit agreement
with a bank in April 1999 to provide for additional liquidity (see Note 15).
The accompanying financial statements do not reflect any adjustments
resulting from the risks noted above.
2. Summary of Significant Accounting Policies:
------------------------------------------
Principles of consolidation -
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Foreign currency transactions -
-----------------------------
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, the Company applies the current rate method to translate the
subsidiaries' financial statements into U.S. dollars. Translation
adjustments are included as a separate component of shareholders' equity in
the accompanying consolidated financial statements.
Cash and cash equivalents -
-------------------------
F-7
<PAGE>
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. As of December 31, 1997 and
1998, the Company's cash and cash equivalents are primarily deposited with
two financial institutions.
Short-term investments -
----------------------
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities. This statement requires that securities be
classified as "held to maturity," "available for sale" or "trading", and the
securities in each classification be accounted for at either amortized cost
or fair market value, depending upon their classification. Included in the
accompanying 1997 and 1998 balance sheets are short-term corporate bonds
that have original maturities of less than six months, and which are
recorded at amortized cost plus accrued interest which approximates fair
value.
Equipment -
---------
Equipment is recorded at cost and is depreciated or amortized, using the
straight-line method, over their estimated useful lives of three to seven
years.
At December 31, 1997 and 1998, property and equipment, net, consisted of the
following (in thousands):
December 31,
---------------
1997 1998
------ -------
Equipment $4,890 $ 7,235
Furniture and fixtures 1,676 2,280
Leasehold improvements 595 487
------ -------
7,161 10,002
Less Accumulated depreciation and
amortization 4,882 6,868
------ -------
$2,279 $ 3,134
====== =======
Expenditures for repairs and maintenance are charged against income as
incurred while renewals and betterments are capitalized.
Software development costs -
--------------------------
The Company expenses research and development costs as incurred. The
Company has evaluated the establishment of technological feasibility of its
products in accordance with Statement of Financial Accounting Standards No.
86, Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed. The Company defines technological feasibility as the
completion of a working model. The Company sells products in a market that
is subject to rapid technological change, new product development and
changing customer needs. The Company has concluded that technological
feasibility is not established until the development stage of the product is
nearly complete. The time period during which costs could be capitalized
from the point of reaching technological feasibility until the time of
general product release
F-8
<PAGE>
is very short and, consequently, the amounts that could be capitalized are
not material to the Company's financial position or results of operations.
Therefore, the Company has charged all such costs to research and
development in the period incurred.
Revenue recognition -
-------------------
The Company generates revenues from licensing the rights to use its software
products directly to end users and indirectly through sublicense fees from
resellers. The Company also generates revenues from sales of software
maintenance contracts, and from consulting and training services performed
for customers who license its products. 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 year ended
December 31, 1998.
Revenues from software license agreements are recognized upon the delivery
of the software to the customer if there are no significant post-delivery
obligations and collection is probable. Service revenues consist of
professional consulting, implementation and training services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of the Company's software products. Revenues from consulting
and training services are recognized as services are performed. The Company
enters into transactions which include both license and service elements.
As such service elements do not include more than minor alteration of the
software, the license fees are recognized upon delivery and the service
revenues are recognized when performed.
Software maintenance fees are recognized ratably over the term of the
maintenance period. If software maintenance fees are provided for in the
license fee or at a discount in a license agreement, a portion of the
license fee equal to the fair market value of these amounts is allocated to
software maintenance revenue based on the value established by independent
sales of such maintenance service to customers.
Cost of license revenues consists primarily of the cost of media on which
the product is delivered and third party software products which are resold
by the Company. Cost of service and maintenance revenues consists primarily
of salaries, benefits, subcontracted consulting costs and allocated overhead
costs related to consulting personnel and the customer support group.
Deferred revenues primarily relate to post-contract customer support which
has been paid by customers prior to the performance of the services.
Earnings per share -
------------------
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
F-9
<PAGE>
during the period. Dilutive common share equivalents include stock options,
warrants and convertible preferred stock.
