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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-28480
EDIFY CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0250992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2840 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices)
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(408) 982-2000
(Registrant's telephone number, including area code)
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Indicate by checkmark 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.
(1) Yes [X] No [ ]
As of June 30, 1998, there were 17,097,381 shares of the Registrant's common
stock outstanding.
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EDIFY CORPORATION
FORM 10-Q
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
ITEM 1: Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997....................................................................... 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1997............................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997..................................................... 5
Notes to Condensed Consolidated Financial Statements........................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 9
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk..................... 17
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................................. 18
ITEM 2: Changes in Securities and Use of Proceeds...................................... 18
ITEM 3: Defaults Upon Senior Securities................................................ 18
ITEM 4: Submission of Matters to a Vote of Security Holders............................ 18
ITEM 5: Other Information.............................................................. 19
ITEM 6: Exhibits and Reports on Form 8-K............................................... 19
Signatures..................................................................... 21
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PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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EDIFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash, cash equivalents and short-term investments ... $ 43,923 $ 43,161
Accounts receivable, net ............................ 16,887 16,668
Prepaid expenses and other current assets ........... 1,915 1,457
-------- --------
Total current assets ........................... 62,725 61,286
Property and equipment, net ............................. 7,232 6,953
Other assets ............................................ 303 241
-------- --------
Total assets ................................... $ 70,260 $ 68,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 1,767 $ 1,062
Current installments of capital lease obligations ... 382 424
Accrued expenses .................................... 7,761 6,265
Unearned revenue .................................... 4,690 4,581
-------- --------
Total current liabilities ...................... 14,600 12,332
-------- --------
Capital lease obligations, excluding current installments 177 340
Commitments and contingencies
Stockholders' equity:
Common stock ........................................ 17 17
Additional paid-in capital .......................... 68,066 66,624
Deferred compensation and other ..................... (123) (193)
Accumulated deficit ................................. (12,477) (10,640)
-------- --------
Total stockholders' equity ..................... 55,483 55,808
-------- --------
Total liabilities and stockholders' equity ..... $ 70,260 $ 68,480
======== ========
See notes to condensed consolidated financial statements.
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EDIFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net revenues:
License ..................................... $ 9,179 $ 7,807 $ 16,237 $ 14,939
Services and other .......................... 8,682 5,730 15,382 10,908
-------- -------- -------- --------
Total net revenues ........................ 17,861 13,537 31,619 25,847
Cost of license revenues ....................... 226 205 522 336
Cost of services and other revenues ............ 5,888 4,274 10,758 8,651
-------- -------- -------- --------
Gross profit .............................. 11,747 9,058 20,339 16,860
-------- -------- -------- --------
Operating expenses:
Product development ......................... 2,884 2,511 5,418 4,609
Sales and marketing ......................... 8,056 4,953 14,840 9,474
General and administrative .................. 1,573 1,155 2,847 2,182
-------- -------- -------- --------
Total operating expenses .................. 12,513 8,619 23,105 16,265
-------- -------- -------- --------
Income (loss) from operations ............. (766) 439 (2,766) 595
Interest income, net ........................... 504 502 984 994
-------- -------- -------- --------
Income (loss) before income taxes ......... (262) 941 (1,782) 1,589
Provision for income taxes ..................... 33 76 55 129
-------- -------- -------- --------
Net income (loss) ......................... $ (295) $ 865 $ (1,837) $ 1,460
======== ======== ======== ========
Basic net income (loss) per share .............. $ (0.02) $ 0.05 $ (0.11) $ 0.09
======== ======== ======== ========
Shares used in computing basic net income (loss)
per share ................................... 16,997 16,339 16,884 16,290
======== ======== ======== ========
Diluted net income (loss) per share ............ $ (0.02) $ 0.05 $ (0.11) $ 0.08
======== ======== ======== ========
Shares used in computing diluted net income
(loss) per share ............................ 16,997 17,953 16,884 17,948
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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EDIFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .............................................. $ (1,837) $ 1,460
