-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PJuH/8fQPghZtDuDjNu5+3a2z32iBxi/4Q2v/pTnlQABSqAiuci9xtjMlmpJtwnJ vQaypIh8RaalZk4a+iJPpg== 0000891618-99-001279.txt : 19990402 0000891618-99-001279.hdr.sgml : 19990402 ACCESSION NUMBER: 0000891618-99-001279 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDIFY CORP CENTRAL INDEX KEY: 0000879898 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770250992 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28480 FILM NUMBER: 99580089 BUSINESS ADDRESS: STREET 1: 2840 SAN TOMAS EXPERSSWY CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4089822000 MAIL ADDRESS: STREET 1: 2840 SAN TOMAS EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 10-K 1 FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998 1 ================================================================================ 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 - -------------------------------- ------------------------------------ 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. ================================================================================ 2 TABLE OF CONTENTS
Page ---- 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. 3 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. 1 4 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. 2 5 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 3 6 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. 4 7 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 5 8 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. 6 9 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. 7 10 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. 8 11 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 9 12 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 10 13 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 11 14 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. 12 15 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 21 24 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 22 25 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 23 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 24 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 25 28 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. 26 29 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. 27 30 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." 28 31 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. 29 32 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. 40 43 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. 41 44 (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. 42 45 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: 43 46
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. 44 47 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. 45 48 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. 46 49 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)
47 50 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"). 48 51 (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. 49 EX-10.05 2 SECOND AMENDMENT AND LOAN DOCUMENTS 1 EXHIBIT 10.05 SECOND AMENDMENT TO LOAN DOCUMENTS THIS SECOND AMENDMENT TO LOAN DOCUMENTS ("Second Amendment") is made and entered into as of December 28, 1998 by and among EDIFY CORPORATION, a Delaware corporation ("Borrower"), and IMPERIAL BANK ("Bank"). RECITALS A. Bank agreed to make revolving loans to Borrower in the maximum principal amount of $8,000,000.00 ("Commitment") pursuant to the terms of that certain Credit Terms and Conditions with Addendum dated December 30, 1996, as previously amended, ("Credit Terms Agreement"), entered into between Borrower and Bank. The Commitment is evidenced by that certain Note dated December 30, 1996, as previously amended, ("Note"), made by Borrower and payable to Bank in the original principal amount of the Commitment. B. The termination date of the Commitment and the maturity date of the Note was extended to December 28, 1998, pursuant to the terms of the First Amendment dated December 29, 1998 ("First Amendment"), entered into between Borrower and Bank upon the terms and conditions contained therein. C. The Commitment terminated on December 28, 1998, and Borrower desires to extend the termination date of the Commitment as provided for in this Second Amendment, and Bank is willing to make such accommodation to Borrower, subject to the terms and conditions set forth herein. D. The Credit Terms Agreement, the Note (as amended hereby), the First Amendment, and this Second Amendment, together with all other documents entered into or delivered pursuant to any of the foregoing, in each case as originally executed or as the same may from time to time be modified, amended, supplemented, restated or superseded are hereinafter collectively referred to as the "Loan Documents". AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants herein set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, Borrower and Bank hereby agree to amend the Loan Documents as follows: 1. DEFINITIONS. Unless otherwise defined herein, all terms used in the Credit Terms Agreement have the same meaning when used herein. 2 2. AMENDMENTS TO CREDIT TERMS AGREEMENT. a. Section 5 of the Credit Terms Agreement is hereby amended in full to read as follows: "5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity, provided Borrower may purchase or acquire the assets or business of any person as long as an event of default does not exist hereunder and as long as such purchase or acquisition does not cause an event of default hereunder; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor, or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same." b. The Termination Date contained in the COMMITMENT Section of the Addendum to the Credit Terms and Conditions is hereby extended from December 28, 1998 to "December 27, 1999". c. The Addendum to the Credit Terms Agreement is amended by adding the following as subsection 4) to the Section entitled REPORTING: "4) At the following times: (i) while any advances, letters of credit or foreign exchange contracts are outstanding hereunder, within 45 days after the end of each quarter and fiscal year of Borrower, and (ii) not later than 20 days prior to any advance request by Borrower, including letters of credit, Borrower shall provide Bank, in form and substance satisfactory to Bank, a certificate of an authorized officer of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof." d. The Addendum to the Credit Terms Agreement is further amended by replacing the existing subsection 3) to the Section entitled OTHER CONDITIONS with the following: "3) At Bank's option, but no less than once per year, Bank may require an audit by Bank's representatives at Borrower's expense, with results satisfactory to Bank." e. The Addendum to the Credit Terms Agreement is hereby further amended to add the following sections: 2 3 "YEAR 2000 COMPLIANCE" Borrower affirmatively covenants that it will perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms of this paragraph as Bank may from time to time require. REPRESENTATION REGARDING YEAR 2000 COMPLIANCE Borrower and its subsidiaries, as applicable, represent and warrant that they have reviewed the areas within their operations and business which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the Year 2000 Problem and have made related appropriate inquiry of material suppliers and vendors, and based on such review and program, the Year 2000 Problem will not have a material adverse effect upon their financial condition, operations or business as now conducted. "Year 2000 Problem" means the possibility that any computer applications or equipment used by Borrower may be unable to recognize and properly perform date sensitive functions involving certain dates prior to and any dates on or after December 31, 1999." 3. AMENDMENT TO NOTE. The stated maturity date of the Note is hereby extended from December 28, 1998 to December 27, 1999. 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that its representations and warranties in the Loan Documents continue to be true and complete in all material respects as of the date hereof after giving effect to this Second Amendment (except to the extent such specifically relate to another date or as specifically described on EXHIBIT A attached hereto and incorporated herein by this reference) and that the execution, delivery and performance of this Second Amendment are duly authorized, do not require the consent or approval of any governmental body or regulatory authority and are not in contravention of or in conflict with any law or regulation or any term or provision of any other agreement entered into by Borrower. 5. CONDITIONS PRECEDENT. The legal effectiveness of this Second Amendment is subject to the satisfaction of all of the following conditions precedent: 3 4 a. PAYMENT OF ACCRUED INTEREST. Bank shall have received all unpaid interest accrued under the Note from December 1, 1997 through and including December 28, 1998 at the rate of interest and computed in accordance with the terms of the Note. b. EXECUTED AMENDMENT. Bank shall have received this Second Amendment duly executed and delivered by Borrower. c. RESOLUTIONS AND OTHER CORPORATE DOCUMENTS OF BORROWER. Bank shall have received resolutions of the Board of Directors of Borrower authorizing Borrower to enter into this Second Amendment and such other corporate documents as Bank shall reasonably request. d. FINANCIAL CONDITION. There shall have occurred no material adverse change in the financial condition or prospects of Borrower as shown on the most recent financial statements submitted to Bank or disclosed to Bank, respectively, and relied upon by Bank in entering into this Second Amendment. e. NO DEFAULT. There shall have occurred no Event of Default that remains uncured and is continuing under any of the Loan Documents. f. PAYMENT OF FEES. Bank shall have received reimbursement from Borrower of its costs and expenses incurred (including, without limitation, its attorneys' fees and expenses) in connection with this Second Amendment and the transactions contemplated hereby. g. OTHER DOCUMENTS. Bank shall have received such other documents, information and items from Borrower as it shall reasonably request to effectuate the transactions contemplated hereby. 6. RELEASE AND WAIVER. a. Borrower hereby acknowledges and agrees that: (1) it has no claim or cause of action against Bank or any parent, subsidiary or affiliate of Bank, or any of Bank's officers, directors, employees, attorneys or other representatives or agents (all of which parties other than Bank being, collectively, "Bank's Agents") in connection with the Loan Documents, the loans thereunder or the transactions contemplated therein and herein; (2) it has no offset or defense against any of its respective obligations, indebtedness or contracts in favor of Bank; and (3) it recognizes that Bank has heretofore properly performed and satisfied in a timely manner all of its obligations to and contracts with Borrower. b. Although Bank regards its conduct as proper and does not believe Borrower to have any claim, cause of action, offset or defense against Bank or any of Bank's Agents in connection with the Loan Documents, the loans thereunder or the transactions contemplated therein, Bank wishes and Borrower agrees to eliminate any possibility that any past conditions, acts, omissions, events, circumstances or matters could impair or otherwise affect any rights, interests, contracts or remedies of Bank. Therefore, Borrower unconditionally releases and waives (1) any and all liabilities, indebtedness and obligations, whether known or unknown, of any kind to Bank or of any of Bank's Agents to Borrower, except the obligations remaining to be performed by Bank as expressly stated in the Credit Terms Agreement, the First Amendment, 4 5 this Second Amendment, and the other Loan Documents executed by Bank; (2) any legal, equitable or other obligations or duties, whether known or unknown, of Bank or of any of Bank's Agents to Borrower (and any rights of Borrower against Bank) besides those expressly stated in the Credit Terms Agreement, the First Amendment, this Second Amendment, and the other Loan Documents; (3) any and all claims under any oral or implied agreement, obligation or understanding with Bank or any of Bank's Agents, whether known or unknown, which is different from or in addition to the express terms of the Credit Terms Agreement, the First Amendment, this Second Amendment, or any of the other Loan Documents; and (4) all other claims, causes of action or defenses of any kind whatsoever (if any), whether known or unknown, which Borrower might otherwise have against Bank or any of Bank's Agents, on account of any condition, act, omission, event, contract, liability, obligation, indebtedness, claim, cause of action, defense, circumstance or matter of any kind whatsoever which existed, arose or occurred at any time prior to the execution and delivery of this Second Amendment or which could arise concurrently with the effectiveness of this Second Amendment. c. Borrower agrees that it understands the meaning and effect of Section 1542 of the California Civil Code, which provides: Section 1542. Certain Claims Not Affected by General Release. A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS SECOND AMENDMENT IN FAVOR OF BANK AND BANK'S AGENTS, AND BORROWER HEREBY WAIVES AND RELEASES ALL RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFOREMENTIONED SECTION 1542 OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY) WHICH ANY SUCH LAWS MAY BE APPLICABLE, BORROWER WAIVES AND RELEASES (TO THE MAXIMUM EXTENT PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER THIS SECOND AMENDMENT. 7. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent expressly provided in this Second Amendment, the terms and conditions of the Credit Terms Agreement, the First Amendment and the other Loan Documents shall remain in full force and effect. This Second Amendment and the other Loan Documents constitute and contain the entire agreement of the parties hereto and supersede any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral, respecting the subject matter hereof. The parties hereto further agree that the Loan Documents comprise the 5 6 entire agreement of the parties thereto and supersede any and all prior agreements, negotiations, correspondence, understandings and other communications between the parties thereto, whether written or oral respecting the extension of credit by Bank to Borrower and/or its affiliates. 8. COUNTERPARTS; EFFECTIVENESS. This Second Amendment may be executed in any number of counterparts, each of which when so delivered shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument. Each such agreement shall become effective upon the execution of a counterpart hereof or thereof by each of the parties hereto and telephonic notification that such executed counterparts has been received by Borrower and Bank. IN WITNESS WHEREOF, each of the parties hereto has caused this Second Amendment to be executed and delivered by its duly authorized officer as of the date first written above. BANK BORROWER IMPERIAL BANK EDIFY CORPORATION, a Delaware corporation By: /s/ ERIN L. HANEY By: /s/ STEPHANIE VINELLA ------------------------------- ------------------------------- Erin L. Haney Stephanie Vinella Assistant Vice President Chief Financial Officer 6 7 EXHIBIT A Schedule of Exceptions to Representations and Warranties (List or indicate "NONE") NONE 1 EX-10.12 3 SUBLEASE DATED AUGUST 14, 1995 1 EXHIBIT 10.12 [C&C LOGO] ================================================================================ S U B L E A S E ================================================================================ SUBLESSOR: RATIONAL SOFTWARE CORPORATION, SUBLEASED 2860 San Tomas Expressway A CALIFORNIA CORPORATION PREMISES: 34,964 square foot portion of that 47,432 square foot premises SUBLESSEE: EDIFY CORPORATION, DATE: May 22, 1998 A CALIFORNIA CORPORATION 1. PARTIES: This Sublease is made and entered into as of May 22, 1998, by and between Rational Software Corporation ("Sublessor"), and Edify Corporation ("Sublessee"), under the Master Lease dated September 7, 1993 between San Tomas No. 1 Limited Partnership as "Lessor" and Sublessor under this Sublease as "Lessee." A copy of the Master Lease is attached hereto as Attachment 1 and incorporated herein by this reference. 2. PROVISIONS CONSTITUTING SUBLEASE: This Sublease is subject to all of the terms and conditions of the Master Lease. Sublessee hereby assumes and agrees to perform all of the obligations of "Lessee" under the Master Lease to the extent said obligations apply to the Subleased Premises and Sublessee's use of the Common Areas, except as specifically set forth herein. The following sections of the Master Lease are specifically excepted from inclusion in this Sublease: Sections 2, 3, 4 and 12. Sublessor hereby agrees to cause Lessor under the Master Lease to perform all of the obligations of Lessor thereunder to the extent said obligations apply to the Subleased Premises and Sublessee's use of the Common Areas. Sublessee shall not commit or permit to be committed on the Subleased Premises or on any other portion of the Project any act or omission which violates any term or condition of the Master Lease. Except to the extent waived or consented to in writing by the other party or parties hereto who are affected thereby, neither of the parties hereto will, by renegotiation of the Master Lease, assignment, subletting, default or any other voluntary action, avoid or seek to avoid the observance or performance of the terms to be observed or performed hereunder by such party, but will at all times in good faith assist in carrying out all the terms of this Sublease and in taking all such action as may be necessary or appropriate to protect the rights of the other party or parties hereto who are affected thereby against impairment. Nothing contained in this Section 2 or elsewhere in this Sublease shall prevent or prohibit Sublessor (a) from exercising its right to terminate the Master Lease pursuant to the terms thereof or (b) from assigning its interest in this Sublease or subletting the Premises to any other third party. Notwithstanding Sections 9, 16(p) and 49 of the Master Lease, Sublessee shall only be liable for "Hazardous Materials" (as defined in the Master Lease) which are placed on the Subleased Premises by Sublessee. rev 7/95 Page 1 of 5 2 [C&C LOGO] ================================================================================ S U B L E A S E ================================================================================ 3. Subleased Premises and Rent: 3.1 Subleased Premises: Sublessor leases to Sublessee and Sublessee leases from Sublessor the Subleased Premises upon all of the terms, covenants and conditions contained in this Sublease. The Subleased Premises consist of 34,964 plus or minus square feet, measured by Master Lessor, located at 2860 San Tomas Expressway. 