The calculation of basic and diluted earnings per share is as follows (in
thousands, except per share amounts):
1996 1997 1998
-------- -------- ---------
Basic earnings (loss) per share:
-------------------------------
Net income (loss) applicable
to common shareholders $(1,884) $2,721 $(20,299)
======= ====== ========
Weighted average shares outstanding 4,258 6,371 9,588
======= ====== ========
Basic earnings (loss) per share $ (.44) $ .43 $ (2.12)
======= ====== ========
Diluted earnings (loss) per shares:
----------------------------------
Net income (loss) $(1,047) $3,173 $(20,299)
Accretion of Series A preferred
stock dividends (394) - -
Accretion of Series B preferred
stock dividends (58) (208) -
Increase in fair market value of
redeemable common stock warrants (385) - -
------- ------ --------
$(1,884) $2,965 $(20,299)
======= ====== ========
Weighted average shares outstanding 4,258 6,371 9,588
Weighted average shares resulting
from exercise of options,
calculated in accordance with the
treasury stock method - 397 -
Weighted average shares resulting
from conversion of redeemable
common stock warrants - 409 -
Weighted average shares resulting
from conversion of
Series A preferred stock - 537 -
------- ------ --------
4,258 7,714 9,588
======= ====== ========
Diluted earnings (loss) per share $ (.44) $ .38 $ (2.12)
======= ====== ========
The 1996 calculation of diluted earnings (loss) per share does not include
the exercise of stock options (see Note 5), the conversion of Series A and
Series B preferred stock (see Note 6) or the conversion of the redeemable
common stock warrants (see Note 7), as the effect on diluted earnings loss
per share would have been antidilutive. The 1997 calculation of diluted
earnings (loss)
F-10
<PAGE>
per share does not include the conversion of the Series B preferred stock as
the effect on diluted earnings (loss) per share would have been
antidilutive. The 1998 calculation of diluted earnings (loss) per share does
not include the exercise of stock options as the effect on diluted earnings
(loss) per share would have been antidilutive.
Comprehensive income -
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130).
SFAS 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
stockholders' equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. The
Company has disclosed comprehensive income for all periods presented in the
accompanying consolidated statements of shareholder's equity.
Income taxes -
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). SFAS 109 requires the Company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and the tax
basis of the assets and liabilities and the net operating loss carryforwards
available for tax reporting purposes, using applicable tax rates for the
years in which the differences are expected to reverse.
Long-lived assets -
-----------------
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
requires a company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. As of December 31, 1998, the Company has
determined that no material adjustment to the carrying value of its long
lived assets is required.
Concentration of credit risk -
----------------------------
Financial instruments which potentially subject the Company to concentration
of credit risk consists principally of cash, short term investments and
trade receivables. As of December 31, 1998, one customer accounted for 11%
of accounts receivables. No one customer accounted for greater than 10% of
accounts receivable as of December 31, 1997.
Use of estimates in the preparation of financial statements -
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
Reclassifications -
-----------------
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements in order for them to be presented in conformity with
the 1998 consolidated financial statements.
Recently Issued Accounting Standards -
------------------------------------
The Company is required to adopt Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) for the year ending December 31, 1999. SFAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is not expected to have any material impact on the Company's
financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP
98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is not
expected to have any material impact on The Company's financial condition or
results of operations.
3. Business Acquisitions and Investments:
-------------------------------------
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 final adjusted aggregate purchase price of $8,656,000 consisted of
$1,247,000 of cash, 254,841 shares of common stock valued at $3,383,000,
$3,641,000 of net assumed liabilities and $385,000 of transaction costs. Of
the 254,841 shares, 42,508 shares (valued at $564,000) have been placed in
escrow and will be released from escrow no later than March 30, 1999,
subject to the satisfactory collection of accounts receivable and the
absence of any indemnification claims. The value of the common stock was
determined based on the average trading price of the Company's common stock
for the two days prior to, the day of, and the two days after, the date that
the terms of the Acquisitions were announced.
The Acquisitions have been accounted for under the purchase method of
accounting and the aggregate purchase price was allocated to the acquired
F-12
<PAGE>
assets and assumed liabilities based on their estimated fair value. Of the
aggregate purchase price, $6,988,000 was allocated to acquired product
development costs and charged to operations at the date of acquisition,
$1,389,000 was allocated to purchased software and will be amortized over
three years and $279,000 was allocated to goodwill and will be amortized
over seven years.