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................ 2,048 1,508
Amortization of deferred compensation ........................ 70 140
Changes in operating assets and liabilities:
Accounts receivable ........................................ (219) (3,925)
Prepaid expenses and other current assets .................. (458) (280)
Accounts payable ........................................... 705 (203)
Accrued expenses ........................................... 1,496 522
Unearned revenue ........................................... 109 87
-------- --------
Net cash provided by (used in) operating activities ..... 1,914 (691)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net ....................... (2,327) (2,417)
Purchases of short-term investments ............................ (2,998) (6,391)
Sales and maturities of short-term investments ................. 10,330 1,955
Other assets ................................................... (62) --
-------- --------
Net cash provided by (used in) investing activities ..... 4,943 (6,853)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations ............. (205) (190)
Net proceeds from issuance of common stock ..................... 1,442 1,344
-------- --------
Net cash provided by financing activities ............... 1,237 1,154
-------- --------
Increase (decrease) in cash and cash equivalents ................... 8,094 (6,390)
Cash and cash equivalents at beginning of period ................... 31,790 33,704
-------- --------
Cash and cash equivalents at end of period ......................... $ 39,884 $ 27,314
======== ========
Supplemental schedule of cash flow information:
Cash paid during the period for interest ....................... $ 49 $ 61
Cash paid during the period for taxes .......................... $ 165 $ 69
Supplemental schedule of noncash investing and financing activities:
Property and equipment acquired under capital lease obligations $ -- $ 35
See notes to condensed consolidated financial statements.
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EDIFY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Company's unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary to fairly state the Company's
financial position, results of operations, and cash flows for the periods
presented. These consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements included in the
Company's Form 10-K for the fiscal year ended December 31, 1997. The results of
operations for the three- and six-month periods ended June 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 1998. The December 31, 1997
balance sheet was derived from audited consolidated financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
(2) NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" in 1997 and restated all comparative per
share amounts for prior periods. SFAS No. 128 requires the presentation of basic
earnings per share and, for companies with potentially dilutive securities, such
as options, diluted earnings per share.
Basic earnings per share is computed using the weighted average number
of shares of common stock outstanding. Diluted earnings per share is computed
using the weighted average number of shares of common stock and, when dilutive,
common equivalent shares from options to purchase common stock and warrants
outstanding using the treasury stock method.
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The following table sets forth the computation of net income (loss) per
share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ------- ---------- -------
Net income (loss) .......................... $ (295) $ 865 $ (1,837) $ 1,460
=========== ======= ========== =======
Basic:
Weighted average common shares
outstanding used in computing basic net
income (loss) per share ................ 16,997 16,339 16,884 16,290
=========== ======= ========== =======
Basic net income (loss) per share ........ $ (0.02) $ 0.05 $ (0.11) $ 0.09
=========== ======= ========== =======
Diluted:
Weighted average common shares outstanding 16,997 16,339 16,884 16,290
Dilutive options outstanding ............. -- 1,614 -- 1,658
----------- ------- ---------- -------
Shares used in computing diluted net
income (loss) per share ................ 16,997 17,953 16,884 17,948
=========== ======= ========== =======
Diluted net income (loss) per share ...... $ (0.02) $ 0.05 $ (0.11) $ 0.08
=========== ======= ========== =======
As of June 30, 1998 and 1997, there were 3,362,134 and 817,227 options
to acquire shares of common stock with weighted-average exercise prices of $9.00
and $14.42, respectively, which could potentially dilute basic earnings per
share in the future but which were not included in diluted per share results for
the three-months ended June 30, 1998 and 1997 as their effect was antidilutive
in the periods presented. Options to purchase 3,362,134 and 437,627 shares of
common stock with weighted-average exercise prices of $9.00 and $17.10 were
outstanding as of June 30, 1998 and 1997, respectively. These options could
potentially dilute basic earnings per share in the future but were not included
in diluted earnings per share for the six-months ended June 30, 1998 and 1997 as
their effect was antidilutive in the periods presented.
In July 1998, the Board of Directors approved the repricing of all
incentive stock options granted during the period May 1, 1996 through July 24,
1998. The repricing does not include incentive stock options granted to the
Company's officers or Board of Directors. Employees have the choice of
exchanging any stock options granted from May 1, 1996 through July 24, 1998 for
new options that would have a new exercise of price of $8.625, the then current
market value of the Company's stock. Options to purchase 2,159,353 shares of
common stock were eligible to be exchanged under this option repricing program.
