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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 00021539
Alysis Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3161772
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification Number)
1900 Powell Street, Suite 500
Emeryville, California 94608
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (510) 450-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 23, 2000 was approximately $76,983,230 based upon the
last sales price reported for such date on the NASDAQ Stock Market. For purposes
of this disclosure, shares of Common Stock held by persons who hold more than 5%
of the outstanding shares of Common Stock and shares held by officers and
directors of the registrant, have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
At March 23, 2000, registrant had outstanding 13,199,234 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the Company which will be filed no later than 120 days after
December 31, 1999.
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ALYSIS TECHNOLOGIES, INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
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PART I............................................................................................. 3
ITEM 1. BUSINESS............................................................................. 3
ITEM 2. PROPERTIES........................................................................... 18
ITEM 3. LEGAL PROCEEDINGS.................................................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 18
PART II............................................................................................ 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................. 19
ITEM 6. SELECTED FINANCIAL DATA.............................................................. 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
ITEM 7A. MARKET RISK DISCLOSURES.............................................................. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 26
PART III........................................................................................... 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 27
ITEM 11. EXECUTIVE COMPENSATION............................................................... 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 27
PART IV............................................................................................ 28
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES............................................. 28
SIGNATURES......................................................................................... 44
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ALYSIS TECHNOLOGIES, INC.
PART I
This "Business" section and other parts of this Annual Report on Form 10-K
contain forward-looking statements (identified with an asterisk "*") that
involve risk and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in this "Business" section and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk Factors".
The Company assumes no obligation to update such forward-looking statements or
to update the reasons actual results could differ materially from those
anticipated such forward-looking statements.
ITEM 1. BUSINESS
Alysis Technologies, Inc. ("Alysis") develops and delivers software products
and services that allow leading edge organizations to integrate the power of the
Internet with their network document repositories to provide superior customer
service, one-to-one marketing, and business intelligence. We are a leading
provider of Electronic Bill Presentment and Payment ("EBPP") and electronic
statement presentment ("ESP") software to a client base that includes 20
percent of the largest banks in the United States, the largest mutual fund
organizations, leading global brokerage firms and many of the world's largest
information technology outsourcing companies.
We have two different, although not unrelated, sources of revenue. First, we
provide electronic billing and statement presentation software to financial
services, utilities, telecommunications companies and service bureaus through
our WorkOut(TM) product. WorkOut allows companies in document intensive
industries to repurpose legacy data for presentation on the Web, enabling them
to understand their customers better and to potentially increase revenue and
remain competitive. Because of our proven technology and domain expertise, we
believe we are well positioned to help companies move their billing and
statement distribution systems to the Internet and to compete more effectively
in the new electronic commerce industry.
WorkOut enables companies to parse and render print streams for billing
systems and to implement electronic data interchange and other structured feeds.
It enables firms to effectively manage, store and distribute legacy reports and
print-formatted documents such as customer statements over the Internet.
Notable WorkOut licensees include Pitney Bowes and Kodak's Australian
subsidiary. By the end of 1999, we had sold WorkOut to South Trust Bank and two
additional service bureaus. One of those service bureaus was in Israel where we
implementing WorkOut entirely in Hebrew. Service bureau clients worldwide
represent an opportunity as they migrate their check processing services to the
Web and link with many financial services institutions.
The acquisition of At Work Corp. ("At Work"), in 1999 allowed Alysis to
extend our capabilities in the ESP software space and to enter the EBPP market
with an end-to-end proven architecture for the business-to-business and
business-to-consumer market segments. Prior to the acquisition, Alysis had
installed ESP at Merrill Lynch and several of its banks. Today Merrill Lynch's
repository holds over three billion electronic documents, processes more than
one hundred million pages per month and supports thousands of on-line users.
The second source of revenue is CheckVision(R), a large-scale application
software solution. Today, twenty of the top one hundred U.S. banks use our
CheckVision solution for their check imaging and storage requirements. Our
larger applications are designed to process more than five million checks per
day.
We deploy all of our products through services that include installation,
customization, training and maintenance.
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Industry Background
For more than a decade, companies made enormous inward-looking investments in
Enterprise Resource Planning ("ERP") systems in an effort to streamline internal
processes. What has prevented companies from optimizing their ERP investments
has been the inability to bring customers, suppliers and business partners into
the loop. The Internet has eliminated the single greatest barrier to doing this:
connectivity. With their Y2K worries behind them, organizations are finally free
to invest in the future instead of the past. The next great wave of business
automation will occur as companies rush to interconnect their internal systems
with their customers and trading partners, transforming forever traditional
business concepts such as price lists, shipping information, billing and
payment. Because of our proven technology and domain expertise, we believe
Alysis is uniquely positioned to help companies move their billing and statement
distribution systems to the Internet, which will enable us to exploit the
explosive growth of this market.*
Generating statements, billing customers and processing payments are the
major line of business applications for companies that provide account based
services in fields such as financial services, banking, insurance, benefit
management and credit cards. The movement of the billing and statement process
from paper to the Internet holds enormous economic potential.
In this competitive market, EBPP and ESP can be much needed and valuable
strategic marketing weapons and sources of competitive advantage. In addition
to the direct cost savings and benefits of EBPP and ESP, issuers must also
estimate the potential opportunity costs of not migrating to electronic
distribution particularly if their competitors are embarking upon such a
direction.
Nevertheless, the environment needed for a successful EBPP or ESP operating
model is dependent on the value proposition to the consumer. Examples of these
propositions include but are not limited to:
. For individual consumers the biggest benefits are the convenience and
control that EBPP and ESP offer as well as receiving personalized,
relevant content.
. For the business-to-business market multiple value-added services
exist which include decreasing costs and paperwork for small to medium
sized enterprises, delivering targeted messages or for larger companies
include applications such as bill and data analysis.
Additionally, the EBPP and ESP marketplace offers inroads to multiple
software spaces and applications. The integration of EBPP and ESP are now being
positioned as one part of a broader customer relationship management
application. This is due primarily to one of the largest benefits of e-
presentment, the access to, and delivery of, personalized content and customer
information. Utilizing presentment as a direct inroad to the customer is due
primarily to the following:
. Businesses increasingly are relying on target marketing, as mass
marketing becomes more expensive and its returns decline. The trend is
happening as a result of increased audience fragmentation, increased
consumer sophistication and less time to engage the message. Businesses,
realizing that they cannot be all things to all people, find that target
marketing and in some industries one-to-one marketing is helping them
focus on the right customers with tailored messages.
. Businesses are shifting their focus to customer equity from brand
equity. As a result of this shift, such terms as "share of wallet",
"share of customers" and "customer lifetime value" have become part of
marketers' vocabularies.
. The amount of available data is growing and the need to integrate
customer data is more pressing. While mountains of data exist throughout
an organization, historically they are sorted independently in
disconnected "silos". The users of the data are in a vacuum of
knowledge, unaware that other data sets exist or information they have
could be valuable elsewhere in the organization. Without integrating the
data, the total picture of the customer remains hidden.
According to a recent study by Killen and Associates, a leading EBPP and
business intelligence research firm, the electronic statement and bill
presentment market will expand aggressively. The study shows that the
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total market size (for statements and EBPP) in North America alone will increase
from $2.5 billion last year (1998) to $31.7 billion in 2005. Furthermore,
according to Killen and Associates:
. The statement presentment segment is emerging as one of the fastest
growing components of this market. The amount of investment in statement
delivery is expected to grow from $500 million in 1998 to $8.2 billion
in 2005.
. Of that $8.2 billion, it is estimated that e-statement issuers (banks,
brokerages, pension, insurance, etc.) will spend $3.3 billion on
software alone to promote Internet statement delivery.
. The e-statement market in North America is emerging as the fastest
growing presentment market in the world, with average annual growth
rates expected to reach 50% through 2005.