Of the $6,988,000 allocated to acquired product development costs,
approximately $5,180,000 related to MIS technologies and $1,808,000 related
to TSI technologies. The Company had originally allocated $2,478,000 to
the TSI acquired product development costs based on its initial valuation at
the time of acquisition. However, the Company subsequently adjusted its
initial valuation and reduced the amount allocated to the TSI acquired
product development costs by $670,000 to reflect certain adjustments in the
valuation methodology resulting from a reallocation of a portion of future
cash flows from the TSI acquired product development to the TSI purchased
software. The adjustment to increase the value of the TSI purchased software
and decrease the value of the TSI acquired product development costs was
recorded by the Company during its fiscal quarter ended December 31, 1998.
The MIS technologies were comprised of two separate projects: SalesPath, a
sales force automation tool valued at approximately $4,860,000 and MSM, a
telemarketing tool valued at approximately $320,000. Subsequent to the
acquisition date, the Company determined that the acquired SalesPath
technologies were of no material value. Although the SalesPath technologies
were believed to be valuable at the time of acquisition, subsequently, the
Company discontinued the development of SalesPath as a standalone product
and decided to pursue development of a sales force automation component as
part of its current suite of products.
The operating results of the Acquisitions have been included in the
consolidated statement of operations from the date of acquisition. The
unaudited pro forma results below assume the acquisition occurred on January
1 of each year:
(Unaudited)
-----------
1997 1998
---- ----
Revenues $42,975 $ 50,359
Operating income (loss) $(4,876) $(21,089)
Net Income (loss) $(5,155) $(20,320)
Net income per share:
Basic $ (0.85) $ (2.11)
Diluted $ (0.85) $ (2.11)
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisition been consummated at the beginning of fiscal 1997 or 1998
or of future operations of the combined companies under the ownership and
management of the Company.
4. Equity Investment:
-----------------
During 1998, the Company acquired 19.8% of the common stock of Mitsucon
Tecnologia S/A., a Brazilian software and services company that acts as a
distributor for the Company, for a purchase price of approximately
$1,715,000 in cash, including transaction costs. This investment is being
accounted for under the cost method of accounting and is included in other
assets in the accompanying 1998 consolidated balance sheet.
F-13
<PAGE>
5. Shareholders' Equity
--------------------
Common stock -
------------
In connection with its initial public offering (see below), the Company
amended its Certificate of Incorporation to increase the number of
authorized shares of common stock from 5,000,000 to 20,000,000 and to give
effect to a 2.25-for-1 split of the Company's common stock. The
accompanying financial statements have been restated to reflect this stock
split and change in authorized shares.
In July 1997, the Company completed its initial public offering (IPO) of
3,900,000 shares of its common stock, of which 2,800,000 shares were issued
and sold by the Company and 1,100,000 shares were issued and sold by certain
selling shareholders. As a result of this offering, the Company recorded
proceeds of $32,400,000, net of related underwriting discounts and offering
expenses of $4,100,000. In connection with the offering, the Company's
Series A and Series B preferred stock were converted into 1,532,161 shares
of common stock (see Note 6), 416,669 shares of common stock were issued in
connection with the exercise of the redeemable common stock warrants (see
Note 7) and 154,934 stock options were exercised.
Restricted stock awards -
-----------------------
During 1990, the Company granted 160,875 shares of common stock to certain
key employees in consideration of future services to be performed. The
awards required the recipients to be employed or engaged as a consultant by
the Company for seven years in order to retain ownership of the stock. The
related compensation was recognized ratably over the 7-year vesting period.
During each of 1996 and 1997, $10,000 of compensation expense was recognized
in connection with these restricted stock awards. These shares became fully
vested in 1997.
Stock option plans -
------------------
The Company has stock option plans which provide for the issuance of both
incentive and nonqualified stock options. In March 1998, the Company adopted
the 1998 Employee and Consultant Stock Option Plan, (The 1998 Plan) which
provides for the issuance of up to 800,000 shares of common shares for both
incentive and nonqualified stock options. In March 1996, the Company adopted
both the 1996 Employee and Consultant Stock Option Plan, which provides for
the issuance of up to 900,000 shares of common shares for both incentive and
nonqualified stock options, and the 1996 Non-Employee Directors' Stock
Option Plan, which provides for the issuance of up to 135,000 shares of
common stock (collectively, The 1996 Plans). Under the provisions of The
1998 and 1996 Plans, the exercise price of each option shall not be less
than 100% of the fair market value of a share of common stock at the time of
grant, as defined, and the options may vest immediately or over time. The
1998 and 1996 Plans shall be adjusted for future changes in the
capitalization of the Company or as designated by the Board of Directors.