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(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and disclosures of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose consolidated
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of financial statements for
earlier periods to be provided for comparative purposes. The Company's total
comprehensive income (loss) for all periods presented herein would not have
differed from those amounts reported as net income (loss) in the consolidated
statements of operations.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. This Statement is effective for annual
financial statements for periods beginning after December 15, 1997, and for
interim periods after the first year of adoption. The Company has not yet
determined the impact of adopting its disclosure requirements.
(4) CONTINGENCIES
In April 1996, the Company received a letter from Lucent inviting the
Company to negotiate a license of Lucent's patents. Since then, Lucent has
asserted that it believes that certain of the Company's products infringe
certain of Lucent's patents and has offered to license those patents to the
Company for a substantial payment. In November 1997, the Company received a
letter from Lucent in which Lucent made similar assertions with respect to other
patents it holds. The Company believes that it has substantial arguments that
its current products do not violate any valid claims of the Lucent patents
referenced in the April 1996 letter or in the November 1997 letter. The Company
has had several discussions with Lucent regarding the potential licensing of the
patents referenced in Lucent's letters and is currently engaged in such
discussions. Based on these discussions, it appears that obtaining a license
from Lucent will require the payment of a substantial license fee and possibly
ongoing royalties, which could have a material adverse effect on the Company's
results of operations in the periods when such payments are made, although the
Company does not believe that such payments would have a material adverse effect
on the Company's financial condition or liquidity. In the event that the Company
cannot come to an agreement with Lucent, the Company may be drawn into
litigation with Lucent. Such litigation could be protracted and expensive, and
the outcome cannot be predicted. There can be no assurance that the costs
associated with participating in or settling such litigation would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those indicated by the forward-looking statements herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
set forth below in "Factors That May Affect Future Operating Results" as well as
those discussed in the "Business Risks" section included in the Company's Form
10-K for the fiscal year ended December 31, 1997.
RESULTS OF OPERATIONS
NET REVENUES
Total net revenues were $17.9 million for the quarter ended June 30,
1998 as compared to $13.5 million for the comparable 1997 quarter, representing
an increase of 31.9%. Total net revenues were $31.6 million for the six months
ended June 30, 1998, an increase of 22.3% as compared to $25.8 million for the
same period a year ago. The Company's revenues are principally derived from
software licenses and fees for services, which generally are charged separately.
Revenues are recorded net of reserves for potential product returns, which have
not been significant to date. In the three- and six-month periods ended June 30,
1998 and 1997, 5% or less of the Company's total net revenues were derived from
international sales. Over time, the Company intends to expand its international
operations and enter additional international markets. International operations
entail a number of risks including those associated with product customization
and regulatory compliance, and there can be no assurance that such expansion
will be successful.
LICENSE REVENUES. License revenues were $9.2 million for the quarter
ended June 30, 1998 as compared to $7.8 million for the comparable 1997 quarter.
License revenues for the six-month period ended June 30, 1998 were $16.2 million
as compared to $14.9 million for the comparable period in 1997. The increases in
license revenues were due to an increase in unit volume as a result of the
market's growing awareness and acceptance of Electronic Workforce and Electronic
Banking System, revenues from Employee Service System (introduced in June 1997),
and expansion of the Company's field sales force, offset by a downward trend in
average selling prices for Electronic Banking System. The prices of the
Company's Electronic Workforce licenses have remained relatively constant during
the comparable periods of 1998 and 1997. The Company does not believe that the
historical growth rates of license revenues are indicative of future results.