. The number of statements presented electronically worldwide will
increase from 1.8 billion in 1998 to 59 billion in 2005, an average
annual growth rate of 65%.
. It is expected that a cumulative share of 70% of all statements will be
presented electronically by 2005.
The Alysis Strategy
Our objective is to be the leader in helping customers in the financial
services industry bring their billing and statement distribution systems to the
Internet. Our strategy includes expansion into other verticals including
telecommunications and utilities. As key elements of our strategy we intend
to:
. Leverage and expand existing client relationships: Past financial
services customers are ideal clients for the WorkOut product.
Additionally, current customers such as Pitney-Bowes are actively
reselling our products.
. Cultivate strategic alliances: We currently have a team focused on
expanding this key objective. Companies that provide application
services or payment processing are ideal candidates for complimenting
the functions of the WorkOut product.
. Further identify and penetrate new markets: Any document intensive
industry is a candidate for legacy to Internet presentment. Currently we
are focused on our core competency of financial services but are
researching and pursuing global market share with the utilities,
telecommunications and insurance industries.
. Hire and retain individuals with extensive skill sets in existing and
emerging technologies: In the current economic environment, attracting
and retaining the necessary talent to succeed is a top priority. We have
performed well in this area and will continue to pursue talent through
multiple channels. Most importantly, employee retention efforts will
continue to focus on providing competitive compensation packages and an
environment where employees are challenged and able to grow their skills
in emerging technologies.
. Acquire complementary technologies and/or businesses: In order to
compete effectively, we will need to continually add new technology or
feature sets. Given the opportunity costs of new applications, a build
or buy strategy will be considered. There are many smaller technology
companies that can bring key functionality and products to Alysis and we
will be researching acquisition opportunities on an ongoing basis.
. Strengthen Distribution: Partnerships are being researched and pursued
for OEM, reseller and joint marketing programs worldwide.
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Alysis Product Suite
We design, develop and market software for electronic document presentment
("EDP") and EBPP. Our flagship product, WorkOut, provides an end-to-end
solution for migrating customer documents, including bills and statements to the
Internet.
WorkOut may be sold as (1) a stand alone Extensible Markup Language ("XML")
transformer and repository for enterprises desiring to transform legacy
information into XML; (2) a presentment solution for Internet-enabling customer
documents or (3) an end-to-end solution of EBPP.
Workout. WorkOut has existed since 1998 as a solution to parse and render
print streams from billing systems, and implement electronic data interchange
and other structured data feeds. Adopted by service bureaus such as Pitney
Bowes, WorkOut manages the biller-direct model well. According to Doculabs, "The
WorkOut Server provides one of the most comprehensive solutions in the market."
Large billers will enjoy many of the same benefits that garnered support
among service bureaus. In particular, the solution, written in Java, implements
a distributed architecture using Common Object Request Broker Architecture
("CORBA"). As such, the product should scale well into very large systems. The
Virtual Trainer module maps existing billing data streams into the WorkOut
Server's schema.
In the financial services industry, check image processing will play an
increasingly important role in the battle for market share. Surveys show that
an excess of 80 percent of the top 100 US banking institutions are actively
pursuing check imaging programs. CheckVision from Alysis can provide an
organization with all the application solutions for increasing fee-based
revenue, reducing operations costs and differentiating their organization's
product offerings.
CheckVision. Financial institutions can use CheckVision, an application
framework, to create new business and consumer check image products. By
deploying these products, financial institutions increase fee income and improve
customer service, two primary interests of any institution. The CheckVision
product line includes a high performance storage module and distributed
functionality to deliver a variety of image-based offerings: image statements,
corporate image statements, image account reconciliation processing ("ARP") and
other image-enhanced case management services. These include payable through
drafts controlled disbursements and positive pay.
CheckVision installations are specially tailored to meet the needs of each
installation. CheckVision's open, scalable architecture supports a variety of
check image transports, UNIX servers, RAID Storage and Windows client
workstations. It is CheckVision's flexibility that allows financial institutions
to increase capacity as volume grows and upgrade application functionality as
needed.
Services
We may provide implementation services to install both our WorkOut product
and CheckVision product. Both WorkOut and CheckVision can be installed at
Alysis' premises or at our customers' operational sites and each interfaces with
our customers' operating environments, which usually include legacy
applications.
We offer maintenance support contracts to customers who have entered into
license agreements. We offer several levels of technical support service: a
choice of hours of coverage for telephone support, remote diagnostics or on-site
support. In addition, standard training is included in the installation
services.
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Customers
WorkOut and Custom Statement Presentment
<TABLE>
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Be'eri Merrill Lynch
InfoImage Pitney Bowes
Hermes Precis Ltd. SouthTrust Bank
</TABLE>
CheckVision
<TABLE>
<CAPTION>
<S> <C>
ABN AMRO Northern Trust
Bank of California QuestPoint, L.P. (CoreStates)
Comerica Sanwa Bank
Crestar Bank SouthTrust
Fiserv UMB Bank
Fleet Services Corporation Union Bank of California
Key Services Corp. (NCR-GSA) Wells Fargo
</TABLE>
Sales, Marketing and Distribution
Sales. Alysis currently sells its products in North America, Europe, the
Middle East and Australia through its direct sales force and distributors.
Alysis employs experienced product salespersons and technical sales support to
facilitate the needs of prospects and customers. Our sales staff is
headquartered in New York, NY, and covers North America from various regional
offices. Alysis generates sales leads from its strategic alliances, directly
from corporate site and prospecting, and through participation in industry trade
shows and conferences. We also sell products through OEM relationships
worldwide.
Marketing. Alysis' marketing activities to date have been largely focused on
re-branding the company as an EBPP and ESP provider, generating customer
interest through the corporate Web site, and undertaking vigorous public
relation activities including various market publications and attendance at
conferences and trade shows worldwide. Additionally for 2000, we have
developed a very aggressive integrated marketing campaign consisting of public
relations, advertising, trade-show participation, vertical market programs and
analyst relations.
Competition
As with many new markets, barriers to entry are few and a number of players
are entering this market, or are re-positioning themselves as EBPP and ESP
providers. Companies such as BlueGill/CheckFree, Edocs, Interface, Just in Time
and Xenos represent competition.
With respect to our CheckVision application framework, we compete primarily
with NCR, Fiserv, BancTec, Check Solutions and Unisys. Among our potential
competitors are a number of large hardware and software companies that may
develop or acquire software products that compete with our application
frameworks. In competing with hardware vendors we may be at a competitive
disadvantage because hardware vendors are able to package and discount sales of
software bundled with hardware to allow the customer the opportunity to deal
with a single vendor at a more attractive price.
Technology
The following paragraphs describe some of the main features, capabilities and
technologies provided by WorkOut.
XML Database. WorkOut has a sophisticated and intuitive document description
workstation designed to simplify the transformation of documents into XML
databases.
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Highly Scalable Distributed Architecture. WorkOut can be installed in a
clustered configuration. Consequently, if application requirements outgrow
server hardware, another physical server is simply added to a WorkOut
SuperSet(TM). Multiple WorkOut servers automatically share (or load balance)
processing. No other available system provides this kind of scalability, which
is achieved by using distributed technology based on the industry standard
CORBA.
Runs on High-End Computing Platforms. WorkOut is a 100% Java system that can
run on virtually any computing platform, such as Microsoft Windows NT, 64-bit
UNIX systems and even OS/390 mainframes. This portability, combined with the
system's distributed architecture, makes WorkOut the most scalable system of its
kind.
Virtually Unlimited Storage Retention. By using WorkOut's highly scalable
and partitioned document database, organizations can make a virtually unlimited
number of documents available for on-line presentment for extended time periods.
WorkOut documents can even be migrated to near-line storage media, such as
optical disks or tape.
