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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[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
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)
(408) 982-2000
(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:
Title or Class Name of exchange on which registered
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COMMON STOCK, $0.001 PAR VALUE NASDAQ NATIONAL MARKET SYSTEM
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 filer 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. [ ]
At February 26, 1999, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was $104,775,411.
As of February 26, 1999, there were 17,646,385 shares of the Registrant's Common
Stock outstanding.
Part III incorporates by reference from the definitive Proxy Statement for the
Registrant's 1999 Annual Meeting of Stockholders to be filed with the Commission
not later than 120 days after the end of the fiscal year covered by this Form.
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TABLE OF CONTENTS
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PART I................................................................................................................1
Item 1. Business....................................................................................1
Item 2. Properties.................................................................................12
Item 3. Legal Proceedings..........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders........................................13
Item 4A. Executive Officers of the Registrant.......................................................13
PART II..............................................................................................................15
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................15
Item 6. Selected Consolidated Financial Data.......................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................26
Item 8. Financial Statements and Supplementary Data................................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......27
PART III.............................................................................................................28
Item 10. Directors and Executive Officers of the Registrant.........................................28
Item 11. Executive Compensation.....................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................28
Item 13. Certain Relationships and Related Transactions.............................................28
PART IV..............................................................................................................29
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.............................29
SIGNATURES...........................................................................................................47
INDEX TO EXHIBITS....................................................................................................48
This Report contains forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Report.
Additionally, statements concerning future matters such as the features,
benefits and advantages of the Company's products, the development of new
products, enhancements or technologies, business and sales strategies, matters
relating to proprietary rights, competition and facilities needs and other
statements regarding matters that are not historical are forward-looking
statements.
Forward-looking statements are subject to risks and uncertainties, and actual
results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include those discussed
in Item 7 under the heading "Business Risks," as well as those discussed
elsewhere in this Report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report. The
Company undertakes no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Report.
Edify and Electronic Workforce are registered trademarks, and Electronic Banking
System and Employee Service System are trademarks, of Edify Corporation. All
other company or product names may be trademarks of their respective owners.
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PART I
ITEM 1. BUSINESS
Edify Corporation ("Edify" or the "Company") is a leading supplier of
enterprise self service software solutions that enable organizations to
automate, integrate and personalize interactions with customers and employees
through multiple channels, including the Internet, corporate intranets and the
telephone. The Company's software addresses the growing need for organizations
to automate, integrate and personalize interactions with customers and
employees, yielding stronger, more profitable relationships. Originally, Edify's
self service solutions enabled organizations to contain costs, to capitalize on
emerging interactive media, and to leverage investments in enterprise systems
and communications infrastructure. Over the past seven years, Edify has licensed
its Electronic Workforce application development and runtime platform to over
1,200 customers for custom development of Web and telephone self service
applications such as bank account inquiries and employee benefit enrollments. In
the last three years, the Company introduced two software application products,
the Electronic Banking System ("EBS") and the Employee Service System ("ESY"),
as part of its strategy to establish leadership in the market for self service
applications in the financial services and human resource market segments.
Edify's Electronic Workforce is a full-featured, scalable and flexible
application development and runtime system that enables organizations to create
and deploy custom self service applications through which users can conveniently
and easily obtain access to a broad range of valuable information and services.
Electronic Workforce's object-oriented architecture allows the incorporation of
multiple media, enabling service applications through Web browsers, telephones,
facsimiles, electronic mail and alphanumeric pagers. It also facilitates
interaction with information content assembled from a variety of sources,
including mainframe and client/server applications and relational databases.
Electronic Workforce also includes a "visual" development environment that
enables rapid development and adaptation of self service applications without
writing lines of code.
Edify's Electronic Banking System is a software application product which
offers financial institutions the means to deploy a suite of automated banking
services via the World Wide Web (the "Web"). The Company's Employee Service
System is a software application product that offers human resources ("HR")
organizations the means to empower employees with direct access to information
and services over corporate intranets. EBS and ESY each offer a fully integrated
application suite, multiple access options including the Web and telephone and
visual customization tools for rapid customization and integration with a wide
range of back-office systems. They both are built on Edify's Electronic
Workforce and utilize Web browser, Java and other technologies that address the
customization requirements necessary for the application products market.
INDUSTRY BACKGROUND
In today's highly competitive global marketplace, customers and employees
are increasingly demanding faster, more convenient and more interactive access
to information and services. Competitive pressures are driving businesses to
increase the quality of such services while containing costs. The delivery of
richer, more cost-effective services has become critical in differentiating a
company's product or service offerings and expanding its market share. While
traditional information and automation systems have focused primarily on
increasing the efficiency of core business operations, new opportunities exist
to employ available and emerging technologies to automate and enhance an
organization's interactions with its customers and employees.
Organizations traditionally have used trained service representatives to
bridge the gap between customers and employees and the enterprise information
systems that store and process account, employment, shipment or other
information. Service representatives perform multiple functions, including
receiving inquiries from customers or employees, using enterprise software
applications to extract relevant information, implementing company policies and
communicating responses to the inquiries. Reliance on people to perform these
service functions is expensive and has inherent limitations in terms of
scalability, flexibility and reliability. Labor costs tend to grow
proportionately with increased demands for service, and the quality of service
becomes more difficult to maintain as the number of service representatives
increases. In addition, the time required to hire and train service personnel
limits the speed with which organizations can respond to increasing customer
demands or to new competitive service offerings. The solution to these service
demands and challenges is to use technology to enable customers and employees to
serve themselves through automated "self service" applications that provide
direct and interactive access to enterprise information and services.
THE EVOLUTION OF SELF SERVICE
Self service applications have expanded rapidly over the last two decades
as end users have become increasingly comfortable with self service and as new
technologies have broadened end-user access to automated services and
increasingly have enabled the development of full-featured applications. Each
new technology has expanded the scope of self service applications rather than
supplanted the earlier technologies. The evolution of these technologies and
applications can be viewed in phases.
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ACCEPTANCE PHASE. During the 1970s, automated teller machines ("ATMs") were
an initial proving ground for the economic benefits and consumer acceptance of
self service. ATMs not only provide the benefits of better customer service but
also reduce the need for banks to build, staff and maintain expensive branch
offices.
CONVENIENCE PHASE. During the 1980s, the availability of toll-free
telephone service and touch-tone dialing provided an infrastructure that
permitted self service over the telephone. This infrastructure has been
exploited using voice processing technology and stand-alone interactive voice
response ("IVR") systems. IVR systems, often operating in large call centers,
provide convenient 24-hour access to information and services through touch-tone
telephones, facsimile machines or alphanumeric pagers. Popular telephone self
service applications include telephone banking, employee benefit enrollment,
university student course registration and verification of customer order and
shipment status. While telephone self service has continued to gain acceptance
and grow due to the ubiquity of touch-tone telephones, Edify believes that the
inherent user interface limitations of the telephone, such as the lack of a
visual display and the small number of touch-tone keys, have limited the
development of a larger self service automation market. However, current
developments in voice recognition capabilities are helping to reduce such
limitations by enabling the automation of activities that had previously been
restricted by the small number of touch-tone keys.
In recent years, the development of the Web/intranet infrastructure has
enabled users of personal computers operating Web browser software to access and
interact with a broad range of information sources, independent of physical
location and underlying computer design. The Web/intranet infrastructure shares
many attributes of the telephone: widespread connectivity, widespread access to
service and a simple, easy-to-use interface. Web browsers, however, offer
advantages over the telephone, including a visual user interface, keyboard input
and extensive support for alphanumeric, audio, video and text information types.
Organizations are rapidly adopting Web browser and server software for both
external customer communications via the Internet and internal employee
communications via corporate intranets. The proliferation of telephone-based
self service solutions, as well as the emergence of Web-based self service
solutions, have provided end users with convenient "anytime, anywhere" access
to information and services, resulting in improved customer service and greater
customer satisfaction.
MASS CUSTOMIZATION PHASE. As technologies continue to advance for both
telephone- and Web-based solutions, organizations will be able to deploy
increasingly sophisticated self service applications. For example, organizations
now can provide services for particular users or groups of users, utilizing
information that the organization has accumulated about its individual
customers, employees and suppliers. The Company believes that end users will
demand that these services become increasingly personalized so they can take
ownership of their own service needs. Organizations that offer these
capabilities should be able to build and maintain stronger relationships with
their constituencies.
The evolution from the "convenience" phase to the "mass customization"
phase is complicating the self service infrastructure within the enterprise.
Today, the self service landscape is comprised primarily of disjointed solutions
that provide a single point of access to a single source of data. These point
solutions result in duplicate connections to the enterprise systems in the back
office, inconsistent interfaces for the customer and high maintenance costs.
Point solutions also fail to provide a unified base of customer contact
information with which customer service can be delivered regardless of media and
contact point. There is an increasing need for integrated solutions supporting
multiple media and aggregating data from the many islands of information in the
enterprise. Such solutions enable end users to access any information via any
media and are easier to create and maintain. At the same time, these solutions
must incorporate the necessary flexibility, scalability and reliability to be
capable of supporting sophisticated self service applications.
THE EDIFY SOLUTION
Edify's self service software solutions provide the following benefits:
PERSONALIZED, FEATURE-RICH SELF SERVICE APPLICATIONS. Edify's software
enables organizations to deploy self service applications through which end
users can conveniently and easily obtain access to a broad range of valuable
information and services. Although an application may require access to
information and services on a wide variety of disparate computer systems within
the organization, it retrieves the information and presents the services to the
end user in a unified, intuitive way. In addition, the architecture of Edify's
software enables organizations to provide highly interactive self service
applications that can be customized easily for and by the end user. The runtime
system provides service functions interactively in response to user inquiries
from an online personal computer or telephone as well as proactively in
response to pre-set parameters. The Company's architecture also allows companies
to target particular groups of users with specific services through
cross-selling, narrowcasting of content and segmented service by class of user.
These "one-to-one" capabilities enhance the value of the self service
applications for the end user, thereby developing a stronger, more profitable
relationship for the organization.
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ACCESS THROUGH MULTIPLE FRONT-END MEDIA. The object-oriented architecture
of Edify's software is designed to provide self service functions through a
broad range of communications media, including Web browsers, telephones,
facsimiles, electronic mail and alphanumeric pagers, either alone or in
combination. This design has enabled the Company to provide end users with
multiple points of entry to the system and to incorporate new communications
media, such as the Web browser, as they have emerged to deliver a wider, more
useful range of self service functions. In addition, the Company's software
provides better, more differentiated types of service by supporting multiple
combinations of communications media within the same application. For example,
the Company's software allows Web users to initiate a direct telephone link to a
customer service representative ("CSR") in a call center with a mouse click. The
current page being viewed by the user "pops" onto the screen of the CSR, who can
shadow the user's movements, thereby communicating more effectively. Edify's
multiple media approach enables organizations to uniformly manage customer
interactions.
BROAD INTEGRATION WITH BACK-OFFICE ENTERPRISE SYSTEMS AND COMMUNICATIONS
MEDIA. In contrast to systems that are designed specifically for stand-alone Web
or telephone applications, Edify's software is designed to integrate with a wide
variety of computer and telecommunications technologies and products. These
include mainframe, client/server and personal computer software applications,
relational databases running locally or on distributed networks, Web servers,
central offices or private branch exchanges ("COs" and "PBXs") and automated
call distributors ("ACDs"). In addition, the Company has developed or is
developing specific links to systems offered by CheckFree Corporation
("CheckFree"), First Data Corporation, Integrion Financial Network
("Integrion"), Microsoft Corporation ("Microsoft"), M&I Data Services, NCR
Corporation ("NCR") and TransPoint in the financial services market and
PeopleSoft Inc. ("PeopleSoft") and SAP AG ("SAP") in the human resources market.
This broad integration capability enables Edify's solutions to access
information from multiple back-office systems and to extend the information by
assembling rich combinations of content from diverse sources and making them
available to end users.
HIGHLY ADAPTABLE, "VISUALLY" DEVELOPED APPLICATIONS. Electronic Workforce
includes an object-oriented visual development environment that enables
developers to create and adapt custom self service applications rapidly. By
positioning graphical icons on a workspace grid, a developer can define complete
self service applications without writing lines of code. The visual development
environment allows a developer to build new objects for often-used processes,
such as obtaining and preparing information from a particular source, and then
to reuse these objects in other applications. In addition to reducing the time
to market for new custom applications, the Company believes that the
adaptability of its development environment provides substantial cost savings
over the life of an application. In addition, the visual customization tools for
EBS and ESY enable developers to modify easily the look and feel of the
application, define classes of users, segment functionality by user type and
establish cross-selling rules and notification services.
SCALABILITY, RELIABILITY AND SECURITY. Edify's software architecture is
designed to provide the high capacity and reliability necessary for large-scale
deployment of self service applications. The Company's software operates on one
or more networked computer servers allowing customers to expand capacity as the
number of applications or users increases. The Company has successfully deployed
customer applications with more than 20 networked servers and believes that its
architecture is scalable beyond the size of such installed systems. In addition,
the Company's software, optimized for Microsoft's Windows NT operating system,
supports lightweight threads, message passing and symmetric multiprocessing to
achieve greater scalability on a single server. The large-scale version of
Edify's Electronic Workforce (EWF/LS) scales to 288 ports per server (according
to a benchmarking study conducted by Compaq Computer Corporation ("Compaq")).
Electronic Workforce has been designed with separate subsystems that isolate
system faults and can accommodate the loss of one or more networked nodes
without affecting service elsewhere in the system. In addition, Electronic
Workforce manages security and resource contention in providing access to
various enterprise systems and communications media.
THE EDIFY STRATEGY
The Company's objective is to become the leading provider of enterprise
self service software used by organizations to automate, integrate and
personalize interactions with customers and employees, yielding stronger, more
profitable relationships. Edify's strategy includes the following key elements:
DEVELOP AND LEVERAGE LEADING TECHNOLOGIES FOR ENTERPRISE SELF SERVICE
SOLUTIONS. Edify intends to capitalize on its object-oriented software
architecture and visual development technology to extend the capabilities of
Electronic Workforce to automate a wide range of service functions. The system
architecture of Electronic Workforce enables organizations to create and manage
functionally rich, intuitive customer- and employee-oriented services assembled
and delivered through the integration of enterprise computer and
telecommunications systems. The Company plans to continue to enhance the
functionality of its self service solutions and to incorporate new technologies
and standards as they evolve to offer more comprehensive solutions and to
broaden the market acceptance and application of these solutions.
DEVELOP APPLICATION PRODUCTS FOR SPECIFIC MARKET SEGMENTS. Edify's market
strategy is to apply its technology and experience in self service solutions to
develop application products for certain market segments. As part of this
strategy, the Company has introduced
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fully integrated application products for the financial services and human
resources markets, the Electronic Banking System and the Employee Service
System. The Company's application products are designed to leverage its core
Electronic Workforce technology and extend it utilizing Web, Java and other
technologies which address the customization requirements necessary for the
applications market. The Company's application products offer a suite of
customizable application modules that provide specific self service functions
for each target market. This modularity enables organizations to offer the
services that meet their particular needs as they evolve over time. The Company
is investing in the ongoing development of additional application modules for
these products.
PARTNER WITH INDUSTRY-LEADING COMPANIES THAT PROVIDE COMPLEMENTARY
SOLUTIONS. To augment its product offerings, the Company intends to evaluate
opportunities to enter into partnerships, such as licenses with or investments
in third parties that could deliver key existing complementary technologies.
Edify's open, object-oriented software architecture can easily and quickly
incorporate additional third-party technologies into its existing products,
creating significant value for its customers. Edify intends to base its
decisions to partner with, invest in or jointly develop additional solutions on
the intellectual capital as well as the technological strengths of the third
parties.
ESTABLISH LEADERSHIP IN THE FINANCIAL SERVICES AND HUMAN RESOURCES MARKETS.
While the Company markets its products across multiple markets, it emphasizes
two key market segments: customer self service applications within the financial
services industry and HR self service applications across multiple industries.
The Company is focusing on these segments because they represent a large portion
of the self service market and the Company has developed significant expertise
in developing solutions for these segments. The Company focuses a significant
portion of its sales and marketing activities on these two segments, including
the establishment and expansion of distribution or joint marketing relationships
with leading technology providers, outsourcers and integrators in each segment.