SERVICES AND OTHER REVENUES. Services and other revenues consist
primarily of fees from consulting, post-contract customer support and, to a
lesser extent, training and installation services. Services and other revenues
were $8.7 million for the quarter ended June 30, 1998 as compared to $5.7
million for the comparable 1997 quarter. Services and
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other revenues for the six months ended June 30, 1998 were $15.4 million as
compared to $10.9 million for the comparable period of 1997. Services and other
revenues as a percentage of total net revenues increased to 48.6% for the
quarter ended June 30, 1998 from 42.3% for the quarter ended June 30, 1997, and
increased to 48.6% for the six months ended June 30, 1998 from 42.2% for the
comparable 1997 period. The increase in services and other revenues in absolute
dollars and as a percentage of total net revenues occurred primarily due to
increased demand for consulting services, as well as increases in post-contract
customer support and installation services associated with the increased
installed base of the Company's software. The Company does not expect historical
growth rates of its services revenues to be sustainable. To the extent services
and other revenues is a higher percentage of total net revenues, overall gross
profit margins may be adversely impacted.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists primarily
of the cost of product media, product duplication, documentation and royalties
paid to third parties under technology licenses. Cost of license revenues was
$226,000 and $205,000 for the quarters ended June 30, 1998 and 1997,
representing 2.5% and 2.6% of the related license revenues for the respective
quarters. Cost of license revenues was $522,000 for the six months ended June
30, 1998 as compared to $336,000 for the comparable 1997 period, representing
3.2% and 2.2% of the related license revenues for the respective periods. The
increase in the cost of license revenues in absolute dollars for the comparable
periods, as well as the increase in the percentage of license revenues for the
six-month period, were due primarily to the costs of third-party technology used
for particular customers. If the Company were required to obtain licenses from
third parties under patent or other intellectual property rights, the cost of
license revenues could increase significantly.
COST OF SERVICES AND OTHER REVENUES. Cost of services and other
revenues consists primarily of personnel-related costs and fees for third-party
consultants incurred in providing consulting, post-contract customer support,
training and installation services to customers. Cost of services and other
revenues was $5.9 million and $4.3 million for the quarters ended June 30, 1998
and 1997, representing 67.8% and 74.6% of the related services and other
revenues for the respective quarters. Cost of services and other revenues was
$10.8 million for the six months ended June 30, 1998 as compared to $8.7 million
for the comparable 1997 period, representing 69.9% and 79.3% of the related
services and other revenues for the respective periods. The increase in absolute
dollars for the comparable periods was due primarily to increases in
personnel-related costs as the Company continued to expand its consulting,
customer support, training and installation services organizations. The increase
in gross profit margins was due primarily to increased demand for consulting
services, as well as increases in post-contract customer support and
installation services associated with the increased installed base of the
Company's software. The Company does not expect historical growth rates of its
gross profit margins to be sustainable. The cost of services and other revenues
as a percentage of services and other revenues may vary between periods due to
the amount and mix of services provided by the Company and to varying levels of
expenditures to build the services organizations. Any significant decline in the
demand for the Company's consulting services would have a material adverse
impact on the Company's
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revenues and, as a result of the under-utilization of consulting personnel, on
the Company's gross profit and results of operations.
PRODUCT DEVELOPMENT
Product development expenses were $2.9 million and $2.5 million, or
16.1% and 18.5% of total net revenues, for the quarters ended June 30, 1998 and
1997, respectively. Product development expenses were $5.4 million and $4.6
million, or 17.1% and 17.8% of total net revenues, for the six-month periods
ended June 30, 1998 and 1997, respectively. Product development expenses consist
primarily of salaries and other related expenses for research and development
personnel, as well as the cost of facilities and depreciation of capital
equipment. The increase in absolute dollars for the comparable periods was
attributable primarily to increased staffing related to the development of
application products and ongoing enhancements to Electronic Workforce. The
decrease in product development expenses as a percentage of total net revenues
was due primarily to personnel-related costs associated with the development of
the Company's Windows NT-based software, which was delivered in the fourth
quarter of 1997. The Company believes that significant investments in product
development are required to remain competitive. As a result, the Company expects
that product development expenses will increase in absolute dollars in the
future and will not decline significantly as a percentage of total net revenues
from their current levels.
In accordance with SFAS No. 86, the Company expects to capitalize
eligible computer software development costs upon the achievement of
technological feasibility, subject to net realizable value considerations. The
Company has defined technological feasibility as completion of a working model.
To date, the Company believes its process for developing software was
essentially completed concurrently with the establishment of technological
feasibility, and, accordingly, no software development costs have been
capitalized in the accompanying balance sheet.