Double-Byte Architecture. WorkOut supports all double-byte international
character sets, such as Chinese and Japanese, in addition to all single-byte
Western alphabets, such as English, French and German.
Visual HTML Authoring and Customization. The WorkOut Studio automatically
creates starter presentment templates, which can be customized by using popular
HTML authoring tools, such as Microsoft FrontPage and Macromedia Dreamweaver.
WorkOut dynamically creates HTML bills for specific individuals based on
customer templates. Because WorkOut uses Java Server Pages ("JSPs"),
organizations have complete flexibility for customizing and extending the
functionality of on-line statements. This customization can include additional
integration with existing systems as well as enhanced decision making and
presentation logic. With WorkOut, virtually any type of functionality for cross
selling and up selling can be added to on-line documents.
Web Site Publishing. Once HTML templates have been created, organizations
can use the WorkOut Studio to publish the entire site to virtually any Web
server, such as Microsoft Internet Information Server ("IIS") on Windows NT, or
an Apache Web server running on UNIX. This automatic site publishing capability
saves a great deal of time and labor by eliminating the need to perform this
task manually.
Data Extraction. The WorkOut Visual Trainer (patent pending) is a graphical
tool that enables organizations to visually define input data streams, such as
IBM AFP documents. This makes it possible for WorkOut licensees to extract
billings and statements from their existing and legacy data sources. In addition
to supporting major print stream formats, they can also load structured text
files, Electronic Data Interchange ("EDI") invoices and XML data into WorkOut.
Electronic Mail Notification. WorkOut can automatically send email messages
to customers in order to inform them that their statements are available for on-
line viewing. These email messages can be plain text or richly formatted HTML.
They can also contain summary and/or detailed statement information with hot
links back to a Web page containing the full statement details. Email messages
are created by using the same HTML publishing mechanism template utilized to
create online Web pages.
Enrollment Processing. WorkOut provides functionality that enables users to
enroll for online presentment and subscribe to one or more statement documents.
As such, WorkOut maintains a rich customer profile for handling user preferences
and other critical pieces of information. Enrollment information can also be
loaded directly into WorkOut from an external source.
Security. WorkOut provides comprehensive tracking of user permissions and
authorizations for accessing documents and paying on-line bills. WorkOut can
support virtually any level of security required, including simple user ID and
password security or client side certificates. For a very high level of
security, users can even restrict access to WorkOut documents by using secure
hardware tokens. WorkOut also has the ability to provide a third party OFX
consolidator service with an authentication token that may eliminate the need
for a user to have multiple login IDs and passwords when linking to a WorkOut
bill from a consolidator's site or a Web portal site. Popular portals include
Yahoo and Excite. Microsoft, Intuit and CheckFree designed the OFX standard for
bill presentment.
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Integration with Consolidators. WorkOut automatically extracts billing
summary data into an OFX-compliant format. Alysis has integrated and tested this
functionality with Electronic Funds and Data Corporation ("EFD") and is close to
announcing an additional partnership with another major consolidator.
Payment Processing Ready. The WorkOut database provides robust functionality
for payment processing and tracking. Payment entry and confirmation screens can
be created by using standard WorkOut templates or templates developed by an
organization. WorkOut supports EFD's SafePay(TM) service and Cybercash's
PayNow(TM) service. Moreover, WorkOut can generate most standard payment file
formats, such as the Account Clearinghouse ("ACH") format used by most US banks.
Payment Scheduling. Users that get their bills via WorkOut can be allowed to
edit their own payment profile. This makes it possible for them to schedule
bills to be paid automatically at predefined points in a billing cycle. WorkOut
can also automatically notify users of scheduled payments. Moreover, users can
stop or modify a scheduled payment at any time before it is executed. This
feature benefits users by providing them with all of the convenience of
automatic debits, but still gives them full control over their payments. The
biller also gets the benefits of direct debit--lower costs and a more reliable
cash flow.
Full Logging and Tracking. WorkOut maintains comprehensive logs of user and
system activity. This information can be used to create standard and ad hoc
reports.
Intellectual Property and Licensing
Our success depends upon our proprietary technology. We rely on a combination
of copyright, patent, trademark and trade secret laws, confidentiality
procedures, and licensing arrangements to establish and vigorously enforce our
proprietary rights.
We have a recently issued patent for a System for Data Extraction from a
Print Data Stream and a patent pending in the U.S. and internationally for Data
Parsing System for Use in Electronic Commerce. In addition, we have four other
patents. While our current products are not dependent on these four patents,
such patents may be utilized in future products.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, consultants, distributors and
corporate partners, and limit access to and distribution of our products,
supporting documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries where we
have in the past and may in the future license our products. There can be no
assurance that the protection of our proprietary rights will be adequate or that
our competitors will not independently develop similar technology, duplicate our
products or design around any intellectual property rights upon which our
business is now or may in the future be dependent.
To the best of our knowledge, our products do not infringe on the proprietary
rights of third parties. There can be no assurance, however, any third parties
will not challenge our patents or claim infringement by us with respect to
current or future products. We expect that product developers will increasingly
be subject to such claims as the number of products and competitors in our
industry segment grows and the functionality of products in the industry segment
overlaps. Any such claims, with or without merit, could result in costly
litigation that could absorb significant management time, which could have a
material adverse affect on our business, operating results and financial
condition. Such claims might require us to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to us or at all, which could have a material
adverse affect on our business, operating results and financial condition.
Our products incorporate certain software that we license from third parties,
including software that is integrated with internally developed software and
used in our Company's products to perform key functions. There can be no
assurance that such suppliers will remain in business, that they will continue
to support their products, or that their products will otherwise continue to be
available to us on commercially reasonable terms. We believe that substantially
all of the software we license is available from vendors other than our current
vendors, or could be developed internally by us, and could therefore be replaced
with equivalent software.* However, it is possible that the loss or inability to
maintain any of these software licenses could result in delays
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or reductions in product shipments until equivalent software can be developed,
identified, licensed, and integrated, which would adversely affect our business,
operating results, and financial condition.*
We typically license our software products in object code to customers under
nonexclusive, nontransferable license agreements. As is customary in the
software industry, we do not sell or transfer title of our software products to
customers. In addition, we escrow the applicable source code as part of its
maintenance program, pursuant to which our source code would be released to the
customer upon the occurrence of certain events, such as the commencement of
bankruptcy or insolvency proceedings by or against us, or certain material
breaches of the agreement. In the event of any release of the source code from
escrow, the customer's license is generally limited to use of the source code to
maintain, support and enhance our application software solutions for the
customer's own use. Licenses for our application software solutions are usually
perpetual. Under our standard form license agreement, the annual software
maintenance fee is based on a percentage of the applicable product license fee.
Our published product license price list includes discounts for multiple sites
and/or multiple copies of client viewer software, and where applicable, upgrade
fees for increases in the volume of processed transactions.
Employees
As of December 31, 1999, we employed 99 persons, including 20 in sales and
marketing; 67 in product development, delivery, and support; and 12 in general
and administrative positions. An organized association represents none of our
employees. We have experienced no work stoppages and believe that our
relationship with our employees is good. Competition for qualified personnel in
the software segment in which we compete is intense. We believe that our future
success will depend in part on our continued ability to attract, hire, and
retain qualified personnel.
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Executive Officers and Directors
The following table set forth-certain information as of March 1, 2000, with
respect to each person who is an executive officer or director of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- -------------- -------------------------------------------------------------------------
<S> <C> <C>
Kevin D. Moran 44 President, Chief Executive Officer and Chairman of the Board
David R. Bankhead 50 Vice President, Chief Financial Officer, Secretary and Treasurer
Geraldine McGrath 50 Vice President, General Counsel, Assistant Secretary
John J. Cook, Jr. 56 Director
Stewart Gross (2) 40 Director
Randy Katz (1) (2) 44 Director
Henry Kressel (1) 66 Director
Timothy F. McCarthy 49 Director
John Oltman (1) (2) 54 Director
</TABLE>
- ---------------------------------
(1) Compensation Committee member.