In the financial services market, Edify has established relationships with
CheckFree, Hewlett-Packard Company ("HP"), Integrion, Intuit Inc. ("Intuit"),
M&I Data Services, Microsoft, NCR, Transaction Systems Architects, Inc. ("TSA")
and TransPoint, among others. In the HR market, the Company has relationships
with Cambridge Technology Partners ("CTP"), Foundation Technologies, Hunter
Group, PeopleSoft and SAP, among others. In addition, the Company has introduced
application suites for the financial services and human resources markets, EBS
and ESY. The Company intends to invest significantly in these relationships and
products in order to establish leadership in the financial services and human
resources markets.
TARGET LARGE CALL CENTERS. The Company intends to market its Electronic
Workforce software to large call centers for telephone-based customer service
applications, in addition to its traditional focus on medium-sized call centers.
In 1998, the Company introduced EWF/LS, the large scale version of Electronic
Workforce. Optimized for the Windows NT operating system and supporting
symmetric multiprocessing, EWF/LS allows organizations to scale with improved
price-performance and smaller footprint. The Company believes that the increased
scalability of Electronic Workforce, combined with its ability to integrate with
a variety of access media and enterprise information and communications systems,
has enabled the Company to more effectively target the large-scale call center
market.
EXPAND DOMESTIC AND INTERNATIONAL DISTRIBUTION. To achieve broad adoption
of its self service software, the Company believes that it must continue to
pursue multiple distribution channels worldwide. The Company currently
distributes products through a combination of field sales and indirect sales
channels, including VARs, OEMs, outsourcers and international distributors. In
order to facilitate sales of its application products and to leverage its
installed base and distribution partners, Edify has established dedicated sales
positions for application specialists, major customers and major partners. The
Company pursues VARs with vertical market expertise, systems integration
experience and geographical diversity. The Company's international distribution
strategy is to penetrate key international markets by seeking additional
regional distributors and by further developing its existing distributor
relationships. Through its distributors, the Company currently has a presence in
more than 24 countries. The Company's international expansion currently is
focused on Asia/Pacific, Europe and South America, where the Company is
investing resources in sales, marketing and technical personnel.
EXPAND IMPLEMENTATION CAPACITY AND EXPERTISE. The Company seeks to
accelerate customer adoption and deployment of self service solutions by
expanding its services consulting organization and leveraging its partnerships
with third party integrators. Through its services organization, the Company has
established expertise in assisting and training customers to perform
integrations of diverse computer and communications systems as well as knowledge
of user interface and design and a familiarity with the self service needs of
its targeted market segments. The Company intends to continue to expand its
services organization with experienced consultants who combine technical and
application expertise. The Company believes that its services organization
facilitates the success of its customers' implementations, strengthens its
customer relationships and generates valuable feedback that the Company can
apply to product enhancements. In addition, the Company has established
relationships with third party integrators such as CTP and HP to assist
customers with the successful implementation of Edify products. The Company
believes these relationships will enable its customers to achieve efficient
implementation of its products while decreasing the capacity strain on the
Company's services organization.
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The foregoing statements regarding the Company's strategy and intentions
are forward-looking statements, and actual results may vary substantially
depending upon a variety of factors, including the development of emerging
markets for Web-based self service software, intense competition, evolving
industry standards, changing customer needs, any product development delays, and
the ability of the Company to manage any future growth and new distribution
channels.
MARKETS, CUSTOMERS AND APPLICATIONS
MARKETS
The Company targets large organizations where there is a need to process
substantial numbers of customer or employee service transactions efficiently.
Electronic Workforce is best suited for organizations seeking to offer a variety
of functionally rich services that can be rapidly deployed or modified, accessed
by customers and employees through multiple communications media and integrated
with existing or new enterprise applications and telecommunications systems. The
Company has successfully installed solutions in the banking, consumer goods,
energy/utilities, financial services, technology, universities, retail,
insurance, telecommunications, healthcare, manufacturing and media sectors,
among others. The Company currently participates in two major self service
areas: customer self service across a number of industries, with an emphasis on
banking and financial services, and employee self service focused on HR
applications.
CUSTOMERS
As of December 31, 1998, Edify had, directly or indirectly through VARs or
distributors, licensed its products to more than 1,200 customers. The following
is a representative list of the Company's direct and indirect customers as of
December 31, 1998 that accounted for more than $150,000 in revenue to Edify from
January 1, 1997 through December 31, 1998. The Company believes that these
customers are typical of the Company's customer base by virtue of the industries
they represent and the types of applications they implement using the Company's
products. Because the Company generally does not have long-term sales contracts
with its customers, however, there can be no assurance that relationships with
these or other customers will continue. No single customer accounted for more
than 10% of the Company's total revenue in 1998.
BANKING/FINANCIAL SERVICES CONSUMER GOODS INSURANCE/HEALTHCARE
-------------------------- -------------- --------------------
Alaska USA Federal Credit Union Bristol-Meyers Squibb Company American Skandia
Australia and New Zealand Banking Group Kraft General Foods, Inc. Empire Blue Cross and Blue Shield
Boeing Employees' Credit Union Nintendo of America, Inc. Independence Blue Cross
Busey Bank The Upper Deck Company SAFECO Corporation
Chase Manhattan Bank Warner-Lambert Company The Travelers Indemnity Company
Comerica Incorporated
Fifth Third Bank MANUFACTURING TECHNOLOGY
First American National Bank ------------- ----------
First National Bank of England
First National Bank of Omaha Eastman Chemical Company 3Com Corporation
First Union Corporation Lockheed Martin Corporation Applied Materials, Inc.
FirstBank Data Corporation Michelin North America Hewlett-Packard Company
Harris Bank United Technologies Corporation, Oracle Corporation
Janus Capital Corporation Pratt & Whitney Unisys Corporation
Los Alamos National Bank Solvay Polymers
Mercantile Bank National Association
Motorola Employee Credit Union TELECOMMUNICATIONS UNIVERSITIES
NationsBank Corporation ------------------ ------------
Pennsylvania State Employees Credit Union
Scudder Kemper AT&T Corp. California State University
Standard Chartered Bank Intermedia Communications Stanford University
MCI WorldCom University of California, Los Angeles
Nextel Communications, Inc. Los Angeles Community College
Pacific Telesis Group University of Utah
CUSTOMER APPLICATIONS
Edify's software can be used in many applications, including the following
representative applications:
CHASE MANHATTAN: EBS AND ESY APPLICATIONS. With $366 billion in assets, The
Chase Manhattan Corporation is one of the world's premier financial services
institutions. Chase first implemented Edify's Employee Service System to provide
HR self service via the telephone and intranet for its 70,000 employees. ESY
enables employees to access and modify personal information such as address,
telephone and emergency contact and dependent information. Further, new hires
can enroll in benefits and existing employees can register for training courses
and participate in open enrollment. Following the success of this application,
Chase elected to use Edify's Electronic Banking System to enhance its 400,000
customer-strong Online Banking service. Based on EBS, Chase Online Banking
offers improved graphics, easier navigation and Internet access. It provides all
Chase customers, consumers and small
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businesses alike, with an easy, convenient way to do their day-to-day banking
including transferring funds, paying bills and communicating with the bank.
Additionally, Edify's OFX module allows Chase customers to download data
directly into personal financial managers such as Microsoft Money or Quicken.
REPUBLIC INDUSTRIES: TELEPHONE AND WEB-BASED CALL CENTER HR APPLICATION.
Republic Industries, a Fortune 150 company, is using the Employee Service System
to offer open enrollment to its employees via the telephone. Republic employs
60,000 individuals dispersed among more than 500 subsidiaries in the auto
retail, auto rental, and solid waste industries. Edify consultants deployed a
bilingual (Spanish and English) IVR application that enables Republic's
employees to self-enroll in benefits programs over the telephone combined with
an integrated Web-based application for use by Republic's HR call center
representatives. Employees can complete their enrollment process over the phone
or transfer to a specially trained HR call center representative who has access
to the employee's benefits history as well as life events profile and employment
history. The representative is able to view all of the information the employee
entered during the IVR session, saving the employee the time needed to repeat
this information verbally, and the representative can complete the enrollment
process at the employee's request. This Web-based application records key call
statistics, including the employee's rating of the enrollment procedure, so that
Republic Industries can fine-tune its benefits administration.
NET.B@NK: WEB AND TELEPHONE ELECTRONIC BANKING APPLICATION. Net.B@nk,
which opened its virtual doors in October 1996, is the world's first
FDIC-insured federal savings bank to offer a full line of financial services
exclusively through the Internet. The bank's services are hosted by Edify
partner NCR Corporation with BISYS Group, Inc. as the bank's core processing
center. Edify's EBS application allows Net.B@nk customers to access account
balances, review and search for transactions, transfer funds between accounts,
place a stop payment and communicate with the bank via secure electronic mail.
Customers can also review their banking activity and download the data to a
personal financial manager, pay bills, transfer funds and communicate with the
bank via e-mail. Net.B@ank also offers high-interest checking accounts, ATM,
debit and credit cards, money market accounts, CDs, brokerage services, mortgage
loans and more. As a result of such offerings, Net.B@nk had over 17,500
customers and deposits of $283 million by the end of 1998.
INTERMEDIA COMMUNICATIONS: ADVANCED CALL CENTER APPLICATION. The nation's
largest independent competitive local exchange carrier has incorporated Edify's
EWF/LS along with Genesys computer telephony integration software and other
best-of-breed Windows NT-based industry-standard components to provide a
mission-critical, 24 hour, 7-day a week customer call center in Tampa, Florida.
Plans are underway to expand this capability to other locations serving
Intermedia's growing network of customers. Edify's IVR application, running on
Compaq hardware, uses the customer's dialed number (DNIS) and identification
number as well as the customer's response to prompts about the problem to route
the call to an appropriate CSR. By tightly integrating with the Clarify
front-office system and a Visual Basic desktop, the Edify IVR application
enables the CSR to view a profile of the customer's account while addressing the
call. Additionally, the CSR can provide customers with a tracking number, which
can subsequently be used to get automated updates on various requests.
PRODUCTS
Edify currently offers three self service software products: the Electronic
Workforce, the Electronic Banking System and the Employee Service System.
Electronic Workforce is an integrated development and runtime platform utilized
for the creation and management of custom self service solutions. EBS and ESY
are application products that address the needs of the financial services and
human resources markets, respectively. EBS and ESY are built on top of the
Electronic Workforce and incorporate Web, Java and other technologies that
address the customization requirements necessary for the application product
market. Versions through 4.x of Electronic Workforce and 1.x of EBS and ESY
operate on Intel-based hardware platforms using IBM Corporation's ("IBM") OS/2
operating system.
In October 1997, the Company began shipping Electronic Workforce Release 5,
which is optimized for Microsoft's Windows NT operating system. In December
1997, the Company began shipping EBS Release 2 and ESY Release 2, both of which
are optimized for Windows NT. By transitioning to the Windows NT platform,
Edify's products are able to provide an extended open architecture, enhanced
visual development tools and larger scale deployment for high-end applications.
Throughout 1998, the Company continued to develop new products. In June
1998, Edify began to ship the large scale version of its EWF product (EWF/LS).
EWF/LS enables Edify to compete in the high-end call center market. In December
1998, the Company shipped Release 3 of EBS, which incorporates end-to-end
support for online bill presentment and payment, and the industry's first
internet banking module designed specifically for commercial banks' small
business customers.
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ELECTRONIC WORKFORCE
Edify's Electronic Workforce, which began shipping in the first quarter of
1992, is a full-featured, scalable and flexible application development and
runtime system that enables organizations to create and deploy custom self
service applications that automate, integrate and personalize interactions with
customers and employees. Electronic Workforce's object-oriented architecture
allows the incorporation of a broad range of media, enabling self service
applications through Web browsers, telephones, facsimiles, electronic mail and
alphanumeric pagers, either alone or in combination. It also facilitates
interaction with information content assembled from a variety of sources,
including mainframe and client/server applications and relational databases, all
in a way that is transparent to the end user. Electronic Workforce comprises
three primary components, which are licensed separately:
WORKFORCE OBJECTS. Workforce Objects are advanced high-function software
objects that provide access to a variety of enterprise information systems
through a broad range of media. Workforce Objects are the core building blocks
of Electronic Workforce applications, enabling them to perform tasks such as
answering a telephone, operating a host application or exchanging information
through Web browsers.
WORKFORCE APPLICATION BUILDER. The Workforce Application Builder is an
object-oriented, visual development environment used to assemble and customize
self service applications using Workforce Objects. Workforce Application Builder
provides developers with a visual framework for process automation through which
complex associations of media, information sources and application functions may
be represented in a simple and conceptual way. By positioning graphical icons on
a workspace grid, a developer can define complete self service applications
without writing lines of code.
WORKFORCE APPLICATION SERVER. The Workforce Application Server is a robust,
open runtime environment that schedules resources and activities, manages
resource usage, tracks application status and reacts and responds to changing
conditions. These features simplify the task of developing self service
applications by eliminating the need to program such functions within each
application. In addition, they give administrators the ability to manage
large-scale systems efficiently where many applications need to be scheduled and
share resources concurrently. Workforce Application Server can be installed on
multiple networked servers and can work in a coordinated fashion to achieve high
levels of service capacity. It is designed to work with the Workforce
Application Builder so that applications can be developed, tested and installed
online without interruption of ongoing service.
Electronic Workforce components are licensed according to capacity and
according to functionality. Capacity is determined by the number of concurrent
users on a server. Functionality is determined primarily by the end-user
communications media and by the access methods to a customer's back-office
systems that are supported by the software. Typical software licenses with
associated maintenance and consulting contracts begin at approximately $75,000,
and large customer contracts can exceed $1 million.
ELECTRONIC BANKING SYSTEM
The Electronic Banking System, which began shipping in September 1996, is a
software application product that offers financial institutions the means to
deploy a suite of automated banking services via the World Wide Web. EBS is
built on top of the Electronic Workforce and incorporates Web, Java and other
technologies that address the customization requirements necessary for the
application product market. EBS is the first product to combine Web banking
services with optional electronic banking capabilities that support self service
via telephones, facsimiles and personal financial management software. EBS
comprises three components: a fully integrated application suite for web
banking; multiple electronic delivery options including telephone, facsimile and
personal financial managers; and visual customization tools for rapid
customization and integration with a wide range of back-office systems.
The Electronic Banking System's application suite utilizes a user interface
framework that includes a tool set which enables banks to incorporate their
unique brands, logos and product names into the application. EBS currently
includes the following integrated application modules: home banking, small
business banking, electronic bill presentment and payment, dynamic target
marketing, checkbook transaction register, multi-lingual & multi-currency
support for international banking, personal profile, proactive notification,
message center and customer service teleconferencing. EBS also offers
integration modules for leading technology vendors such as CheckFree, Integrion
and TransPoint for bill presentment and payment processing, and offers an OFX
integration module for communication with personal financial management software
programs such as Microsoft Money and Intuit Quicken.
Edify intends to develop additional application modules for EBS to enable
customers to expand the range of services offered through EBS. In addition, EBS
has been designed using the visual customization tools of Electronic Workforce,
enabling EBS customers and Edify partners to develop custom Web banking modules
that integrate with the EBS Web user interface framework. With this
customization capability, financial institutions can offer differentiated
services ahead of their competition while still gaining the economies of scale
traditionally achieved with pre-built solutions. Finally, use of the Electronic
Workforce software provides a scalable and highly reliable runtime environment,
meeting requirements for high-capacity, mission-critical implementations.
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As of December 31, 1998, EBS had been licensed to more than 100 customers.
EBS pricing, including the application and implementation services, begins at
approximately $150,000. Actual pricing varies depending upon the number of
modules desired, the capacity requirements of the system and the level of
customization and integration support.
EMPLOYEE SERVICE SYSTEM
The Employee Service System, which began shipping in June 1997, is a
software application product that offers human resources organizations the means
to empower employees with direct access to information and services over
corporate intranets. ESY addresses the growing need for HR organizations to
reduce administrative costs while expanding the availability and value of
employee services. Similar to EBS, ESY comprises three components: a fully
integrated application suite for employee self service; multiple access options
including Web, telephone, electronic mail, kiosk and facsimile; and visual
customization tools for rapid customization and integration with a wide range of
back-office systems.
ESY offers a suite of integrated application modules that automate the most
common and time-intensive employee transactions managed by HR organizations. ESY
currently includes the following integrated application modules: benefits
enrollment, personal profile, direct deposit, electronic paystub, W-4, leave
status, benefits summary, employee directory, job posting and training
registration.