SALES AND MARKETING
Sales and marketing expenses were $8.1 million and $5.0 million, or
45.1% and 36.6% of total net revenues, for the quarters ended June 30, 1998 and
1997, respectively. Sales and marketing expenses were $14.8 million and $9.5
million, or 46.9% and 36.7% of total net revenues, for the six-month periods
ended June 30, 1998 and 1997, respectively. Sales and marketing expenses consist
primarily of salaries and commissions earned by sales and marketing personnel
and promotional expenses. The increase in absolute dollars and as a percentage
of total net revenues for the comparable periods was due primarily to the
expansion of the Company's field and indirect sales operations and increased
marketing activities. The Company expects to continue to expand its field sales
and marketing efforts, its third party value added reseller ("VAR") distribution
channel and its operations outside the United States and, therefore, anticipates
that sales and marketing expenditures will increase in absolute dollars in the
future. In addition, sales and marketing expenses as a percentage of total net
revenues may fluctuate between periods due to varying levels of expenditures to
build the sales and marketing organizations.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.6 million and $1.2 million,
or 8.8% and 8.5% of total net revenues, for the quarters ended June 30, 1998 and
1997, respectively. General and administrative expenses were $2.8 million and
$2.2 million, or 9.0% and 8.4% of total net revenues, for the six months ended
June 30, 1998 and 1997, respectively. General and administrative expenses
consist primarily of salaries and other related expenses of administrative,
executive and financial personnel and outside professional fees. The increase in
absolute dollars and as a percentage of total net revenues for the comparable
quarter was attributable primarily to the addition of staff and the increased
infrastructure costs to support the growth of the Company's business. The
increase in absolute dollars and as a percentage of total net revenues for the
comparable six-month period was primarily due to the addition of staff and an
increase in the provision for doubtful accounts. The Company expects to continue
to expand its staffing, information systems and other items related to
infrastructure and, therefore, anticipates that general and administrative
expenses will increase in absolute dollars in the future.
INTEREST INCOME, NET
Interest income, net was $504,000 for the quarter ended June 30, 1998,
compared to $502,000 for the quarter ended June 30, 1997. Interest income, net
for the six months ended June 30, 1998 and 1997 was $984,000 and $994,000,
respectively.
PROVISION FOR INCOME TAXES
The provision for income taxes was $33,000 and $76,000 for the quarters
ended June 30, 1998 and 1997, respectively. The provision for income taxes was
$55,000 and $129,000 for the six months ended June 30, 1998 and 1997,
respectively. For the three and six months ended June 30, 1998, the provision
for income taxes relates primarily to state income and foreign withholding
taxes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's cash, cash equivalents and short-term
investments totaled $43.9 million. At June 30, 1998, the Company also had
available an $8.0 million unsecured revolving bank line of credit agreement
which expires in December 1998 and contains certain financial covenants, with
which the Company was in compliance. Borrowings accrue interest at the bank's
prime rate. As of June 30, 1998, there were no borrowings outstanding under this
line of credit.
For the six months ended June 30, 1998, operating activities provided
cash of $1.9 million, resulting primarily from increases in accrued expenses and
depreciation and amortization, partially offset by a net loss. Investing
activities provided cash of $4.9 million from the net sale and maturity of $7.3
million in short-term investments, partially offset by the purchase of $2.3
million in property and equipment. The Company expects that its capital
expenditures will increase as the Company's employee base grows. Net cash
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generated from financing activities of $1.2 million was related primarily to
proceeds from the issuance of the Company's common stock through its Employee
Stock Purchase Plan and stock option exercises.