(2) Audit Committee member.
Mr. Moran has served as President and Chief Executive Officer of the Company
since August 3, 1998 and as the Chairman of the Board since January 25, 1999.
From 1997 to 1998, Mr. Moran served as senior vice president of Charles Schwab &
Co. Prior to 1997, Mr. Moran held numerous positions over a ten-year career at
Fidelity Investments. These positions included President of National Financial
Brokerage Services and Senior Vice President of Fidelity Investments
Institutional Retirement Services. Mr. Moran earned his MBA from Northeastern
University and a BA from College of Holy Cross in Worcester, MA. Mr. Moran is a
Certified Public Accountant.
Mr. Bankhead has served as Vice President and Chief Financial Officer of the
Company since February 28, 2000. Mr. Bankhead formerly served as Senior Vice
President and Chief Financial Officer of Hogan Systems, Inc., a provider of
software and services to large banks and financial institutions worldwide. Most
recently Mr. Bankhead was President, Chief Executive Officer and Chief Financial
Officer of Xybernet, Inc., which he joined in 1996 after Hogan's acquisition by
The Continuum Company. His experience also includes nine years in various
positions at Cybertek Corporation including controller, Chief Financial Officer
and Chief Operating Officer. Mr. Bankhead is a Certified Public Accountant and
earned a BA from California State University, Northridge.
Ms. McGrath has served as General Counsel of the Company since its inception
in 1992. From 1987 until 1992, Ms. McGrath served as Litton Industries'
Integrated Automation Division Counsel and Assistant Secretary. From 1986 until
1987, Ms. McGrath served as General Counsel and Assistant Secretary for
Integrated Automation, Inc., a predecessor to the Company. Ms. McGrath holds a
BA from San Francisco State University and a JD from San Francisco Law School
and is a member of the American Arbitration Association's Arbitrator and
Mediator panels.
Mr. Cook has served as president of UAM Investment Services, Inc., and as
chairman and chief executive officer of CS First Boston Investment Management,
Inc. Mr. Cook's previous appointments included terms as president of Fidelity
Investments Institutional Group and managing director of FMR Corporation, as
president of Fidelity Management Trust Company. He also worked at Morgan
Guaranty Trust Co. and J.P. Morgan Investment Management Company. Mr. Cook
serves as managing director of Seaward Management Corporation, Boston,
Massachusetts.
Mr. Gross has served as a director of the Company since 1997. Mr. Gross, a
partner of Warburg, Pincus & Co., the general partner of Warburg, Pincus
Investors, L.P., and a managing director of E.M. Warburg, Pincus &
Page 11
<PAGE>
Co., LLC, has been with E.M. Warburg, Pincus & Co., LLC since 1987. Mr. Gross is
a Director of BEA Systems, Inc., SkillSoft, Inc., and several private companies.
Dr. Katz has served as a director of the Company since 1997. Dr. Katz has
been a professor at the University of California Berkeley for 17 years and is
the past Chairman of the Electrical Engineering and Computer Science Department
at UC Berkeley.
Dr. Kressel has served as a director of the Company since its inception in
1992. Dr. Kressel, a partner of Warburg, Pincus & Co., the general partner of
Warburg, Pincus Investors, L.P., and a managing director of E.M. Warburg, Pincus
& Co., LLC has been with E.M. Warburg, Pincus & Co., LLC since 1983. Dr. Kressel
serves as a director of Level One Communications, Inc., Covad, NOVA Corporation,
Inc. and several privately held companies.
Mr. McCarthy has served as a director of the Company since January 1999. Mr.
McCarthy is the Chairman of the AdvisorTech Corporation, a brokerage systems
company founded by Mr. McCarthy in 1998 and based in Tokyo, San Francisco, and
Boston. From 1995 to 1998, Mr. McCarthy was President and Chief Operating
Officer of Charles Schwab and Company, Inc. From 1994 to 1995, Mr. McCarthy was
Chief Executive Officer of Jardine Fleming Unit Trust Ltd. in Hong Kong.
Mr. Oltman has served as a director of the Company since 1996. From 1991 to
1995, Mr. Oltman served as the Chairman of the Board and Chief Executive Officer
of SHL Systemhouse Inc., a company that provides client/server consulting and
integration services. From 1970 to 1991, Mr. Oltman served as Worldwide Managing
Partner for Integration Services for Andersen Consulting and a member of
Andersen Consulting's Worldwide Organization Board of Directors. Mr. Oltman
serves as a director of Inacom Corp., and a privately held company.
This "Risk Factors" section contains forward-looking statements (identified
with an asterisk "*") that involve risk and uncertainties. The Company's actual
results may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in this "Risk Factors" section and in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The Company assumes no obligation to update such forward-looking
statements or to update the reasons actual results could differ materially from
those anticipated in such forward-looking statements.
Risk Factors
We Can Make No Assurances that We Will Be Profitable in Any Future Period. We
have incurred significant net losses since our inception. At December 31, 1999,
we had an accumulated deficit of approximately $24.6 million. Although we
achieved a net operating profit in the three months ended September 30, 1999 and
the three months ended March 31, 1995, 1996 and 1997, June 30, 1996, September
30, 1996 and 1997, and December 31, 1996 and 1997, we cannot assure you that we
will have operating profits in any future period.
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<PAGE>
Our Quarterly Operating Results Will Fluctuate because of Many Factors. Our
quarterly operating results have varied in the past, and we expect our quarterly
operating results to vary significantly in the future.* Our revenues and
operating results are difficult to forecast and could be significantly affected
by many factors, some of which are outside our control, including, among others:
. Demand for the Company's products and services;
. The variable size and timing of individual license transactions;
. The timing of our future revenue which we will recognize under SOP 97-2
and SOP 98-4;
. Increased competition;
. The timing of new product releases by us and our competitors;
. Market acceptance of our software;
. The ability to expand our sales and marketing operations, including
hiring additional sales personnel;
. Software defects or other quality problems with our software;
. Changes in pricing policies by us and our competitors;
. The mix of our license and service revenue;
. Budgeting cycles of our customers;
. Success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners;
. The introduction of indirect sales into our revenue mix which has
resulted in and could continue to result in lower gross margins;
. The ability to control costs;
. Technological changes in our markets;
. Changes in our strategy;
. Personnel changes; and
. General economic factors.
We are in the process of transitioning to the ESP and EBPP application
business. During this process we plan to increase our operating expenses to
expand our sales and marketing operations, fund greater levels of research and
development, develop new partnerships, expand our two East Coast facilities, and
expand into Europe and Asia. If our revenues do not increase along with these
expenses, our business, operating results and financial condition could be
seriously harmed and net losses in a given quarter could be even larger than
expected.*
In addition, because our expense levels are relatively fixed in the near term
and based in part on expectations of our future revenues, any decline in our
revenues to a level that is below our expectations would have a
disproportionately adverse impact on our operating results.*
We May Have Difficulties in Retaining the Proper Resources to Address Our
Current Contract Obligations that Extend as Far as 2006. During our transition
out of CheckVision and our other mature software application frameworks, we may
incur transition expenses over the next few quarters such as retention bonuses,
severance payments and moving expenses.* In addition, the company expects to
incur a short-term decline in total revenues over the next few quarters.* Since
the majority of our sales of CheckVision and our other mature software
application frameworks are to customers in the financial services industry, this
transition could result in ill will towards the company and, as a result, hinder
our ability to penetrate the financial services industry with sales of our new
ESP and EBPP products.* This transition could also result in litigation. If we
are unable to retain the proper resources, or if we are hindered in our ability
to penetrate the financial services industry, or if we incur litigation
resulting from this transition, our business, operating results and financial
condition could be significantly harmed.*
The Business-To-Business Electronic Presentment Industry Is Very Competitive,
and We Face Intense Competition from Many Participants in this Industry. The
markets for electronic commerce software ESP and EBPP are becoming progressively
competitive. While Alysis believes that our product offering is unique and our
technology superior, there can be no assurance that new competitors will not
emerge and/or current competitors will match our technology in the near to
medium term. There are a number of companies from various industries vying for
market share in the ESP and EBPP markets. Some companies have more established
alliances, marketing and sales departments and greater financial resources.