3.2 Rent: Sublessee shall pay to Sublessor as Rent for the Subleased Premises the sum of Sixty One Thousand One Hundred Eighty Seven and No/100 Dollars ($61,187.00) per month, without deductions, offset, prior notice or demand. Rent shall be payable by Sublessee to Sublessor in consecutive monthly installments on or before the first day of each calendar month during the Sublease Term. If the Sublease commencement date or the termination date of the Sublease occurs on a date other than the first day or the last day, respectively, of a calendar month, then the Rent for such partial month shall be prorated and the prorated Rent shall be payable on the Sublease commencement date or on the first day of the calendar month in which the Sublease termination date occurs, respectively. The base rent provided for herein shall be adjusted upward as provided for in paragraph 6 herein. 3.3 Security Deposit: In addition to the Rent specified above, Sublessee shall pay to Sublessor an equivalent of one month's rent as a non-interest bearing Security Deposit. In the event Sublessee has performed all of the terms and conditions of this Sublease during the term hereof, Sublessor shall return to Sublessee, within thirty (30) days after Sublessee has vacated the Subleased Premises, the Security Deposit less any sums due and owing to Sublessor. 4. Rights of Access and Use: Use: Sublessee shall use the Subleased Premises only for those purposes permitted in the Master Lease, unless Sublessor and Master Lessor consent in writing to other uses prior to the commencement thereof. Sublessor shall have use of the restrooms and showers, and Sublessee shall provide access to the restroom area 24 hours per day. Sublessee is responsible for securing its space on the first floor. 5. Sublease Term: The Sublease Term shall be for the period commencing on June 15, 1998, and continuing through January 31, 2001. In no event shall the Sublease Term extend beyond the Term of the Master Lease. 6. Rent Increases: The base rent shall be increased on the following schedule commencing June 1, 1999, $62,935.20 per month. Commencing June 1, 2000, $64,683.40 per month. These rents are subject to adjustment based on the terms of paragraph 2 herein. rev 7/95 Page 2 of 5 3 [C&C LOGO] ================================================================================ S U B L E A S E ================================================================================ 7. EXPANSION RIGHTS: Sublessee shall have ten (10) business days to commit to any additional space Sublessor makes available in the building. Sublessor shall be free to deal with third parties if there is no firm commitment in the time period provided. 8. EXTENSION RIGHTS: In the event Sublessor elects not to exercise its option to extend the Master Lease, Sublessor shall assign its rights to extend to Sublessee provided Sublessee is not in default under its Sublease. Sublessor shall notify Sublessee in writing at least seven (7) months before the expiration of the "Initial Term" (as defined in the Master Lease) whether or not Sublessor will exercise its right to extend the Master Lease. If Sublessor states that it will extend the Master Lease it shall be obligated to exercise its extension right. 9. FURNITURE, FIXTURES AND EQUIPMENT: Within thirty (30) days of sublease commencement, Sublessor and Sublessee will agree to an itemized inventory list of furniture, fixtures and equipment owned by Sublessor. Said inventory shall remain in premises for use by Sublessee during the term of the sublease. Said items shall be returned to Sublessor in good order and repair, normal wear and tear excepted, at the end of the sublease term. 10. UTILITIES: Sublessee shall be responsible for 100% of the utilities billed to the building as long as Rational's use of their premises is primarily a warehouse use. All other triple net and common area expenses will be shared pro rata to rentable square feet of the parties. The parties shall be entitled to equal, nonexclusive use of the "Common Area" (as defined in the Master Lease and outlined on Exhibit A). Said "Common Area" shall be maintained by Sublessee. 11. NOTICES: All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be given in the manner provided in the Master Lease, at the addresses shown on the signature page hereof. Sublessor shall notify Sublessee of any Event of Default under the Master Lease, or of any other event of which Sublessor has actual knowledge which will impair Sublessee's ability to conduct its normal business at the Subleased Premises, as soon as reasonably practicable following Sublessor's receipt of notice from the Lessor of an Event of Default or actual knowledge of such impairment. If Sublessor elects to terminate the Master Lease, Sublessor shall so notify Sublessee by giving at least 30 days notice prior to the effective date of such termination. 12. BROKER FEE: Upon execution of the Sublease, Sublessor shall pay Cornish & Carey Commercial, a licensed real estate broker, fees set forth in a separate agreement between Sublessor and Broker. Cornish & Carey Commercial will split the commission with Wayne Mascia Associates per a separate agreement. rev 7/95 Page 3 of 5 4 [C&C LOGO] ================================================================================ S U B L E A S E ================================================================================ 13. SURRENDER AT END OF TERM: Sublessee agrees to surrender the Subleased Premises on expiration or earlier termination of the term hereof, in good condition and repair, reasonable wear and tear excepted. SUBLESSOR: RATIONAL SOFTWARE CORPORATION, A CALIFORNIA CORPORATION By: /s/ [SIG] Date: 5/21/98 ------------------------------- ----------------------- SUBLEASE: EDIFY CORPORATION, A CALIFORNIA CORPORATION By: /s/ WARREN JAQUES Date: 5/22/98 ------------------------------- ----------------------- NOTICE TO SUBLESSOR AND SUBLESSEE: CORNISH & CAREY COMMERCIAL, IS NOT AUTHORIZED TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE OR ANY DISCUSSIONS BETWEEN CORNISH & CAREY AND SUBLESSOR AND SUBLESSEE SHALL BE DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY CORNISH & CAREY COMMERCIAL, OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE TRANSACTION CONTEMPLATED BY THIS PROPOSAL. Exhibit A1 and A2: Floorplans Attachment I Master Lease Attachment II Furniture, Fixtures, and Equipment List (Owned by Rational) rev 7/95 Page 4 of 5 5 [C&C LOGO] ================================================================================ S U B L E A S E ================================================================================ LESSOR CONSENT The undersigned, Lessor under the Master Lease attached as Attachment I, hereby consents to the subletting of the Subleased Premises described herein on the terms and conditions contained in this Sublease. This Consent shall apply only to this Sublease and shall not be deemed to be a consent to any other Sublease. LESSOR: SAN TOMAS #1 LIMITED PARTNERSHIP By: Date: ------------------------------- ----------------------- ATTORNMENT AGREEMENT Sublessee shall attorn to Lessor and perform all of Sublessee's obligations under the Sublease directly to Lessor as if Lessor were the sublessor under the Sublease. If Sublessee is not, at the time of the notice, in default, Lessor shall continue to recognize the estate of Sublessee created under the Sublease. If Sublessee is not in default, the Sublease shall continue with the same force and effect as if Lessor and Sublessor had entered into a lease on the same provisions as those contained in the Sublease, including, without limitation, the Sublessee's right to extend the term of the Lease. SUBLESSEE: EDIFY CORPORATION By: /s/ WARREN JAQUES Date: 5/22/98 ------------------------------- ----------------------- rev 7/95 Page 5 of 5 EX-10.13 4 FIRST AMENDMENT TO LEASE AGREEMENT 1 EXHIBIT 10.13 AMENDMENT NO. 1 TO THE LEASE AGREEMENT BETWEEN TOP I PROPERTY HOLDINGS, L.P., AS LESSOR AND EDIFY CORPORATION, INC., AS LESSEE WHEREAS Lessor and Lessee entered into a certain Lease Agreement dated August 26, 1996 (hereinafter referred to as the "Lease"), whereas Lessor leased to Lessee space consisting of 4,233 square feet known as Suite 310 (hereinafter referred to as the "Original Premises") in the building known as Office Alpha, 13140 Coit Rd., Dallas, Texas 75240 (hereinafter referred to as the "Building") and; WHEREAS, TOP I Property Holdings, L.P., a Delaware limited partnership has substantially succeeded the interest of CleveTrust Realty Investors, and as hereinafter referred, the term Lessor shall mean TOP I Property Holdings, L.P., a Delaware Limited Partnership; and WHEREAS, Lessor and Lessee desire to amend the Lease to increase the Premises by 1,691 square feet as follows (hereinafter referred to as the "Expansion Space") known as Suite 309; NOW THEREFORE in consideration of the mutual benefits to accrue to each of the Parties, it is hereto agreed as follows; 1. Effective October 1, 1998 the term "Premises" shall be revised to show a total of 5,924 square feet. 2. Effective the earlier of October 1, 1998 or the date Tenant occupies the Expansion Space the Base Rental as detailed in paragraph 2.1 and the Addendum of the Lease is hereby modified as follows:
Period Period Base Rent Monthly Installment 10-1-98/9-30-99 80,612 $6,717.67 10-1-99/9-30-00 82,724 $6,893.67
3. Tenant's security deposit shall be increased from $4,374 to $6,893.67 and $2,519.67 shall be due and payable upon execution of this Amendment. 4. The Work Letter and Exhibit D of the Lease have been completed and are therefore null and void. The attached Exhibit "B", "B-1" and "B-2" details the Allowance provided by Lessor for the refurbishment to the Expansion Space. 5. Paragraph 4 of the Addendum to the lease, Parking is hereby amended to show a total of three (3) covered parking spaces at no cost and fifteen (15) surface spaces at no cost. Except as herein expressly changed or amended, all the terms, conditions, and covenants of the Lease shall remain in full force and effect. Witness the signatures of the Parties this the 27th day of August, 1998. TENANT: Lessor: Edify Corporation TOP I Property Holdings, L.P., a Delaware limited partnership By: /s/ WARREN JAQUES By: Transwestern Investment Company, L.L.C., -------------------------- as agent Name: Warren Jaques Title: Corp Services By: /s/ DIRK DEGANAARS ---------------------------------- Name: Dirk Deganaars Title: Vice President Page 1 2 EXHIBIT "A" PREMISES/EXPANSION SPACE [MAP OF PREMISES] 3 EXHIBIT "B" WORK LETTER AGREEMENT This Work Letter Agreement supplements and is hereby incorporated in that certain lease (hereinafter referred to as the "Lease") dated and executed concurrently herewith by and between TOP I Property Holdings, L.P., (hereinafter referred to as "Lessor") and Edify Corporation, (hereinafter referred to as "Lessee") with the terms defined in the Lease to have the same definition where used herein. 1. The Premises are leased to Lessee in their "AS IS" condition and this Work Letter Agreement is intended to set forth the obligations of Lessor and Lessee with respect to the preparation of the Premises for Lessee's occupancy. All improvements described in this Work Letter Agreement to be constructed in and upon the Premises are hereinafter referred to as the "Lessee Improvements." It is agreed that construction of the Lessee Improvements will be completed in accordance with the procedures set forth in this Work Letter Agreement. 2. Lessee shall devote such time in consultation with Lessor or Lessor's agent as may be required to provide all necessary information to Lessor or Lessor's agent as Lessor deems necessary in order to enable Lessor to complete, and obtain Lessee's written approval of, the final layout, drawings, and plans for the Premises. If Lessee fails to furnish any such information, or fails to approve layout, drawings, or plans within five (5) Business Days after written request, Lessor may, at its election, be discharged of its obligations under this Work Letter Agreement, but the same shall not affect or diminish Lessee's duties and obligations set forth in the Lease, and Lessee agrees to pay on demand all costs and expenses and increased unit prices incurred by Lessor on account of Lessee's failure to furnish such information and approved drawings within such prescribed times. All of Lessee's plans and specifications shall be subject to Lessor's consent, the granting or denial of which shall be in Lessor's sole discretion. 3. Space planning and construction drawings, and when deemed necessary by Lessor, engineering drawings, shall be prepared by Lessor's architect. Lessor shall bear the cost of the initial space planning drawings, to include one revision, which shall be prepared by Lessor's architect. Unless otherwise provided in Exhibit "D-2", Lessee shall pay for additional space planning services beyond those specified above, for Lessor's standard construction and engineering drawings covering Lessor's Building Standard materials as defined in Exhibit "D-1", and for any nonstandard construction and engineering drawings, or any additional costs for drawings occasioned by special installation other than Building Standard. Lessee may pay for such services out of the Allowance, if any, provided in Exhibit "D-2". Lessee shall furthermore be responsible for the design, function and maintenance of all special improvements, whether installed by Lessor at Lessee's request or installed by Lessee with Lessor's prior written approval. Lessee shall use the Building Standard materials unless other materials are expressly approved in writing by Lessor. 4. Prior to commencing any construction of Lessee Improvements, Lessor shall submit to Lessee a written estimate setting forth the anticipated cost of the Lessee Improvements (excluding any costs which may be specified herein or in Exhibit "D-2" as being borne by Lessor), including but not limited to labor and materials, contractor's fees (Lessor's construction management fees), permit fees, and space planning, construction, and engineering drawing costs which are the responsibility of Lessee. Within five (5) Business Days Lessee shall either notify Lessor in writing of its approval of the cost estimate, or specify its objections thereto and desired changes to the proposed Lessee Improvements. In the event Lessee notifies Lessor of such objections and desired changes, Lessee shall work with Lessor to reach acceptable plans and cost estimate; provided, however, if Lessee fails to give written approval of a cost estimate within ten (10) Business Days following delivery to Lessee of the original cost estimate, Lessee shall be chargeable with one day of Delay for each day thereafter until Lessee provides to Lessor in writing its approval of a cost estimate. 5. In the event Lessor's estimate and/or the actual cost of construction shall exceed the Allowance, (as defined in Exhibit "D-2" attached hereto), if any (such amounts exceeding the Allowance being herein referred to as the "Excess Costs"), Lessee shall pay to Lessor such Excess Costs as follows: (a) Lessee shall deliver to Lessor, with its approval of the Lessor's estimate, and in any event prior to commencement of construction, an amount equal to fifty percent (50%) of the Excess Costs as then estimated by Lessor. (b) After substantial completion of the Lessee Improvements, but prior to occupancy of the Premises by Lessee, Lessee shall pay to Lessor on demand an amount which when added to the initial payment described in subparagraph (a) above equals ninety percent (90%) of the Excess Costs as then estimated by Lessor. (c) As soon as the final accounting can be prepared and submitted to Lessee, Lessee shall pay on demand to Lessor the entire balance of the Excess Costs based upon the actual cost of construction. The statements of costs submitted to Lessor by Lessor's contractors shall be conclusive for purposes of determining the actual cost of the items described therein. The amounts payable hereunder constitute other rent payable pursuant to the Lease, and the failure to timely pay same constitutes an event of default under the Lease. Page 3 4 6. If Lessee shall request any change, addition or alteration in the working drawings, after approval by Lessor and Lessee, Lessor shall have such working drawings prepared, and Lessee shall promptly reimburse Lessor for the cost thereof. Promptly upon completion of the revisions, Lessor shall notify Lessee in writing of the cost which will be chargeable to Lessee by reason of such change, addition or deletion. Lessee shall, within three (3) Business Days, notify Lessor in writing whether it desires to proceed with such change, addition or deletion. In the absence of such written authorization, Lessor shall have the option to continue work on the Premises disregarding the requested change, addition or alteration, or Lessor may elect to discontinue work on the Premises, in which event Lessee shall be chargeable with a Delay in completion of the Premises resulting therefrom in accordance with Paragraph 3(a) of the Lease. In the event such revisions result in a higher estimate of the cost of construction, Lessee shall pay to Lessor an amount sufficient to provide Lessor with the above described fifty percent (50%) (or if applicable ninety percent (90%)) payment toward Excess Costs. 7. Following approval of the plans and the payment by Lessee of the required portion of the Excess Costs, if any, Lessor shall cause the Lessee Improvements to be constructed in accordance with the approved plans. Unless otherwise specifically provided in the approved plans, all material used in the construction of the Lessee's Improvements shall be of such quality as determined by the Lessor's architect. Lessor shall notify Lessee of substantial completion of the Lessee Improvements. Page 4 5 EXHIBIT "B-1" 1. The Building Standard (herein so called) materials are the following: A. FLOORING: Grade and quality of carpeting to be selected by Lessor, with color to be selected by Lessee from those offered by Lessor. B. WINDOW COVERING: At Lessor's option, miniblinds or drapes in Lessor's uniform color. C. CEILING: Acoustical tiles - Grid system. D. PARTITIONS: Sheetrock partitions with tape, bed, texture and paint finish, and/or vinyl pre-clad sheetrock. E. DOORS: Solid core door with metal frame and hardware. F. ELECTRICAL POWER: Standard 110 volt duplex wall-OUTLETS; mounted convenience outlets. G. LIGHT SWITCHES: Single pole light switches. H. TELEPHONE FACILITIES: Standard unwired telephone outlets (ring and string) mounted on partitions. Lessee must make timely arrangements for telephone installation and is responsible for all charges related to such installation. I. LIGHT FIXTURES: Recessed fluorescent lighting fixtures.