Previous to The 1996 Plans, the Company had established a stock option plan
which provided for the issuance of up to 900,000 shares of common stock for
both incentive and nonqualified stock options. Under the provisions of this
plan, the exercise price of each option was not to be less than 100% of the
fair market value of a share of common stock, as defined, and the options
could vest immediately or over time.
F-14
<PAGE>
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS No. 123), requires the measurement of the fair
value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based compensation
for employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS 123. The Company has computed the Pro
forma disclosures required under SFAS 123 for options granted in 1996, 1997
and 1998 using the Black-Scholes option pricing model prescribed by SFAS
123. The weighted average assumptions used are as follows:
1996 1997 1998
---- ---- ----
Risk free interest rate 6.15-6.94% 5.77%-6.30% 4.65%-5.56%
Expected dividend yield None None None
Expected lives 8 years 5 years 5 years
Expected volatility 72% 56% 78%
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net income (loss) and
net income (loss) per share would have been as follows (in thousands except
for per share data):
1996 1997 1998
-------- ------ ---------
Net income (loss):
As reported $(1,047) $3,173 $(20,299)
Pro forma $(2,563) $2,215 $(20,745)
Basic net income (loss) per common share:
As reported $ (.44) $ .43 $ (2.12)
Pro forma $ (.80) $ .28 $ (2.16)
Diluted net income (loss) per common share:
As reported $ (.44) $ .38 $ (2.12)
Pro forma $ (.80) $ .23 $ (2.16)
F-15
<PAGE>
A summary of the status of the Company's stock option plans at December 31,
1996, 1997 and 1998 and changes during the years then ended is presented in
the table and narrative below :
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 894,606 $2.97 1,336,349 $4.62 1,509,548 $6.23
Granted 502,875 7.51 409,626 9.56 966,185 7.55
Exercised (5,782) .04 (187,957) 1.13 (185,295) 3.41
Expired (55,350) 4.61 (48,470) 9.81 (682,067) 9.73
--------- --------- ---------
Outstanding, end of year 1,336,349 4.62 1,509,548 6.23 1,608,371 5.87
========= ========= =========
Exercisable, end of year 854,282 3.42 896,335 4.74 739,971 5.22
========= ========= =========
Weighted average fair value
of options granted $5.80 $6.27 $5.90
===== ===== =====
</TABLE>
The following table presents weighted average price and life information for
significant option groups outstanding at December 31, 1998:
<TABLE>
<CAPTION> Weighted-
Average
Remaining Weighted-
Number Contractual Average Number Weighted-
Outstanding Life Exercise Exercisable Average
Range of Exercise Prices at 12/31/98 (Years) Price at 12/31/98 Exercise Price
------------------------ ----------- ------- ----- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
0.04 32,447 2.8 $ 0.04 32,447 $ 0.04
$2.25- 2.94 61,274 3.9 $ 2.62 61,274 $ 2.62
$4.00- 5.75 959,952 6.3 $ 5.17 348,792 $ 4.16
$6.06- 8.00 474,998 7.5 $ 7.41 281,083 $ 7.40
$10.00- 11.75 79,700 8.0 $10.67 16,375 $10.47
--------- -------
1,608,371 739,971
========= =======
</TABLE>
Stock Purchase plan -
-------------------
On March 1, 1997, the Board of Directors approved the adoption of an
employee stock purchase plan designed to allow eligible employees of the
Company to purchase shares of common stock. The Board of Directors has
reserved 450,000 shares of Common Stock to be available under this plan.
The stock purchase plan allows eligible employees the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at
the beginning or end of each offering period. During 1998 and 1997
employees purchased 20,917 and 5,841 shares of common stock for an aggregate
purchase price of approximately $105,000 and $48,000, respectively.
F-16
<PAGE>
6. Redeemable Convertible Preferred Stock:
--------------------------------------
In March 1995, the Company issued Series A preferred stock, with a stated
value of $1,000, to certain common shareholders for proceeds of
approximately $4,475,000. In November 1996, the Company issued Series B
preferred, with a stated value of $1,000, to certain common shareholders for
proceeds of approximately $4,228,000. In connection with the initial public
offering the Series A and Series B Preferred Stock, plus accrued dividends,
were converted into shares of common stock (see Note 5).