While we intend to
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maintain our current advantages and seek out new ways to minimize our
weaknesses, through acquisition or other means, there can be no assurances that
this will be achieved.
We Derive a Significant Portion of Our Revenue from the Financial Services
Industry and for Us to Be Successful We Will Need to Penetrate Additional
Industries Such as Telecommunications and Utilities. Currently, a substantial
majority of our total revenue results from services and licenses provided to
large banks and other financial institutions. Our future operating results will
depend in part on our ability to penetrate additional industries such as
telecommunications and utilities. While we may devote substantial resources to
penetrate these and other markets, we cannot assure you that the revenues we
generate from this effort, if any, will exceed the cost of such efforts.* To
successfully expand our product offerings to industries other than the financial
services industry, we must continue to enhance our ESP and EBPP products and to
expand our sales and marketing departments. We cannot assure you that we will
be able to create or modify our software products effectively, that they will
achieve market acceptance, or that we will be able to expand our sales and
marketing departments.* If we are unable to penetrate new industries, our
future financial condition will depend upon our ability to further penetrate the
financial services industry. The current focus of the banking industry on
mergers may impede our ability to further penetrate this industry.* If we are
unable to adapt our software and product solutions or our sales and marketing
efforts to meet the needs of new industries, or if we are not able to further
penetrate the financial services industry, our business, operating results and
financial condition could continue to be significantly harmed.*
Our Business Could Be Affected by Software Defects and Product Liability
Claims. Software products as complex as ours may contain errors that may be
detected at any point in a product's life cycle. We have in the past discovered
software errors in certain of our software application solutions and have
experienced delays in shipment of application frameworks during the period
required to correct these errors. We can make no assurances that, despite
testing by us as well as by current and potential customers, errors will not be
found, resulting in:
. Loss of, or delay in, market acceptance;
. Diversion of development resources;
. Injury to our reputation; or
. Increased service and warranty costs, any of which could significantly
harm our business, operating results and financial condition.*
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. Our
software application solutions are generally used to manage data that is
critical to an organization, and as a result, our sale and support of our
application frameworks may entail the risk of significant product liability
claims. A liability claim brought against us could significantly harm our
business, operating results and financial condition.*
Our Success Depends on Our Ability to Expand Our Distribution Channels and
Successfully Manage the Risks Associated with Such Expansion. To date, we have
sold our ESP, EBPP and software application solutions primarily through our
direct sales force. We will need to successfully recruit, retain and train
sufficient direct sales personnel and establish other distribution channels and
partnerships to achieve significant revenue growth in the future. We continue
to seek ways to augment our direct sales force by establishing indirect
distribution channels, including relationships with OEMs, resellers, bill
consolidators, application service providers, and service bureaus. Our
distribution channels and alliances have to-date produced substantially less
revenue than we originally expected. We can make no assurances that we will
successfully increase our revenue through channels and alliances. We can make no
assurances that we will successfully expand our direct sales force or that any
such expansion will result in any substantial increase in our revenues. Our
failure to expand our direct sales force or other distribution channels could
continue to significantly harm our business, operating results and financial
condition.*
We Expect Our Transition to the ESP and EBPP Application Market Will Continue
to Strain Our Management, Operational and Technical Resources. We are in the
process of transitioning from an application services focus to a product-centric
focus in the ESP and EBPP market. Our transition has placed significant demands
on our management, operational and technical resources. We expect this
transition to continue to
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challenge our sales, marketing, technical and support personnel and senior
management. Our future performance will depend in part on our ability to adapt
our operational systems to respond to changes in our business. Our transition
entails a number of risks, including continued potential declines in revenue and
the need to develop the appropriate sales and marketing capabilities and
software development estimation, production, delivery and distribution
infrastructure. We can make no assurances that we will be successful in creating
the necessary capabilities and infrastructure at all. Our failure to manage the
transition successfully has had and could continue to significantly harm our
business, operating results and financial condition.
Our Senior Management and Other Key Personnel Are Critical to Our Business
and Those Managers and Personnel May Not Remain with Us in the Future. We must
retain the continued service of our senior management as well as sales and
product development personnel if we are to provide improved future performance.
We do not have and do not intend to obtain key person life insurance on our
personnel. The loss of one or more of our key personnel could significantly harm
our business, operating results and financial condition. We are also actively
seeking key technical personnel. We believe that our future success will depend
in large part upon our ability to attract and retain highly skilled management,
marketing, sales and product development personnel. Competition for such
personnel is intense, and we can make no assurances that we can retain our key
employees or that we will successfully attract, assimilate and retain such
personnel in the future. Our failure to attract, assimilate and retain key
personnel could significantly harm our business, operating results and financial
condition.*
Our Efforts to Protect Our Intellectual Property May Not Protect Us Against
Misuse and Others May Claim that Our Products Infringe. Our success depends in
significant part upon our proprietary technology. We rely on a combination of
copyright, patent, trademark and trade secret laws, confidentiality procedures,
and licensing arrangements to establish and protect our proprietary rights. We
have a recently issued patent for a System for Data Extraction from a Print Data
Stream and U.S. and international patents pending for Data Parsing System for
Use in Electronic Commerce. In addition, we have four other patents. While our
current products are not dependent on these four patents, we may utilize these
patents in future software products.
We vigorously enforce our patent rights. While there can be no assurances of
success, we continually evaluate methods by which to enforce and capitalize on
our patent rights. Such actions may cause us to incur substantial costs which
could impact our financial results.*
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, consultants, distributors and business
partners, and limit access to and distribution of our products, supporting
documentation and other proprietary information. Despite these precautions, a
third party may be able to copy or otherwise obtain and use our software
products or technology without our authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries, where
customers have in the past licensed and may in the future license our products.
We cannot assure you that protection of our proprietary rights will be adequate
or that our competitors will not independently develop similar technology,
duplicate our software products or design around any intellectual property
rights upon which our business is now or may in the future be dependent.
Our products incorporate certain software that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform key functions. We cannot assure you that:
. Such firms will remain in business;
. They will continue to support their software products; or
. Their software products will otherwise continue to be available to us on
commercially reasonable terms.
We believe that substantially all of the software we license is available
from vendors other than our current vendors. We also believe that we could
develop such software internally. However, it is possible that the loss or
inability to maintain any of these software licenses could result in delays or
reductions in product shipments until we could develop, identify, license and
integrate equivalent software. Such delays could significantly harm our
business, operating results and financial condition.*
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We are not aware that any of our products infringe on the proprietary rights
of third parties. We cannot assure you, however, that third parties will not
challenge our patents or claim infringement by us with respect to our current or
future products. We expect that software product developers will increasingly be
subject to such claims as the number of software products and competitors in our
industry segment grows and the functionality of software products in the
industry segment overlaps.* Any such claims, with or without merit, could result
in costly litigation that could absorb significant management time, which could
have a material adverse affect on our business, operating results and financial
condition. Such claims might require us to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to us or at all, which could significantly harm
our business, operating results and financial condition.*
We Depend on the Introduction of New Versions of the Company's WorkOut
products and on Enhancing the Functionality and Services Offered by the Company.
If we are unable to develop new software products or enhancements to our
existing products on a timely and cost-effective basis, or if new products or
enhancements do not achieve market acceptance, our business would be seriously
harmed.* The life cycles of our products are difficult to predict because the
market for our products is new and emerging, and is characterized by rapid
technological change, changing customer needs and evolving industry standards.