Page 5 6 EXHIBIT "B-2" Lessor agrees to provide Lessee an allowance (the "Allowance") of $3.00 per square foot of Rentable Area in the Premises (which for purposes hereof is agreed to be 1,691 square feet), being the total sum of $5,073.00 toward the cost of the Lessee Improvements. Lessee shall not be entitled to any credit for any amount not applied to the cost of the Lessee Improvements. In the event the Allowance shall not sufficient to complete the improvements contemplated by the approved plans, Lessee shall pay the Excess Costs as prescribed in Exhibit "D". Page 6 EX-10.14 5 LEASE AGREEMENT DATED AUGUST 26, 1996 1 EXHIBIT 10.14 OFFICE LEASE AGREEMENT OFFICE ALPHA-DALLAS, TEXAS THIS AGREEMENT OF LEASE made at Dallas County, this 26th day of August 1996, by and between CLEVE TRUST REALTY INVESTORS, a Massachusetts business trust, (hereafter the "LESSOR") and EDIFY CORPORATION (hereafter the "LESSEE"). AGREEMENT: ARTICLE 1 - PREMISES AND TERMS In consideration of the rents, covenants and agreement herein contained, the LESSOR hereby lets and leases unto the LESSEE, Suite 310, containing approximately 4,233 square feet of rentable area, hereinafter referred to as PREMISES being more particularly described herein by the attached Exhibit "A", in the building known as OFFICE ALPHA, hereinafter referred to as BUILDING, located at 13140 Coit Road, in the City of Dallas, for a term of four (4) years and zero (0) months, beginning on the first day of October, 1996 and ending on the last day of September, 2000, unless sooner terminated as hereinafter provided. ARTICLE 2 - ANNUAL BASE RENT Section 2.1 The LESSEE covenants and agrees to pay to the LESSOR as Annual Base Rent for said PREMISES, without demand or notice, the sum of SEE ADDENDUM Dollars ($ SEE ADDENDUM) per year throughout the term of this LEASE in equal monthly installments of SEE ADDENDUM Dollars ($ SEE ADDENDUM), without deduction or set-off, payable in legal tender of the United States of America in advance on the first day of each and every calendar month during the said term, at 2001 Crocker Road, Suite 400, Westlake, Ohio, 44145, or such other place as the LESSOR may designate in writing. The amount of such Annual Base Rent shall be subject to adjustment from time to time in accordance with ARTICLE 5 hereinafter. LESSEE agrees to pay a "late charge" equal to five percent (5%) of the monthly rental installment as herein provided when any installment of rental is paid more than ten (10) days after the due date thereof. It is hereby understood that this charge is for extra expenses incurred by the LESSOR and shall not be considered interest. ARTICLE 3 - SECURITY DEPOSIT The LESSEE agrees to deposit with LESSOR upon the execution of this LEASE the sum Four Thousand Three Hundred Seventy Four and no/100 Dollars ($4,374.00) to be held without interest to secure the faithful performance of all the ARTICLES and Sections of this LEASE, and if the same has been faithfully performed, said deposit shall be refunded at the expiration of this LEASE, otherwise such deposit shall be retained by the LESSOR and applied against all damages suffered by LESSOR, and the balance, if any, shall be returned to LESSEE. ARTICLE 4 - USE The PREMISES are to be occupied and used only for the following purpose: general office, and for no other purpose. LESSEE shall not occupy or use the PREMISES for any unlawful purpose or any purpose which would violate the BUILDING'S Certificate of Occupancy, violate any provision of this LEASE, or impair the appearance, character, or reputation of the BUILDING, or BUILDING's services. LESSEE shall not use any portion of the PREMISES for preparation or serving of food or beverage. Further, LESSEE shall fully comply with the terms and conditions of any permit or license required of the LESSEE by law or ordinance. ARTICLE 5 - RENTAL ADJUSTMENT LESSEE shall pay, as monthly rent hereunder, in addition to the Annual Base Rent provided in ARTICLE 2 hereof, the sums provided in the "rent escalation rider" attached hereto as Exhibit "B" and incorporated herein by this reference. LESSEE shall be advised of any change, from time to time, in rent escalation payments required hereunder by written notice from LESSOR, which shall include information in such detail as LESSOR may reasonably determine to be necessary in support of such change. LESSEE shall have 30 days after the receipt of any such notice to protest in writing the change indicated therein; but notwithstanding any such protest, all rent escalation payments falling due after service of such notice shall be made in accordance with such notice until the protest has been resolved, whereupon any necessary adjustment shall be made between LESSOR and LESSEE. ARTICLE 6 - CONSTRUCTION OF PREMISES Section 6.1 - LESSEE'S FLOOR PLAN. The LESSOR agrees that the PREMISES shall be constructed substantially in accordance with the LESSEE's Floor Plan, as noted within Exhibit "A". Section 6.2 - WORK LETTER. The LESSOR agrees that the materials used in the construction of the PREMISES shall be substantially in accordance with the Work Letter set forth in Exhibit "C", attached hereto and made a part of this LEASE. Should the LESSEE request additional work involving labor and/or materials or other changes in variance with the Work Letter for the PREMISES, they shall be set forth in Exhibit "D", entitled Special Specifications, attached hereto and made a part of this LEASE. The LESSOR shall prepare an estimate of the cost of the Special Specifications and the LESSEE shall give written approval within five (5) days of receipt thereof. The LESSOR shall bill LESSEE for all such work, and the LESSEE shall pay LESSOR fifty percent (50%) of the cost of the Special Specifications at the time of commencement of work, and the balance the time of completion of the work, upon receipt of a statement therefore. 1 2 Section 6.3 - DELAYS. Any delay in the construction of PREMISES resulting from LESSEE's acts or omissions, which result in an increase in the costs of performing such work, shall be charged to and paid by the LESSEE. ARTICLE 7 - POSSESSION Section 7.1 - DELAY IN POSSESSION. If LESSOR shall be unable to deliver possession of said PREMISES on the date of the commencement of the term hereby created because of the holding over of any tenant, or tenants, or for any other cause beyond LESSOR's reasonable control, then the rent reserved shall not commence until the date possession of said PREMISES is available to LESSEE, and LESSEE agrees to accept such allowance and abatement of rent as liquidated damages, in full satisfaction for the failure of LESSOR so to deliver possession on said date of commencement, and to the exclusion of all claims and rights which LESSEE might otherwise have by reason of delivery of possession not being made on said date; and no failure so to deliver possession on said date shall in any event extend, or be deemed to extend, the term of this LEASE. Unfinished extra work, if any, undertaken by LESSOR for LESSEE shall not be considered in determining the date when possession is available to LESSEE. Section 7.2 - SUBSTANTIAL COMPLETION. If LESSOR is unable to give possession of the PREMISES to LESSEE on the date for the commencement of the term hereof by reason of the fact that LESSOR has not substantially completed any space preparation work in said PREMISES pursuant to LESSOR's "Work Letter" signed on behalf of LESSOR AND LESSEE (which said "Work Letter" is made a part hereof by reference), and if the delay in completion of such work has not been caused by LESSEE's failure to submit its plans and specifications to LESSOR on or before the time called for in said Work Letter, or caused by other act or failure to act by LESSEE, then the term of this LEASE shall commence on the date of certification by LESSOR's AGENT that such work has been substantially completed. If such date shall be other than the first day of a calendar month, the rent for such month shall be prorated on a per diem basis. No failure to deliver possession on the scheduled date for the commencement of the term shall extend, or be deemed to extend the term of this LEASE. Notwithstanding anything contained herein to the contrary, Lessor shall use all reasonable good faith efforts to substantially complete the space preparation work within sixty (60) days from the commencement of such work. In the event the space preparation work is not substantially completed, save and except for "punchlist" items, within the sixty (60) day period, Lessee may elect to terminate this Lease and Lessor shall thereafter return to Lessee any sums paid in advance. If this Lease is rescinded and terminated, then neither Lessor or Lessee shall have any claim against the other. Section 7.3 - ACCESS PRIOR TO COMMENCEMENT DATE. In the event the LESSEE shall occupy the PREMISES or portion thereof, with the LESSOR's written consent, prior to the commencement of this LEASE term, all of the ARTICLES and Sections of this LEASE shall be in full force and effect as soon as the LESSEE occupies the PREMISES except the term shall not commence until the date provided in ARTICLE 1, and the monthly rental shall be due and payable by LESSEE on the earlier of the commencement date of this LEASE or the first date of occupancy by LESSEE. Section 7.4 - ACCEPTANCE. The taking of possession of the PREMISES by the LESSEE shall be conclusive evidence of acceptance thereof. ARTICLE 8 - BUILDING SERVICES Section 8.1. Provided LESSEE is not in default under any of the covenants and agreements of this LEASE, LESSOR shall furnish LESSEE the following services: a) cleaning, janitor and window washing services standard for the BUILDING (LESSEE shall not engage or provide cleaning, janitor, window washing or maintenance services without LESSOR's prior written consent, and if consent is given, such services shall always be subject to supervision by LESSOR, and at LESSEE's sole responsibility and expense); b) heat and air conditioning during business hours as defined in ARTICLE 8.1(g). Should the LESSEE require special heating or air conditioning equipment for restrooms, conference rooms, computer rooms or other areas where the heat release is greater than in normal office space, the additional costs shall be charged to, and paid by, the LESSEE. c) water in reasonable amounts for drinking, lavatory and toilet purposes only; d) passenger and freight elevator service, during business hours; freight elevator service at other times shall be optional with LESSOR and when so provided shall never be deemed a continuing obligation of LESSOR; e) electricity for normal business usage. All additional costs including but not limited to heating and/or air conditioning, resulting from LESSEE's installation of computers or like equipment, shall be paid by LESSEE. LESSEE shall not install any equipment which uses a substantial amount of electricity without the prior express written consent of LESSOR. LESSEE shall ascertain from LESSOR the maximum amount of electrical current which can be safely used in the PREMISES. LESSOR's consent to the installation of electrical current which can be safely used in the PREMISES. LESSOR's consent to the installation of electrical equipment shall not relieve LESSEE from the obligation not to use more electricity than the safe capacity. f) If LESSEE shall request air conditioning service at other than during business hours, LESSOR shall use its best efforts to supply such special service provided that: (i) LESSEE's request therefor shall be received by LESSOR not later than 2:00 p.m. of the day on which any service is requested after hours, or not later than 4:00 p.m. of the day preceding the day on which any service is requested before hours; and 2 3 (ii) LESSEE shall pay to LESSOR as additional rent within ten (10) days after rendering of a statement therefor the cost of such service. g) the term "business hours" as used in this Section shall mean Monday to Friday, inclusive from 8:00 a.m. to 6:00 p.m. but excluding all days observed by the Federal or State governments as legal holidays. LESSOR and LESSEE agree that: (i) LESSEE at all times shall cooperate fully with LESSOR with respect to, and shall observe all regulations which LESSOR may from time to time establish for, the proper functioning, protection and control of LESSOR'S air conditioning and heating equipment; (ii) LESSOR, through LESSOR's agents and employees, at all reasonable times shall have the right to enter said PREMISES and to have free access to said equipment and components thereof located on said PREMISES for the purpose of the repair, maintenance and preservation of the same; (iii) LESSEE will not damage or abuse said equipment nor permit the same to be done; and (iv) neither LESSEE nor LESSEE's agents, employees or invitees shall tamper with, or otherwise in any manner adversely affect, the mechanical or electrical components of said equipment, and any damage to the same caused by the willful or negligent act or acts of LESSEE or LESSEE's agents, employees or invitees shall be paid for by LESSEE promptly upon receipt of a statement of the amount thereof. Section 8.2. LESSOR while not warranting that any of the BUILDING services stipulated in this ARTICLE will be free from interruptions or suspensions caused by repairs, renewals, improvements, alterations, strikes, lockouts, accidents, inability of LESSOR to procure such service, or to obtain fuel or supplies, or for other cause or causes beyond LESSOR's reasonable control, will nevertheless diligently attempt to make such repairs or renewals to BUILDING distribution lines and facilities as may be required to restore any such service so interrupted or suspended. An interruption or suspension of, or fluctuation in, any BUILDING service (resulting from any of said cause or causes) shall never be deemed an eviction or disturbance of LESSEE's use and possession of said PREMISES, or any part thereof, nor render LESSOR liable to LESSEE for damages, nor relieve LESSEE from performance of LESSEE's covenants and agreements hereunder. LESSOR shall also attempt to comply from time to time with all government regulations, proclamations, orders or requests in an effort to conserve energy. ARTICLE 9 - ALTERATIONS LESSEE shall not make any alterations, additions, improvements or other changes in or to said PREMISES or the BUILDING, or attach, affix or build therein any improvement or installation without LESSOR's prior written consent in each and every instance. Before any such work is done or any materials therefore are delivered on said PREMISES or into the BUILDING, LESSEE shall provide LESSOR with plans, specifications, names of contractors, copies of contracts and necessary permits; shall indemnify and hold harmless LESSOR against liens, costs, damages and expenses of all kinds; and shall submit to LESSOR's reasonable supervision of such work. All additions, installations, alterations, fixtures and improvements (temporary or permanent) in and upon said PREMISES, whether installed by LESSEE or LESSOR shall become LESSOR's property, and shall remain upon, and be surrendered with, said PREMISES without disturbance or injury upon the termination of this LEASE by lapse of time or otherwise, all without payment or credit to LESSEE. LESSEE shall have the right to place in said PREMISES, at such locations therein as LESSEE from time to time may determine, LESSEE's furniture, trade fixtures and standard business office machines and equipment, and such personal property shall be and remain the property of LESSEE, and, provided LESSEE is not in default hereunder, may be removed by LESSEE at any time during the LEASE term, upon its expiration, or upon its earlier termination in any manner, LESSEE, however, agreeing to repair at LESSEE's expense any damage to said PREMISES or the BUILDING caused by such removal. ARTICLE 10 - REPAIR OF PREMISES Section 10.1. LESSEE shall take good care of said PREMISES and the fixtures and improvements therein, and will use said PREMISES during the term of the LEASE for the purpose above specified and no other; will not illegally sell or store therein any spirituous, malt or various liquors, or any narcotic drugs; will not exhibit, sell or offer for sale on said PREMISES; will not make or permit any use of said PREMISES which, directly or indirectly, is forbidden by ordinance, statute or government regulation, or by any restrictions of record, or which may increase the premium cost of, or invalidate, any policy of insurance carried on the BUILDING or covering its operation, and will comply with the Rules and Regulations appearing at the end of his LEASE, which Rules and Regulations are made a part hereof by reference. LESSEE shall give immediate notice to LESSOR in case of fire or accident in said PREMISES or of any defects, damage or injury therein or in any fixtures or equipment. Section 10.2. Unless otherwise expressly provided, LESSOR shall not be required to make any improvements, replacements or repairs of any kind or character to the PREMISES during the term of this LEASE except such repairs as are set forth in this section. LESSOR shall maintain only the roof, foundation, Building common areas (including, but not limited to, hallways, lobby areas, stairways and restrooms), parking areas, landscaped areas, exterior glass, and the structural soundness of the exterior walls (excluding all overhead doors, if any) of the BUILDING in good repair and condition except for reasonable wear and tear. LESSEE shall repair and pay for any damage caused by LESSEE's negligence or default. LESSEE shall immediately give written notice to LESSOR of the need for repairs, which repairs shall be made by LESSOR beginning no more than fifteen (15) days after written notice by LESSEE. LESSOR shall not be liable to LESSEE, except as expressly provided in this LEASE, for any repairs, alterations or additions made by LESSOR under this lease. LESSEE shall, at its own cost and expense, 3 4 maintain all other parts of the PREMISES and other improvements on the PREMISES in good repair and condition including all necessary replacements. Section 10.3. All repairs required to be made as a result of LESSEE's misuse or neglect of said PREMISES or of damage to, or defacement of, the BUILDING or any part thereof, by reason of LESSEE's tenancy therein shall be made at LESSEE's expense. Section 10.4. All requests for repairs or maintenance that are the responsibility of LESSOR pursuant to any provision of this LEASE must be made in writing to LESSOR at the address set forth in ARTICLE 2, or LESSOR's Management Office within the BUILDING, if any. ARTICLE 11 -- LESSEE COVENANTS TO COMPLY WITH GOVERNMENT LESSEE, at the LESSEE's own cost and expense, shall comply with all requirements of law and all ordinances, regulations and rules of any Federal, State, Municipal or other public authority affecting the PREMISES, and with all requirements of any insurance underwriter of the LESSOR. Further, LESSEE shall fully comply with the terms and conditions of any permit or license required of LESSEE by law or ordinance. ARTICLE 12 -- LESSEE WASTE LESSEE covenants and agrees not to commit any waste in or upon any portion of the PREMISES during the term of this LEASE. ARTICLE 13 -- LOSS OR DAMAGE TO PROPERTY Section 13.1. All personal property belonging to LESSEE or to any other person located in or about