At June 30, 1998, the Company's working capital was $48.1 million. In
1998, the Company expects to incur costs in excess of $500,000 associated with
the implementation of a new financial system to replace its current system. The
Company has no other significant capital spending or purchase commitments other
than normal purchase commitments and commitments under its facilities and
capital leases. The Company believes that its working capital, together with its
bank line of credit and anticipated cash flows from operations, if any, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next 12 months.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Except for the historical information contained in this Form 10-Q, the
matters discussed herein are forward-looking statements. These forward-looking
statements concern matters which include, but are not limited to, the
sustainability of historical revenue growth rates, the Company's expected mix of
revenues, expected gross margins on license revenues and services and other
revenues, certain expected operating expense levels and the Company's liquidity
and capital needs. These matters involve risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. The revenue levels and results of operations achieved during the
quarter and six months ended June 30, 1998 are not necessarily indicative of the
results that may be achieved in any future period. There can be no assurance
that the Company will achieve or sustain profitability or experience growth in
revenues in any future quarter. The Company's revenues, margins and operating
results have fluctuated in the past, and are expected to continue to fluctuate
in the future, on an annual and quarterly basis as a result of a number of
factors, such as demand for the Company's products, including new products and
product enhancements, sales force initiatives, transitions to new products, the
mix of products and services sold, the mix of distribution channels through
which the Company's products are sold, customer order deferrals in anticipation
of new products or product enhancements, purchasing patterns of value added
resellers and customers, Company decisions regarding hiring and other expenses
and competitive conditions in the industry. In particular, the Company plans to
increase its operating expenses to expand its sales and marketing operations,
expand its distribution channels, expand its international operations, fund
greater levels of product development, broaden its consulting services and
customer support capabilities and increase its administrative infrastructure. A
relatively high percentage of the Company's expenses is fixed in the short term
as the Company's expense levels are based, in part, on its expectations as to
future revenues. If revenues fall below expectations, expenditure levels could
be disproportionately high as a percentage of total net revenues, and operating
results would be immediately and adversely affected.
The Company historically has operated with little backlog because its
products are generally shipped as orders are received. As a result, license
revenues in any quarter depend on the volume and timing of, and the Company's
ability to fill, orders received in that quarter. Individual orders for the
Company's products typically are for relatively large
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dollar amounts. The Company also believes the purchase of its products is
relatively discretionary and generally involves a significant commitment of
capital resources. Therefore, any downturn in any potential customer's business,
or any loss or delay of individual orders for any reason, could have a
significant impact on the Company's revenues and quarterly results. In addition,
because the Company typically recognizes a substantial portion of its total
revenue from transactions booked and shipped in the last weeks, or even days, of
the quarter, the magnitude of quarterly fluctuations may not become evident
until very late in a particular quarter. Revenues are difficult to forecast
because the market for the Company's products is rapidly evolving.
Based upon all of the foregoing, the Company believes that its
quarterly revenues, expenses and operating results could vary significantly in
the future and that period-to-period comparisons should not be relied upon as
indications of future performance. There can be no assurance that the Company
will be able to grow in future periods or that it will be able to sustain its
level of total net revenues or increase or sustain its rate of revenue growth on
a quarterly or annual basis. It is likely that, in some future quarters, the
Company's operating results will be below the expectations of stock market
analysts and investors. In such event, the price of the Company's common stock
could be materially adversely affected.
The Company's future success will depend on its ability to design,
develop, test, sell and support new software products and enhancements of
current products on a timely basis in response to changing customer needs,
competition, technological developments and emerging industry standards.
Versions through 4.x of Electronic Workforce and 1.x of EBS and ESY run on IBM's
OS/2 operating system. In October 1997, the Company released its first version
of Electronic Workforce Release 5 for the Windows NT operating system. In
December 1997, the Company released initial versions of EBS and ESY for NT.
Because these products have been recently released, many customers licensing
these versions have not yet fully deployed the product and undetected errors may
remain in these versions. The existence of any such errors may delay the release
of future versions and adversely affect the acceptance of these products, either
of which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, certain features of the
OS/2 versions of the Company's software are not available on currently available
NT-based versions. Accordingly, the Company is devoting significant engineering
and development resources to develop enhancements to the versions of its
products that run on the Microsoft Windows NT operating system. It is possible
that the newness of or lack of features on the Windows NT-based versions of its
products will cause potential customers to defer or forgo purchases of current
or future versions of these products, which could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's future success will depend upon the timely and successful introduction
of new versions of its Windows NT-based products. There can be no assurance that
the Company will be successful in developing, on a timely basis or at all, fully
featured Windows NT-based versions of its products or that such versions, if
developed, will achieve customer acceptance. Failure by the Company to develop
new Windows NT-based versions successfully and in a timely manner would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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The Company intends to invest a significant majority of its product
development resources on products and product enhancements for the Windows NT
operating system. The Company must manage the effect on its existing OS/2
customers of this focus on the Windows NT operating system. There can be no
assurance that updates to and enhancements for the Company's OS/2-based products
will be sufficient to encourage its OS/2 customers to continue to purchase
additional software or services from the Company. In addition, the Company must
provide its customers with an economically reasonable and technologically
feasible migration path from the OS/2-based products to the NT-based products.