The introduction of products employing new technologies and emerging industry
standards could render our existing products or services obsolete and
unmarketable.*
To be successful, our products and services must keep pace with technological
developments and emerging industry standards, address the ever-changing and
increasingly sophisticated needs of our customers and achieve market acceptance.
In developing new products and services, we may:
. Fail to develop and market products that respond to technological
changes or evolving industry standards in a timely or cost-effective
manner;
. Encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or
that shorten the life cycles of our existing products and services;
. Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services; or
. Fail to develop new products and services that adequately meet the
requirements of the marketplace or achieve market acceptance.
If We Fail to Release Our Products in a Timely Manner, or if Our Products Do
Not Achieve Market Acceptance, Our Business Would Be Seriously Harmed. We may
fail to introduce or deliver new potential offerings on a timely basis or at
all. If new releases or potential new products are delayed or do not achieve
market acceptance, we could experience a delay or loss of revenues and customer
dissatisfaction.* Customers may delay purchases of WorkOut in anticipation of
future releases. If customers defer material orders of WorkOut in anticipation
of new releases or new product introductions, our business would be seriously
harmed.*
In Order to Manage Our Growth and Expansion, We Will Need to Improve and
Implement New Systems, Procedures and Controls. We have recently experienced a
period of rapid expansion in our East Coast locations and this has placed a
significant strain upon our management systems and resources. If we are unable
to manage our growth and expansion, our business will be seriously harmed.* In
addition, we have recently hired a large number of employees and plan to further
increase our total headcount. We also plan to expand the geographic scope of our
customer base and operations, both domestically and internationally. This
expansion has resulted and will continue to result in substantial demands on our
management resources. Our ability to compete effectively and to manage future
expansion of our operations, if any, will require us to continue to improve our
financial and management controls, reporting systems and procedures on a timely
basis, and expand, train and manage our employee work force.
As We Expand Our International Sales and Marketing Activities, Our Business
Will be Susceptible to Numerous Risks Associated With International Operations.
To be successful, we believe we must expand our international operations and
hire additional international personnel. Therefore, we expect to commit
significant
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resources to expand our international sales and marketing activities. If
successful, we will be subject to a number of risks associated with
international business activities. These risks generally include:
. Currency exchange rate fluctuations;
. Seasonal fluctuations in purchasing patterns;
. Unexpected changes in regulatory requirements;
. Tariffs, export controls and other trade barriers;
. Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. Difficulties in managing and staffing international operations;
. Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. The burdens of complying with a wide variety of foreign laws;
. The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia; and
. Political instability.
In the Future We May Need to Raise Additional Capital in Order to Remain
Competitive in the ESP and EBPP Industry. This Capital May Not Be Available on
Acceptable Terms, if at All. We believe that our existing cash and cash
equivalents, together with expected cash flows from operations combined with
external financing, will be sufficient to fund our operations for the next 12
months. There can be no assurance that such financing will be available on
acceptable terms, if at all and that such terms will not be dilutive to our
existing stockholders. Our inability to secure necessary funding would have a
material adverse affect on our financial condition and results of operations.*
We Depend on Increasing Use of the Internet and on the Growth of Electronic
Commerce. If the Use of the Internet and Electronic Commerce Do Not Grow as
Anticipated, Especially in the International Arena, Our Business Will Be
Seriously Harmed. Alysis' ESP and EBPP products depend on the increased
acceptance and use of the Internet as a medium of commerce. Rapid growth in the
use of the Internet is a recent phenomenon. As a result, acceptance and use may
not continue to develop at historical rates and a sufficiently broad base of
business customers may not adopt or continue to use the Internet as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty, and there
exist few proven services and products.
Our business would be seriously harmed if:
. Use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
. The technology underlying the Internet and other online services does
not effectively support any expansion that may occur;
. The Internet and other online services do not create a viable commercial
marketplace, inhibiting the development of electronic commerce and
reducing the need for our products and services; or
. There is increased governmental regulation.*
Security Risks and Concerns May Deter the Use of the Internet for Conducting
Electronic Commerce. A significant barrier to electronic commerce and
communications is the secure transmission of confidential information over
public networks. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments could result in compromises or
breaches of our security systems or those of other Web sites to protect
proprietary information. If any well-publicized compromises of security were to
occur, it could have the effect of substantially reducing the use of the Web for
commerce and communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
customers or suppliers, which could disrupt WorkOut or make it inaccessible to
customers or suppliers. We may be required to expend significant capital and
other resources to protect against
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the threat of security breaches or to alleviate problems caused by breaches. To
the extent that our activities may involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability.* Our security
measures may be inadequate to prevent security breaches, and our business would
be harmed if we do not prevent them.*
ITEM 2. PROPERTIES
We occupy approximately 29,000 square feet of office space in Emeryville,
California, pursuant to a lease, which expires in April 2004. We lease 4,600
square feet of storage facilities in Oakland, California. We occupy
approximately 4,000 square feet of office space in Easthampton, Massachusetts,
pursuant to a lease, which expires in October 2000. We occupy approximately
1,000 square feet of office space in New York, New York, on a month-to-month
lease. We are currently looking to relocate our Massachusetts facility to a
larger location prior to the end of the lease term. We are also looking for
larger office space in New York.
ITEM 3. LEGAL PROCEEDINGS
From time to time, in the normal course of business, various claims may be
made against us. At this time, in the opinion of management, there are no
pending claims the outcome of which is expected to result in a material adverse
affect on our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter ended
December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the NASDAQ National Market under the symbol ALYS.
The market price for our stock, from January 1, 1998 through December 31, 1999,
is as follows:
<TABLE>
<CAPTION>
HIGH LOW
-------------------- --------------------
1999
<S> <C> <C>
First Quarter................................ $ 1.688 $0.625
Second Quarter................................ 4.500 0.938
Third Quarter................................. 2.125 1.063
Fourth Quarter................................ 10.000 0.750
1998
First Quarter............................... $ 3.063 $1.500
Second Quarter............................... 3.313 2.000
Third Quarter............................... 3.250 1.188
Fourth Quarter.............................. 1.250 0.313
</TABLE>
As of December 31, 1999, we had approximately 54 holders of record of our
common stock.
The market price for our common stock may be affected by a number of factors,
some of which are outside our control, including the announcement of new
software products or product enhancements by us or our competitors, quarterly
variations in our operating results or the operating results of our competitors
or companies in related industries, changes in earnings estimates or
recommendations by securities analysts, developments in our industry, general
market conditions and other factors, including factors unrelated to our
operating performance or our competitors. In addition, stock prices for many
companies in the technology and emerging growth sectors have experienced
particularly volatile fluctuations that have often been unrelated to the
operating performance of such companies. Such factors and fluctuations, as well
as general economic, political and market conditions, such as recessions, may
materially adversely affect the market price of our common stock.