said PREMISES or the BUILDING shall be there at the sole risk of LESSEE or such other person, and neither LESSOR nor LESSOR's agents or employees shall be liable for the theft of misappropriation thereof, nor for any damage or injury thereto, nor for death or injury of LESSEE or any other persons or damage to property caused by water, snow, frost, steam, heat, cold, dampness, falling plaster, explosions, sewers or sewerage, gas, odors, noise, the bursting or leaking of pipes, plumbing, electrical wiring, and equipment and fixtures of all kinds, or by any act or neglect of other tenants or occupants of the BUILDING, or of any other person, or caused in any other manner whatsoever, unless the same shall proximately result from the sole negligence of LESSOR or LESSOR's agents, or employees. LESSEE will protect, indemnify and save harmless LESSOR from all losses, costs or damages sustained by reason of any act or other occurrence or failure to act causing death or injury to any person or damage to property whomsoever or whatsoever due directly or indirectly to the use or occupancy of said PREMISES or any part thereof by LESSEE, LESSEE's guests, invitees or agents, or due directly or indirectly to any breach or default on the part of the LESSEE in the performance of any covenant or agreement on the part of LESSEE to be performed, except losses, costs or damage proximately resulting from the sole negligence of LESSOR or LESSOR's agents or employees. LESSEE covenants, upon notice from LESSOR, to resist or defend, at LESSEE's expense, such action or proceeding by counsel reasonably satisfactory to LESSOR. Section 13.2. If, because of any act or omission of LESSEE or anyone claiming by, through, or under LESSEE, any mechanic's lien or order for the payment of money shall be filed against the demised PREMISES or the BUILDING, or against LESSEE (whether or not such lien or order is valid or enforceable as such). LESSEE shall, at LESSEE's own cost and expense, cause the same to be canceled and discharged of record within fifteen (15) days after the date of filing thereof and shall also indemnify and save harmless LESSOR from and against any and all costs, expenses, claims, losses or damages, including reasonable counsel fees, resulting therefrom or by reason thereof. ARTICLE 14 -- SURRENDER AT END OF TERM Section 14.1. SURRENDER AND REMOVAL. LESSEE shall not allow any damage to be committed on any portion of the PREMISES, and on or before the termination date of this LEASE, the LESSEE shall surrender the PREMISES in as good condition as when the LESSEE took possession, ordinary wear and tear, and loss by fire, other than fire caused by the negligence or omission of the LESSEE or its employees, agents or invitees, excepted (unless the waiver contained in ARTICLE 18 is effective). The LESSEE shall remove from the PREMISES all of its Movable Fixtures and make necessary repairs at its own cost and expense. The cost and expense of any repairs necessary to restore the condition of the PREMISES shall be borne by LESSEE, and if LESSOR undertakes to restore the PREMISES, it shall remain with the LESSOR and title to all Movable Fixtures shall at all times remain with the LESSEE, except that any Movable Fixtures remaining in the PREMISES after the end of the LEASE term or earlier termination as hereinafter provided, may at the LESSOR's option, be deemed abandoned and may either be retained by the LESSOR as his property or disposed of in such a manner as the LESSOR may deem fit. The LESSEE's obligations under this Section shall survive the end of the LEASE term. Section 14.2. MOVABLE FIXTURES. Movable Fixtures shall mean LESSEE's trade fixtures and other personal property which were (a) furnished and installed at the sole expense of the LESSEE, (b) not covered by any credit or allowance granted by LESSOR to the LESSEE and (c) not affixed to the PREMISES. Section 14.3. BUILDING IMPROVEMENTS. BUILDING improvements shall mean all fixtures, equipment, improvements, alterations, installations and appurtenances whether furnished by or at the expense of the LESSOR or the LESSEE, which are affixed to or built into the PREMISES (including without limitation thereof all electric, plumbing, heating and cooling equipment, elevator, fixtures and outlets, partitions, doors, stairs, paneling, molding, shelving, cork, vinyl composition tile, carpeting) excluding, however, any Movable Fixtures. ARTICLE 15 -- HOLD OVER 4 5 Should the LESSEE remain in possession of said PREMISES after the expiration of this LEASE, with or without the consent of the LESSOR, then, unless a new agreement in writing shall have been entered into between the parties hereto, the LESSEE shall be a LESSEE from month-to-month, subject to all the covenants and conditions of this LEASE, except that the rent shall be at 150% of the monthly rent provided, however, that such tenancy may be terminated by either party effective any day during such tenancy, by either party given written notice at least thirty (30) days prior to such effective date. Notwithstanding the foregoing, if the PREMISES are not surrendered at the end of the LEASE term, the LESSEE shall indemnify and hold harmless the LESSOR against and from any loss or liability resulting therefrom, including any claims made by any succeeding LESSEE founded upon such delay. ARTICLE 16 - HEAVY EQUIPMENT The LESSEE shall not move any safe, heavy equipment, freight, bulky matter or bulky fixtures into or out of the BUILDING, without the LESSOR's prior consent which shall not be unreasonably withheld. ARTICLE 17 - ASSIGNMENT, SUBLETTING, MODIFICATIONS Section 17.1. LESSOR's NECESSARY CONSENT. The LESSEE covenants (a) not to assign or convey this LEASE or any interest under it; (b) not to allow any transfer hereof or any lien upon the LESSEE's interest by operation of law (c) not to sublet the PREMISES or any part thereof, or (d) not to permit the use or occupancy of the PREMISES or any part thereof by any other than the LESSEE, without, in each instance, obtaining the prior written consent of the LESSOR, any such assignment, sublease or permission without such written consent shall be void and at the option of LESSOR shall terminate this LEASE. Section 17.2. ASSUMPTION AND NO RELEASE OF LIABILITY. Any consent by the LESSOR to any act of assignment, or subletting shall be held to apply only to the specific transaction thereby authorized. Such consent shall not be construed as a waiver of the duty of the LESSEE or the legal representatives or assigns of the LESSEE to obtain from the LESSOR consent to any other or subsequent assignment, or subletting or as modifying or limiting the rights of the LESSOR under the foregoing covenant by the LESSEE. Any violation for any provision of this LEASE, whether by act or omission, by any assignee, sub-tenant or occupant, also shall be deemed a violation of such provision by the LESSEE, it being the intention and meaning of the parties hereto that the LESSEE shall assume and be liable to the LESSOR for any and all acts and omissions of any and all assignees, sub-tenants and occupants. If this LEASE be assigned in accordance with the terms of this LEASE, the LESSOR may, and is hereby empowered to collect rent from the assignee. If the PREMISES or any part thereof be sublet or occupied by any person other than the LESSEE, the LESSOR may, in the event of the LESSEE's default, and is hereby empowered to, collect rent from the sub-tenant or occupant, in any event, the LESSOR may apply the net amount received by LESSOR from such assignee or sub-tenant or occupant to the rent herein reserved, and no such collection shall be deemed a waiver of the covenants herein against assignment and subletting or the acceptance of the assignee, sub-tenant or occupant as LESSEE, or a release of the LESSEE from the further performance of the covenants herein contained on the part of the LESSEE, or a release of the LESSEE from the further performance of the covenants herein contained on the part of the LESSEE. Section 17.3. EFFECT OF MODIFICATIONS. The joint and several liability of the LESSEE and any immediate or remote successor in interest of the LESSEE, shall not be released, discharged or impaired in any respect by any agreement or stipulation made by the LESSOR or any grantee or assignee, by way of mortgage, or otherwise, of the LESSOR, or any such assignees extending the time of or modifying any of the obligations of this LEASE, or any waiver of the LESSOR's failure to enforce any of the obligation of this LEASE, which shall remain in full force and effect and the LESSEE shall continue liable hereunder. Section 17.4. TAKE BACK AND FIRST REFUSAL. If the LESSEE intends to request LESSOR's consent to sublet the PREMISES, or to assign this LEASE, it shall make such request in written form to notify the LESSOR or such intention before offering the same to any party either directly or through any broker. In each such event, the LESSOR may, within fifteen (15) days of LESSEE's notice, elect to cancel this LEASE. ARTICLE 18 - INSURANCE Section 18.1. INCREASED COST OF CASUALTY INSURANCE. The LESSEE shall not do or permit to be done any act or thing upon the PREMISES which will invalidate or be in conflict with the provisions of the fire and extended coverage insurance policies covering the BUILDING or the property therein nor shall the LESSEE do or permit to be done any act or thing which will or might subject the LESSOR to any liability or responsibility for injury to any person or to any property by reason of any business or operation being carried on in the PREMISES. If by reason of the failure of the LESSEE to comply with this section, the rate of such insurance shall at any time be higher than it would otherwise have been, then the LESSEE shall reimburse the lessor, as additional rent, for that part of all premiums paid by the LESSOR which shall have been charged because of such failure or use by the LESSEE. Section 18.2. WAIVER OF SUBROGATION. The LESSOR and the LESSEE hereby release each other from any and all liability or responsibility to the other, or anyone claiming through or under them by way of subrogation or otherwise, for any loss or damage to property caused by fire or other casualty included in extended coverage, even if such fire or casualty shall have been caused by negligence of the other party, or anyone for whom such party may be responsible; provided, however, that his release shall apply only with respect to such loss or damage occurring during the time that the releasor's insurance shall contain a provision that such release shall not impair such coverage or prejudice the right of the releasor to recover thereunder. The LESSOR and the LESSEE each agree that each of their respective policies will include a waiver of subrogation provision so long as the same shall be obtainable without extra cost, or, if extra cost shall be charged therefor, provided the other party shall pay such extra cost. If extra cost shall be chargeable therefor, each party, at its election, may pay the same, but shall not be obligated to do so. Section 18.3. LESSEE'S INSURANCE REQUIREMENTS. LESSEE shall carry, at its own expense during the term hereof, 5 6 public liability and property damage insurance with a combined single limit of $1,000,000.00 (or such higher amounts as LESSOR may hereafter reasonably require) covering injuries to persons or property in or about the PREMISES. Said insurance shall be written by A-XII rated companies satisfactory to LESSOR and LESSEE shall provide LESSOR with satisfactory evidence, if requested, of such insurance, and LESSEE shall obtain from its insurance carrier a waiver of subrogation against LESSOR. In the event LESSEE fails to obtain any insurance as provided in this LEASE, LESSOR may obtain any such insurance, and the cost thereof shall be paid by LESSEE as additional rent with the first payment of the rent which is due subsequent to LESSOR'S incurring such cost, and LESSOR shall have all remedies to collect the same as rent as in the LEASE provided, and/or as otherwise provided by law for the collection of rent. Such policy shall name LESSOR and others as may be designated by LESSOR as additional insured. ARTICLE 19 - ESTOPPEL CERTIFICATE LESSEE shall at any time and from time to time upon not less than ten (10) days prior written notice from LESSOR execute, acknowledge and deliver to LESSOR a statement in writing (i) certifying that this LEASE is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this LEASE, as so modified, is in full force and effect) and the dates to which the rental and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to LESSEE'S knowledge, any uncured defaults on the part of LESSOR hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the PREMISES are a part. LESSEE'S failure to deliver such statement within such time shall be conclusive upon LESSEE (i) that this LEASE is in full force and effect, without modification except as may be represented by LESSOR, (ii) that there are no uncured defaults in LESSOR'S performance, and (iii) that not more than one month's rental has been paid in advance. ARTICLE 20 - UNTENABILITY If said PREMISES shall be partially damaged by fire or other casualty, the damage to said PREMISES shall be repaired by and at the expense of LESSOR and the rent until such repairs shall be made shall be abated on a per diem basis proportionate to the extent and for the period that said PREMISES are unfit for occupancy. LESSOR shall incur no liability on account of any delay in the completion of such repairs which may arise by reason of adjustment of insurance, labor difficulties or any other cause beyond LESSOR'S control. If all or substantially all of said PREMISES or the BUILDING are made unfit for occupancy by fire or other casualty, acts of God or other cause, LESSOR may elect (a) to terminate this LEASE as of the date when said PREMISES or the BUILDING are so made unfit for occupancy, by written notice to LESSEE within 90 days after the date, or (b) to repair, restore or rehabilitate said PREMISES or the BUILDING at LESSOR'S expense within 180 days after LESSOR is enabled to take possession of the damaged PREMISES and undertake reconstruction or repairs; and if LESSOR elects so to repair, restore or rehabilitate said PREMISES or the BUILDING, this LEASE shall not terminate, but rent shall be abated on a per diem basis proportionate to the extent and for the period that said PREMISES are unfit for occupancy. In the event LESSOR shall proceed under (b) above and shall not substantially complete the work within said 180 day period (excluding from said period loss of time resulting from delays beyond the reasonable control of LESSOR) either LESSOR or LESSEE may then terminate this LEASE, as of the date when said PREMISES or the BUILDING were so made unfit for occupancy, by written notice to the other not later than 10 days after the expiration of said 180 day period, computed as herein provided. Except as expressly provided in this ARTICLE, LESSEE shall not have any rights to terminate this LEASE on account of any damage or destruction to said PREMISES. In the event of termination of this LEASE pursuant to this ARTICLE, rent shall be apportioned on a per diem basis to and including the effective date of such termination. ARTICLE 21 - RESERVED RIGHTS Section 21.1 - CHANGES BY LESSOR. The LESSOR reserves the right to make any alteration to the BUILDING, the PREMISES, the fixtures and equipment thereof, the street entrances, doors, halls, corridors, passages, elevators, stairways or other facilities which the LESSOR may deem necessary, if reasonable under the circumstances. Section 21.2 - CHANGE IN BUILDING ADDRESS. The LESSOR reserves the right without liability to LESSEE to change the name or street address of the BUILDING or the arrangement or location of entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the BUILDING. Section 21.3 - ENTRY BY LESSOR. The LESSOR reserves the right to enter the PREMISES at any reasonable times by pass key (a) for the making of inspections, repairs, alterations, improvements or additions of or to the PREMISES or the BUILDING as LESSOR may deem necessary or desirable; (b) to exhibit the PREMISES to others; (c) for any purpose whatsoever related to the safety, protection, preservation or improvements of the PREMISES of the BUILDING or of the LESSOR'S interest; (d) in order to provide the services set forth in ARTICLE 8 hereof. Any such entering shall be done with a minimum of interruption to the LESSEE and the conduct of the business or undertakings by the LESSEE in the PREMISES. Section 21.4 - USE OF CONTRACTORS. The LESSOR reserves the right to designate all sources furnishing sign painting, lettering, vending machines, towel or toilet supplies, or other similar services required in said PREMISES. Section 21.5 - SIGNS. LESSEE shall not place or permit to be placed any sign, advertisement, notice or other display on any part of the inside or outside of the PREMISES, except of such color, size and style and in such locations as shall be designated by LESSOR. LESSEE, upon request of LESSOR, shall immediately remove any sign, advertisement, notice or other display which LESSEE has placed or permitted to be placed on any part of the inside or outside of the PREMISES, which, in the opinion of LESSOR, is objectionable, offensive or not in good taste, and if LESSEE shall fail so to do, LESSOR may enter the PREMISES and remove the same at the expense of LESSEE. ARTICLE 22 - ACCESS TO BUILDING 6 7 LESSEE, for LESSEE and for LESSEE'S agents, employees, visitors, licensees, and invitees, agrees that all such persons desiring to enter or leave the BUILDING at other than normal business hours, shall use such entrances or exits as may be designated by LESSOR, and shall comply with BUILDING security regulations established from time to time by LESSOR, so as to establish the right of such persons to enter or to leave the BUILDING. The provisions of this ARTICLE shall not require the LESSOR to keep the BUILDING open other than during normal business hours. ARTICLE 23 - RELOCATION OF PREMISES (This Article is intentionally deleted.) ARTICLE 24 - COMMON AREAS LESSEE and LESSEE'S agents, employees, licensees, and invitees shall have the right to use, in common with LESSOR and LESSOR'S tenants and the agents, employees, licensees and invitees of each, the public sidewalks, entrances, lobbies, vestibules, stairways, corridors, passenger and freight elevators, public toilets and other public areas of the BUILDING subject, however, to applicable BUILDING rules, regulations and security measures; and LESSEE and LESSEE'S agents, employees, licensees and invitees shall not obstruct or litter, or use for storage (temporary or otherwise) or for the display of merchandise or services, or for any purpose other than the intended and normal purpose, any of said public sidewalks, entrances, lobbies, vestibules, stairways, corridors, passenger and freight elevators, public toilets and other public areas of said BUILDING; and no floor mats or runners shall be placed by LESSEE in any BUILDING corridor, lobby or vestibule. Notwithstanding the foregoing, LESSOR shall be free to change, reduce, enlarge or alter any of the Common Areas, all in LESSOR'S sole discretion. ARTICLE 25 - NO WAIVER Section 25.1 - RECEIPT OF FUNDS. No receipt of money by LESSOR from