As with EBS, the Company intends to develop additional application modules
for ESY. In addition, in order to facilitate integration with human resources
information systems, Edify offers a pre-built integration module for
PeopleSoft's HRMS and can provide integration with SAP. ESY also has been
designed using the visual customization tools of Electronic Workforce, enabling
ESY customers and Edify partners to develop custom application modules that
integrate with the ESY Web user interface framework. In addition, ESY includes a
visual customization tool that enables easy customization of the user interface
and other graphical elements. Finally, also similar to EBS, the use of the
Electronic Workforce software provides a scalable and highly reliable runtime
environment, meeting requirements for high-capacity, mission-critical
implementations.
As of December 31, 1998, ESY had been licensed to 40 customers. ESY
pricing, including the application and implementation services, begins at
approximately $150,000. Actual pricing varies depending upon the number of
modules desired, the capacity requirements of the system and the level of
customization and integration support.
SALES AND MARKETING
The Company's sales strategy is to pursue opportunities with large
organizations in the United States through its field sales force and services
organization, and to penetrate various targeted market segments through multiple
indirect distribution channels, including VARs, international distributors, OEMs
and joint marketing partners. To support its selling efforts, the Company
conducts comprehensive marketing programs which include direct mail, phone- and
Web-based lead generation, advertising, trade shows, an annual users and
developers conference, and ongoing customer communication programs. As of
December 31, 1998, the Company's sales and marketing organization consisted of
137 employees, including 40 quota-carrying salespeople.
DOMESTIC FIELD SALES FORCE. The Company employs a field sales force to
market its products and services directly in the United States. Field sales
representatives are assigned quotas and are compensated for all Company revenue
resulting from their assigned territory and specialty. While the sales cycle
varies from customer to customer, it typically ranges from one month to over a
year and averages six months. In order to sell the application products and to
generate increased levels of repeat sales more effectively, the Company has
assigned sales representatives to focus on application products and on the
Company's installed base.
VALUE ADDED RESELLERS. VARs license and distribute the Company's software
to build and implement self service solutions for their customers in various
market segments. VARs often provide specialized application or systems
integration expertise in the installation, development and support of self
service applications. The Company maintains an organization to recruit, train
and provide ongoing support for its VARs. As of December 31, 1998, the Company
had more than 50 domestic VARs.
STRATEGIC ACCOUNTS. Over time, some of the Company's customers and channel
partners account for a significant amount of revenue. In 1998, the Company began
identifying certain of these customers and partners as "strategic accounts." The
Company has assigned sales representatives to focus 100% of their efforts on one
or more of these accounts in order to provide increased support for and maximize
revenue from these accounts.
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OEMS. The Company has agreements with Aspect Telecommunications Inc.
("Aspect") and NEC America, Inc. ("NEC") under which Aspect and NEC licensed the
Company's software technology to provide solutions to the call center market.
Additionally, in the first quarter of 1999, Edify entered into an agreement with
ACI Worldwide, Inc. to provide solutions to the financial services market.
INTERNATIONAL SALES. International revenues accounted for 5% or less of
total net revenues for each of the years ended December 31, 1998, 1997 and 1996.
The Company maintains distribution relationships with distributors in Canada,
Europe, Asia/Pacific and South America. The Company's ability to expand its
Web-based applications internationally is limited by the general acceptance of
the Internet and intranets in other countries. The Company's ability to expand
its telephony applications internationally is limited to those countries where
there is regulatory approval of the third-party telephony hardware supported by
Edify software. Because Edify depends on third-party suppliers to certify such
telephony hardware and obtain regulatory approval on a country by country basis,
there can be no assurance that such approval will exist or continue to exist in
the future.
STRATEGIC RELATIONSHIPS
As part of its objective of establishing leadership in the self service
software market, particularly for financial services and human resources, the
Company has established strategic relationships with leading technology
providers, outsourcers and integrators in these markets. These relationships
enable the Company to interoperate with new technologies, lend the Company
significant visibility and credibility within the self service market and
provide the Company with access to their large customer bases. The Company
intends to leverage these relationships and to develop additional strategic
relationships.
In the financial services market, Edify has established relationships with
CheckFree, Electronic Data Systems, HP, Integrion, Intuit, M&I Data Services,
Microsoft, NCR, TSA, TransPoint and Unisys Corporation, among others. In the HR
market, the Company has relationships with CTP, Foundation Technologies, Hunter
Group, PeopleSoft and SAP, among others. In the call center market, the Company
has relationships with Aspect, Compaq, Fujitsu Limited, Genesys
Telecommunications Laboratories, NEC, Nuance Communications, RightPoint Software
and Rockwell.
EDIFY SERVICES
Edify services are an important component of the complete solution that
Edify offers its customers. The Company's services organization provides
customers and distribution partners with fee-based consulting, education and
support services. As of December 31, 1998, the Company had 169 people in its
services organization. The Company charges for its consulting, education and
support offerings separately from the license fees charged for the Company's
software.
CONSULTING SERVICES. The Company's consulting organization provides full
lifecycle consulting to its direct customers who wish to outsource their
software installation, design, application development and implementation.
Edify's consulting team has expertise in systems integration, knowledge of user
interface and design, and familiarity with the self service needs of its
targeted market segments.
EDUCATION SERVICES. The Company offers a comprehensive education program to
its customers and partners. Courses are offered for each of the Company's
product lines to meet the needs of application developers, system
administrators and project managers. Courses are offered at the Edify "U"
education facilities located at the Company's offices in Santa Clara, California
and Waltham, Massachusetts. In addition, the Company provides onsite training,
upon request, at customer facilities. As of December 31, 1998, the Company had
trained more than 1,400 people to develop self service applications with its
software.
SUPPORT SERVICES. The Company offers a choice of support plans. Through
these plans, Edify provides customers and partners with technical support, new
software releases and documentation and online support. Edify's technical
support engineers help diagnose and resolve technical questions. Edify's product
development engineers develop new software releases and enhance the
functionality, quality and performance of existing software applications.
Additionally, Edify's technical publications organization develops new
documentation for major releases, and online support, offered out of the
technical support organization, includes a support website that provides
"one-stop" access to technical information.
PRODUCT DEVELOPMENT
The statements made herein regarding the Company's products and product
enhancements under development are forward-looking statements, and the actual
results for such products or enhancements could differ materially from those
projected as a result of a variety of factors, including those contained in this
"Product Development" section and elsewhere in this Report.
The market for Edify's products is characterized by rapid technological
change, changes in customer requirements, frequent new product introductions and
enhancements and emerging industry standards. The Company must continually
change and improve its
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products in response to changes in operating systems, application software,
computer and telephony hardware, networking software, programming tools and
computer language technology. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. In particular, the market for self service
application products has only recently begun to develop and is rapidly evolving.
The Company's success will depend upon its ability on a timely and
cost-effective basis to enhance its current products and to develop new products
that meet changing market conditions, which include changing customer needs, new
competitive product offerings, emerging industry standards and changing
technology. There can be no assurance that the Company will be successful in
developing and marketing, on a timely and cost-effective basis or at all, fully
functional and integrated product enhancements or new products that respond to
technological change, updates or enhancements to third party products used in
conjunction with the Company's products, changes in customer requirements or
emerging industry standards, or that the Company's enhanced or new products will
be accepted by customers. Any failure by the Company to anticipate or respond
adequately to changing market conditions, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's software development team is composed of members with
experience in Internet and Web technology, financial services and human
resources application software, visual programming design, object-oriented
software development, computer telephony integration, voice processing and
large-scale real-time subsystems. The Company believes this assembly of diverse
technical expertise contributes to the highly integrated functionality of its
products. The Company's ability to attract and retain highly qualified employees
will be the principal determinant of its success in maintaining technological
leadership.
Product development expenses were $12.0 million in 1998, $10.1 million in
1997 and $5.8 million in 1996. To date, all software development costs have been
expensed as incurred. The total product development staff consisted of 89
full-time employees as of December 31, 1998. All of the Company's products have
been developed internally by its product development staff. Product development
expenses have increased over recent quarters as the Company increased product
development staff to develop versions of its products for the Windows NT
platform. The Company believes significant investments in product development
are required to remain competitive. As a consequence, the Company intends to
increase the dollar amount of its product development expenditures in the
future.
The Company's current development efforts are focused on enhancements to
the Windows NT versions of Electronic Workforce, EBS and ESY. These enhancements
include increased scalability and functionality for Electronic Workforce and
additional application modules for EBS and ESY. There can be no assurance that
these development efforts will be completed within the Company's anticipated
schedules or that, when completed, they will have the features necessary to make
them successful in the marketplace. Moreover, software as complex as that
developed by the Company may contain undetected errors when first introduced or
as new versions are released. Errors in new products may be found after
commencement of commercial shipments, resulting in loss or delay of market
acceptance. Future delays in the development or marketing of product
enhancements or new products, including presently contemplated new features of
the Company's software products for Windows NT, could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
The market for self service software and services is rapidly evolving,
extremely competitive and subject to rapid technological change. The Company
expects competition to increase in the future from existing competitors and from
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance or
functionality than the Company's products. Many of the Company's current and
potential competitors have longer operating histories, greater name recognition,
larger installed customer bases and significantly greater financial, technical,
marketing and other resources than the Company. To be successful in the future,
the Company must continue to respond promptly and effectively to the challenges
of changing customer requirements, technological change and competitors'
innovations. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations.
The Company's current and potential competitors include Internet software
and tools vendors, Web application vendors, business application vendors and
stand-alone IVR vendors. In the market for Web-based self service solutions, the
Company's primary competition has been from system integrators, potential
customers' internal information systems departments that build applications with
custom code and Web development tool vendors. In the future, the Company expects
competition from Netscape Communications Corporation, Microsoft and others to
increase. In addition, the Company expects database vendors such as Oracle
Systems Corporation, Informix Corporation and Sybase, Inc. to provide many of
the capabilities needed in the development of Web self service applications. Any
of these companies could use its superior financial resources, market power and
installed base of customers to
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compete effectively against the Company. The Company believes that the principal
competitive factors in the Web self service market segment are breadth and depth
of application functionality, support for multiple communications media, speed
of application development, integration with mainframe and client/server
computer systems, price, reliability and scalability of product offerings,
third-party distribution, company reputation, application development expertise
and customer service and support. Although the Company believes that its
products and services currently compete favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Such competition could materially adversely affect the Company's ability to
sustain current pricing levels and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects to encounter increased competition from companies
offering Internet application products that compete with the Company's
application products and custom applications of the Company's software. The
Company's Electronic Banking System competes with solutions from BroadVision,
Inc., IBM and Security First Technologies, among others. The Company believes
that the principal competitive factors in this market are application
functionality, ease-of-use, adaptability of applications, integration with
on-premise enterprise applications, and systems and support for multiple media.
Although the Company believes that its products and services compete favorably
on the basis of these factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors.
Web browser and Web server technology offers vendors of business
application software a means to extend their products to provide self service
capabilities over the Web or intranets. The Company expects that application
vendors such as Baan Company N.V., Oracle, PeopleSoft, SAP and others will
market new or enhanced products offering Web-based self service capabilities.
These products could dilute materially the value of the Company's Employee
Service System with customers who use applications licensed from such vendors.
Such enhanced offerings could materially and adversely affect the Company's
market position, business, financial condition and results of operations.
For telephone self service solutions, the Company competes principally with
stand-alone IVR vendors such as Brite Voice Systems, Inc., InterVoice, Inc.,
Lucent Technologies Inc. ("Lucent"), Periphonics Corporation, Syntellect
Technology Corporation and TALX Corp. The Company believes that the principal
competitive factors in the telephone self service market segment are the same as
those for the Web-based self service market. Although the Company believes that
it competes favorably on the basis of these factors, there can be no assurance
that the Company can maintain its competitive position against current and
potential competitors. Certain of the Company's IVR competitors have introduced
products supporting Web applications. Such competition could materially
adversely affect the Company's ability to compete and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
The Company relies primarily on a combination of copyright, trade secret and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials through trade secret and
copyright laws, which provide only limited protection. In addition, the Company
holds two United States patents, has three United States patent applications
pending (one of which has also been filed internationally) and intends to seek
further United States and international patents on its technology. There can be
no assurance that any patents held by the Company will not be challenged and
invalidated, that patents will issue from any of the Company's pending
applications or that any claims allowed from existing or pending patents will be
of sufficient scope or strength or be issued in all countries where the
Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. As part of its confidentiality procedures,
the Company generally enters into nondisclosure agreements with its employees,
consultants, distributors and corporate partners and limits access to and
distribution of its software, documentation and other proprietary information.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use the Company's products
or technology that the Company considers proprietary, and third parties may
attempt to develop similar technology independently. In particular, the Company
provides its existing and potential distribution partners with access to its
product architecture and other proprietary information underlying the Company's
licensed software. Policing unauthorized use of the Company's products is
difficult, and, while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In addition, effective protection of intellectual property
rights may be unavailable or limited in certain countries. Accordingly, there
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology.
In April 1996, the Company received a letter from Lucent inviting the
Company to negotiate a license of Lucent's patents. Lucent asserted that certain
of the Company's products infringe certain of Lucent's patents and offered to
license those patents to the
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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. In November 1998, the Company entered into an agreement with
Lucent (the "Lucent Settlement"), under which each party released the other from
claims of past infringement and settled their patent disputes. Under the Lucent
Settlement, Edify paid Lucent a one-time fee of $5 million. The one-time
settlement fee released the Company from all claims, demands and rights of
action which Lucent may have on account of any infringement or alleged
infringement of any of Lucent's patents that are covered by the Lucent
Settlement. In connection with the Lucent Settlement, the Company will pay
Lucent a minimum annual royalty fee of approximately $500,000 up to a maximum of
approximately $700,000 in each of the fiscal years from 1999 to 2004. In
addition, in fiscal years 2005 and 2006, if the Company exceeds certain revenue
targets that are specified under the Lucent Settlement, the Company will be
required to pay additional amounts.
In the future, the Company may receive additional communications from 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 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.
EMPLOYEES
As of December 31, 1998, the Company had a total of 442 employees,
including 89 in product development, 137 in sales and marketing, 169 in services
and customer support, and 47 in administration and finance. Of these, one was in
Spain, five were in the United Kingdom and the remainder was located in the
United States. The Company's future performance depends to a significant degree
upon the continued contributions of members of the Company's senior management
and other key research and development, sales and marketing personnel and its
continuing ability to identify, attract, train and retain other highly skilled
managerial, engineering, sales and marketing and services personnel. Competition
for highly qualified personnel is intense, and there can be no assurance that
the Company will be successful in attracting, assimilating and retaining the
necessary personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and product
development facility occupies approximately 130,000 square feet of leased space
in Santa Clara, California. In addition, the Company leases offices in Waltham,
Massachusetts, Dallas, Texas, and London, England. The Company believes that its
existing facilities, together with certain options to expand its existing
facilities, are adequate for its current needs but that it may need to seek
additional space in the future. The Company believes that suitable additional
space or alternative space will be available in the future, as needed, on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Jeffrey M. Crowe .............. 42 President, Chief Executive Officer and Director
Alvin S. Begun ................ 54 Vice President of Edify Services
Joseph G. Brown ............... 49 Vice President of Worldwide Sales
Charles H. Jolissaint ......... 55 Vice President and Chief Technical Officer
Steven Pollock ................ 35 Vice President of Worldwide Marketing
William A. Soward ............. 41 Vice President of Business Development
Jimmy A. Sutton ............... 54 Vice President of Engineering
Patricia A. Tomlinson ......... 41 Vice President of Human Resources
Stephanie A. Vinella .......... 44 Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Mr. Crowe has been President, Chief Executive Officer and a director of the
Company since co-founding the Company in 1990. From 1982 to 1990, he held
various management and marketing positions at Rolm Corporation ("Rolm"), a
telecommunications equipment manufacturing company, most recently as General
Manager. Mr. Crowe received a Bachelor of Arts degree in History from Dartmouth
College in 1978 and a Masters degree in Business Administration from Stanford
University in 1982.
Mr. Begun has been Vice President of Edify Services since April 1995. From
March 1992 to April 1995, he was the President and Chief Executive Officer of
Wyatt Software Services, Inc., a human resources software development company
and a subsidiary of The Wyatt Company, a benefits and compensation consulting
company. Mr. Begun also served as President of the David Corporation, a
subsidiary of The Wyatt Company, from January to April 1995. From October 1988
to March 1992, he was an Administrative Systems Practice Leader and a senior
systems consultant at The Wyatt Company. Mr. Begun received a Bachelor of
Science degree in Chemistry from Cornell University in 1966.