7. Redeemable Common Stock Warrants:
--------------------------------
The Company issued redeemable warrants to purchase 433,372, shares of
commons stock, with exercise prices ranging from $.40 per share to $1.33 per
share. In connection with the initial public offering the redeemable common
stock warrants were converted into 416,699 shares of common stock (see Note
5). The Company accounted for the initial value of the warrants based on
their fair market values at the time the warrants were originally issued.
Subsequent increases in the fair market value of the warrants, as determined
by sales of the Company's common stock, resulted in adjustments to the
carrying value of the warrants through direct charges to accumulated
deficit.
8. Income Taxes:
------------
Income (loss) from operations before provision for income taxes consisted
of (in thousands):
1996 1997 1998
---- ---- ----
U.S. $ (374) $ 4,249 $ (17,481)
International (643) (845) (2,348)
------ ------ --------
$(1,017) $ 3,404 $ (19,829)
====== ====== =======
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 is as follows (in thousands):
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Current:
Foreign $ - $ 199 $ 380
Federal - - -
State 30 32 90
----- ----- -----
$ 30 $ 231 $ 470
===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial reporting and
income
F-17
<PAGE>
tax purposes. A valuation allowance has been recorded for the
deferred tax assets as a result of uncertainties regarding the realization
of the asset.
The approximate tax effects of temporary differences which give rise to
deferred tax assets and liabilities is as follows (in thousands):
December 31,
1996 1997 1998
-------- -------- --------
Current:
Allowance for doubtful accounts $ 178 $ 243 $ 943
Accrued vacation and payroll 57 65 81
Other 216 76 187
Valuation allowance (451) (384) (1,211)
------- ------- -------
$ - $ - $ -
======= ======= =======
Non-current:
Purchased software $ - $ - $ 510
Depreciation 51 71 91
Deferred compensation 23 - -
Rental obligations 154 145 155
Tax effect of net operating losses,
excluding amounts related to
stock option exercises 3,265 2,053 3,608
Valuation allowance (3,493) (2,269) (4,364)
------- ------- -------
$ - $ - $ -
======= ======= =======
The exercise price of non-qualified stock options gives rise to compensation
which is included in the taxable income of the applicable employees and
deducted by the Company for federal and state income tax purposes. As a
result of the exercise of nonqualified stock options during 1997 and 1998,
the Company has related net operating loss carryforwards of $4,051,000 which
can be used to offset future taxable income, if any. When realized, the
related tax benefits of these net operating loss carryforwards will be
credited directly to paid in capital.
F-18
<PAGE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
December 31,
1996 1997 1998
----- ----- -----
Income tax at statutory rate (34)% 34% (34)%
Other (3) 1 1
Net operating loss not benefited 37 - 33
Utilization of net operating loss
carryforwards - (35) -
---- ---- ----
0% 0% 0%
==== ==== ====
At December 31, 1998, the Company had approximately $13,000,000 of U.S.
Federal net operating loss carryforwards, of which approximately $4,051,000
resulted from the exercise of nonqualified stock options (see above), and
approximately $4,000,000 of state net operating loss carryforwards which can
be used, subject to certain limitations, to offset future taxable income, if
any. These U.S. Federal net operating loss carryforwards expire through
2018 and the state net operating loss carryforwards expire through 2003.
In addition, the Company has United Kingdom net operating loss carryforwards
of approximately $3,500,000 which can be utilized to offset future taxable
income and which have no expiration.
The Company's IPO (see Note 5) 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 $4,700,000.
9. Related Party Transactions:
--------------------------
Notes receivable from related parties consists of net advances to
shareholders of $24,000 at December 31, 1997 which were repaid to the
Company during 1998.
10. Commitments and Contingencies:
-----------------------------
Leases -
------
The Company has entered into an agreement to lease its corporate
headquarters. This lease commenced April 1, 1994, and has a term of 10
years. Total aggregate lease payments of approximately $2,176,000 are being
amortized on a straight-line basis over the term of the operating lease,
beginning in April 1994. Accordingly, approximately $28,000 of deferred
rent expense was recorded during 1997 and 1998, respectively, related to
this lease and is included in other accrued liabilities and other long-term
liabilities in the accompanying consolidated balance sheets.