LESSEE with knowledge of the breach of any covenants of the LEASE, or after the termination hereof, or after the service of any notice, or after the commencement of any suit, or after final judgment for possession of said PREMISES shall be deemed a waiver of such breach, nor shall it reinstate, continue or extend the term of this LEASE or affect any such notice, demand or suit. Section 25.2 - DELAYS. No delay on the part of LESSOR in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other, or further, exercise thereof or the exercise or any other right, power or privilege. Section 25.3 - THIRD PARTY ACTS. No act done or thing said by LESSOR or LESSOR'S agents or employees shall constitute a cancellation, termination or modification of this LEASE, or a waiver of any covenant, agreement or condition hereof, nor relieve LESSEE from LESSEE'S obligation to pay the rents reserved or other charges to be paid hereunder. Any waiver or release by LESSOR and any cancellation, termination or modification of this LEASE must be in writing signed by LESSOR. ARTICLE 26 - LESSOR'S REMEDIES Section 26.1 - BANKRUPTCY. This LEASE and term hereby granted is subject to the limitation that if any voluntary or involuntary petition or similar pleading under any Act of Congress relating to bankruptcy shall be filed by or against LESSEE or if any voluntary proceedings in any court or tribunal shall be instituted by or against LESSEE to declare LESSEE insolvent or unable to pay LESSEE'S debts, then and in any such event LESSOR may, if LESSOR so elects, with or without entry or other action by LESSOR, forthwith terminate this LEASE, and, notwithstanding any other provisions of this LEASE, LESSOR shall forthwith upon such termination file for any and all damages pursuant to the Bankruptcy Act. Section 26.2 - DEFAULT CONDITIONS OF LIMITATIONS. If the LESSEE is in default in the payment of rent when due, or within ten (10) days thereafter or fails to pay LESSOR'S charges for water, electrical or other services within ten (10) days after rendition of statement, or is in default of the prompt or full performance of any other provisions of this LEASE after thirty (30) days written notice sent to the LESSEE by the LESSOR, or if the leasehold interest of the LESSEE be levied upon under execution or be attached, or if the LESSEE makes an assignment for the benefit of creditors, or if a receiver be appointed by or for the LESSEE, or if the LESSEE abandons the PREMISES, then and in any such event the LESSOR may, if the LESSOR so elects, with or without notice of such election, except as herein provided, with or without demand, (a) cease to provide any or all services to LESSEE hereunder or (b) forthwith terminate this LEASE and the LESSEE'S right to possession of the PREMISES; provided, however, that if the LESSOR has notified the LESSEE to cure defaults under the thirty day notice as above provided and the curing of such defaults cannot be effected within said thirty day period but has been commenced during said thirty day period, and provided that once begun the LESSEE proceeds without delay beyond his control to complete the necessary work to cure said defaults, then the LESSOR shall not exercise the rights otherwise contained in this Section. Section 26.3 - DAMAGES. If the LESSEE abandons the PREMISES or if the LESSOR elects to terminate the LESSEE'S right to possession only without terminating the LEASE as above provided, the LESSOR may remove from the PREMISES any and all property found therein and such repossession shall not release the LESSEE from LESSEE'S obligation to pay the rent herein reserved in addition to any damages as hereinafter provided. After any such repossession by LESSOR without termination of the LEASE, the LESSOR may, but need not, relet the PREMISES or any part thereof to any person, firm, or corporation and for such time and upon such terms as the LESSOR in the LESSOR'S sole discretion may determine including letting the same for a period after the expiration of this LEASE, and the LESSOR may make repairs, alterations, and additions by and to the PREMISES and redecorate the same to the extent deemed by the LESSOR necessary or desirable, and the LESSEE, upon demand in writing, shall pay the cost thereof together with the LESSOR'S expenses or reletting, including 7 8 commissions relative thereto. If the rents collected by the LESSOR upon any such reletting are not sufficient to pay monthly the full amount of the rent reserved herein, together with the costs of such repairs, alterations, additions, redecorating and expenses, the LESSEE shall pay to the LESSOR the amount of each monthly deficiency upon demand in writing. LESSEE shall be obligated to pay to LESSOR any and all costs expended by LESSOR in connection with LESSEE'S default together with interest thereon at the maximum legally allowable contract rate of interest to which a party can agree in addition to any legal fees incurred. Section 26.4 - ABANDONED PROPERTY. Any and all property which may be removed from the PREMISES by the LESSOR in accordance with the terms of this LEASE, may be handled, removed, stored or otherwise disposed of by the LESSOR at the risk and expense of the LESSEE, the LESSOR, in no event shall be responsible for the preservation or safekeeping thereof. The LESSEE shall pay to the LESSOR, upon demand in writing, any and all expenses incurred with such removal and all storage charges against such property so long as the same shall be in the LESSOR'S possession or under the LESSOR'S control. If any property shall remain in the PREMISES or in the possession of the LESSOR and shall not be retaken by the LESSEE within a period of ten (10) days from and after the time when the PREMISES are either abandoned by the LESSEE or repossessed by the LESSOR under the terms of this LEASE, said property shall conclusively be deemed to have been forever abandoned by the LESSEE. Section 26.5 - LESSOR'S LIEN. LESSOR and LESSEE agree that all of the goods, chattels, trade fixtures and other personal property belonging to LESSEE which are or may be put into said PREMISES during said term, whether exempt or not from sale under execution or attachment, shall at all times be bound with a lien in favor or LESSOR and shall be chargeable for all rents hereunder and to the fulfillment of the other covenants and agreements of LESSEE herein contained. In the event of any default of LESSEE hereunder, LESSOR shall have the right to sell all or any part of said property at public or private sale, without giving notice to LESSEE or any notice of sale, all notices required by statute or otherwise being hereby expressly waived, and to apply the proceeds of such sale, first, to the payment of all costs and expenses of conducting the sale and/or caring for or storing said property; second, toward the payment of any indebtedness which may be or may become due from LESSEE to lessor; and, third, to pay to LESSEE on demand in writing any surplus remaining after all indebtedness of LESSEE to LESSOR has been fully paid. Section 26.6 - ACTION FOR BREACH. At the sole option of the LESSOR, any violation, failure to perform, or breach of any of the ARTICLES or Sections of this LEASE by the LESSEE, or by any assignee, sub-tenant or other occupant, may be treated by the LESSOR as giving rise to a cause of action for damages, or as a forfeiture, or both. ARTICLE 27 - CONDEMNATION If a whole or a substantial part of the BUILDING containing the PREMISES shall be taken for any public or quasi-public use by right of any statute or by right of eminent domain or by any governmental authority vested with the power of eminent domain, then when possession shall be taken thereunder of the PREMISES or any part thereof, the term herein and all rights of the LESSEE hereunder shall immediately cease and terminate and the rent shall be adjusted as of the time of such termination. Any award for the taking of all or any part of the PREMISES under the power of eminent domain, or any payment made under the threat of the exercise of such power, shall be the sole property of the LESSOR. In no event whatsoever shall LESSEE have any claim against LESSOR by reason of any appropriation, condemnation or taking of the whole or any part of said PREMISES or of said BUILDING, nor shall LESSEE have any claim to the amount, or any portion thereof, that may be awarded as damages or paid as a result of such appropriation and taking. LESSEE hereby assigns to LESSOR all of LESSEE'S right, title and interest in and to any and all amounts awarded or paid by reason of such appropriation, condemnation and taking. Notwithstanding anything contained herein to the contrary, Lessee shall have the right to make a separate, independent claim against any condemning authority for any loss or damage suffered by Lessee as a result of any such condemnation, provided such separate claim does not reduce Lessor's claim. ARTICLE 28 - SUBORDINATION OF LEASE This LEASE shall be subordinate to any mortgage or mortgages which are now or may be hereafter placed upon the BUILDING and/or Land of which said PREMISES are a part. In the event any proceedings are brought for the foreclosure of any such mortgage, LESSEE covenants that it will, to the extend of the LESSOR'S interest affected by such foreclosure, attorn to the purchaser upon any such foreclosure sale and recognize such purchaser's interest as LESSOR under this LEASE. LESSEE agrees to execute and deliver at any time and from time to time, upon the request of LESSOR or of any such holder, any instrument which, in the sole judgment of LESSOR, may be necessary or appropriate in any such foreclosure proceeding or otherwise to evidence such attornment. LESSEE hereby appoints LESSOR and the holder of such mortgage or either of them, the attorney-in-fact, irrevocably, of LESSEE to execute and deliver for and on behalf of LESSEE any such instrument. LESSEE further waives the provisions of any statute or rule of all, now or hereafter in effect, which may give or purport to give LESSEE any right or election to terminate or otherwise adversely affect this LEASE and the obligation of LESSEE hereunder in the event any such foreclosure proceeding is brought, and agrees that this LEASE shall not be affected in any way whatsoever by any such foreclosure proceeding. ARTICLE 29 - SALE BY LESSOR In the event of sale or conveyance by LESSOR of the BUILDING containing the PREMISES, the same shall operate to release LESSOR from any future liability upon any of the ARTICLES or Sections herein contained in favor of LESSEE, and in such event, LESSEE agrees to look solely to the successor in interest of LESSOR in and to this LEASE for the observance or performance of any such covenants or conditions. Any security deposit given by LESSEE to secure the faithful performance of or any of the covenants of this LEASE on the part of LESSEE, LESSOR may transfer and/or deliver to the Purchaser and/or grantee of the BUILDING, and thereupon LESSOR shall be discharged from any further liability therefor. 8 9 ARTICLE 30 - COVENANTS RUNNING WITH THE LAND The ARTICLES and Sections of this LEASE shall be covenants running with the land, with the estate created hereby and shall be binding upon and inure to the benefit of the LESSOR, the LESSOR'S heirs, personal representatives, successors and assigns, and to LESSEE and the LESSEE'S respective heirs, personal representatives, successors and assigns, and wherever in this LEASE the singular is used, it shall include the plural as the context and meaning so require, and wherever any gender is used it shall include every other gender where the context and meaning so require; provided, however, that this LEASE shall be binding upon the LESSOR'S heirs, personal representatives, successors and assigns in and for such period only as said LESSOR and the LESSOR'S heirs, personal representatives, successors and assigns respectively shall be the record owners of the herein PREMISES. ARTICLE 31 - NOTICES In every instance where it shall be necessary or desirable for the LESSOR to serve any notice or demand upon the LESSEE, such notice or demand shall be deemed sufficiently given or made if, in writing, and sent by certified mail addressed to the LESSEE at the BUILDING of which these PREMISES are a part or left at said PREMISES addressed to LESSEE, and the time of the making or giving of such notice or demand shall be deemed to be the time when the same is delivered to LESSEE, mailed, or left at the PREMISES as herein provided, any notice by LESSEE to LESSOR must be served by certified mail, addressed to the LESSOR at the address where the last previous rental hereunder was paid. ARTICLE 32 - SEPARABILITY If any ARTICLE or Section of this LEASE or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this LEASE, or the application of such ARTICLES or Section other than those as to which it is held invalid or enforceable, shall not be affected thereby and each ARTICLE or Section of this LEASE shall be valid and be enforced to the fullest permitted by law. ARTICLE 33 - INCORPORATION OF PRIOR AGREEMENTS AND AMENDMENTS This LEASE contains all agreements of the parties with respect to any matter referred to herein. No prior agreement or understanding pertaining to any such matter shall be effective. This LEASE may be modified in writing only, signed by the parties in interest at the time of application. ARTICLE 34 - RECORDING If either of the parties hereto desire to record this LEASE, LESSOR and LESSEE agree to execute a Memorandum of this LEASE, which Memorandum of Lease may then be recorded in the office of the county Recorder at Dallas County, Texas. Upon written request of LESSOR, LESSEE will at any time and from time to time execute with LESSOR such forms of security agreement and financing statements for filing as in the opinion of counsel for LESSOR is reasonably necessary to protect the rights, priorities and liens of LESSOR hereunder. ARTICLE 35 - QUIET ENJOYMENT If Lessee shall (a) pay the rent reserved, the charges for services stipulated herein and other amounts to be paid by LESSEE to LESSOR, and (b) well and faithfully keep, perform and observe all of the covenants, agreements and conditions herein stipulated to be kept, performed and observed by LESSEE, LESSEE shall at all times during the term of this LEASE have the peaceable and quiet enjoyment of said PREMISES without hindrance of LESSOR or any person lawfully claiming under LESSOR, subject, however, to the terms of this LEASE and any mortgage provided for hereinabove. ARTICLE 36 - THE RULES AND REGULATIONS A copy of the Rules and Regulations is attached hereto as Exhibit "E" and made a part hereof as fully as though herein rewritten. LESSEE grants to LESSOR the right to make such change therein from time to time as in LESSOR'S judgment may be necessary for the best interest, safety, care and cleanliness of the PREMISES, the BUILDING, parking area and driveways, and for the preservation of good order therein. LESSEE agrees to comply with and abide by all such rules and regulations including amendments thereof. Nothing in this LEASE contained shall be construed to impose upon LESSOR any duty or obligation to enforce the Rules and Regulations in any other lease as against any other tenant, and LESSOR shall not be liable to LESSEE for violation of the same by any other tenant or the agents, employees, licensees or invites of such other tenant. ARTICLE 37 - BROKER LESSEE represents and warrants to LESSOR that it has authorized Bennett Litwin of Litwin & Co. to negotiate with the LESSOR this LEASE to the LESSEE of the above described PREMISES or the BUILDING thereon. LESSEE acknowledges that LESSOR has an Exclusive Agency Agreement with William Roth Company and that LESSOR has agreed to pay William Roth Company a commission in connection with this Lease as provided for in said Exclusive Agency Agreement. ARTICLE 38 - ARTICLE HEADINGS The ARTICLE headings appearing in this LEASE are inserted only as a matter of convenience and for reference purposes, and in no way define, limit or describe the scope and intent of this LEASE, or any ARTICLE hereof, nor in any way affect it. ARTICLE 39 - ENTIRE AGREEMENT 9 10 This LEASE contains the entire agreement between the parties hereto and shall not be modified in any manner except by an instrument in writing executed by said parties or their respective successors in interest. ARTICLE 40 - REPRESENTATIVE CAPACITY This LEASE is offered to LESSEE by LESSOR subject to the Project Owner's acceptance and approval. In the absence of fraud, no person, firm or corporation, or their heirs, personal representative, successors and assigns, respectively thereof, executing this LEASE as agent, administrator, executor, trustee, or in any other representative capacity shall ever be deemed or held individually liable hereunder for any reason or cause whatsoever. ARTICLE 41 - EXCULPATION ARTICLE CLEVETRUST REALTY INVESTORS, the Project Owner, is a Massachusetts business trust governed by the terms of a Second Amended and Restated Declaration of Trust dated as of February 21, 1992, as amended. No obligation of the Trust is personally binding upon, nor shall resort be had to the private property of, any of the trustees, shareholders, officers, employees or agents of the Trust, but the herein described PROJECT only shall be bound. ARTICLE 42 - SUCCESSORS AND ASSIGNS The covenants, agreements and conditions contained in this LEASE shall bind and inure to the benefit of LESSOR and LESSEE and their respective heirs, legal representatives, successors, and assigns, subject, at all times, nevertheless, to all restrictions herein contained with respect to the assignment of LESSEE'S interest in this LEASE. ARTICLE 43 - APPLICABLE LAW This LEASE shall be construed and enforced in accordance with the laws of the State of Texas. ARTICLE 44 - NOTICE TO VACATE A written notice of intent to vacate is required ninety (90) days in advance of the expiration of this LEASE. ARTICLE 45 - OTHER PROVISIONS Notwithstanding anything to the contrary contained herein, LESSEE acknowledges that LESSOR makes no warranties either expressed or implied in connection with this Lease, including but not limited to, warranties of fitness for a particular purpose or of habitability or suitability of the Premises. This Lease is an enforceable, legally binding agreement. The real estate Brokers involved in the negotiation cannot give legal advice. The parties to this Lease acknowledge that they have been advised by the Brokers to have this Lease reviewed by competent legal counsel of their choice before signing this Lease. By executing this Lease, Lessor and Lessee each agree to the provisions, terms, covenants and conditions contained herein. The following Addendum and Exhibits are a part of this LEASE: Addendum Exhibit "A" - Floor Plan Exhibit "B"-Rent Escalation Rider Exhibit "C" - Work Letter Exhibit "D" - Special Specifications Exhibit "E" - Rules and Regulations