Mr. Brown joined the Company as Vice President of Worldwide Sales in May
1998. From January 1994 to May 1998, he held the position of Senior Vice
President of Worldwide Field Operations, among other vice president of sales
positions, at Auspex Systems, Inc, a network attached storage company. Mr. Brown
also served as Vice President of Marketing of the UNIX Systems Group within
Unisys Corporation from January 1992 to January 1994. Mr. Brown received a
Bachelor of Commerce degree from the University of Witwatersrand in 1974 and a
Masters degree in Business Administration from the University of South Africa in
1982.
Dr. Jolissaint has been Vice President and Chief Technical Officer of the
Company since co-founding the Company in 1990. From 1978 to 1990, he held
various engineering management positions at Rolm. In October 1989, he was
elected a Senior Member of the Technical Staff at Rolm. Dr. Jolissaint received
a Bachelor of Science degree in Electrical Engineering from Louisiana State
University in 1965 and Master of Science and Ph.D. degrees in Electrical
Engineering from Stanford University in 1966 and 1972, respectively.
Mr. Pollock joined the Company as Vice President of Worldwide Marketing in
November 1998. From May 1996 to October 1998, he was Executive Vice President of
Portera Systems, an enterprise application outsourcing company. Mr. Pollock also
served as Vice President of Worldwide Marketing for Claris Corporation from
April 1988 to April 1996. From June 1987 to April 1988, he held positions in
product marketing at Microsoft Corporation and from June 1986 to May 1987, he
held positions in product marketing at Apple Computer. Mr. Pollock received a
Bachelor of Science degree in Business and Cybernetic Systems from San Jose
State University in 1985 and a Masters degree in Business Administration from
Stanford University in 1987.
Mr. Soward has been Vice President of Business Development since January
1999. From July 1998 to December 1998 he was the Vice President of Product
Marketing and from April 1995 to June 1998 he was Director of Product Marketing
for Edify. Prior to joining the Company, Mr. Soward served as Senior Product
Manager for Call Center Applications at Rolm from October 1992 to March 1995.
From January 1986 to September 1992, he also held various product management
positions in the voice processing, multimedia and call center business segments
at Rolm when it was part of IBM and then Siemens. Mr. Soward received a Bachelor
of Science degree in Business Administration from the University of California,
Berkeley in 1979.
13
16
Mr. Sutton joined the Company as Vice President of Engineering in June
1998. From May 1997 to February 1998, he was Vice President of Product
Development and Technology at Micro Focus Group Plc, a developer of enterprise
software development environments. From January 1997 to April 1997, he was Vice
President of Product Development at Unison Software, Inc., a network management
software company. Mr. Sutton also held the position of Vice President of
Development at Avalon Software, an enterprise resource planning ("ERP") company,
from January 1996 to January 1997; Information Handling Services, an information
content provider company, from September 1994 to January 1996; Informix, a
database and tools company, from March 1993 to June 1994; and ASK Computer
Systems, an ERP company, from December 1991 to March 1993. From January 1980
through December 1991, he held the positions of Software Development Engineer
and General Manager at Hewlett-Packard Company. Mr. Sutton received a Bachelor
of Science degree in Management, specializing in Computer Science and Marketing,
from the Massachusetts Institute of Technology in 1967, and a Masters of Science
degree in Management, specializing in Computer Science and Marketing, from the
Massachusetts Institute of Technology in 1968.
Ms. Tomlinson has been Vice President of Human Resources since April 1996.
From March 1995 to April 1996, she was Vice President of Human Resources for the
Desktop Document Systems Division of Xerox Corporation. Ms. Tomlinson also
served as Director of Human Resources for Synopsys, Inc. from June 1992 to March
1995. From July 1983 to June 1992, she held human resource management positions
with Apple Computer, Inc. Ms. Tomlinson received a Bachelor of Arts degree in
Sociology from Pomona College in 1979.
Ms. Vinella has been Chief Financial Officer of the Company since August
1990, Vice President of Finance and Administration since August 1994 and
Secretary since February 1996. Prior to joining the Company, she served as
Director of Finance at Lumisys, Inc., a medical equipment company, from 1988 to
1990, and as Director of Finance and Chief Financial Officer at Spectra Logic
Corporation, a disk and tape controller manufacturer, from 1982 to 1987. Ms.
Vinella received a Bachelor of Science degree in Accounting from the University
of San Francisco in 1976 and a Masters degree in Business Administration from
Stanford University in 1982.
14
17
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock has been traded on the Nasdaq National Market since the
Company's initial public offering in May 1996 under the symbol EDFY. The
following table sets forth, for the periods indicated, the high and low bid
prices for the Company's common stock as reported by Nasdaq:
High Low
------- -------
Year Ended December 31, 1997
----------------------------------
First Quarter 16 1/4 10 1/8
Second Quarter 15 8 7/8
Third Quarter 18 3/4 11 3/4
Fourth Quarter 22 1/8 14 1/8
Year Ended December 31, 1998
----------------------------------
First Quarter 20 7/8 14 5/8
Second Quarter 20 3/16 8 1/16
Third Quarter 11 5/8 4 7/8
Fourth Quarter 9 3/4 4 5/8
As of December 31, 1998, there were approximately 351 holders of record of
the Company's common stock.
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
15
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
License $ 37,375 $ 34,081 $ 20,134 $ 10,774 $ 6,274
Services and other 33,511 22,971 12,883 5,229 2,089
-------- -------- -------- -------- --------
Total net revenues 70,886 57,052 33,017 16,003 8,363
Cost of license revenues 1,328 889 450 503 267
Cost of services and other revenues 23,671 17,576 10,635 3,865 2,225
-------- -------- -------- -------- --------
Gross profit 45,887 38,587 21,932 11,635 5,871
-------- -------- -------- -------- --------
Operating expenses:
Product development 11,986 10,066 5,801 2,627 2,189
Sales and marketing 31,511 21,565 15,371 8,015 4,696
General and administrative 5,745 4,613 2,946 1,163 762
Intellectual property settlement 5,000 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 54,242 36,244 24,118 11,805 7,647
-------- -------- -------- -------- --------
Income (loss) from operations (8,355) 2,343 (2,186) (170) (1,776)
-------- -------- -------- -------- --------
Interest income 1,953 2,078 1,598 143 113
Interest expense (148) (125) (123) (58) (59)
-------- -------- -------- -------- --------
Interest, net 1,805 1,953 1,475 85 54
-------- -------- -------- -------- --------
Income (loss) before income taxes (6,550) 4,296 (711) (85) (1,722)
Provision for income taxes 125 344 44 19 22
-------- -------- -------- -------- --------
Net income (loss) $ (6,675) $ 3,952 $ (755) $ (104) $ (1,744)
======== ======== ======== ======== ========
Basic net income (loss) per share $ (0.39) $ 0.24 $ (0.07) $ (0.05)
======== ======== ======== ========
Shares used in computing basic net income
(loss) per share 17,090 16,398 10,686 2,283
======== ======== ======== ========
Diluted net income (loss) per share $ (0.39) $ 0.22 $ (0.07) $ (0.05)
======== ======== ======== ========
Shares used in computing diluted net income
(loss) per share 17,090 18,063 10,686 2,283
======== ======== ======== ========
DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $34,837 $43,161 $44,840 $ 7,154 $ 2,587
Working capital ................................. 44,161 48,954 43,870 8,992 2,128
Total assets .................................... 67,004 68,480 60,721 15,372 6,214
Capital lease obligations, excluding current
installments .................................. 20 277 674 510 148
Total stockholders' equity ...................... 51,709 55,808 49,187 10,419 3,063
16
19
The following tables set forth certain unaudited consolidated statement of
operations data for each of the four quarters in 1997 and 1998, as well as the
percentage of the Company's total net revenues represented by each item. The
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements contained herein and include
all adjustments (consisting only of normal recurring adjustments) that the
Company considers necessary for a fair presentation of such information when
read in conjunction with the Company's consolidated financial statements and
notes thereto appearing elsewhere in this Report. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
QUARTER ENDED
-------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues:
License ................................ $ 7,132 $ 7,807 $ 8,742 $ 10,400 $ 7,058
Services and other ..................... 5,178 5,730 5,478 6,585 6,700
--------- --------- --------- --------- ---------
Total net revenues ................ 12,310 13,537 14,220 16,985 13,758
Cost of license revenues ................. 131 205 162 391 296
Cost of services and other revenues ...... 4,377 4,274 4,136 4,789 4,870
--------- --------- --------- --------- ---------
Gross profit ...................... 7,802 9,058 9,922 11,805 8,592
--------- --------- --------- --------- ---------
Operating expenses:
Product development .................... 2,098 2,511 2,721 2,736 2,534
Sales and marketing .................... 4,521 4,953 5,329 6,762 6,784
General and administrative ............. 1,027 1,155 1,160 1,271 1,274
Intellectual property settlement ....... -- -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses .......... 7,646 8,619 9,210 10,769 10,592
--------- --------- --------- --------- ---------
Income (loss) from operations ..... 156 439 712 1,036 (2,000)
--------- --------- --------- --------- ---------
Interest income .......................... 525 529 508 515 507
Interest expense ......................... (33) (27) (32) (32) (27)
--------- --------- --------- --------- ---------
Interest, net ..................... 492 502 476 483 480
--------- --------- --------- --------- ---------
Income (loss) before income taxes . 648 941 1,188 1,519 (1,520)
Provision for income taxes ............... 53 76 95 120 22
--------- --------- --------- --------- ---------
Net income (loss) ................. $ 595 $ 865 $ 1,093 $ 1,399 $ (1,542)
========= ========= ========= ========= =========
PERCENT OF TOTAL NET REVENUES:
Net revenues:
License ................................ 57.9% 57.7% 61.5% 61.2% 51.3%
Services and other ..................... 42.1 42.3 38.5 38.8 48.7
--------- --------- --------- --------- ---------
Total net revenues ................ 100.0 100.0 100.0 100.0 100.0
Cost of license revenues ................. 1.1 1.5 1.1 2.3 2.2
Cost of services and other revenues ...... 35.6 31.6 29.1 28.2 35.4
--------- --------- --------- --------- ---------
Gross profit ...................... 63.4 66.9 69.8 69.5 62.4
--------- --------- --------- --------- ---------
Operating expenses:
Product development .................... 17.0 18.6 19.1 16.1 18.4
Sales and marketing .................... 36.7 36.6 37.5 39.8 49.3
General and administrative ............. 8.3 8.5 8.2 7.5 9.3
Intellectual property settlement ....... -- -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses .......... 62.1 63.7 64.8 63.4 77.0
--------- --------- --------- --------- ---------
Income (loss) from operations ..... 1.3 3.2 5.0 6.1 (14.6)
--------- --------- --------- --------- ---------
Interest income .......................... 4.3 3.9 3.6 3.0 3.7
Interest expense ......................... (0.3) (0.2) (0.2) (0.2) (0.2)
--------- --------- --------- --------- ---------
Interest, net ..................... 4.0 3.7 3.4 2.8 3.5
--------- --------- --------- --------- ---------
Income (loss) before income taxes . 5.3 7.0 8.4 8.9 (11.1)
Provision for income taxes ............... 0.4 0.6 0.7 0.7 0.2
--------- --------- --------- --------- ---------
Net income (loss) ................. 4.8% 6.4% 7.7% 8.2% (11.3)%
========= ========= ========= ========= =========
QUARTER ENDED
-------------------------------------------
JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998
--------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues:
License ................................ $ 9,179 $ 10,087 $ 11,051
Services and other ..................... 8,682 8,623 9,506
--------- --------- ---------
Total net revenues ................ 17,861 18,710 20,557
Cost of license revenues ................. 226 465 341
Cost of services and other revenues ...... 5,888 6,034 6,879
--------- --------- ---------
Gross profit ...................... 11,747 12,211 13,337
--------- --------- ---------
Operating expenses:
Product development .................... 2,884 3,305 3,263
Sales and marketing .................... 8,056 7,918 8,753
General and administrative ............. 1,573 1,418 1,480
Intellectual property settlement ....... -- 5,000 --
--------- --------- ---------
Total operating expenses .......... 12,513 17,641 13,496
--------- --------- ---------
Income (loss) from operations ..... (766) (5,430) (159)
--------- --------- ---------
Interest income .......................... 526 500 420
Interest expense ......................... (22) (19) (80)
--------- --------- ---------
Interest, net ..................... 504 481 340
--------- --------- ---------
Income (loss) before income taxes . (262) (4,949) 181
Provision for income taxes ............... 33 26 44
--------- --------- ---------
Net income (loss) ................. $ (295) $ (4,975) $ 137
========= ========= =========
PERCENT OF TOTAL NET REVENUES:
Net revenues:
License ................................ 51.4% 53.9% 53.8%
Services and other ..................... 48.6 46.1 46.2
--------- --------- ---------
Total net revenues ................ 100.0 100.0 100.0
Cost of license revenues ................. 1.3 2.5 1.7
Cost of services and other revenues ...... 33.0 32.3 33.5
--------- --------- ---------
Gross profit ...................... 65.7 65.2 64.8
--------- --------- ---------
Operating expenses:
Product development .................... 16.1 17.7 15.9
Sales and marketing .................... 45.1 42.3 42.6
General and administrative ............. 8.8 7.6 7.2
Intellectual property settlement ....... -- 26.7 --
--------- --------- ---------
Total operating expenses .......... 70.0 94.3 65.7
--------- --------- ---------
Income (loss) from operations ..... (4.3) (29.1) (0.9)
--------- --------- ---------
Interest income .......................... 2.9 2.7 2.0
Interest expense ......................... -- (0.1) (0.4)
--------- --------- ---------
Interest, net ..................... 2.9 2.6 1.6
--------- --------- ---------
Income (loss) before income taxes . (1.4) (26.5) 0.7
Provision for income taxes ............... 0.2 0.1 0.2
--------- --------- ---------
Net income (loss) ................. (1.6)% (26.6)% 0.5%
========= ========= =========
17
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements that reflect the
Company's current views with respect to future matters such as revenue sources,
levels and growth, spending levels, international operations, gross profit and
capital needs. Actual results may differ materially from the results and
outcomes discussed in the forward-looking statements. Factors that could cause
or contribute to such differences in results and outcomes include those
discussed below as well as those discussed elsewhere in this Report.
OVERVIEW
The Company develops, markets and supports enterprise self service
software solutions that enable organizations to automate, integrate and
personalize interactions with customers and employees through multiple channels,
including the Internet, corporate intranets and the telephone. The Company
commenced operations in May 1990 to address the issues facing organizations
needing to provide more and better service through a broad range of interactive
media while containing costs. The Company was engaged principally in research
and development through the first quarter of 1992, when it made its initial
product shipments of its principal product, Electronic Workforce. Since that
time, the Company has released new versions of Electronic Workforce at least
annually.
The Company derives revenues from licenses of its software products and
fees for services related thereto. The Company currently markets Electronic
Workforce across multiple industries, emphasizing customer self service
applications within the financial services industry and employee self service
applications deployed by human resources organizations. In addition, the Company
has introduced two software application products for Web-based self service
applications in the financial services and human resources markets, the
Electronic Banking System and the Employee Service System, both of which are
built on Electronic Workforce and incorporate Web, Java and other technologies
that address the customization requirements necessary for the application
products market. The Company began shipping EBS in September 1996 and began
shipping ESY in June 1997.
The Company markets its products through its own field sales force, as well
as through VARs and OEMs, and markets its services directly to its customers and
distribution partners. The typical size of a direct transaction (including
software licenses and services) ranges from $100,000 to $300,000 and can be over
$1,000,000 for large applications. Most indirect licenses are smaller and do not
include a service component, resulting in substantially lower revenues per
transaction to the Company. In 1998, the Company derived approximately 53% of
its revenues from software licenses and 47% from fees for services. The Company
generally recognizes revenue from the licensing of software products upon
shipment and revenue from service contracts ratably over the contract period or
as the services are performed.
As of December 31, 1998, the Company had an accumulated deficit of $17.3
million. The Company intends to make ongoing investments in its sales,
marketing, research and development, customer support and administrative
infrastructure over the near term. Operating results for future periods are
subject to numerous uncertainties, and there can be no assurance that the
Company will achieve or sustain profitability on an annual or quarterly basis.
The Company's prospects must be considered in light of the risks encountered by
companies in new and rapidly evolving markets. The Company does not believe that
prior percentage rates of revenue growth are sustainable or indicative of future
growth. The ability of the Company to achieve revenue growth and profitability
in the future will depend on a number of factors, many of which are outside of
the Company's control. In particular, growth and profitability will depend on
the Company's success in marketing versions of and developing enhancements to
its products that run on the Windows NT platform as well as the Company's
success in marketing its application products. The Company's inability to
implement these key elements of its growth strategy would result in a material
adverse effect on its business, financial condition and results of operations.