There can be no assurance that the Company's OS/2 customers will migrate to the
Company's NT-based products. The failure of a significant number of its existing
OS/2 customers to purchase additional software or services from the Company, for
any reason, would have a material adverse effect on the Company's business,
operating results and financial condition.
In March 1996, the Company received a letter from Syntellect Technology
Corporation ("Syntellect") inviting the Company to negotiate a license of
certain of Syntellect's patents. Since then, Syntellect has called additional
Syntellect patents to the Company's attention. Based on its investigation of the
patents referenced in Syntellect's March 1996 letter, the Company believes that
it has substantial arguments that it does not violate any valid claims of such
Syntellect patents.
In April 1996, the Company received a letter from Lucent Technologies
Inc. ("Lucent") inviting the Company to negotiate a license of Lucent's patents.
Since then, Lucent has asserted that it believes that certain of the Company's
products infringe certain of Lucent's patents and has offered to license those
patents to the Company for a substantial payment. In November 1997, the Company
received a letter from Lucent in which Lucent made similar assertions with
respect to other patents it holds. The Company believes that it has substantial
arguments that its current products do not violate any valid claims of the
Lucent patents referenced in the April 1996 letter or in the November 1997
letter. The Company has had several discussions with Lucent regarding the
potential licensing of the patents referenced in Lucent's letters and is
currently engaged in such discussions. Based on these discussions, it appears
that obtaining a license from Lucent will require the payment of a substantial
license fee and possibly ongoing royalties, which could have a material adverse
effect on the Company's results of operations in the periods when such payments
are made, although the Company does not believe that such payments would have a
material adverse effect on the Company's financial condition or liquidity. In
the event that the Company cannot come to an agreement with Lucent, the Company
may be drawn into litigation with Lucent. Such litigation could be protracted
and expensive, and the outcome cannot be predicted. There can be no assurance
that the costs associated with participating in or settling such litigation
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
In the future, the Company may receive additional communications from
these or other parties asserting that the Company's products, trademarks or
other proprietary rights require a license of intellectual property rights or
infringe, or may infringe, on their property rights. As the number of software
products in the industry increases, and the functionality of these products
further overlaps, the Company believes that software developers may become
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increasingly subject to infringement claims. Any such claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation to determine the validity of any claims could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel from productive tasks, whether or not such litigation is
determined in favor of the Company. In the event of an adverse ruling in any
such litigation, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology. The failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and results of operations.
An integral part of the Company's strategy is to develop multiple
distribution channels, including a field sales force, VARs and OEMs. The Company
intends to increase its reliance on third-party distribution partners in the
future. The Company is expending and intends to continue to expend significant
resources to develop the VAR channel. VARs and OEMs are not, however, subject to
any minimum purchase or resale requirements and can cease marketing the
Company's products at any time. Certain VARs and OEMs may offer competing
products that they produce or that are produced by third parties. There can be
no assurance that the Company's existing VARs will continue to provide the level
of services and technical support necessary to provide a complete self service
solution to the Company's customers, that they will transition smoothly to sales
of new products or enhancements of existing products or that they will not
emphasize their own or third-party products to the detriment of the Company's
products. The loss of VARs, the failure of such parties to perform under
agreements with the Company or the inability of the Company to attract and
retain new VARs with the technical, industry and application expertise required
to market the Company's products successfully in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations. To the extent that the Company is successful in
increasing its sales through VARs, those sales will be at discounted rates, and
revenue to the Company for each such sale will be less than if the Company had
licensed the same products to the customer directly.
Many currently installed computer systems and software products are
coded to accept 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, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Although the Company's products are Year 2000
compliant, the Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch 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 the Company, which could
have a material adverse effect
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on the Company's business, financial condition and results of operations. In
addition, even if the Company's products are Year 2000 compliant, other systems
or software used by the Company's customers may not be Year 2000 compliant. The
failure of such noncompliant third-party software or systems could affect the
perceived performance of the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the Company is in the process of identifying operating and
application software challenges related to the Year 2000. While the Company
expects to resolve Year 2000 compliance issues substantially through normal
replacement and upgrades of software, there can be no assurance that there will
not be interruption of operations or other limitations of system functionality
or that the Company will not incur substantial costs to avoid such limitations.