In November 1998, the Company entered into an agreement to lease office
space in Irvine, California, which is to be used as a sales, service and
product development facility. The lease will commence May 1, 1999 and has a
term of 7
F-19
<PAGE>
years. Under the terms of the lease, the Company is committed to
pay aggregate lease payments of approximately $5,860,000. In connection
with entering into this lease, the Company terminated the lease for its
previous California facility. As a result of the termination of such lease,
the Company incurred a $250,000 lease termination cost and $77,000 of
expense associated with the write off of leasehold improvements which are
reflected as a general and administrative expense in the accompanying 1998
consolidated statement of operations. Of the total lease termination charge,
$125,000 was paid by the Company upon execution of the lease and the
remaining $125,000, which will be paid when the Company vacates the current
premises in April 1999.
The Company leases other property and equipment under a number of operating
leases extended for varying periods of time. Operating lease rental expense
approximated $858,000, $1,255,000 and $1,426,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. Minimum future rental
commitments under all operating leases for each of the succeeding five years
subsequent to December 31, 1998, and thereafter, are as follows (in
thousands):
Year Ending
December 31, Amount
------------ ------
1999 $1,893
2000 1,835
2001 1,785
2002 1,835
2003 1,867
Thereafter 2,060
Litigation -
----------
During 1998, the Company entered into a settlement agreement with Rockwell
International Corporation, Rockwell Semiconductor Systems, Inc. and Rockwell
Telecommunications, Inc. (collectively, "Rockwell") resulting from
Rockwell's claims related to the Company's provision of a call center
solution to United States Cellular Corporation ("USCC"). The Company decided
to settle the matter to enable it to resume its relationship with USCC which
included USCC's exercise of its option to license additional software from
the Company during the quarter ended September 30, 1998 for a fee of
$1,750,000. Under the terms of the settlement, the litigation was dismissed
and all claims by Rockwell relating to the Company's relationship with USCC
have been released. IMA agreed to pay Rockwell $1,750,000 in four
installments over one year, of which $950,000 was paid during 1998.
The Company is currently a party to other litigation arising in the normal
course of business. In the opinion of management, no claims are expected to
have a material adverse effect on the Company's operations or financial
position.
11. Employee Benefit Plan:
---------------------
The Company has a voluntary 401(k) plan. All full-time employees who have
completed six months of service are eligible to participate in the plan.
The plan provides for matching contributions and an annual profit sharing
contribution made at the discretion of the Company's Board of Directors.
During 1996, 1997 and 1998, $33,000, $57,000 and $104,000, respectively, of
matching contributions were made to the plan by the Company.
12. Disclosures about Fair Value of Financial Instruments:
-----------------------------------------------------
The carrying value of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable,
F-20
<PAGE>
accounts payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying value of its capital
lease obligations also approximates fair value.
13. 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 which requires disclosure
of financial and descriptive information about the Company's reportable
operating segments. The operating segments reported below are the segments
for which separate financial information is available and for which
operating profit (loss) amounts are evaluated regularly by senior management
in deciding how to allocate resources and in assessing performance.
The Company operates two reportable segments: enterprise call center
software solutions and professional services. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately, based on the fundamental differences
in their operations. The enterprise call center software solution provides
software licenses of the Company's software products. The professional
services provides the professional consulting services, implementation,
training and maintenance related to the Company's enterprise call center
software solutions. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. Expenses
related to general corporate functions such as Information Technology,
Finance and Human Resources, and general and administrative costs such as
depreciation, rent and utilities are allocated to the reportable segments
based on relative headcount or relative usage. Income tax provision
(benefit) is allocated to the reportable segments in deriving segment profit
(loss) based on each segment's pro rata income or loss before income tax
provision (benefit). The Company has no intersegment sales and transfers,
and does not allocate assets to the operating segments.
For The Year Ended December 31, 1998
--------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues $ 24,903 $24,190 $ 49,093
Cost of Sales 356 17,420 17,776
Product Development 9,266 - 9,266
Depreciation & Amortization 1,085 911 1,996
Other Income(Expense), net 440 370 810
-------- ------- --------
Segment Loss $(11,915) $(8,384) $(20,299)
======== ======= ========
F-21
<PAGE>
For The Year Ended December 31, 1997
------------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues $ 19,295 $ 17,377 $ 36,672
Cost of Sales 304 9,428 9,732
Product Development 6,190 - 6,190
Depreciation & Amortization 804 602 1,406
Other Income(Expense), net 10 8 18
------- ------- -------
Segment Profit $ 2,745 $ 428 $ 3,173
======= ======= =======
For The Year Ended December 31, 1996
------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues $ 13,022 $ 13,255 $ 26,277
Cost of Sales 709 7,191 7,900
Product Development 6,382 - 6,382
Depreciation & Amortization 493 728 1,221
Other Income(Expense), net (435) (644) (1,079)
------- ------- -------
Segment Profit (Loss) $ 670 $ (1,717) $ (1,047)
======= ======= =======
The Company also operates in two major geographic areas: United States and
International. The United States charges the International segment a 50% royalty
on license fees recognized, which approximates the royalty fee charged to
unaffiliated resellers. In addition, certain direct costs incurred by the United
States segment, primarily related to research and development and customer
support costs, are charged to the International segment. The elimination in the
identifiable assets is for intercompany receivables (in thousands).