18
21
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total net revenues,
consolidated statement of operations data for the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
----- ----- -----
Net revenues:
License ............................ 52.7% 59.7% 61.0%
Services and other ................. 47.3 40.3 39.0
----- ----- -----
Total net revenues .............. 100.0 100.0 100.0
Cost of license revenues ............. 1.9 1.6 1.4
Cost of services and other revenues .. 33.4 30.8 32.2
----- ----- -----
Gross profit .................... 64.7 67.6 66.4
----- ----- -----
Operating expenses:
Product development ................ 16.9 17.6 17.6
Sales and marketing ................ 44.5 37.8 46.5
General and administrative ......... 8.1 8.1 8.9
Intellectual property settlement ... 7.1 -- --
----- ----- -----
Total operating expenses ........ 76.6 63.5 73.0
----- ----- -----
Income (loss) from operations ... (11.9) 4.1 (6.6)
----- ----- -----
Interest income ...................... 2.7 3.6 4.8
Interest expense ..................... (0.2) (0.2) (0.4)
----- ----- -----
Interest, net ................... 2.5 3.4 4.4
----- ----- -----
Income (loss) before income taxes (9.4) 7.5 (2.2)
Provision for income taxes ........... 0.2 0.6 0.1
----- ----- -----
Net income (loss) ............... (9.6)% 6.9% (2.3)%
===== ===== =====
NET REVENUES
Total net revenues were $70.9 million, $57.1 million and $33.0 million in
1998, 1997 and 1996, respectively, representing increases of 24.2% from 1997 to
1998 and 72.8% from 1996 to 1997. The Company's revenues are principally derived
from software licenses and fees for services, which are generally charged
separately. Revenues are recorded net of reserves for potential product returns
and allowances. No single customer exceeded 10% of total net revenues in 1998,
1997 or 1996. In each of 1998, 1997 and 1996, 5% or less of the Company's total
net revenues were derived from international sales. Over time, the Company
intends to expand its operations outside the United States 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. Revenues from licenses were $37.4 million, $34.1 million
and $20.1 million in 1998, 1997 and 1996, respectively, representing increases
of 9.7% from 1997 to 1998 and 69.3% from 1996 to 1997. The increases in license
revenues from 1996 to 1998 were attributable to several factors, including an
increase in unit volume as a result of the market's growing awareness and
acceptance of Electronic Workforce, the introduction of the Electronic Banking
System in September 1996, the introduction of the Employee Service System in
June 1997, increased follow-on business from existing customers, and expansion
of the Company's field sales force and indirect distribution channels. The
prices of the Company's Electronic Workforce licenses have remained relatively
constant from 1996 to 1998. The Company does not believe that the historical
growth rates of license revenues will be sustainable or 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,
education and installation services. Services and other revenues were $33.5
million, $23.0 million and $12.9 million in 1998, 1997 and 1996, respectively,
representing increases of 45.9% from 1997 to 1998 and 78.3% from 1996 to 1997.
Services and other revenues increased as a percentage of total net revenues to
47.3% in 1998 from 40.3% in 1997 and 39.0% in 1996. These increases in services
and other revenues occurred primarily due to increased demand for consulting
services, as well as increases in post-contract customer support, education and
installation services associated with the increased installed base of the
Company's software. Consulting services primarily are contracted for under time
and material arrangements. The Company does not expect historical growth rates
of its services revenues to be sustainable in the future. To the extent services
and other revenues increase as a percentage of total net revenues, overall
gross profit margins may be adversely impacted.
19
22
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
$1,328,000, $889,000 and $450,000 in 1998, 1997 and 1996, respectively,
representing 3.6%, 2.6% and 2.2% of the related license revenues for the
respective years. The increase in absolute dollars and the cost of license
revenues as a percentage of license revenues from 1996 to 1998 was due primarily
to the costs of third-party technology used for particular customers as well as
increases in shipments of the Company's software products.
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,
education and installation services to customers. Cost of services and other
revenues was $23.7 million, $17.6 million and $10.6 million in 1998, 1997 and
1996, respectively, representing 70.6%, 76.5% and 82.6% of the related services
and other revenues for the respective years. The increases in absolute dollars
from 1996 to 1998 were due primarily to increases in personnel-related costs as
the Company continued to expand its consulting, customer support, education and
installation services organizations. The increases in gross profit margins from
1996 to 1998 were 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 revenue 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 organization. Any significant decline in the demand for the
Company's consulting services would have a material adverse impact on the
Company's revenues and, as a result of the under-utilization of consulting
personnel, on the Company's gross profit and results of operations.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses were $12.0 million, $10.1
million and $5.8 million, or 16.9%, 17.6% and 17.6% of total net revenues, in
1998, 1997 and 1996, 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 from 1997 to 1998 was due primarily
to increased staffing related to the development of the Company's application
products and ongoing enhancements to Electronic Workforce. The decrease in
product development costs as a percentage of net revenue from 1997 to 1998 was
due primarily to the growth in total net revenue. The increase in absolute
dollars from 1996 to 1997 was attributable primarily to increased staffing
related to development of application products and ongoing enhancements to
Electronic Workforce and an increase in personnel-related costs associated with
the development of the Company's Windows-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 Statement of Financial Accounting Standards 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 consolidated balance sheet.
SALES AND MARKETING. Sales and marketing expenses were $31.5 million, $21.6
million and $15.4 million, or 44.5%, 37.8% and 46.5% of total net revenues, in
1998, 1997 and 1996, respectively. Sales and marketing expenses consist
primarily of salaries and commissions earned by sales and marketing personnel
and promotional expenses. The increases in absolute dollars in sales and
marketing expenses from 1996 to 1998 and as a percentage of total net revenues
from 1997 to 1998 were due primarily to the expansion of the Company's field and
indirect sales operations and increased marketing activities. The reduction in
sales and marketing expenses as a percentage of total net revenues from 1996 to
1997 was due primarily to the growth in total net revenues. The Company expects
to continue to expand its field sales and marketing efforts, its third-party 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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.7
million, $4.6 million and $2.9 million, or 8.1%, 8.1% and 8.9% of total net
revenues, in 1998, 1997 and 1996, respectively. General and administrative
expenses consist primarily of salaries and other related expenses of
administrative, executive and financial personnel and outside professional fees.
The increases in
20
23
absolute dollars from 1996 to 1998 were attributable primarily to the increase
in the provision for doubtful accounts and the addition of staff and increased
infrastructure costs to support the growth of the Company's business. The
reduction in general and administrative expenses as a percentage of total net
revenues from 1996 to 1997 was due primarily to the growth in total net
revenues. 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.
INTELLECTUAL PROPERTY SETTLEMENT. Intellectual property settlement
represents a non-recurring charge of $5 million related to the resolution of the
Company's patent discussions with Lucent in November 1998. See Note 4 of Notes
to Consolidated Financial Statements for further discussion of this settlement.
INTEREST INCOME. Interest income, which consists of interest earned from
the Company's cash, cash equivalents and short-term investments, was $2.0
million, $2.1 million and $1.6 million in 1998, 1997 and 1996, respectively. The
increase from 1996 to 1997 was due primarily to an increase in average
investment balances from the proceeds of the Company's initial public offering.
The reduction from 1997 to 1998 was due primarily to a decrease in average
investment balances primarily resulting from the intellectual property
settlement in 1998.
INTEREST EXPENSE. Interest expense, which relates primarily to capital
lease obligations, was $148,000, $125,000 and $123,000 in 1998, 1997 and 1996,
respectively.
PROVISION FOR INCOME TAXES
The provision for income taxes was $125,000, $344,000 and $44,000 in 1998,
1997 and 1996, respectively. No provision for federal income taxes was required
through 1996, as the Company had not been profitable on an annual basis from its
inception through 1996. As of December 31, 1998, the Company had federal and
state net operating loss carryforwards of approximately $11.7 million and $4.5
million, respectively. The federal net operating loss carryforwards expire in
various years from 2008 through 2018, and the state net operating loss
carryforwards expire in years 1999 through 2003. As of December 31, 1998, the
Company also had federal and state research and development tax credit
carryforwards of approximately $1,156,000 and $893,000, respectively. The
Company has provided a valuation allowance against 100% of the deferred tax
assets, including that related to the carryforwards.
The Company's accounting for deferred taxes under Statement of Financial
Accounting Standards No. 109 involves the evaluation of a number of factors
concerning the realizability of the Company's deferred tax assets. To support
the Company's conclusion that a 100% valuation allowance was required,
management primarily considered such factors as the Company's history of
operating losses, the nature of the Company's deferred tax assets, the lack of
significant firm sales backlog, no significant excess of appreciated asset value
over the tax basis of the Company's net assets and the absence of taxable income
in prior carryback years. Although management's operating plans assume taxable
and operating income in future periods, management's evaluation of all the
available evidence in assessing the realizability of the deferred tax assets
indicates that such plans are not considered sufficient to overcome the
available negative evidence.
LIQUIDITY AND CAPITAL RESOURCES
From inception through April 1996, the Company financed its operations and
met its capital expenditure requirements primarily through private sales of
preferred stock, totaling $24.1 million. On May 2, 1996, the Company completed
its initial public offering of 2,875,000 shares of its Common Stock at a price
of $15.00 per share. Proceeds to the Company from this offering were
approximately $38.9 million, net of underwriting discounts and other offering
costs. At December 31, 1998, the Company's cash, cash equivalents and
short-term investments totaled $34.8 million.
At December 31, 1998 and 1997, the Company also had available an $8.0
million unsecured revolving bank line of credit. The line of credit agreement
will expire in December 1999 and contains certain financial covenants, with
which the Company was in compliance at December 31, 1998. Borrowings accrue
interest at the bank's prime rate. As of December 31, 1998 and 1997, there were
no borrowings outstanding under this line of credit.
In 1998, $5.4 million of cash was used in operating activities, resulting
primarily from the Company's intellectual property settlement payment of $5.0
million and an increase in accounts receivable of $6.3 million due to an
increase in revenues and average days sales outstanding, offset by depreciation
and amortization of $4.5 million and increases in accounts payable and accrued
expenses of $3.2 million. In 1997, $673,000 of cash was provided by operating
activities, resulting primarily from net income of $4.0 million, depreciation
and amortization of $3.2 million and increases in accrued expenses and unearned
revenue of $2.0 million, offset by an increase in accounts receivable of $8.9
million due to an increase in revenues and average days sales outstanding. In
1996, $4.0
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million of cash was provided by operating activities, resulting primarily from
depreciation and amortization of $1.6 million and increases in accrued expenses
and unearned revenue of $5.5 million, partially offset by an increase in
accounts receivable of $3.2 million.
In 1998, 1997 and 1996, the Company's investing activities have consisted
primarily of purchases and sales of short-term investments and purchases of
property and capital equipment. Capital expenditures, including equipment
acquired under capital leases, were $4.9 million, $4.4 million and $5.5 million
in 1998, 1997 and 1996, respectively, which were primarily for expansion of the
Company's facilities and purchases of computer and network equipment for the
Company's growing employee base. The Company expects that its capital
expenditures will increase as the Company's employee base grows. The Company's
principal commitments consist primarily of leases on its facilities and its
equipment. In 1998, net cash generated from financing activities of $2.0 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 December 31, 1998, the Company's working capital was $44.2 million. The
Company has no significant capital spending or purchase commitments other than
normal purchase commitments and commitments under facilities and capital leases.
The Company believes that its working capital, together with its bank line of
credit and 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.
BUSINESS RISKS
This section on "Business Risks" includes forward-looking statements that
reflect the Company's current views with respect to future matters such as
factors that can affect the Company's operating results, technological change,
the markets for the Company's products, the Company's sales channels and the
stability and availability of compatible technology. Forward-looking statements
are subject to risks and uncertainties. Actual results may differ materially
from the results and outcomes discussed in the forward-looking statements. This
section contains cautionary statements that identify important factors,
including certain risks and uncertainties, that could cause actual results or
outcomes to differ materially from those in the forward-looking statements in
this section and elsewhere in this Report.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. 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, 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 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. The Company's sales cycle,
including initial order, provision of services and follow-on sales, averages six
months, but varies substantially from customer to customer and can range from
one month to over one year from initial contact. Furthermore, the Company
expects that sales derived through indirect channels, which are harder to
predict and may have lower margins than direct sales, will increase as a
percentage of total net revenues. In addition, as a result of recently issued
guidance on software revenue recognition, license agreements entered into during
a quarter may not meet the Company's revenue recognition criteria. Therefore,
even if the Company meets or exceeds its forecast of aggregate licensing and
other contracting activity, it is possible that the Company's revenues would not
meet expectations. Although the Company's revenue growth has made it difficult
to determine whether the Company's business has been subject to seasonal
variations, the Company believes that some of its customers
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tend to make product purchase decisions in the fourth quarter as a result of
purchase cycles related to expiration of budgetary authorizations.
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. The Company may also choose to reduce prices or increase
spending in response to competition or to pursue new market opportunities. If
new competitors, technological advances by existing competitors, or other
competitive factors require the Company to invest significantly greater
resources in research and development efforts, the Company's operating results
in the future may be adversely affected. 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 revenues or its rate of revenue growth on a quarterly
or annual basis. In particular, the rate of revenue growth decreased in 1998
compared to 1997. During 1998, the Company experienced actual performance that
did not meet financial market expectations. It is likely that, in some future
quarters, the Company's operating results will again 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.
RISKS OF EXPANSION TO WINDOWS NT OPERATING SYSTEM. The Company's future
success will depend on its ability to develop, sell, implement 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. Furthermore, the Company's future success will
depend on its ability to convert existing customers and partners to the Windows
NT operating platform. 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 Windows NT. Because these products are still relatively new, 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 Windows 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.
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 Windows NT-based
products. There can be no assurance that the Company's OS/2 customers will
migrate to the Company's Windows 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.
EMERGING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S APPLICATION PRODUCTS.
Certain of the Company's products and features have been introduced only
recently. In September 1996, the Company began shipping the Electronic Banking
System, its first application product. In June 1997, Edify began shipping its
Employee Service System. The emerging self service application products markets
are rapidly changing and are characterized by an increasing number of new
entrants whose products compete with those of the Company. Demand for and market
acceptance of these products and services are subject to a high level of
uncertainty. Moreover, much of the industry software and infrastructure
supporting the use of the Company's products in these markets, particularly the
Web, is new and unproven. In addition, portions of the markets for the Company's
products and services are new and evolving, and it is difficult to predict the
future growth of this market. There can be no assurance that a viable market for
self service application products will develop or be sustainable. If the market
fails to develop, develops more slowly than expected or becomes saturated with
competitors, or if the Company's products and services do not achieve or sustain
market acceptance, the Company's business, financial condition and results of
operations would be materially adversely affected.
LENGTHY SALES CYCLE. The licensing of Edify's software is often an
enterprise-wide decision by prospective customers and generally requires the
Company to engage in a lengthy sales cycle and to provide a significant level of
education to prospective
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26
customers regarding the use and benefits of its software. Due in part to the
business-critical nature of certain of the Company's software applications and
the associated hardware, software and consulting expenditures, potential
customers tend to be cautious in making product acquisition decisions. In
addition, the licensing of the Company's software involves a significant
commitment of capital and the attendant delays frequently associated with
approving large capital expenditures and reviewing new technologies that affect
key operations. For these and other reasons, the sales cycle for the Company's
products can range from one month to over one year, averages six months and is
subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, over which the Company has little
or no control. Consequently, if sales forecasted from a specific customer for a
particular quarter are not realized in that quarter, the Company is unlikely to
be able to generate revenue from alternate sources in time to compensate for the
shortfall. As a result, and due to the relatively large size of a typical order,
a lost or delayed sale could have a material adverse effect on the Company's
quarterly operating results. Moreover, to the extent that significant sales
occur earlier than expected, operating results for subsequent quarters may be
adversely affected.
DEPENDENCE UPON DEVELOPMENT OF MARKETING CHANNELS. 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 also 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.