IN WITNESS WHEREOF: LESSEE and LESSOR have respectively executed triplicate counterparts of this LEASE AGREEMENT as of the day and year first above written. LESSOR: CLEVETRUST REALTY INVESTORS, A WITNESS, as to LESSOR; Massachusetts business trust ------------------------------ By /s/ [SIG] ------------------------------------ ------------------------------ Title LESSEE: WITNESSES, as to LESSEE; ------------------------------ By /s/ ROBERT F. HOLMES VP, Operations ------------------------------------ ------------------------------ Title 10 11 ADDENDUM TO LEASE AGREEMENT BY AND BETWEEN CLEVETRUST REALTY INVESTORS, AS LESSOR AND EDIFY CORPORATION, AS LESSEE 1. ANNUAL BASE RENT. Lessee covenants and agrees to pay to Lessor as Annual Base Rent for said Premises, without demand or notice, the following sums throughout the term of this Lease as set forth below:
Period Period Base Rent Monthly Installment ------ ---------------- ------------------- October 1, 1996 - September 30, 1997 $49,320.00 $4,110.00 October 1, 1997 - September 30, 1998 $51,432.00 $4,286.00 October 1, 1998 - September 30, 1999 $53,556.00 $4,463.00 October 1, 1999 - September 30, 2000 $55,668.00 $4,639.00
2. RENEWAL OPTION. If, and only if, on the Expiration Date and on the date Lessee notifies Lessor of its intention to renew the term of this Lease by written notice at least six (6) months prior to the Expiration Date, (i) Lessee is not in default under this Lease, (ii) Lessee then occupies and the Premises then consist of at least 4,233 rentable square feet and (iii) this Lease is in full force and effect, then Lessee, but not any assignee or subtenant of Lessee, shall have and may exercise an option to renew this Lease for one (1) additional term of three (3) years (the "Renewal Term") upon the same terms and conditions contained in this Lease with the exceptions that (x) this Lease shall not be further available for renewal and (y) the rental for the Renewal Term shall be the "Renewal Rental Rate", but in no event will the Annual Base Rent be less than the Annual Base Rent for the last twelve (12) calendar months of the initial term of the Lease. The Renewal Rental Rate is hereby defined to mean the then prevailing rents (including, without limitation, those similar to the Annual Base Rental and Additional Rent) for properties of equivalent size, quality, utility and location, with the length of the lease term and credit standing of the lessee to be taken into account. 3. ACCESS CARDS. Lessee shall be allowed ten (10) building access cards at no charge during the term of this Lease. Additional cards are available at a cost of $10.00 per card upon move-in, nonrefundable. Lost or replacement cards, thereafter, are available at a charge of $25.00 per card, nonrefundable. 4. PARKING. Lessee shall be allowed three (3) covered parking spaces at no charge during the term of this Lease. 11 12 EXHIBIT "A" FLOOR PLAN [MAP OF FLOOR PLAN] 13 EXHIBIT "B" RENT ESCALATION RIDER As used in this Lease, the following terms shall have the following respective meanings: (a) "Annual Base Rent" - The minimum annual rent to be paid by LESSEE to LESSOR pursuant to the provisions of ARTICLE 2. (b) "Adjusted Annual Rent" - The Annual Base Rent as hereinafter increased or decreased in accordance with the provisions hereof, but in no event less than the minimum Annual Base Rent. (c) "Operating Expenses" - All expenses incurred in any calendar year during the term of this LEASE, with respect to the operation, management and maintenance of the BUILDING and the parking area in accordance with accepted principles of sound management and accounting practices as applied to the operation maintenance of first class office buildings, including without limitation thereof, cost of janitorial service, cleaning service, cleaning materials, equipment, the cost of leasing necessary equipment, supplies, salaries (wages and fringe benefits, including workmen's compensation, disability benefits, insurance payroll taxes, and welfare benefits), and other personal costs of engineers, superintendents, watchmen, building managers, and other building employees, utilities (other than those billed directly to tenants), heating, air conditioning, repairs and maintenance, insurance (fire and extended coverage, liability, boiler, property damage, glass, rental and other necessary and appropriate) expenses for elevator maintenance, mechanical equipment, maintenance, window washing, legal, accounting, and arbitration expenses, management fees, landscaping, rubbish removal, maintenance of parking areas, removal of snow and ice, the lighting, policing, lining and repair of parking areas and sidewalks, personal or tangible taxes, if any, and other services, but shall not include: (i) cost of any capital improvements made after the commencement of the term which are not for the general benefit of tenants of the BUILDING except that in the case of the installation of a substantial labor or cost saving device or operation, Operating Expenses in each year shall include the expense thereof amortized over a reasonable number of years. (ii) expenses for painting, redecorating, or other work performed for other tenants in the BUILDING other than painting, redecorating and other work which is standard for the BUILDING. (iii) expenses for repairs and other work occasioned by fire, windstorm or other insurable casualty; (iv) expenses incurred in leasing or procuring new tenants including lease commissions, advertising expenses and expenses of renovating space for new tenants; (v) legal expenses incurred in enforcing the terms of any lease; (vi) except as provided above, interest or amortization payment of any mortgages; (vii) wages, salaries, or other compensation paid for clerks or attendants in concessions or newsstands operated by LESSOR. (d) "Taxes" - The taxes and assessments, special or otherwise and sewer charges, if any, including expenses incurred in connection with disputing or contesting the amounts thereof, levied or assessed for any calendar year (regardless as to when said taxes are to be paid), or partial year, upon or with respect to the BUILDING and the land upon which it is located by Federal, State or Municipal government. Should any governmental authority having jurisdiction hereafter impose a tax and assessment, or either (other than an income tax or a franchise tax), upon or against the Annual Base Rent payable hereunder or on the privilege of renting, leasing or letting real property, either in substitution for, or in lieu of, the taxes and assessments now levied or assessed against said land and the BUILDING, or in addition thereto, such tax and assessment, or either, shall be deemed to constitute a tax and assessment, or either, against said land and the BUILDING for the purposes of this sub-paragraph (d). Any increase in such tax and 1 14 EXHIBIT "B" RENT ESCALATION RIDER (CONTINUED) assessments attributable to new additions made after the commencement of the term which are not for the general benefit of tenants of the BUILDING shall be excluded. COMPUTATION OF RENTAL ADJUSTMENTS. The Annual Base Rent shall be adjusted commencing with the first year of the LEASE term and for each subsequent year of the LEASE term in the event that the Operating Expenses and Taxes (as defined above) of LESSOR for the BUILDING, including any parking area serving the BUILDING, shall in any calendar year during the term of this LEASE, exceed the sum of actual expenses for calendar year 1996 per square foot. The adjustment for the period when the first LEASE year begins to the end of said calendar year shall be paid in a lump sum within sixty (60) days of notice to LESSEE of such amount, and commencing at the beginning of the next calendar year monthly estimated payments shall be made. Thereafter, for each subsequent calendar year, LESSOR shall make an estimate of the Operating Expenses and Taxes for the next calendar year and the monthly installments of the Annual Base Rent for the next succeeding calendar year shall be adjusted to the extent necessary to pay an estimate Adjusted Annual Rent in equal monthly installments commencing with the next due monthly rental installment. During each subsequent calendar year, the LESSOR shall calculate the actual Operating Expenses and Taxes for the previous calendar year and furnish LESSEE with a statement setting forth the total sum due LESSOR or LESSEE, respectively, and such difference, if any, shall be paid by the LESSOR or LESSEE, respectively, in a lump sum payment within sixty (60) days of notice to LESSEE of such difference. (a) For any fractional portion of a calendar year at the termination of this LEASE, any overpayment or underpayment shall be settled and accounted for in the same manner as at the end of a full calendar year and shall be based on the calendar year Operating Expenses and Taxes to date. (b) LESSOR shall keep and make available to LESSEE, at its corporate offices, for a period of twelve (12) months after the statement above referred to is rendered to LESSEE, records in reasonable detail of Taxes and Operating Expenses for the period covered by such statement and shall permit LESSEE and the representatives of LESSEE at LESSOR's expense to examine and audit such statements and records at any reasonable time during business hours. IF LESSEE shall dispute any item or items included by LESSOR in determining Taxes or Operating expenses, and such dispute is not amicably settled between LESSOR and LESSEE within thirty (30) days after such statement has been rendered, either party may, during the twenty (20) days next following the expiration of said thirty (30) day period, notify the other of the election to arbitrate said dispute and may then refer such disputed item or items or computation to a reputable firm of independent certified public accountants reasonably selected by LESSOR for decision of such firm shall be conclusive and binding upon LESSOR and LESSEE. The expense involved in such determination shall be borne by the party against whom a decision is rendered by said accountants provided that when the decision of the arbitrator is party against each party the arbitrator shall equitably apportion the expense of the decision between the parties. If LESSEE shall not dispute any item or items of any such statement within thirty (30) days after such statement has been rendered, LESSEE shall be deemed to have approved such statement. 2 15 EXHIBIT "C" WORK LETTER Development: OFFICE ALPHA - 13140 COIT ROAD Suite No.: 310 ---------------------------------- ------------------ 4,233 ---------------------------------- Sq.Ft.: ------------------ Requested By: 8/26/96 ---------------------------------- Date: ------------------
============================================================================================================================= ITEM DESCRIPTION OF WORK/MATERIALS QUANTITY UNIT COST TOTAL COST ============================================================================================================================= CARPET Partial replacement $2,876.25 - ----------------------------------------------------------------------------------------------------------------------------- Paint Repaint throughout $3,096.90 - ----------------------------------------------------------------------------------------------------------------------------- Wallcovering $0.00 - ----------------------------------------------------------------------------------------------------------------------------- Lighting Fixtures $1,350.00 - ----------------------------------------------------------------------------------------------------------------------------- Electrical Fixtures $1,080.00 - ----------------------------------------------------------------------------------------------------------------------------- Tile - ceiling $360.00 - ----------------------------------------------------------------------------------------------------------------------------- Partitions Demo and new construction $1,868.50 - ----------------------------------------------------------------------------------------------------------------------------- Doors Doors, labor, stops and hardware $2,271.50 (including touch-up of existing) - ----------------------------------------------------------------------------------------------------------------------------- Cleaning Trash removal and final clean $250.00 - ----------------------------------------------------------------------------------------------------------------------------- Mill-work & Incl. cabinetry and phone board $1,450.00 shelving - ----------------------------------------------------------------------------------------------------------------------------- Plumbing & HVAC $2,800.00 - ----------------------------------------------------------------------------------------------------------------------------- Mini-blinds $245.00 - ----------------------------------------------------------------------------------------------------------------------------- Coordination & $565.00 Labor - ----------------------------------------------------------------------------------------------------------------------------- Sidelight $400.00 - ----------------------------------------------------------------------------------------------------------------------------- Other Insurance, fee, permit and sales tax $3,348.97 - ----------------------------------------------------------------------------------------------------------------------------- LESSEE HEREBY REQUESTS LESSOR TO PERFORM THE ABOVE ESTIMATED COST $21,962.12 DESCRIBED WORK --------------- EST. LESSEE COST $0.00 --------------- LESSOR COST $21,962.12 ------------------------------------------ FOR LESSOR'S USE ONLY ------------------------------------------ Rent per sf APPROVED BY: ---------------- ------------------------------------------------------------------ Finish costs per sf $5.19 TITLE: ---------------- ------------------------------------------------------------------ Effective Rent per sf ---------------- DATE: - -----------------------------------------------------------------------------------------------------------------------------
16 EXHIBIT "D" SPECIAL SPECIFICATIONS The construction of the Premises shall conform to the floorplan attached hereto and instructions set forth below. Notwithstanding anything contained in Article 6.2 to the contrary, the cost of these Special Specifications is already reflected in the Work Letter included with this Lease as Exhibit "C" and shall be borne by Lessor. The cost of any further changes to the Special Specifications attached hereto shall thereafter be handled in the manner set forth in Article 6.2. 1 Remove one door to hallway and fill-in with wall. 2 Remove interior partitions to make one large room. New carpet in this large room. 3 Add door as noted. 4 Demo wall partitioning suites. 5 Install opening between suites as noted. 6 Remove one door to hallway and fill-in with wall. 7 Replace existing with new carpet. 8 Install door as noted. 9 Demo existing walls. Patch carpet with reusable material from area marked with number 2. 10 Install plumbing and kitchen cabinetry (8' upper and lower cabinetry) as noted. Allow room for under-the-counter refrigerator. Install water lines for icemaker and coffeemaker. 11 Re-paint suite with color to be selected by Lessee from management office selections. 12 Mini-blinds for all offices and interior glass walls. 13 Clean remaining, existing carpet in all areas other than those marked by numbers 2 and 7. 14 Create closet with door and shelving. 17 EXHIBIT "D" SPECIAL SPECIFICATIONS (continued) [DIAGRAM OF SPECIAL SPECIFICATIONS] 18 EXHIBIT "E" RULES AND REGULATIONS 1. Nothing shall be affixed to or projected beyond the outside of the BUILDING by LESSEE without the prior written consent of LESSOR. 2. Unless expressly permitted by LESSOR, no sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed on any part of the outside or inside of the BUILDING, except on the glass or panels of the doors of the PREMISES, and then only of subject matter and such color, size, style and material as shall conform to the specification of LESSOR. LESSOR reserves the right to remove all other signs or lettering, without notice to LESSEE, at the expense of LESSEE. 3. No show cases or other articles shall be affixed to any part of the exterior of the building, nor placed in halls, corridors, or vestibules without the prior written consent of LESSOR. 4. Any newspaper, magazine or other advertising done from said PREMISES, or referring to said PREMISES or the BUILDING, which in the opinion of LESSOR is objectionable, shall be immediately discontinued upon notice from LESSOR. 5. Unless expressly permitted by LESSOR, no bicycle or other vehicle and no animal or bird shall be brought or permitted to be in the BUILDING or any part thereof. 6. Unless expressly permitted by LESSOR, all doors to said PREMISES are to be kept closed at all times except when in actual use for entrance to or exit from said PREMISES. LESSEE shall be responsible for the locking of doors and the closing of transoms and windows in and to said PREMISES. LESSEE shall be responsible for any damage or loss resulting from violation of this rule. 7. Unless LESSOR gives prior written consent in each and every instance, LESSEE shall not install or operate any steam or internal combustion engine, boiler, machinery, refrigerating or heating device or air conditioning apparatus in or about said PREMISES, or carry on any mechanical business therein. If consent is given, all equipment of any electrical or mechanical nature shall be placed in settings which absorb and prevent vibration, noise, or annoyance, or the spillage of leakage of fluids, oils or grease on the floors of said PREMISES. 8. Moving or delivery of furniture, trade fixtures and equipment, and freight by or for LESSEE shall be done at such time and in such manner as may be required by LESSOR. LESSEE shall list with LESSOR any and all furniture, trade fixtures and equipment, and similar articles to be removed from the BUILDING, and the list must be approved at the office of the BUILDING before building employees shall permit any article to be removed. LESSOR reserves the right, but shall not be obligated, to inspect all articles being moved in or out of the BUILDING, and LESSOR shall not be liable to LESSEE or to any other person for loss, or damage to, any furniture, trade fixtures and equipment or other personal property from any cause. 9. Unless expressly permitted by LESSOR, LESSEE shall not place or allow anything to be against or near the glass of partitions or doors of said PREMISES, or be unsightly from halls, corridors, or exterior of the BUILDING. 10. Unless expressly permitted by LESSOR, no additional locks or similar devices shall be attached to any door or window and no keys other than those provided by LESSOR shall be made for any door. If more than two keys for one lock are desired by LESSEE, LESSOR shall provide the same upon payment thereafter by LESSEE. LESSEE shall obtain keys from LESSOR only and from no other source. Upon termination of this LEASE or of LESSEE'S possession, LESSEE shall surrender all keys of said PREMISES and shall provide LESSOR with the then current combination for any combination locks on safes, cabinets and vaults. 11. LESSEE shall not make or permit any noise or odor that is objectionable to LESSOR or to other occupants of the BUILDING to emanate from said PREMISES, and shall not create or maintain a nuisance therein, and shall not disturb, solicit or canvass any occupant of the BUILDING, and shall not do any act tending to injure the reputation of the BUILDING. LESSEE shall not install or operate any phonograph, musical instrument, radio or television receiver or similar device in the BUILDING without prior approval of LESSOR. The use thereof, if permitted, shall be subject to control by LESSOR to the end that others shall not be disturbed or annoyed. 