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATION CONSOLIDATED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Revenues. $ 39,981 $ 12,695 $ (3,583) $ 49,093
======== ======== ======== ========
Loss from operations (18,263) (2,376) - (20,639)
======== ======== ======== ========
Identifiable assets 38,727 8,153 (9,642) 37,238
======== ======== ======== ========
Year Ended December 31, 1997
Revenues 32,345 6,086 (1,759) 36,672
======== ======== ======== ========
Income (loss) from operations 4,239 (853) - 3,386
======== ======== ======== ========
Identifiable assets 44,774 3,620 (4,472) 43,922
======== ======== ======== ========
Year Ended December 31, 1996
Revenues 22,762 4,680 (1,165) 26,277
======== ======== ======== ========
Income (loss) from operations 802 (740) - 62
======== ======== ======== ========
Identifiable assets 17,483 2,648 (2,850) 17,281
======== ======== ======== ========
</TABLE>
F-22
<PAGE>
The following table summarizes the Company's revenues by major worldwide
regions (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
United States $19,483 $26,887 $ 31,622
Canada 546 833 394
Mexico and Latin America 277 1,903 2,145
Europe 4,798 5,552 12,692
Pacific Rim 1,173 1,497 2,240
------- ------- --------
$26,277 $36,672 $ 49,093
======= ======= ========
14. Significant Customers:
---------------------
For the years ended December 31, 1996, 1997 and 1998, approximately 8%, 10%
and 12%, respectively, of the Company's revenues resulted from sales to a
single customer.
15. Subsequent Event:
----------------
In March 1999, the Company obtained a commitment letter from a bank for a
line of credit facility (Line of Credit). Borrowing under the Line of
Credit will be limited to the greater of $7,500,000 or 80% of eligible
accounts receivable, as defined. The Line of Credit, which will mature two
years from the final execution date, will contain certain financial
covenants including, but not limited to, minimum net worth, minimum working
capital, and minimum interest coverage ratios, as defined. The Company
expects to execute the Line of Credit in April 1999.
F-23
<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: July 7, 1999 /s/ Albert R. Subbloie, Jr. President, Chief Executive
------------------------------ Officer and Director
Albert R. Subbloie, Jr. (Principal Executive Officer)
Dated: July 7, 1999 /s/ Gary R. Martino Chairman of the
--------------------------- Board of Directors,
Gary R. Martino Chief Financial Officer, Treasurer
and Director (Principal Financial
Accounting Officer)
</TABLE>
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFORMATION MANAGEMENT ASSOCIATES, INC.
By: /s/ Albert R. Subbloie, Jr.
-------------------------------------
Albert R. Subbloie, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Albert R. Subbloie, Jr. President, Chief July 7, 1999
------------------------------ Executive Officer
ALBERT R. SUBBLOIE, JR. and Director
(Principal
Executive Officer)
/s/ Gary R. Martino Chairman of the
------------------------------ Board of Directors,
GARY R. MARTINO Chief Financial
Officer, Treasurer
and Director
(Principal Financial
and Accounting
Officer
/s/ Paul J. Schmidt Director
------------------------------
PAUL J. SCHMIDT
/s/ Thomas F. Hill Director
------------------------------
THOMAS F. HILL
/s/ Donald P. Miller Director
------------------------------
DONALD P. MILLER
/s/ David J. Callard Director
-------------------------------
DAVID J. CALLARD
</TABLE>
<PAGE>
EXHIBIT 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
----------------------------------------------------
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Information Management Associates, Inc.
included in this Form 10-K and have issued our report thereon dated March 3,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 3, 1999