The Company plans to expand its field sales force and its marketing
organization. The Company's future success depends upon the increased
productivity of its existing field sales force and the ability of the Company to
integrate and train new sales personnel. There can be no assurance that the
Company's efforts will be successful, that the cost of such efforts will not
exceed the revenue generated, or that the Company's sales and marketing
organization will be able to compete successfully against the significantly more
extensive and well-funded sales and marketing operations of many of the
Company's current or potential competitors. The Company's inability to manage
its internal expansion effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANAGEMENT OF A RAPIDLY CHANGING BUSINESS. The rapid development of an
infrastructure necessary for the Company to exploit the market opportunities for
its products requires an effective planning and management process. The Company
has recently experienced changes in its operations that have placed significant
demands on the Company's administrative, operational and financial resources. In
1998, the Company increased its staff from 349 to 442 employees and its total
net revenues by 24%. The Company is expanding its sales and marketing
organizations, developing its distribution channels to penetrate different and
broader markets, funding increasing levels of research and development, and
growing its support organization to accommodate the increasing installed base of
products. The growth in the Company's customer base and product offerings has
placed, and any future growth is expected to continue to place, a significant
strain on the Company's management and operations, including its sales,
marketing, customer support, research and development, finance and
administrative operations. The Company's officers as a whole have had limited
experience in managing large or rapidly growing business organizations. The
Company's ability to compete effectively and its future growth, if any, will
require the Company to continually improve its financial and management
controls, reporting systems and procedures on a timely basis, implement new
systems as necessary, and expand, train and manage its employee workforce. There
can be no assurance that the Company's controls, systems or procedures will be
adequate to support the Company's operations. The failure of the Company's
management to respond effectively to changing business conditions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
future performance depends to a significant degree upon the continued
contributions of members of the Company's senior management and other key
research and development, sales and marketing personnel. Loss of any key persons
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not have employment
agreements with any of its key personnel. In addition, the Company believes that
its future success will depend upon its continuing ability to identify, attract,
train and retain other highly skilled managerial, engineering, sales and
marketing and services personnel. Competition for such personnel is intense.
There can be no
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27
assurance that the Company will be successful in attracting, assimilating and
retaining the necessary personnel, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON STABILITY AND AVAILABILITY OF THIRD-PARTY SOFTWARE AND
HARDWARE. The Company's products involve integration with products and systems
developed by third parties. A significant portion of the Company's installed
base of products runs on the OS/2 operating system, and the Company is therefore
dependent upon the continued viability of the OS/2 operating system and upon
IBM's continuing support for the OS/2 operating system. In the fourth quarter of
1997, the Company released Windows NT-based versions of its products and intends
to focus future product development efforts on Windows NT. Accordingly, the
Company also is dependent upon the continued viability of that operating
environment. In addition, the current versions of the Company's products are
designed to function only with Natural MicroSystems Corporation's voice hardware
cards and software drivers and Intersolv Inc.'s QELib for database connectivity.
If any of these third-party products should become unavailable for any reason,
fail under operation with the Company's products or fail to be supported by
their respective vendors, it would be necessary for the Company to redesign its
products. There can be no assurance that any redesign could be accomplished in a
cost-effective or timely manner. The Company or its customers could also
experience difficulties integrating the Company's products with other hardware
and software. Furthermore, should new releases of these operating systems, voice
hardware cards and software drivers or database connectivity software occur
before the Company develops products compatible with such new releases, any
resulting decline in demand for the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
YEAR 2000 COMPLIANCE. 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 one year,
computer systems and software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements.
The Company is currently taking steps to address Year 2000 issues in the
following three areas: (1) the Company's products; (2) internal systems; and (3)
readiness of third party vendors and business partners. The Company has assigned
a Year 2000 project team to develop and implement the Year 2000 readiness effort
for its domestic and international operations. The project has executive
sponsorship and is regularly reviewed by senior management, the Board of
Directors and the Audit Committee.
The Company has designed and tested its current products to be Year 2000
compliant. However, since all customer situations cannot be anticipated,
particularly those involving third-party products, the Company may see an
increase in warranty and other claims as a result of the Year 2000 transition.
As such, the impact of customer claims could have a material adverse impact on
the Company's business, financial condition and results of operations.
The Company's internal systems include both information technology systems
such as financial and order entry systems and non-information technology systems
such as telephones and facilities. In August 1998, the Company completed the
installation of a Year 2000 compliant ERP system, which includes the Company's
order entry, project accounting and financial systems. The Company expects to
resolve remaining Year 2000 compliance issues substantially through normal
replacement and upgrades of software by June 1999. In January 1999, the Company
initiated a comprehensive inventory and evaluation of all desktop systems and
expects to complete this process by April 1999. The additional costs of
remediation are not expected to be material to the Company's financial condition
or results of operations. However, if significant new non-compliance issues are
identified, the Company's business, financial condition and results of
operations could be materially adversely affected.
In December 1998, the Company completed the process of sending detailed
questionnaires to critical suppliers and business partners to certify Year 2000
compliance. Where practicable, the Company will attempt to mitigate its risk
with respect to the failure of suppliers and business partners to be Year 2000
ready. However, such failures remain a possibility and could have an adverse
impact on the Company's business, financial condition and results of operations.
The Company has estimated a preliminary budget of approximately $300,000
for investigating and remedying issues related to Year 2000 compliance involving
software or systems used in its internal operations. Costs that have already
been incurred to replace and upgrade software and systems in the Company's
ordinary course of business are not included in the estimated budget. While the
Company has dedicated substantial resources towards attaining Year 2000
compliance, there can be no assurance that the Company's Year 2000 compliance
program will be completed on time. In addition, 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. Furthermore, 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
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have a material adverse effect 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 non-compliant 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. The most likely worst case
scenarios include hardware failure and the failure of infrastructure services
provided by government agencies, systems vendors and other third parties (e.g.,
electricity, telephone service, water transport, internet services, etc.). The
Company is in the process of completing its contingency planning for high risk
areas at this time and is scheduled to commence contingency planning for medium
to low risk areas by the end of the fiscal year. The Company expects its
contingency plans to include, among other things, manual "work-arounds" for
software and hardware failures, as well as substitution of systems, if
necessary.
For a discussion of additional business risks, see "Business-Product
Development," "-Competition," "-Proprietary Rights" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Overview."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are subject to
risks and uncertainties. Actual results could differ materially from those
discussed in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign currency exchange rates.
The Company does not have derivative financial instruments for hedging,
speculative or trading purposes.
INTEREST RATE SENSITIVITY
The Company maintains a short-term investment portfolio consisting mainly
of income securities with an average maturity of less than one year. These
available-for-sale securities are subject to interest rate risk and will fall in
value if market interest rates increase. The Company has the ability to hold its
fixed income investments until maturity, and therefore, the Company would not
expect its operating results or cash flows to be affected to any significant
degree by the effect of a sudden change in market interest rates on its
securities portfolio.
The Company's cash equivalents and short-term investments have generally
been available-for-sale. Gross unrealized gains and losses were not significant
as of December 31, 1998.
The following table presents the principal amounts and
related weighted-average yields for the Company's fixed rate investment
portfolio (in thousands, except average yields).
CARRYING AVERAGE
AMOUNT YIELD
------- -------
Cash equivalents:
Commercial paper .................................... $ 9,459 5.35%
Money market funds .................................. 6,796 5.43%
Government agency securities ........................ 2,925 5.25%
-------
Total cash equivalents .......................... 19,180 5.36%
-------
Short-term investments:
Government agency securities ........................ 6,600 5.25%
Corporate bonds ..................................... 2,051 5.18%
Commercial paper .................................... 1,988 5.47%
-------
Total short-term investments .................... 10,639 5.28%
-------
Total cash equivalents and short-term investments $29,819 5.33%
=======
FOREIGN CURRENCY RISK
The Company believes that its exposure to currency exchange fluctuation
risk is insignificant because the Company's transactions with international
vendors are generally denominated in U.S. dollars, which is considered to be the
functional currency of the Company and its subsidiary. The currency exchange
impact on intercompany transactions was immaterial in 1998.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company required by this item are set
forth at the pages indicated at Item 14(a). The Supplementary Data required by
this item are incorporated by reference from Item 6 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of the
Company is incorporated by reference from the definitive proxy statement for the
Company's 1999 annual meeting of stockholders to be filed with the Commission
pursuant to Regulation 14A not later that 120 days after the end of the fiscal
year covered by this Report (the "Proxy Statement") under the caption "PROPOSAL
NO. 1-ELECTION OF DIRECTORS." The information relating to the executive officers
of the Company is set forth in Part I of this Report under the caption "Item 4A.
Executive Officers of the Registrant."
Information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the caption "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement under the captions "EXECUTIVE COMPENSATION," "PROPOSAL NO.
1-ELECTION OF DIRECTORS-DIRECTOR COMPENSATION" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement under the captions "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
PAGE
----
1. Financial Statements
Independent Auditors' Report....................................................................... 30
Consolidated Balance Sheets as of December 31, 1998 and 1997....................................... 31
Consolidated Statements of Operations for each of the years in the three-year period ended
December 31, 1998.................................................................................. 32
Consolidated Statements of Stockholders' Equity for each of the years in the three-year
period ended December 31, 1998 33
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1998.................................................................................. 34
Notes to Consolidated Financial Statements......................................................... 35
2. Financial Statement Schedule for the years ended December 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts.................................................... 46
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits: See Index to Exhibits on page 48. The Exhibits listed
in the accompanying Index to Exhibits are filed or incorporated
by reference as part of this Report.
(b) Reports on Form 8-K:
None.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Edify Corporation:
We have audited the accompanying consolidated balance sheets of Edify
Corporation and subsidiary (the "Company") as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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 Edify
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Mountain View, California KPMG LLP
January 25, 1999
30
33
EDIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-----------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 24,198 $ 31,790
Short-term investments ....................................... 10,639 11,371
Accounts receivable, net of allowance for returns and doubtful
accounts of $1,945 and $1,629, respectively ................ 22,629 16,668
Prepaid expenses and other current assets .................... 1,920 1,457
-------- --------
Total current assets .................................. 59,386 61,286
Property and equipment, net .................................... 7,329 6,953
Other assets ................................................... 289 241
-------- --------
Total assets .......................................... $ 67,004 $ 68,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 2,744 $ 1,062
Current installments of capital lease obligations ............ 257 424
Accrued expenses ............................................. 7,749 6,265
Unearned revenue ............................................. 4,475 4,581
-------- --------
Total current liabilities ............................. 15,225 12,332
-------- --------
Deferred rent .................................................. 50 63
Capital lease obligations, excluding current installments ...... 20 277
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 5,000,000
Issued and outstanding - none .............................. -- --
Common stock, $0.001 par value:
Authorized shares - 55,000,000
Issued and outstanding - 17,363,490 (16,607,327 in 1997) . 17 17
Additional paid-in capital ................................... 69,070 66,624
Deferred compensation ........................................ (55) (181)
Note receivable from stockholder ............................. (8) (12)
Accumulated deficit .......................................... (17,315) (10,640)
-------- --------
Total stockholders' equity ............................ 51,709 55,808
======== ========
Total liabilities and stockholders' equity ............ $ 67,004 $ 68,480
======== ========
See accompanying notes to consolidated financial statements.
31
34
EDIFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
Net revenues:
License ........................................ $ 37,375 $ 34,081 $ 20,134
Services and other ............................. 33,511 22,971 12,883
-------- -------- --------
Total net revenues ..................... 70,886 57,052 33,017
Cost of license revenues ......................... 1,328 889 450
Cost of services and other revenues .............. 23,671 17,576 10,635
-------- -------- --------
Gross profit ........................... 45,887 38,587 21,932
-------- -------- --------
Operating expenses:
Product development ............................ 11,986 10,066 5,801
Sales and marketing ............................ 31,511 21,565 15,371
General and administrative ..................... 5,745 4,613 2,946
Intellectual property settlement ............... 5,000 -- --
-------- -------- --------
Total operating expenses ............... 54,242 36,244 24,118
-------- -------- --------
Income (loss) from operations .......... (8,355) 2,343 (2,186)
-------- -------- --------
Interest income .................................. 1,953 2,078 1,598
Interest expense ................................. (148) (125) (123)
-------- -------- --------
Interest, net .......................... 1,805 1,953 1,475
-------- -------- --------
Income (loss) before income taxes ...... (6,550) 4,296 (711)
Provision for income taxes ....................... 125 344 44
-------- -------- --------
Net income (loss) ...................... $ (6,675) $ 3,952 $ (755)
======== ======== ========
Basic net income (loss) per share ................ $ (0.39) $ 0.24 $ (0.07)
======== ======== ========
Shares used in computing basic net income (loss)
per share .................................... 17,090 16,398 10,686
======== ======== ========
Diluted net income (loss) per share .............. $ (0.39) $ 0.22 $ (0.07)
======== ======== ========
Shares used in computing diluted net income (loss)
per share .................................... 17,090 18,063 10,686
======== ======== ========
See accompanying notes to consolidated financial statements.
32
35
EDIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------------- ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------------ ---------- ------------ ------------
Balances as of
December 31, 1995 ....... 10,110,231 $ 24,121 2,431,143 $ 2 $ 691
Conversion of preferred
Stock to common stock .. (10,110,231) (24,121) 10,110,231 10 24,111
Sale of common stock,
Net of issuance costs
of $1,204 ............... -- -- 2,875,000 3 38,875
Stock options exercised ... -- -- 622,303 1 228
Net exercise of stock
Warrants ................ -- -- 62,930 -- --
Deferred compensation
Related to grant of stock
Options ................. -- -- -- -- 303
Amortization of deferred
Compensation ............ -- -- -- -- --
Net loss .................. -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Balances as of
December 31, 1996 ....... -- -- 16,101,607 16 64,208
Stock options exercised ... -- -- 315,281 1 358
Stock purchased under
Employee Stock Purchase
Plan .................... -- -- 190,439 -- 2,058
Payment on note receivable
From stockholder ........ -- -- -- -- --
Amortization of deferred
Compensation ............ -- -- -- -- --
Net income ................ -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Balances as of
December 31, 1997 ....... -- -- 16,607,327 17 66,624
Stock options exercised ... -- -- 520,321 -- 574
Stock purchased under
Employee Stock Purchase
Plan .................... -- -- 235,842 -- 1,872
Payment on note receivable
From stockholder ........ -- -- -- -- --
Amortization of deferred
compensation ............ -- -- -- -- --
Net loss .................. -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Balances as of
December 31, 1998 ....... -- $ -- 17,363,490 $ 17 $ 69,070
========== ============ ========== ============ ============
NOTE
DEFERRED RECEIVABLE TOTAL
COMPENSATION FROM ACCUMULATED STOCKHOLDERS'
(NOTE 7) STOCKHOLDER DEFICIT EQUITY
------------ ------------ ------------ ------------
Balances as of
December 31, 1995 ....... $ (541) $ (17) $ (13,837) $ 10,419
Conversion of preferred
Stock to common stock .. -- -- -- --
Sale of common stock,
Net of issuance costs
of $1,204 ............... -- -- -- 38,878
Stock options exercised ... -- -- -- 229
Net exercise of stock
Warrants ................ -- -- -- --
Deferred compensation
Related to grant of stock
Options ................. (303) -- -- --
Amortization of deferred
Compensation ............ 416 -- -- 416
Net loss .................. -- -- 755) (755)
------------ ------------ ------------- ------------
Balances as of
December 31, 1996 ....... (428) (17) (14,592) 49,187
Stock options exercised ... -- -- -- 359
Stock purchased under
Employee Stock Purchase
Plan .................... -- -- -- 2,058
Payment on note receivable
From stockholder ........ -- 5 -- 5
Amortization of deferred
Compensation ............ 247 -- -- 247
Net income ................ 3,952 3,952
------------ ------------ ------------- ------------
Balances as of
December 31, 1997 ....... (181) (12) (10,640) 55,808
Stock options exercised ... -- -- -- 574
Stock purchased under
Employee Stock Purchase
Plan .................... -- -- -- 1,872
Payment on note receivable
From stockholder ........ -- 4 -- 4
Amortization of deferred
compensation ............ 126 -- -- 126
Net loss .................. -- -- (6,675) (6,675)
------------ ------------ ------------- ------------
Balances as of
December 31, 1998 ....... $ (55) $ (8) $ (17,315) $ 51,709
============ ============ ============= ============
See accompanying notes to consolidated financial statements.