12. LESSEE shall not overload any floor. LESSOR may, but shall not be required to, direct the routing and placement of safes and other heavy articles. Safes, furniture and all large articles shall be brought into said PREMISES or removed therefrom at the LESSEE'S sole risk and responsibility. 13. LESSEE shall not place or permit to be placed any article of any kind on the window ledges or elsewhere on the exterior walls. 14. No electrical wires, telegraphs, telegraph call boxes, antennae, aerial wires or other electrical equipment or apparatus shall be installed inside or outside of the BUILDING without the consent of LESSOR. 15. LESSOR reserves the right, but shall not be held obligated, to exclude or eject from the BUILDING any or all solicitors, canvassers or peddlers, and any persons conducting themselves in such manner as, in the sole judgment of LESSOR, constitutes an annoyance to any of the tenants of the BUILDING, or an interference with LESSOR'S operation of the BUILDING, or who are otherwise undesirable. 16. No article hazardous on the account of fire and no explosive shall be brought into said PREMISES or into the BUILDING. The storage and use of all flammable and volatile materials or substances shall be in conformity with applicable law, rules and regulations of all duly constituted public authorities. 17. The PREMISES hereby leased shall not be used for lodging or sleeping purposes or for any immoral or illegal purpose, and no cooking of food shall be done therein. 18. The sidewalks, entrances, passages, courts, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any tenant or used for any purpose other than ingress and egress to and from the PREMISES. 19. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the PREMISES, except as specified by LESSOR. 20. The sashes, sash doors, skylights, windows and doors that reflect or admit light and air into the halls, passageways or other public places in the BUILDING shall not be covered or obstructed by any tenant. 21. The water, wash closets and plumbing fixtures shall not be used for any purposes other than those for which constructed. No sweepings, rubbish, rags or other substances shall be thrown therein. No person shall waste water by tying back or wedging the faucets, or in any other manner. All damage resulting from misuse of fixtures shall be borne by LESSEE who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 19 22. If any tenant desires telegraphic, telephonic or other electrical connections, LESSOR or its agents will direct the electricians as to where and how the wires may be introduced and without such directions, no boring or cutting for wires will be permitted. Any such installation and connection shall be made at LESSEE'S expense, and in firm compliance with codes. 23. Except as permitted by LESSOR, LESSEE shall not mark upon, paint signs upon, cut, drill into, drive nails or screws into, or in any way deface the walls, ceilings, partitions or floors of the PREMISES or of the BUILDING. Any defacement, damage or injury caused by TENANT, its agents or employees, shall be at LESSEE'S expense. 24. LESSEE shall not lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the PREMISES without the prior approval of LESSOR, and, if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 25. Unless approved by LESSOR in written form, no space in the BUILDING shall be used for manufacturing. 26. No tenant shall throw anything out of the doors, windows, skylights, or down the passageways, courts, elevator shafts, ventilating ducts or shafts of the BUILDING. 27. The requirements of tenants will be attended to only upon application to the office of the LESSOR. Employees of the LESSOR shall not perform any work or do anything outside of their regular duties, unless under special instructions from the LESSOR. 28. The installation and use of a vending machine in the BUILDING is prohibited without the LESSOR'S consent in writing. 29. LESSEE shall not employ any person or persons other than the janitor of the LESSOR for the purpose of cleaning or taking care of the PREMISES without the consent of LESSOR. LESSOR shall be in no ways responsible to LESSEE for any loss of property from the PREMISES, however occurring, or for any damage done to LESSEE'S furniture or equipment by the janitor or any of his staff or by any other person or persons whomsoever. 30. Any painting or decorating as may be agreed to be done by and at the expense of LESSOR shall be done during regular working hours. Should LESSEE desire such work done on Sunday, holidays or outside of regular working hours, LESSEE shall pay for the extra cost thereof. 31. In case of invasion, mob, riot, public excitement or other commotion, the LESSOR reserves the right to prevent access to the BUILDING during the continuance of same by closing the doors or otherwise, for the safety of the tenants and protection of the property in the BUILDING. 32. Conduit required by Building Department codes and rulings for LESSEE's telephone and other installations in the return air plenum suspended ceiling shall be paid for by the LESSEE. The LESSOR at all times shall have the right to amend, modify or waive any of the foregoing rules and regulations and to make such other and further rules and regulations as the LESSOR may adopt. The failure of the LESSOR to seek redress for violation of, or insist upon the strict performance of, any covenant or conditions of this LEASE or any of the rules and regulations set forth above or hereafter adopted by LESSOR, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by LESSOR of rent with knowledge of the breach of any covenant of this LEASE or breach of these rules and regulations shall not be deemed a waiver of such breach. The failure of LESSOR to enforce any of these rules and regulations as set forth above or hereafter adopted against LESSEE and/or any other tenant in the BUILDING shall not be deemed a waiver of any such rules and regulations. LESSOR shall not be liable to LESSEE for violation of any said rules and regulations or the breach of any covenant or condition in any LEASE by any other tenant in the BUILDING. No act or thing done or omitted to be done by LESSOR or LESSOR'S agent during the term of the LEASE which is necessary to enforce these rules and regulations shall constitute an eviction by LESSOR nor shall it be deemed an acceptance or surrender of said PREMISES, and no agreement to accept such surrender shall be valid unless in writing signed by LESSOR. No employee of LESSOR or LESSOR's agent shall have any power to accept the keys of said PREMISES prior to the termination of the leasehold agreement. The delivery of keys to any employee of LESSOR or LESSOR's agents shall not operate as a termination of the LEASE or a surrender of the PREMISES. These rules and regulations shall be binding upon heirs, successors, representatives and assigns of the LESSEE. EX-10.15 6 PATENT LICENSE AGREEMENT DATED NOVEMBER 1, 1998 1 EXHIBIT 10.15 PATENT LICENSE AGREEMENT between LUCENT TECHNOLOGIES INC. and EDIFY CORPORATION Effective as of November 1, 1998 Relating to [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 PATENT LICENSE AGREEMENT TABLE OF CONTENTS
Page ---- ARTICLE I - GRANTS OF LICENSES........................................... 1 1.01 Grant............................................................ 1 1.02 Duration......................................................... 1 1.03 Scope............................................................ 1 1.04 Ability to Provide Licenses...................................... 3 1.05 Joint Inventions................................................. 3 1.06 Publicity........................................................ 4 ARTICLE II - ROYALTY AND PAYMENTS......................................... 4 2.01 Up Front License Fee and Royalty Calculation..................... 4 2.02 Accrual.......................................................... 5 2.03 Exclusions....................................................... 6 2.04 Records and Adjustments.......................................... 6 2.05 Reports and Payments............................................. 7 ARTICLE III - TERMINATION................................................. 8 3.01 Breach........................................................... 8 3.02 Voluntary Termination............................................ 8 3.03 Survival......................................................... 9 ARTICLE IV - MISCELLANEOUS PROVISIONS..................................... 9 4.01 Disclaimer....................................................... 9 4.02 [*] Assignability; Mergers and Acquisitions...................... 9 4.03 Addresses........................................................ 14 4.04 Taxes............................................................ 14 4.05 Choice of Law.................................................... 15 4.06 Integration...................................................... 15 4.07 Outside the United States........................................ 16 4.08 Dispute Resolution............................................... 16 4.09 Releases......................................................... 16 4.10 Severability..................................................... 17 4.11 Multiple Counterparts............................................ 17 4.12 Headings......................................................... 17 4.13 Modification..................................................... 17 4.14 Representation by Counsel........................................ 18 4.15 Non-Agency....................................................... 18
[*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. i 3
Page ---- APPENDIX - DEFINITIONS................................................... 20 EXHIBIT A................................................................ 25 EXHIBIT B................................................................ 26
ii 4 PATENT LICENSE AGREEMENT Effective as of November 1, 1998 ("EFFECTIVE DATE"), LUCENT TECHNOLOGIES INC., a Delaware Corporation ("LUCENT"), having an office at 600 Mountain Avenue, Murray Hill, New Jersey 07974, and EDIFY CORPORATION, a Delaware Corporation ("EDIFY"), having an office at 2840 San Tomas Expressway, Santa Clara, California 95051, agree as follows: * ARTICLE I GRANTS OF LICENSES 1.01 GRANT (a) LUCENT grants to EDIFY a personal, nonexclusive, worldwide, and non-transferable (except as provided in Article IV) license under LUCENT's LICENSED PATENTS for: [*] (b) EDIFY grants to LUCENT a personal, nonexclusive, worldwide, royalty-free, and non-transferable (except as provided in Article IV) license under EDIFY's LICENSED PATENTS for; [*] 1.02 DURATION Subject to the provisions of ARTICLE III and Section 4.02, all licenses granted to both parties herein shall be effective for the LIMITED PERIOD provided that EDIFY provides the payments pursuant to Sections 2.01 (a), 2.01 (b) and 2.01 (c). 1.03 SCOPE (a) The licenses granted herein are licenses to. (i) make, have made, use, lease, sell, offer for sale, import, and otherwise distribute to customers [*] Products (including the licensing of such [*] Products to customers); - ---------- * ANY TERM IN CAPITAL LETTERS WHICH IS DEFINED IN THE DEFINITIONS APPENDIX SHALL HAVE THE MEANING SPECIFIED THEREIN. [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5 (ii) make, have made, use and import machines, tools, materials and other instrumentalities, insofar as such machines, tools, materials and other instrumentalities are involved in or incidental to the development, manufacture, testing or repair of [*] Products which are or have been made, used, leased, owned, sold, licensed or imported by the grantee of such license; and [*] (b) Licenses granted herein to EDIFY or to LUCENT are not to be construed as consent by the grantor to any act which may be performed by the grantee, except that neither party shall claim that any act performed by the other party, its SUBLICENSEES or, in the case of EDIFY, [*] (in accordance with Section 1.03(a)(iii)), within the express scope of the patents granted or permitted under this Agreement to the other party constitutes direct infringement, contributory infringement, or inducement to infringe that party's LICENSED PATENTS. (c) The grant of each license hereunder includes the right to grant sublicenses within the scope of such license to a party's RELATED COMPANIES for so long as they remain its RELATED COMPANIES. Any RELATED COMPANY to whom a party grants a sublicense hereunder shall be referred to as its "SUBLICENSEES," Any such sublicense may be made effective retroactively, [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 6 but not prior to the Effective Date hereof, nor prior to the sublicensee's becoming a RELATED COMPANY of such party. Except as provided in this Section 1.03(c), no party shall have the right to grant sublicenses under the other party's LICENSED PATENTS. 1.04 ABILITY TO PROVIDE LICENSES (a) It is recognized that certain actions of the parties to this Agreement may limit their ability to provide licenses hereunder without constituting a breach. In particular, (i) prior to the earliest filing of a patent application disclosing an invention of a party or its SUBSIDIARY, such party or SUBSIDIARY may assign to a third party the title to patents on such invention, or (ii) prior to the execution of this Agreement, a party or its SUBSIDIARY may have limited by contract its ability to provide licenses hereunder with respect to certain patents or technologies. (b) Each party agrees to disclose to the other party, promptly upon receipt of a written request for such disclosure, any such assignment or other contractual limitation with respect to any patent and/or technology which is specifically identified in such request. (c) Each party represents that it has already disclosed to the other party any such assignment or other contractual limitation currently in effect with respect to any patent and/or technology specifically identified in any such disclosure request received by it prior to execution of this Agreement. (d) Each party represents and warrants that to its best knowledge it either owns all of its LICENSED PATENTS or has sufficient rights therein to grant to the other party all the rights granted to it under this Agreement. (e) A party's failure to meet any obligation hereunder, due to the assignment of title to any invention or patent, or the granting of any licenses, to the United States Government or any agency or designee thereof pursuant to a statute or regulation of, or contract with, such Government or agency, shall not constitute a breach of this Agreement. 1.05 JOINT INVENTIONS (a) There are countries (not including the United States) which require the express consent of all inventors or their assignees to the grant of licenses or rights under patents issued in such countries for joint inventions. (b) Each party shall give such consent, or shall obtain such consent from its RELATED COMPANIES, its employees or employees of any of its RELATED COMPANIES, as required to make full and effective any such licenses and rights respecting any joint invention granted to the grantee hereunder by such party and by another licensor of such grantee. 3 7 (c) Each party shall take steps which are reasonable under the circumstances to obtain from third parties whatever other consents are necessary to make full and effective such licenses and rights respecting any joint invention purported to be granted by it hereunder. If, in spite of such reasonable steps, such party is unable to obtain the requisite consents from such third parties, the resulting inability of such party to make full and effective its purported grant of such licenses and rights shall not be considered to be a breach of this Agreement. 1.06 PUBLICITY Nothing in this Agreement shall be construed as conferring upon either party or its RELATED COMPANIES any right to include in advertising, packaging or other commercial activities related to a LICENSED PRODUCT, any reference to the other party (or any of its RELATED COMPANIES), its trade names, trademarks or service marks in a manner which would be likely to cause confusion or to indicate that such LICENSED PRODUCT is in any way certified by the other party hereto or its RELATED COMPANIES; provided, however, each party may inform others that its [*] Products are licensed under the other party's LICENSED PATENTS, as defined herein. ARTICLE II ROYALTY AND PAYMENTS 2.01 UP-FRONT LICENSE FEE AND ROYALTY CALCULATION In consideration of the releases set forth in Section 4.09 and in payment for the grant of rights hereunder by LUCENT to EDIFY for the LIMITED PERIOD, EDIFY shall pay to LUCENT the payments set forth in subsections (a), (b), and (c) below. (a) An up-front license fee of eight million United States dollars (U.S. $8,000,000.00) that is payable as; (i) a sum of five million United States dollars (U.S. $5,000,000.00) payable upon execution of this Agreement; and (ii) a sum of three million United States dollars (U.S. $3,000,000.00) payable in six equal annual installments of five hundred thousand United States dollars (U.S. $500,000.00), plus interest, [*] at the rate of [*] percent [*%]. For the convenience of EDIFY and LUCENT, EDIFY shall pay the three million United States dollars in accordance with the following schedule: [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4 8
AMOUNT ---------------------------------------------- PAYMENT (U.S. DOLLARS) (INTEREST) (TOTAL DUE) DATE DUE ------- -------------- ----------- ----------- ------------ 1 $500,000.00 [*] [*] Nov. 1, 1999 2 $500,000.00 [*] [*] Nov. 1, 2000 3 $500,000.00 [*] [*] Nov. 1, 2001 4 $500,000.00 [*] [*] Nov. 1, 2002 5 $500,000.00 [*] [*] Nov. 1, 2003 6 $500,000.00 [*] [*] Nov. 1, 2004