Any failure to effectively monitor, implement or improve the Company's
operational, financial, management and technical support systems could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition to the factors discussed above, among the other factors
that could cause actual results to differ materially are the following: demand
for and market acceptance of application products; the Company's ability to
deliver on time, and market acceptance of, new products or upgrades of existing
products; customer order deferrals in anticipation of new products; the timing
of, or delay in, large customer orders; continued availability of technology and
intellectual property license rights; changes in the mix of distribution
channels through which the Company's products are offered; competitive
conditions in the industry; risks associated with global operations; general
economic conditions; and the "Business Risks" listed from time to time in
reports that the Company files with the U.S. Securities and Exchange Commission,
including but not limited to the Company's Form 10-K for the fiscal year ended
December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on May 19,
1998.
(b) See (c) below.
(c) The Company's stockholders voted upon the following matters:
(i) Election of directors. All nominees were elected, with the
votes indicated below:
Name Votes For Votes Withheld
---- --------- --------------
Jeffrey M. Crowe 14,960,426 44,246
Stephen M. Berkley 14,961,631 43,041
Kelly D. Conway 14,961,631 43,041
Tench Coxe 14,961,631 43,041
Donald R. Hollis 14,961,631 43,041
Stewart A. Schuster 14,961,631 43,041
(ii) Approval of an amendment to the 1996 Equity Incentive
Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 1,225,000 shares,
from 2,300,000 shares to 3,525,000 shares. 8,117,565
votes were cast in favor of the amendment, 5,279,860
votes were cast against and zero votes were withheld;
there were 14,680 abstentions and 1,592,567 broker
non-votes.
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(iii) Approval of an amendment to the 1996 Employee Stock
Purchase Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by
300,000 shares, from 600,000 shares to 900,000 shares.
12,411,403 votes were cast in favor of the amendment,
965,459 votes were cast against and zero votes were
withheld; there were 14,491 abstentions and 1,613,319
broker non-votes.
(iv) Approval of an amendment to the 1996 Directors Stock
Option Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 75,000
shares, from 100,000 shares to 175,000 shares.
11,365,145 votes were cast in favor of the amendment,
2,007,127 votes were cast against and zero votes were
withheld; there were 19,081 abstentions and 1,613,319
broker non-votes.
(v) Ratification of selection of independent auditors. The
stockholders ratified the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors to
perform the audit of the Company's financial statements
for the year ending December 31, 1998. 14,987,708 votes
were cast in favor of the amendment, 10,936 votes were
cast against and zero votes were withheld; there were
6,028 abstentions and zero broker non-votes.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
The following statement is provided pursuant to Rule 14a-5 promulgated
by the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended: Proxies solicited by the Company for the
Company's Annual Meeting of Stockholders to be held in 1999 will be
voted in the discretion of the persons voting such proxies with respect
to all proposals presented by the stockholders for consideration at
such meeting after February 28, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this Report:
10.02 Registrant's 1996 Equity Incentive Plan and related
documents (1)
10.03 Registrant's Directors Stock Option Plan and related
documents (2)
10.04 Registrant's 1996 Employee Stock Purchase Plan (3)
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(b) Reports on Form 8-K:
No report on Form 8-K has been filed for the quarterly period
ended June 30, 1998.
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(1) Incorporated by reference to Exhibit 4.06 to Registrant's
Registration Statement on Form S-8 (No. 333-61109), filed
on August 10, 1998.
(2) Incorporated by reference to Exhibit 4.07 to Registrant's
Registration Statement on Form S-8 (No. 333-61109), filed on
August 10, 1998.
(3) Incorporated by reference to Exhibit 4.06 to Registrant's
Registration Statement on Form S-8 (No. 333-61109), filed on
August 10, 1998.
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SIGNATURES
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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.
EDIFY CORPORATION
Date: August 13, 1998 By: /s/ Stephanie A. Vinella
---------------------------------------------
Stephanie A. Vinella
Vice President of Finance and Administration,
Chief Financial Officer and Secretary
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EDIFY CORPORATION
FORM 10-Q
EXHIBIT INDEX
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EXHIBITS
27.01 Financial Data Schedule