33
36
EDIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ................................................ $ (6,675) $ 3,952 $ (755)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................. 4,489 3,227 1,563
Provision for returns and doubtful accounts, net of write-offs
and recoveries ............................................... 316 1,046 408
Amortization of deferred compensation .......................... 126 247 416
Deferred rent .................................................. (13) 30 33
Changes in operating assets and liabilities:
Accounts receivable .......................................... (6,277) (8,877) (3,245)
Prepaid expenses and other current assets .................... (463) (437) (739)
Accounts payable ............................................. 1,682 (482) 742
Accrued expenses ............................................. 1,484 1,137 3,257
Unearned revenue ............................................. (106) 830 2,290
-------- -------- --------
Net cash provided by (used in) operating activities .......... (5,437) 673 3,970
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ......................... (4,865) (4,355) (4,875)
Purchases of short-term investments .............................. (15,510) (15,684) (24,520)
Sales and maturities of short-term investments ................... 16,242 15,449 19,356
Other assets ..................................................... (48) (7) (119)
-------- -------- --------
Net cash used in investing activities ........................ (4,181) (4,597) (10,158)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations ............... (424) (412) (397)
Repayment of shareholder note .................................... 4 5 --
Proceeds from issuance of common stock ........................... 2,446 2,417 39,107
-------- -------- --------
Net cash provided by financing activities .................... 2,026 2,010 38,710
-------- -------- --------
Increase (decrease) in cash and cash equivalents ................... (7,592) (1,914) 32,522
Cash and cash equivalents at beginning of year ..................... 31,790 33,704 1,182
-------- -------- --------
Cash and cash equivalents at end of year ........................... $ 24,198 $ 31,790 $ 33,704
======== ======== ========
Supplemental schedule of cash flow information:
Cash paid during the year for interest ........................... $ 82 $ 125 $ 123
Cash paid during the year for taxes .............................. $ 170 $ 96 $ 29
Supplemental schedule of noncash investing and financing activities:
Property and equipment acquired under capital lease
obligations .................................................... $ -- $ 35 $ 656
Accrual of stock option deferred compensation .................... $ -- $ -- $ 303
See accompanying notes to consolidated financial statements.
34
37
EDIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Edify Corporation and its subsidiary (the "Company") develops and markets
enterprise self service software and provides application development
consulting, installation and post-contract customer support services. The
principal markets for the Company's products are i) human resource and customer
service departments for a wide variety of companies, and ii) banking and
financial services companies. The Company was incorporated on October 19, 1989,
and in April 1996, the Company reincorporated as a Delaware corporation. Edify
EMEA Ltd., a wholly-owned subsidiary, was incorporated on December 17, 1997, and
is located in London, England.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Edify Corporation and Edify EMEA Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Foreign Currency Translation and Transactions
The Company has determined that the functional currency of its foreign
subsidiary is the U.S. dollar and translates monetary assets and liabilities at
year-end exchange rates, and inventories, property and non-monetary assets and
liabilities at historical rates. Gains and losses from these transactions are
included in the consolidated results of operations and are immaterial.
Use of Estimates
The preparation of consolidated 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, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Short-Term Investments
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" requires entities to
classify investments in debt and equity securities with readily determinable
fair values as "held-to-maturity," "available-for-sale" or "trading," and
establishes accounting and reporting requirements for each classification. In
accordance with SFAS No. 115, the Company has classified its investments in debt
securities as available-for-sale. The cost of securities sold is based upon the
specific identification method.
Credit Risk Concentrations and Fair Values of Financial Instruments
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash investments and
accounts receivable. The Company's cash investments are held with several
financial institutions and generally consist of commercial paper, money market
deposits, government agency securities, bankers' acceptances, certificates of
deposit and corporate bonds. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers comprising
the Company's customer base.
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to the short
maturity of those instruments. The fair value of capital leases is not
estimated, but reflects the contractual present value owed to non-related
parties.
35
38
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the lower of fair value or the present value of the minimum lease
payments at the inception of the lease.
Depreciation of property and equipment is computed on a straight-line basis
over the estimated useful lives of the respective assets, generally three years
for equipment and office furniture and the shorter of the useful life of the
asset or the remaining lease term for leasehold improvements.
Equipment under capital leases is amortized on a straight-line basis, generally
42 months.
Software Development Costs
Product development costs include costs related to software products that
are expensed as incurred until the technological feasibility of the product has
been established. After technological feasibility is established, any additional
software development costs would be capitalized in accordance with SFAS No. 86.
Through December 31, 1998, 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 to date.
Revenue Recognition
Revenue on the licensing of software products is generally recognized upon
shipment, net of estimated allowances for product returns. Software license
revenues are recognized upon shipment only if persuasive evidence of an
arrangement with the vendor exists, the vendor's fee is fixed or determinable,
and collection of the resulting receivables is deemed probable. In certain
contracts, shipment is defined as delivery of a product master for noncancelable
product licensing arrangements under which the customer has certain software
reproduction and distribution rights. Revenue on post-contract customer support
and service contracts is recognized ratably over the contract period and as the
services are performed, respectively. Fixed price consulting contract revenues
are recognized based on the percentage of completion method. Estimated losses
are recorded in the period in which they become known. Time and materials
contracts are recognized as services are performed.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition."
Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2 generally
requires revenue recognized from software arrangements to be allocated to each
element of the arrangement based on the relative fair values of the elements,
such as software products, consulting, education services, installation or
post-contract customer support. Fair values are based upon vendor specific
objective evidence ("VSOE"). If evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist, or until all elements of the
arrangement are delivered.
In February 1998, AcSEC issued SOP 98-4, "Deferral of the Effective Date of
SOP 97-2." The SOP defers the effective date for applying the provisions
regarding VSOE of fair value until the AcSEC can reconsider what constitutes
such VSOE. There was no material change to the Company's accounting for revenues
as a result of the adoption of SOP 98-4.
In December 1998, AcSEC issued SOP 98-9, "Software Revenue Recognition,
with Respect to Certain Arrangements," which requires recognition of revenue
using the "residual method" in a multiple element arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the "residual method," the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. There was no
material change to the Company's accounting for revenues as a result of the
adoption of SOP 98-9.
Net Income (Loss) 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,
convertible preferred stock outstanding and common equivalent shares from
options to purchase common stock and warrants outstanding using the treasury
stock method.
Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans using
the intrinsic-value method.
36
39
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. The Company had no items of other comprehensive income in all
periods presented.
Business Segments
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way public business enterprises are to 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. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. Therefore, the Company has made
the required disclosures in Note 9 to these consolidated financial statements.
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in operating results in the period that
includes the enactment date. A valuation allowance is established to reduce
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Recently Adopted Accounting Standards
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software intended for internal
use. SOP 98-1 must be adopted by the Company for periods beginning after
December 15, 1998 and is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which provides guidance on accounting for start-up
activities, including organization costs. SOP 98-5 must be adopted by the
Company for periods beginning after December 15, 1998, and is not expected to
have a material impact on the Company's consolidated results of operations or
financial position.
Reclassifications
Certain items in these consolidated financial statements have been
reclassified to conform to the current period presentations.
37
40
(3) NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of net income (loss) per
share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ -------- --------
Net income (loss) used for the basic and diluted computation $ (6,675) $ 3,952 $ (755)
============ ======== ========
Basic:
Weighted average common shares outstanding used in computing
basic net income (loss) per share ....................... 17,090 16,398 10,686
============ ======== ========
Basic net income (loss) per share .......................... $ (0.39) $ 0.24 $ (0.07)
============ ======== ========
Diluted:
Weighted average common shares outstanding ................. 17,090 16,398 10,686
Dilutive options outstanding ............................... -- 1,665 --
------------ -------- --------
Shares used in computing diluted net income (loss)
per share ............................................. 17,090 18,063 10,686
============ ======== ========
Diluted net income (loss) per share ........................ $ (0.39) $ 0.22 $ (0.07)
============ ======== ========
As of December 31, 1998, there were options to acquire 3,627,498 shares of
common stock with weighted-average exercise prices of $6.16 which could
potentially dilute basic earnings per share in the future but which were not
included in diluted per share results for the year ended December 31, 1998.
These options were excluded because the Company had a net loss in 1998 and to do
so would have been antidilutive.
As of December 31, 1997, there were options to acquire 816,027 shares of
common stock with weighted-average exercise prices of $16.49 which could
potentially dilute basic earnings per share in the future but which were not
included in diluted per share results for the year ended December 31, 1997.
These options were excluded because the exercise price was greater than the
average market price of the common stock for the year ended December 31, 1997,
and, therefore, these options would be antidilutive for the purposes of this
calculation.
As of December 31, 1996, there were options to acquire 2,373,989 shares of
common stock with weighted-average exercise prices of $6.29 which could
potentially dilute basic earnings per share in the future but which were not
included in diluted per share results for the year ended December 31, 1996.
These options were excluded because the Company had a net loss in 1996 and to do
so would have been antidilutive.
(4) BALANCE SHEET AND STATEMENT OF OPERATIONS COMPONENTS
Investments
Under the provisions of SFAS No. 115, debt and equity securities classified
as available-for-sale securities for which cost approximated market value as of
December 31, 1998 and 1997 with maturities generally within one year, consisted
of the following (in thousands):
DECEMBER 31,
------------------------
1998 1997
------- -------
Commercial paper ....................... $11,447 $10,634
Government agency securities ........... 9,525 11,189
Money market funds ..................... 6,796 15,276
Corporate bonds ........................ 2,051 --
------- -------
$29,819 $37,099
======= =======
These investments were classified on the consolidated balance sheet as
follows (in thousands):
DECEMBER 31,
------------------------
1998 1997
------- -------
Cash equivalents ....................... $19,180 $25,728
Short-term investments ................. 10,639 11,371
------- -------
$29,819 $37,099
======= =======
38
41
Gains and losses from sales of available-for-sale securities were not
significant for the years ended December 31, 1998, 1997 or 1996.
Property and Equipment
A summary of property and equipment is as follows (in thousands):
DECEMBER 31,
--------------------
1998 1997
------- -------
Computer equipment ........................... $16,238 $12,014
Office furniture and fixtures ................ 1,627 1,270
Leasehold improvements ....................... 1,124 880
------- -------
18,989 14,164
Less accumulated depreciation and amortization 11,660 7,211
------- -------
$ 7,329 $ 6,953
======= =======
Property and equipment as of December 31, 1998 and 1997 includes equipment
under capital leases of approximately $2,658,000 and $2,658,000, respectively,
and related accumulated amortization of approximately $2,406,000 and $1,978,000,
respectively.
Accrued Expenses
A summary of accrued expenses is as follows (in thousands):
DECEMBER 31,
--------------------
1998 1997
------ ------
Accrued commissions and bonuses .......... $2,903 $2,372
Accrued payroll and related items ........ 2,593 2,145
Other liabilities ........................ 2,253 1,748
------ ------
$7,749 $6,265
====== ======
Unearned Revenue
A summary of unearned revenue is as follows (in thousands):
DECEMBER 31,
------------------
1998 1997
------ ------
Unearned post-contract support agreements .... $3,989 $4,196
Unearned consulting .......................... 454 340
Other unearned revenue ....................... 32 45
------ ------
$4,475 $4,581
====== ======
Note Receivable from Stockholder
In September 1995, the Company received a note for $17,500 in exchange for
50,000 shares of restricted common stock. The note is to be repaid semiannually
based on the vesting terms of the underlying shares, which are dependent on
certain performance milestones. The note is due no later than March 2002, with
interest at 8% compounding semiannually.
Intellectual Property Settlement
In April 1996, the Company received a letter from Lucent inviting the
Company to negotiate a license of Lucent's patents. Lucent asserted that certain
of the Company's products infringe certain of Lucent's patents and 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. In November 1998, the Company
entered into an agreement with Lucent (the "Lucent Settlement"), under which
each party released the other from claims of past infringement and settled their
patent disputes. Under the Lucent Settlement, Edify paid Lucent a one-time fee
of $5 million, which was recorded as intellectual property settlement expense.
The one-time settlement fee released the Company from all claims, demands and
rights of action which Lucent may have on account of any infringement or alleged
infringement of any of Lucent's patents that are covered by the Lucent
Settlement.
39
42
(5) INCOME TAXES
The provision for income taxes in 1998, 1997 and 1996 was as follows (in
thousands):
1998 1997 1996
---- ---- ----
Current:
Federal ...................................... $ 29 $194 $ --
State ........................................ 36 64 17
Foreign ...................................... 60 40 27
---- ---- ----
Total current ............................ 125 298 44
Charge in lieu of taxes attributable to employer
Stock option plans ......................... -- 46 --
---- ---- ----
Total tax provision ............................ $125 $344 $ 44
==== ==== ====
Total income tax expense differs from expected income tax expense (computed
by applying the U.S. federal corporate income tax rate of 34% to net income
(loss) before taxes) as follows (in thousands):
1998 1997 1996
------- ------- -------
Income tax expense (benefit) at federal
Statutory rate ............................ $(2,227) $ 1,461 $ (242)
State income tax, net of federal benefit ...... 24 54 11
Unutilized net operating loss ................. 2,171 -- --
Change in beginning of year valuation allowance -- (1,514) 184
Alternative minimum tax ....................... -- 99 --
Other, net .................................... 157 244 91
------- ------- -------
$ 125 $ 344 $ 44
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1998 and 1997
are presented below (in thousands):
1998 1997
------ ------
Deferred tax assets:
Deferred research expenses ................. $ 143 $ 428
Accrued expenses and reserves .............. 2,150 2,346
Property and equipment depreciation ........ 73 15
Net operating loss carryforwards ........... 4,301 1,441
Credits carryforwards ...................... 2,148 1,722
------ ------
Total gross deferred tax assets .... 8,815 5,952
Less valuation allowance ................... 8,815 5,952
------ ------
Net deferred tax assets ............ $ -- $ --
====== ======
The net change in the total valuation allowance for the year ended December
31, 1998 was an increase of $2,863,000. The Company's accounting for deferred
taxes under SFAS No. 109 involves the evaluation of a number of factors
concerning the realizability of the Company's deferred tax assets. To support
the Company's conclusion that a 100% valuation allowance was required,
management primarily considered such factors as the Company's history of
operating losses, the nature of the Company's deferred tax assets, the lack of
significant firm sales backlog, no significant excess of appreciated asset value
over the tax basis of the Company's net assets, and the absence of taxable
income in prior carryback years. Although management's operating plans assume
taxable and operating income in future periods, management's evaluation of all
the available evidence in assessing the realizability of the deferred tax assets
indicates that such plans are not considered sufficient to overcome the
available negative evidence.
The Company has net operating loss carryforwards for federal purposes of
approximately $11.7 million. These carryforwards expire in various years from
2008 through 2018. In addition, the Company has net operating loss carryforwards
for California purposes of approximately $4.5 million. These carryforwards
expire in years 1999 through 2003. The Company also has research and development
tax credit carryforwards of approximately $1,156,000 and $893,000 for federal
and state tax purposes, respectively. The federal research and development tax
credit carryforwards expire in years 2005 through 2018. There is no expiration
provision for California research and development tax credit. In addition, the
Company has foreign tax credits and alternative minimum tax credit of $95,000
and $4,000, respectively. The foreign tax credits expire in years 2001 through
2003. There is no expiration provision for the alternative minimum tax credit.
Included in gross deferred tax assets above is approximately $650,000 related to
stock option compensation for which the benefit, when realized, will be recorded
to stockholders' equity.
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The Internal Revenue Code of 1986, and applicable state tax laws, impose
substantial restrictions on the ability of the Company to utilize net operating
loss and research and development tax credit carryforwards in the event of an
"ownership change." During 1992, the Company underwent an ownership change. As a
result of the change of ownership, the federal tax losses incurred through that
date, approximately $3.1 million, are subject to an estimated annual limitation
of approximately $550,000. In addition, federal research and development tax
credit carryovers of approximately $150,000 are also subject to this annual
limitation on a tax converted basis; however, they cannot be utilized until the
restricted net operating loss carryforwards have been utilized. In the event
that additional ownership changes occur, there may be additional restrictions on
the future use of research and development tax credits and net operating loss
carryforwards existing at that date.
(6) STOCKHOLDERS' EQUITY
Preferred Stock
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and rights of each series and any qualifications, limitations or
restrictions thereon without any further vote or action by the stockholders.
Common Stock
The Company has periodically sold shares of common stock to its employees,
directors and other individuals under Restricted Stock Purchase Agreements (the
"Agreements") at prices not less than the fair market value of such stock at the
date of issuance as determined by the Board of Directors. Pursuant to the
Agreements, the Company has the option to repurchase the unvested common stock
at the original purchase price in the event that an individual ceases to be an
employee or director of the Company. The stock generally vests either (a) to the
extent of 20% of the shares upon the first 12-month anniversary of the
employee's hire date and an additional 1/48 of the unvested shares ratably over
the following 48 months or (b) to the extent of 25% of the shares upon the first
12-month anniversary of the employee's hire date and an additional 1/36 of the
unvested shares ratably over the following 36 months. As of December 31, 1998,
12,290 shares were subject to repurchase.