(b) A royalty in the amount of [*] ([*]) of the [*] of EDIFY and its SUBLICENSEES [*] for its fiscal year 2004 (i.e., January 1, 2004 to December 31, 2004) that is in excess of the "2004 YEARLY CAP," where the 2004 YEARLY CAP is equal to [*] ([*]) of the [*] of EDIFY [*] for the fiscal year [*] (i.e., January 1, [*] to December 31, [*]). (c) A royalty in the amount of [*] ([*]) of the [*] of EDIFY and its SUBLICENSEES [*] for its Fiscal year 2005 (i.e., January 1, 2005 to December 31, 2005) that is in excess of the "2005 YEARLY CAP", where the 2005 YEARLY CAP is equal to [*] ([*]) of the [*] of EDIFY [*} for the fiscal year [*]. For clarity, the royalty calculation for this section 2.01(c) shall be performed using the [*] [*], despite the fact that the LIMITED PERIOD ends prior to December 31, [*]. (d) In no event shall the sums paid under this Section 2.01 (or any portion thereof) be refunded to EDIFY or be credited toward any other fees due hereunder, except as provided in section 2.04(b). 2.02 ACCRUAL (a) Pursuant to Sections 2.01(b), 2.01(c) and 4.02, royalty shall accrue with respect to EDIFY [*] on the date on which EDIFY accounts for such [*], for the purposes of [*] in its [*] [*] and shall become payable at the time specified in Paragraph 2.05(b). Obligations to pay accrued royalties shall survive termination of licenses and rights pursuant to Article III and the expiration of any patent. (b) When a company ceases to be a RELATED COMPANY of EDIFY, royalties which have accrued with respect to [*] of such company, but which have not been paid, shall become payable with EDIFY's next scheduled royalty payment. [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5 9 (c) Notwithstanding any other provisions hereunder, royalty shall accrue and be payable only to the extent that enforcement of EDIFY's obligation to pay such royalty would not be prohibited by applicable law. 2.03 EXCLUSIONS Any [*] Product may be treated by EDIFY as not licensed and not subject to royalty with respect to sales, leases or licenses of such Product if the purchaser is licensed under the relevant LUCENT patents to have said product made and/or imported, and the purchaser advises EDIFY, in writing at or prior to the time of such sale, that it is exercising its own license under such one or more patents with respect to such manufacture and/or importation. 2.04 RECORDS AND ADJUSTMENTS (a) During any period in which a royalty payment may be due, EDIFY, or its acquiring third party, shall keep full, clear and accurate records of data reasonably required to enable an independent auditor to ascertain the proper royalty due as provided by this Agreement. EDIFY or its acquirer shall retain such records for at least five (5) years from the sale, lease or putting into use of such product. Such records shall at reasonable times during business hours be available upon at least five (5) business days advance written notice, for inspection and copying by an independent auditor chosen by LUCENT and consented to by EDIFY or its acquirer (which consent shall not be reasonably withheld). Any and all non-public information relating to EDIFY or its acquirer revealed in the course of such audit shall be kept confidential by the auditor. Such non-public information shall not be disclosed to anyone other than employees of the auditor who have a reasonable need to know in connection with such audit, and shall not be used for any purpose other than determining the correctness of the royalty payments made hereunder. The auditor may, however, reveal to LUCENT only its final determination as to the correctness of the royalties, but shall not reveal the details of non-public information related to EDIFY or its acquirer revealed or learned by the auditor during the course of the audit. Prompt adjustment shall be made to compensate for any errors in royalty payments discovered by the auditor. (b) Independent of any such examination, LUCENT will credit to EDIFY the amount of any overpayment of royalties made in error which is identified and fully explained in a written notice to LUCENT delivered within twelve (12) months after the due date of the payment which included such alleged overpayment, provided that LUCENT is able to verify, to its own satisfaction, the existence and extent of the overpayment. (c) No refund, credit or other adjustment of royalty payments shall be made by LUCENT except as provided in this Section 2.04. Rights conferred by this Section 2.04 shall not be affected by any statement appearing on any check or [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 6 10 other document, except to the extent that any such right is expressly waived or surrendered by a party having such right and signing such statement. 2.05 REPORTS AND PAYMENTS (a) Royalty payments due under Sections 2.01(b), 2.01(c), 4.02(d)(ii), or 4.02(e)(iii)(1)(bb) shall be due by the following dates: (i) [*] days after the end of the [*] of EDIFY's or its acquirer's fiscal year, for royalties accrued in the [*] of such fiscal year; and (ii) [*] days after the end of the [*] of EDIFY's or its acquirer's fiscal year, for royalties accrued in the [*] of such fiscal year. (b) With respect to Sections 4.02(d)(ii) or 4.02(e)(iii)(1)(bb), if the LIMITED PERIOD expires on a day other than the last day of [*] of the fiscal year of the separate, identifiable business (Section 4.02(d)(ii)) or [*] the [*] for the purposes of royalty calculations under Sections 4.02(d)(ii) or 4.02(e)(iii)(1)(bb) in the [*] in which the LIMITED PERIOD expires shall be calculated by prorating the [*] in such [*] based on the number of days in the [*] within the LIMITED PERIOD (for instance, if there are [*] in a [*] and [*] of them are within the LIMITED PERIOD, the [*] in that [*] for the purpose of royalty calculations shall be [*] of the [*] for that [*]). [*] (d) Regardless of whether any royalty payment is due on the dates listed in section 2.05(a), on each of such dates EDIFY, or [*] shall furnish to LUCENT at the address specified in Section 4.03 a statement, certified by a responsible official of EDIFY or its acquirer, including the following: (i) EDIFY'S [*] for the period corresponding to the due date [*]; [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 11 (ii) If the report is for the [*] and [*], EDIFY'S, [*], [*] for the fiscal year as of the end of the [*]; (iii) the amount of the YEARLY CAP in effect and the amount of [*] in excess of such YEARLY CAP upon which royalties are payable; (iv) all exclusions from royalty pursuant to Section 2.03 and supporting explanations therefor; and (v) the amount of royalty due, if any. (e) EDIFY [*] shall pay any royalty payments due in United States dollars to LUCENT at the address specified in Section 4.03. Any conversion to United States dollars shall be at the prevailing rate for bank cable transfers as quoted, by leading United States banks in New York City dealing in the foreign exchange market, on the last day of the [*] , whichever corresponds to the royalty payment due, of EDIFY's [*]. (f) Overdue payments hereunder shall be subject to a late payment charge calculated at an annual rate of [*] percentage points ([*]%) [*] during delinquency. If the amount of such late payment charge exceeds the maximum permitted by law, such charge shall be reduced to such maximum. ARTICLE III TERMINATION 3.01 BREACH In the event of a material breach of this Agreement by either party, the other party may, in addition to any other remedies that it may have, at any time terminate all licenses and rights granted by it hereunder by not less than [*] ([*]) [*] written notice specifying such breach, unless within the period of such notice all breaches specified therein shall have been remedied. Upon any such termination by LUCENT of EDIFY's licenses and rights hereunder, any unpaid installment payments under Section 2.01(a) shall no longer be due and no further royalties shall accrue hereunder after the date of such termination. 3.02 VOLUNTARY TERMINATION [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8 12 By written notice to LUCENT, EDIFY [*] may voluntarily terminate all or a specified portion of the licenses and rights granted to it hereunder. Upon any such termination by EDIFY, any unpaid installment payments under Section 2.01(a) shall no longer be due and no further royalties shall accrue hereunder after the date of such termination. Such notice shall specify the effective date (not more than [*] ([*]) [*] after the giving of said notice) of such termination and shall clearly specify any affected patent, invention or product. 3.03 SURVIVAL (a) If a company ceases to be a SUBSIDIARY of a party, licenses and rights granted hereunder with respect to patents of such company issued prior to the date of such cessation shall not be affected by such cessation. (b) Any termination of licenses and rights of a party under the provisions of this Article III shall not affect such party's licenses, rights and obligations with respect to any LICENSED PRODUCT made, sold, used, imported, leased, licensed, or otherwise distributed prior to such termination, and shall not affect the other party's licenses and rights (and obligations related thereto) hereunder. (c) If one party's licenses and/or rights under this Agreement are terminated under Section 4.02 before the end of the LIMITED PERIOD, the other party's licenses and rights under this Agreement shall also be terminated at the same time. (d) The provisions of Sections 1.06, 2.02, 2.04(a), 2.05, 3.03, 4.03, 4.04, 4.05, 4.06, 4.07(a), 4.08, and 4.09 will survive the expiration or termination of this Agreement. ARTICLE IV MISCELLANEOUS PROVISIONS 4.01 DISCLAIMER NEITHER PARTY NOR ANY OF ITS RELATED COMPANIES MAKES ANY REPRESENTATIONS, EXTENDS ANY WARRANTIES OF ANY KIND, ASSUMES ANY RESPONSIBILITY OR OBLIGATIONS WHATEVER, OR CONFERS ANY RIGHT BY IMPLICATION, ESTOPPEL OR OTHERWISE, OTHER THAN THE LICENSES, RIGHTS AND WARRANTIES HEREIN EXPRESSLY GRANTED. 4.02 [*] ASSIGNABILITY; MERGERS AND ACQUISITIONS (a) The parties hereto have entered into this Agreement in contemplation of personal performance, each by the other, and intend that the licenses and rights granted hereunder to a party not be extended to entities other [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9 13 than such party's RELATED COMPANIES without the other party's express written consent, except as otherwise expressly permitted herein. All of LUCENT's rights, title and interest in this Agreement and any licenses and rights granted to it hereunder may be assigned to [*]. (b) The licenses granted hereunder to EDIFY shall extend for the LIMITED PERIOD to [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 10 14 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 11 15 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 12 16 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 13 17 [*] 4.03 ADDRESSES (a) Any notice or other communication hereunder shall be sufficiently given to EDIFY when sent by certified mail addressed to General Counsel, Edify Corporation, 2840 San Tomas Expressway, Santa Clara, California 95051, or to LUCENT when sent by certified mail addressed to Contract Administrator, Intellectual Property Organization, LUCENT Technologies Inc., Suite 105, 14645 N.W. 77th Avenue, Miami Lakes, Florida 33014. Changes in such addresses may be specified by written notice. (b) Payments by EDIFY shall be made to LUCENT at Sun Trust, P.O. Box 913021, Orlando, Florida 32891-3021. Alternatively, payments to LUCENT may be made by bank wire transfers to LUCENT's account: LUCENT Technologies Licensing Account No. [*], Swift Code: [*], ABA Code: [*], at Chase Manhattan Bank, N.A., 55 Water Street, New York, New York 10041. Changes in such address or account may be specified by written notice. 4.04 TAXES EDIFY shall pay any tax, duty, levy, customs fee, or similar charge ("taxes"), including interest and penalties thereon, however designated, imposed as a result [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 14 18 of the operation or existence of this Agreement, including taxes which EDIFY is required to withhold or deduct from payments to LUCENT, except (i) net income taxes imposed upon LUCENT by any governmental entity within the United States (the fifty (50) states and the District of Columbia), and (ii) net income taxes imposed upon LUCENT by jurisdictions outside the United States which are allowable as a credit against the United States Federal income tax of LUCENT or any of its SUBSIDIARIES. In order for the exception in (ii) to be effective, EDIFY must furnish to LUCENT evidence sufficient to satisfy the United States taxing authorities that such taxes have been paid. Such evidence must be furnished to LUCENT within thirty (30) days of issuance by the local taxing authority. 4.05 CHOICE OF LAW The parties are familiar with the principles of New York commercial law, and desire and agree that the law of New York, exclusive of its conflict of laws provisions, shall apply in any dispute arising with respect to this Agreement. 4.06 INTEGRATION This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions between them. Neither of the parties shall be bound by any warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or in a writing signed with or subsequent to execution hereof by an authorized representative of the party to be bound thereby. 15 19 4.07 OUTSIDE THE UNITED STATES (a) There may be countries in which a party hereto may have, as a consequence of this Agreement, rights against infringers of the other party's patents licensed hereunder. Each party hereby waives any such right it may have by reason of any third party's infringement or alleged infringement of any such patents. (b) EDIFY hereby agrees to register or cause to be registered, to the extent required by applicable law, and without expense to LUCENT or any of its RELATED COMPANIES, any agreements wherein sublicenses are granted by it under LUCENT's LICENSED PATENTS. EDIFY hereby waives any and all claims or defenses, arising by virtue of the absence of such registration, that might otherwise limit or affect its obligations to LUCENT. 4.08 DISPUTES If a dispute arises out of or relates to this Agreement, or the breach, termination or validity thereof, the parties agree to submit the dispute to a sole mediator selected by the parties or to mediation by the American Arbitration Association ("AAA"). If not thus resolved within [*] days of the mediation, the parties may by mutual agreement extend the time permitted to resolve such dispute to within a mutually agreed to time period. If the dispute is not resolved within the [*] of the mediation and not extended, or if extended and not resolved within the agreed to time period, the dispute may be litigated in any court of competent jurisdiction. 4.09 RELEASES (a) Subject to Section 4.09(c) and payment pursuant to Section 2.01(a)(i), LUCENT, for itself and for its present RELATED COMPANIES, hereby releases EDIFY, its present RELATED COMPANIES [*], from all claims, demands and rights of action which LUCENT or any of its present RELATED COMPANIES may have on account of any infringement or alleged infringement of any of LUCENT's LICENSED PATENTS issued in any country of the world by reason of the manufacture or any past or future use, lease, license, sale or importation of any of such products which, prior to the Effective Date hereof, were manufactured by or for, or used, leased, licensed, sold, imported or otherwise furnished by EDIFY or any of its present RELATED COMPANIES [*]. (b) Subject to Section 4.09(c), EDIFY, for itself and for its present RELATED COMPANIES, hereby releases LUCENT (for the purposes of this Section 4.09, "LUCENT" means LUCENT Technologies Inc. as it presently exists and as it formerly existed as the equipment/manufacturing entity of the AT&T Corp.), its present RELATED COMPANIES [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 16 20 [*] from all claims, demands and rights of action which EDIFY or any of its present RELATED COMPANIES may have on account of any infringement or alleged infringement of any of EDIFY's LICENSED PATENTS issued in any country of the world by reason of the manufacture or any past or future use, lease, license, sale or importation of any of such products which, prior to the Effective Date hereof, were manufactured by or for, or used, leased, licensed, sold, imported or otherwise furnished by, LUCENT or any of its present RELATED COMPANIES. (c) With respect to [*] of LUCENT and of EDIFY other than [*], such releases shall not extend to any patent which is directed to (i) a combination of an [*] Product with any other product; (ii) a method or process which is other than the inherent use of an [*] Product (as furnished to such customers); or (iii) a method or process involving the use of an [*] Product to manufacture (including associated testing) any other product. 4.10 SEVERABILITY If any paragraph or provision of this Agreement shall be deemed void or invalid as a matter of law, the remaining paragraphs or provisions of this Agreement shall nevertheless remain in full force and effect and be interpreted to the extent possible to effect the overall intention of the parties at the Effective Date of this Agreement. 4.11 MULTIPLE COUNTERPARTS This Agreement may be executed in counterparts, each of which will be considered an original and all of which together will constitute one agreement. This Agreement may be executed by the attachment of signature pages which have been previously executed. 4.12 HEADINGS The headings contained in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning and interpretation of this Agreement. 4.13 MODIFICATION This Agreement may not be amended, modified or altered in any way, except in a writing identified as such and signed by both parties hereto. [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 17 21 4.14 REPRESENTATION BY COUNSEL Each of the parties acknowledges that it has been represented by counsel in connection with the negotiation, drafting and execution of this Agreement. The language used in this Agreement shall be deemed to be language chosen by both parties to express their mutual intent, and no rule of strict construction against any party shall be applied to any term or provision hereof. 4.15 NON-AGENCY Nothing contained in this Agreement or the performance thereof is intended or shall be construed to create any relationship of agency, partnership or joint venture between the parties. 18 22 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in duplicate originals by its duly authorized representatives on the respective dates entered below. LUCENT TECHNOLOGIES INC. By: /s/ M.R. GREENE --------------------------------------- M.R. Greene Vice President - Intellectual Property Date: November 2, 1998 ------------------------------------ EDIFY CORPORATION By: /s/ STEPHANIE VINELLA ------------------------------------ Title: Vice President Finance/CFO ------------------------------------ Date: November 2, 1998 ------------------------------------ THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES. 19 23 APPENDIX DEFINITIONS [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 20 24 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 21 25 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 22 26 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 23 27 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 24 28 EXHIBIT A [*] (attached) [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 25 29 EXHIBIT A [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 30 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 31 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 32 [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 33 EXHIBIT B [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 26 34 EXHIBIT B [*] [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-23.01 7 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Edify Corporation We consent to incorporation by reference in the registration statements (No. 333-04666, 333-31833, and 333-61109) on Form S-8 of Edify Corporation of our report dated January 25, 1999, relating to the consolidated balance sheets of Edify Corporation and subsidiary 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, and the related schedule, which report appears in the December 31, 1998, annual report on Form 10-K of Edify Corporation. KPMG LLP Mountain View, California March 26, 1999 50 EX-27.01 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 24,198 10,639 22,629 1,945 0 59,386 7,329 0 67,004 15,225 0 0 0 17 51,692 67,004 37,375 70,886 1,328 24,999 54,242 0 (1,805) (6,550) (125) (6,675) 0 0 0 (6,675) (0.39) (0.39)
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