We have never paid cash dividends on our common stock and do not expect to
pay any such dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statements of Operations:
Revenues:
License $ 7,623 $ 3,141 $ 7,911 $ 7,345 $ 2,110
Service 7,290 5,661 11,347 12,347 10,150
Maintenance 4,899 4,369 3,223 2,588 3,738
Hardware - - - 3,412 1,532
------- -------- ------- ------- --------
Total revenues 19,812 13,171 22,481 25,692 17,530
------- -------- ------- ------- --------
Cost of revenues:
License 77 231 362 426 -
Service 4,334 5,171 4,862 3,631 3,400
Maintenance 2,129 2,500 837 721 1,168
Hardware - - - 2,716 865
------- -------- ------- ------- --------
Total cost of revenues 6,540 7,902 6,061 7,494 5,433
------- -------- ------- ------- --------
Operating Expenses:
Sales and marketing 4,476 5,234 4,757 5,133 4,313
General and administrative 7,582 7,850 7,101 6,629 5,923
Product development 1,874 4,861 4,480 4,226 3,238
------- -------- ------- ------- --------
Total operating expenses 13,932 17,945 16,338 15,988 13,474
------- -------- ------- ------- --------
Operating income (loss) (660) (12,676) 82 2,210 (1,377)
Other Income (expense):
Interest Expense - - (4) (55) (14)
Interest income and other 349 395 506 153 79
------- -------- ------- ------- --------
Income (loss) before income taxes (311) (12,281) 584 2,308 (1,312)
------- -------- ------- ------- --------
Income taxes - - 23 - -
Net income (loss) $ (311) $(12,281) $ 561 $ 2,308 $ (1,312)
Preferred stock dividends $ 117 $ - $ - $ - $ -
------- -------- ------- ------- --------
Net income (loss) applicable to
common stockholders $ (428) $(12,281) $ 561 $ 2,308 $ (1,312)
======= ======== ======= ======= ========
Basic net income (loss) per share
applicable to common stockholders $(0.03) $(1.06) $0.05 $0.25 $ (0.15)
======= ======== ======= ======= ========
Diluted net income (loss) per share
applicable to common stockholders $(0.03) $(1.06) $0.05 $0.23 $ (0.15)
======= ======== ======= ======= ========
Shares used in computing basic net
income (loss) per share applicable
to common stockholders 12,326 11,596 11,164 9,098 8,580
======= ======== ======= ======= ========
Shares used in computing diluted
net income (loss) per share
applicable to common stockholders 12,326 11,596 12,017 10,256 8,580
======= ======== ======= ======= ========
Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
Balance Sheet Data:
Working Capital $ 5,873 $ 3,124 $15,008 $14,117 $ 1,032
Total assets 14,601 10,010 19,288 19,177 5,705
Total debt - - - - 200
Convertible preferred stock 3,814 - - - -
Redeemable convertible preferred - - - - 15,448
stock
Stockholders' equity (net capital 9,014 3,823 15,623 14,576 (13,825)
deficiency)
</TABLE>
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The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. Additionally, this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements (identified with an asterisk "*") that involve risk and
uncertainties. The actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business", and "Risk Factors" and the risks discussed in our other SEC filings
including our Form 10-Qs from the quarters ended March 31, 1999, June 30, 1999,
and September 30, 1999. The Company assumes no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated such forward-looking statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Alysis develops and delivers electronic billing and statement presentment
software that document intensive industries need to remain competitive in the
electronic commerce arena. We were incorporated in July 1992, when management,
in partnership with EM Warburg Pincus and Co. LLC, purchased certain assets and
liabilities of Litton Industries' Integrated Automated Division, a leading
system integrator with a primary focus on the aerospace industry and secondary
focus on the financial services and transportation industries. At that time, a
decision was made to de-emphasize the aerospace market and develop an enterprise
transaction management platform and corresponding software application
frameworks targeted to the financial services industry.
In August 1998, with the hiring of a new Chief Executive Officer, we decided
to aggressively pursue a new product strategy of Internet presentment of legacy
data primarily based on a successful installation of an intranet based statement
delivery system at Merrill Lynch. This installation, which was completed in
early 1998, was the precursor to the CyberStatement application framework. In
order to further penetrate the e-presentment marketplace, Alysis acquired At
Work, a New York based provider of EBPP software and early pioneer in XML
technology. As a result, our CyberStatement product was replaced by At Work's
WorkOut product, and renamed WorkOut. Three contracts were signed for this new
product in December 1999, the major portion of which will generate revenue in
the first half of fiscal year 2000. In 2000, management believes we will derive
an increasing amount of revenue from the WorkOut product, however, there can be
no assurance that we will be successful in our efforts.*
Through 1999, revenues primarily consisted of large application development
contracts and were derived from four application frameworks, CheckVision,
RemitVision, a loan application framework, and CyberStatement, which was
replaced by WorkOut in late 1999. In 1998, our total revenues of $13.2 million
were significantly below 1997's total revenues of $22.5 million. We believe
this was primarily due to a much smaller available market for our existing
application frameworks than originally expected. In addition, we experienced
delays in 1998 in implementation of our RemitVision application framework, a
product that was discontinued in late 1998. In 1999, our total revenues
increased to $19.8 million primarily due to license and royalty revenues
recognized on the amendment of the Global Strategic Alliance Agreement with NCR
and to service revenues recognized on the installation of large CheckVision
contracts. Management believes that it will need to penetrate additional market
segments within financial services in order to achieve continued revenue growth
in CheckVision, the timing of which is difficult to predict.* It is also
management's intention to pursue strategic options in 2000 regarding the
remaining CheckVision application framework product line.
WorkOut enables financial services firms to efficiently manage, store and
distribute legacy reports and print-formatted documents such as customer
statements over the Internet. It is a solution to parse and render print
streams from billing systems, and to implement electronic data interchange and
other structured data feeds. CheckVision provides high-volume check image
capture, storage, and distribution functions necessary to meet the stringent
processing deadlines of check operations.
Alysis' total revenues are derived from software licenses, from maintenance
and support contracts and from delivery of implementation and training services.
Both the software license revenue and service revenue
Page 21
<PAGE>
for the CheckVision, RemitVision and loan application frameworks which require
significant software customization services, are recognized on the percentage-
of-completion method. The implementation of these application frameworks can
take several months or more depending on the complexity of the customer's
environment and the resources directed by the customers to the implementation
projects.
For WorkOut sales, we comply with Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as amended by SOP 98-4, Deferral of the
Effective Date of Certain Provisions of SOP 97-2, and we recognize license
revenue from contracts for software licenses that don't require significant
customization upon delivery when persuasive evidence of an agreement exists,
the fee is fixed or determinable, collectibility is probable and there is
sufficient vendor-specific objective evidence to support allocating the total
fee to all elements of multiple element arrangements. Software maintenance
revenues are recognized ratably over the term of the support contract, which is
generally one year. Other service revenue is recognized as services are
performed. If one or more of the conditions above is not met, we will
recognize the software license revenue ratably over the contract period.
Maintenance and support revenue associated with new product licenses are
deferred and recognized ratably over the contract period. Services revenue is
recognized when services are performed.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions." SOP 98-9 amends SOP 98-4 to extend the SOP
98-4 through fiscal years beginning after March 31, 1999. We do not expect the
final adoption of SOP 98-9 to have a material impact on our future revenues and
results of operations.
We have experienced net losses for the years ended December 31, 1999 and
1998, and our accumulated deficit as of December 31, 1999 is $24.6 million. We
expect to incur operating losses in the foreseeable future as we continue to
invest in further development of the WorkOut product and to recruit and train
personnel for engineering, sales, marketing and professional services for the
WorkOut product.*
Page 22
<PAGE>
Results of Operations
The following table sets forth for the periods indicated statements of
operations data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenues:
License 38.5 % 23.8 % 35.2%
Service 36.8 43.0 50.5
Maintenance 24.7 33.2 14.3
--------------------- -------------------- -------------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
License 0.4 1.8 1.6
Service 21.9 39.3 21.6
Maintenance 10.7 19.0 3.7
--------------------- -------------------- -------------------
Total cost of revenues 33.0 60.1 26.9
--------------------- -------------------- -------------------
Gross margin 67.0 39.9 73.1
--------------------- -------------------- -------------------
Operating expenses:
Sales and marketing 22.6 39.7 21.2
General and administrative 38.3 59.5 31.7
Product development 9.5 36.9 19.9
--------------------- -------------------- -------------------
Total operating expenses 70.4 136.1 72.8
--------------------- -------------------- -------------------
Operating income (loss) (3.4) (96.2) 0.3
Interest income and other 1.8 3.0 2.3
--------------------- -------------------- -------------------
Income (loss) before income taxes (1.6) (93.2) 2.6
Income taxes 0.0 0.0 0.1
--------------------- -------------------- -------------------
Net income (loss) (1.6) (93.2) 2.5
Preferred stock dividends 0.6 0.0 0.0
--------------------- -------------------- -------------------
Net income (loss) applicable to common stockholders (2.2) % (93.2) % 2.5 %
===================== ==================== ===================
</TABLE>
Comparison of 1999, 1998 and 1997
Revenues
License. License revenue for the year ended December 31, 1999 has been
primarily derived from the sale of licenses of our CheckVision, RemitVision and
our loan application framework software application solutions. License revenue
in 1999 was $7.6 million, an increase of 143% over revenue of $3.1 million for
1998. This increase in license revenue primarily resulted from one-time
licenses of approximately $4.8 million recorded in connection with the amendment
of the Global Strategic Alliance Agreement signed in June 1999. License revenue
in 1997 was $7.9 million that was primarily derived from sale of our licenses
for our CheckVision, RemitVision, and WorkVision application frameworks.