Stockholder Rights Plan
On August 7, 1998, the Board of Directors adopted a stockholder rights plan
designed to protect the long-term value of the Company for its shareholders
during any future unsolicited acquisition attempt. In connection with the plan,
the Board declared a dividend of one preferred share purchase right for each
share of the Company's common stock outstanding on August 14, 1998 (the "Record
Date") and further directed the issuance of one such right with respect to each
share of the Company's common stock that is issued after the Record Date, except
in certain circumstances. The rights will expire on August 10, 2008. The rights
are initially attached to the Company's common stock and will not trade
separately. If a person or a group (an "Acquiring Person") acquires 20 percent
or more of the Company's common stock, or announces an intention to make a
tender offer for the Company's common stock, the consummation of which would
result in a person or group becoming an Acquiring Person, then the rights will
be distributed (the "Distribution Date"). After the Distribution Date, each
right may be exercised for one-hundredth of a share of a newly designated Series
A Junior Participating Preferred Stock, par value of $0.001 per share, at an
exercise price of $70.00. The preferred stock has been structured so that the
value of one-hundredth of a share of such preferred stock will approximate the
value of one share of common stock.
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(7) INCENTIVE AND BENEFIT PLANS
1996 Directors Stock Option Plan
In March 1996, the Company adopted the 1996 Directors Stock Option Plan
(the "Directors Plan") and reserved 100,000 shares of common stock for issuance
under this plan. In August 1998, the authorized number of shares was increased
to 175,000. Under the Directors Plan, each eligible director was automatically
granted an initial option to purchase 7,500 shares. Each eligible director who
first becomes a member of the Board thereafter will automatically be granted an
option to purchase 15,000 shares upon joining the Board. At each Annual Meeting
of Stockholders of the Company, each eligible director will automatically be
granted an additional option to purchase 7,500 shares if such director has
served continuously as a member of the Board since the date of grant of such
director's initial option. All options issued under the Directors Plan vest as
to 1/48 of the shares per month, provided the optionee continues as a member of
the Board or as a consultant to the Company. As of December 31, 1998, 112,500
shares at a weighted-average exercise price of $13.98 had been granted under the
Directors Plan, and 35,744 shares were exercisable.
1996 Equity Incentive Plan and 1990 Stock Option Plan (the "Incentive
Plans")
The Company's 1996 Equity Incentive Plan became effective on May 2, 1996
and serves as the successor to the Company's 1990 Stock Option Plan. The 1996
Equity Incentive Plan provides for the grant of stock options and stock bonuses
and the issuance of restricted stock by the Company to its employees, officers,
directors, consultants, independent contractors and advisers. Under the 1990
Stock Option Plan, options were granted to employees, officers, directors,
consultants, independent contractors and advisers to purchase common stock at
not less than the fair market value of the Company's common stock at the grant
date (for incentive stock options) or 85% of the fair market value of such
common stock (for nonqualified stock options). Shares under options for both
plans generally become exercisable to the extent of 25% upon the first 12-month
anniversary of the grant date and an additional 1/36 of the unvested shares
vesting ratably over the following 36 months, and expire 10 years from the grant
date. At the May 1998 Annual Meeting of Stockholders of the Company, 1,225,000
additional shares were authorized for the Incentive Plans. At December 31, 1998,
the Company had reserved 5,128,377 shares of common stock for issuance under
these plans and 1,613,379 shares remained available for grant.
In July 1998, the Board of Directors approved the repricing of all
incentive stock options granted during the period from 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 had 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 price of $8.625, the then current market value of
the Company's stock. Options to purchase 1,096,393 shares of common stock were
exchanged under this option repricing program.
A summary of activity under the Directors Plan and the Incentive Plans is
as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
Outstanding - beginning
of year ............................. 2,999,625 $ 7.61 2,373,989 $ 3.96 2,380,516 $ 0.68
Granted ................................ 2,682,612 8.86 1,158,305 13.54 670,796 12.26
Exercised .............................. (520,321) 1.10 (315,281) 0.99 (622,303) 0.23
Canceled ............................... (1,534,418) 13.21 (217,388) 9.04 (55,020) 5.78
---------- --------- ---------- --------- --------- ---------
Outstanding - end of year .............. 3,627,498 7.10 2,999,625 7.61 2,373,989 3.96
---------- --------- ---------- --------- --------- ---------
Weighted-average fair value of options
granted, calculated under SFAS No. 123
(see below) .......................... $ 6.16 $ 7.22 $ 6.29
In 1996 and 1995, the Company recorded deferred compensation of $303,000
and $601,000, respectively, for the difference between the grant price and the
deemed fair value of the common stock underlying certain options granted during
the year. Deferred compensation amounts are being amortized over the vesting
period of the individual options, generally four years. Amortization of deferred
compensation was approximately $126,000, $247,000 and $416,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
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The following table summarizes information as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
--------------- --------- --------- --------- --------- ---------
$0.01 - $0.35 584,922 5.56 $ 0.32 555,653 $ 0.31
$3.00 - $7.88 933,015 7.42 5.42 323,477 4.44
$8.00 - $9.75 1,572,949 7.98 8.71 22,460 8.88
$10.06 - $20.25 536,612 8.15 12.69 156,637 12.95
--------------- --------- --------- --------- --------- ---------
$0.01 - $20.25 3,627,498 7.47 $ 7.10 1,058,227 $ 3.63
1996 Employee Stock Purchase Plan
In March 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 300,000 shares of common stock for issuance
under this plan. At the May 1997 Annual Meeting of Stockholders of the Company,
300,000 additional shares were authorized for the Purchase Plan, and again, at
the May 1998 Annual Meeting of Stockholders of the Company, 300,000 additional
shares were authorized for the Purchase Plan. The Purchase Plan permits eligible
employees to acquire shares of the Company's common stock through payroll
deductions of between 2% and 10% of their compensation, up to an aggregate total
payroll deduction not to exceed $21,250 in any calendar year. Each offering
under the Purchase Plan is for a period of twenty-four months, and each offering
period consists of four purchase periods, each six months in length. The
purchase price for the Company's common stock purchased under the Purchase Plan
is 85% of the lesser of the fair market value of the Company's common stock on
the first day of the applicable offering period or on the last day of the
respective purchase period. In 1998 and 1997, 235,842 and 190,439 shares,
respectively, were issued under the Purchase Plan at an average purchase price
of $7.94 and $10.78, respectively.
Retirement and Savings Program
The salary deferral "401(k)" plan allows employees to defer up to 20% of
their salary subject to certain limitations. The Company may make discretionary
contributions to the plan; however, no employer contributions have been made
since inception.
Accounting for Stock-Based Compensation Under SFAS No. 123
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options granted to
employees under its stock plans. Had compensation cost for the Company's three
stock plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method prescribed under SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's operating results
and results per share would have changed to the pro forma amounts indicated
below (in thousands, except per share amounts):
1998 1997 1996
---------- ---------- ----------
Net income (loss) - as reported ................. $ (6,675) $ 3,952 $ (755)
Net income (loss) - pro forma ................... $ (12,519) $ 564 $ (1,412)
Basic net income (loss) per share - as reported . $ (0.39) $ 0.24 $ (0.07)
Basic net income (loss) per share - pro forma ... $ (0.73) $ 0.03 $ (0.13)
Diluted net income (loss) per share - as reported $ (0.39) $ 0.22 $ (0.07)
Diluted net income (loss) per share - pro forma . $ (0.73) $ 0.03 $ (0.13)
The fair value of each option grant and Purchase Plan share issuable during
1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
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1998 1997 1996
-------- -------- --------
Expected dividend yield ............. 0% 0% 0%
Expected stock price volatility ..... 95% 63% 43%
Risk-free interest rate ............. 5.78% 6.26% 6.26%
Expected life of options ............ 4 years 4 years 4 years
Expected life of Purchase Plan rights 6 months 6 months 6 months
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee and director stock options and shares
issuable under the Purchase Plan have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee and director stock options and shares
issuable pursuant to the Purchase Plan.
(8) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its offices under various noncancelable operating lease
agreements that expire in years 1999 through 2002. The Company leases certain
equipment under capital leases. As of December 31, 1998, minimum lease payments
under all noncancelable lease agreements were as follows (in thousands):
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
1999 .................................. $ 269 $ 3,716
2000 .................................. 21 1,643
2001 .................................. -- 707
2002 .................................. -- 480
-----
Total minimum lease payments .......... 290
Less amount representing interest ..... 13
-----
Present value of minimum lease payments 277
Less current portion .................. 257
-----
Long-term capital lease obligations ... $ 20
=====
Rent expense was approximately $2,444,000, $2,012,000 and $1,149,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Rent expense
under office leases is recognized on a straight-line basis over the term of the
lease. The difference between the amounts paid and the amounts expensed is
classified as deferred rent in the accompanying consolidated balance sheets.
Commitments
In connection with the Lucent Settlement (see Note 4), the Company will pay
Lucent a minimum annual royalty fee of approximately $500,000 up to a maximum of
approximately $700,000 in each of the fiscal years from 1999 to 2004. In
addition, in fiscal years 2005 and 2006, if the Company exceeds certain revenue
targets that are specified under the Lucent Settlement, the Company will be
required to pay additional amounts.
The Company is party to various other matters arising in the ordinary
course of its business. In the opinion of management, these proceedings will not
have a material adverse effect on the Company's financial position or results of
operations.
(9) SEGMENT REPORTING
The Company has adopted the provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas and major
customers. The method for determining what information to report is based on the
way management organizes the operating segments within the Company for making
operating decisions and assessing financial performance.
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The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information about
revenues by product and service line for purposes of making operating decisions
and assessing financial performance. The Company operates in three operating
segments: software, post-contract customer support services and application
development consulting services.
Net revenue information regarding the Company's operating segments are as
follows (in thousands):
1998 1997 1996
------- ------- -------
Net revenues:
Software ......................... $37,375 $34,081 $20,134
Post-contract customer support ... 10,015 6,458 3,687
Application development consulting 20,584 13,773 7,250
Other ............................ 2,912 2,740 1,946
------- ------- -------
Total net revenues ....... $70,886 $57,052 $33,017
======= ======= =======
The Company's export sales are principally in Europe and Asia/Pacific. In
each of 1998, 1997 and 1996, 5% or less of the Company's total net revenues
were derived from international sales. Accordingly, the Company does not produce
reports that measure performance of revenues by geographic region.
The Company evaluates the performance of its operating segments based on
revenues only. The Company does not assess the performance of its segments on
other measures of income or expense, such as depreciation and amortization,
operating income or net income. In addition, as the Company's assets are
primarily located in its corporate office in the United States and not allocated
to any specific segment, the Company does not produce reports that measure the
performance based on any asset-based metrics. Therefore, segment information is
presented only for revenues.
No single customer accounted for greater than 10% of revenues in any period
presented.
(10) LINE OF CREDIT
The Company has an $8 million line of credit, which expires in December
1999 and bears interest at the prime rate. At December 31, 1998, $8 million was
available for borrowing. As of December 31, 1998 and 1997, there were no
borrowings outstanding under this line of credit.
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EDIFY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF YEAR
-------------- ---------- ---------- ------------- -------------- --------
Allowance for returns and doubtful accounts
Year ended December 31, 1996 ........... $ 175 $ 710 $ -- $ (302) $ 583
======= ======= ======= ======= =======
Year ended December 31, 1997 ........... $ 583 $ 1,456 $ 220 $ (630) $ 1,629
======= ======= ======= ======= =======
Year ended December 31, 1998 ........... $ 1,629 $ 2,708 $ 193 $(2,585) $ 1,945
======= ======= ======= ======= =======
- -------------
(1) Includes charges to unearned revenue.
(2) Includes write-offs of accounts and credits issued.
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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.
Edify Corporation
Date: March 29, 1999 /s/ Stephanie A. Vinella
--------------------------------------
Stephanie A. Vinella
Chief Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 29, 1999 by the following persons on
behalf of the registrant and in the capacities on the date indicated.
Signature Title
- ------------------------------- --------------------------------------------------------------
/s/ Jeffrey M. Crowe President, Chief Executive Officer and Director
- ------------------------------- (Principal Executive Officer)
(Jeffrey M. Crowe)
/s/ Stephanie A. Vinella Vice President of Finance and Administration,
- ------------------------------- Chief Financial Officer
(Stephanie A. Vinella) (Principal Financial Officer and Principal Accounting Officer)
/s/ Stephen M. Berkley Director
- -------------------------------
(Stephen M. Berkley)
/s/ Kelly D. Conway Director
- -------------------------------
(Kelly D. Conway)
/s/ Tench Coxe Director
- -------------------------------
(Tench Coxe)
/s/ Donald R. Hollis Director
- -------------------------------
(Donald R. Hollis)
/s/ Stewart A. Schuster Director
- -------------------------------
(Stewart A. Schuster)
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INDEX TO EXHIBITS
3.03.1 Restated Certificate of Incorporation. (1)
3.04.2 Bylaws, as amended and restated effective August 7, 1998. (2)
3.05.1 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock. (3)
4.01 Second Amended and Restated Registration Rights Agreement, dated
as of October 26, 1995. (4)
4.02 Rights Agreement dated August 10, 1998, between the Company and
BankBoston, N.A., as Rights Agent, which includes as Exhibit A
the form of Certificate of Designations of Series A Junior
Participating Preferred Stock, as Exhibit B the Form of Right
Certificate and as Exhibit C the Summary of Rights to Purchase
Preferred Shares. (5)
10.01 Registrant's 1990 Stock Option Plan, as amended and related
documents. (6) *
10.02 Registrant's 1996 Equity Incentive Plan, as amended through April
1, 1998 and related documents. (7) *
10.03 Registrant's 1996 Directors Stock Option Plan, as amended through
April 1, 1998 and related documents. (8) *
10.04 Registrant's 1996 Employee Stock Purchase Plan, as amended
through April 1, 1998. (9) *
10.05 Second Amendment to Loan Documents dated December 28, 1998
between Imperial Bank and Registrant (amending Credit Terms and
Conditions and related documents) and related documents.
10.06 Form of Indemnification Agreement entered into by Registrant with
each of its directors and executive officers. (6) *
10.07 Office Lease Agreement dated June 11, 1990 between San Tomas No.
1 Limited Partnership and Registrant, as amended. (6)
10.08 Sublease dated August 14, 1995 between Advantest America, Inc.
and the Registrant. (6)
10.09 Master Lease Agreement dated May 15, 1992 between Comdisco, Inc.
and Registrant, as amended and related documents. (6)
10.10 Credit Terms and Conditions dated December 30, 1996 between
Registrant and Imperial Bank and related documents. (1)
10.11 Consulting Agreement dated January 15, 1998 between Registrant
and DRH Strategic Consulting Inc. (10)
10.12 Sublease dated May 22, 1998 between Rational Software Corporation
and the Registrant.
10.13 First Amendment to Lease Agreement dated August 26, 1996 between
Top-1 Property Holdings, L.P. and the Registrant.
10.14 Lease Agreement dated August 26, 1996 between CleveTrust Realty
Investors and the Registrant.
10.15 Patent License Agreement dated November 1, 1998 between Lucent
Technologies Inc. and the Registrant. **
23.01 Consent of Independent Auditors.
27.01 Financial Data Schedule.
- ----------------------
* Management contract or compensatory arrangement.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the Exhibit of the same number to Registrant's
Form 10-K for the year ended December 31, 1996.
(2) Incorporated by reference to Exhibit 3.1 to Registrant's Current Report on
Form 8-K filed on August 11, 1998.
(3) Incorporated by reference to Exhibit 3.2 to Registrant's Registration
Statement on Form 8-A (No. 000-28480) filed on August 11, 1998 (the "Form
8-A").
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(4) Incorporated by reference to Exhibit 4.02 to Registrant's Registration
Statement on Form S-1 (No. 333-02020), declared effective on May 2, 1996
(the "Form S-1").
(5) Incorporated by reference to Exhibit 4.1 to the Form 8-A.
(6) Incorporated by reference to the Exhibit of the same number to the Form
S-1.
(7) Incorporated by reference to Exhibit 4.06 to Registrant's Registration
Statement on Form S-8 (No. 333-61109) filed on August 10, 1998 (the "Form
S-8").
(8) Incorporated by reference to Exhibit 4.07 to the Form S-8.
(9) Incorporated by reference to Exhibit 4.05 to the Form S-8.
(10) Incorporated by reference to the Exhibit of the same number to Registrant's
Form 10-Q for the quarter ended March 31, 1998.
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