Management believes that an increasing amount of future license revenue will be
derived from the WorkOut product.*
Page 23
<PAGE>
Service. Service revenue is comprised primarily of fees from software
application development contracts and to a lesser extent, fees from installation
services and training for our CheckVision and RemitVision software application
frameworks. Service revenue increased 29% to $7.3 million for the year ended
December 31, 1999 from $5.7 million for the year ended December 31, 1998. The
increase is primarily due to the increased sales of CheckVision application
software. Also, in 1998 customer delays deferred revenue recognition. Service
revenue in 1997 was $11.3 million. The decrease from 1997 revenue in 1998 is
primarily the result of a smaller number of sales of our application software
solutions, customer delays deferring revenue recognition and deferral of
expected new contracts. Management believes that an increasing amount of future
service revenue will be derived from installation services performed for the
WorkOut product.*
Maintenance. Maintenance revenue is generated by software support contracts
to customers who have entered into license agreements for the use of our
software application frameworks. Maintenance revenue support includes telephone
support, minor software upgrades, and in some cases, third party support.
Maintenance revenue was $4.9 million in 1999, an increase of 12% over revenue of
$4.4 million in 1998. Maintenance revenue was $3.2 million in 1997.
Maintenance revenue increased in 1999 and 1998 primarily due to the growing base
of installed CheckVision application framework customers resulting in a
corresponding demand for maintenance related services.
Cost of Revenues
License. Cost of license revenue decreased to $77,000 from $231,000 for the
years ended December 31, 1999 and 1998, respectively, representing 1.0% and 7.4%
of license revenues for the years ended December 31, 1999 and 1998,
respectively. Costs declined in absolute dollars because there are no costs of
licenses with the license revenues realized on the amendment of the Global
Strategic Alliance Agreement. Cost of license revenue decreased 36% in 1998
from $362,000 in 1997. Cost of license revenue decreased due to a negotiated
decrease in royalties payable to third parties. The cost of license revenue as
a percentage of license revenue may increase in the future if we negotiate
royalty agreements with partners and customers that fund or partially fund the
ongoing development of our new WorkOut product.*
Service. Cost of service revenue is primarily comprised of employee-related
costs and fees for third-party consultants incurred in providing customization,
installation, and training and development services. Cost of service revenue
decreased 16% to $4.3 million in 1999 as compared to $5.2 million in 1998,
representing 60% and 91% of service revenues for the years ended December 31,
1999 and 1998, respectively. Cost of service revenue decreased in absolute
dollars and as a percentage of revenue due primarily to a reduction in engineers
and improved execution of performance on contracts resulting in quicker customer
acceptance of contract completion. Cost of service revenue was $4.9 million in
1997, or 43% of the related service revenue. Cost of service revenue increased
in 1998 as a percentage of service revenue due to customer delays and our
delays.
Maintenance. Cost of maintenance revenue is primarily comprised of employee-
related costs incurred in providing customer support and also includes the costs
of services provided by third parties for hardware-related maintenance for
certain of the installed base of customers. Cost of maintenance revenue
decreased 15% to $2.1 million for the year ended December 31, 1999 from $2.5
million for the year ended December 31, 1998, representing 44% and 57% of
maintenance revenue for the years ended December 31, 1999 and 1998,
respectively. The decrease in maintenance costs is primarily due to reduced
headcount and improved productivity in delivering maintenance services as our
products mature. Cost of maintenance revenue was $837,000 in 1997, or 26% of
the related maintenance revenue. Cost of maintenance revenue increased in 1998
from 1997 due to maintenance revenue growth coupled with completed software
development contracts requiring higher levels of maintenance labor than
previously experienced.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales personnel, field offices,
travel and related expenses, promotional and advertisement expenses. Sales and
marketing expenses decreased 15% to $4.5 million from $5.2 million for the years
ended December 31, 1999 and 1998, respectively, representing 23% and 40% of
total revenue for the years ended December 31, 1999 and 1998, respectively.
Sales and marketing expenses decreased primarily due to a
Page 24
<PAGE>
decrease in the sales and marketing personnel. Sales and marketing expenses were
$4.8 million in 1997, or 21% of total revenues. Sales and marketing expenses
increased 10% from 1997 to 1998 due primarily to an expansion of the marketing
staff. In 2000, management expects to increase the number of sales personnel and
its investment in marketing to support the new WorkOut product.
General and Administrative. General and administrative expenses were $7.6
million and $7.9 million for the years ended December 31, 1999 and 1998,
respectively, representing 38% and 60% of total revenue in 1999 and 1998,
respectively. The decrease in general and administrative expenses as a
percentage of total revenue for the year ended December 31, 1999 is primarily
due to the increase in revenues. General and administrative expenses were $7.1
million in 1997, or 32% of total revenues. General and administrative expenses
increased from 1997 to 1998 due primarily to an increase in executive salary and
executive recruiting costs coupled with an increase in allowance for doubtful
accounts for certain contracts associated with high collectibility risks.
Product Development. Product development expenses consist primarily of
salaries and other personnel-related expenses. Product development expenses
decreased 61% to $1.9 million in 1999 from $4.9 million in 1998, representing
10% and 37% of total revenues for the years ended December 31, 1999 and 1998,
respectively. The decrease in product development expenses for the year ended
December 31, 1999 is primarily due to the decrease in costs associated with
development initiatives to enhance our CheckVision and RemitVision software
application frameworks, that was only slightly offset by the increase in costs
incurred on development of our new WorkOut product. Product development
expenses were $4.5 million in 1997, or 20% of total revenues. In 1998, product
development expenses increased primarily as a result of increased personnel
costs and associated infrastructure costs required to support software
development initiatives to enhance or expand our product offerings. In 2000,
management expects to increase the costs incurred in the ongoing development of
our WorkOut product.
Interest Income. Interest income represents interest earned by the Company
on its cash and cash equivalents. Interest income remained fairly consistent at
$349,000 and $395,000 for the years ended December 31, 1999 and 1998,
respectively. Interest income was $506,000 for the year ended December 31,
1997.
Provision for Income Taxes. The company did not record a provision for
income taxes for the years ended December 31, 1999 and 1998. The company did
record a provision of $23,000 for income taxes for the year ended December 31,
1997.
Liquidity and Capital Resources
Operating activities for the years ended December 31, 1999, 1998, and 1997
required the use of cash of $901,000, $1.4 million, and $1.7 million,
respectively. The decrease in the use of cash from 1998 to 1999 was primarily
due to the decrease in the net loss applicable to common stockholders partially
offset by the decrease in deferred revenues and the increase in receivables.
The decrease in the use of cash from 1997 to 1998 was primarily the result of
cash provided from the decrease in accounts receivable.
In 1999, our investing activities consisted primarily of the purchase of At
Work. Short-term investment purchases and sales did not occur during 1999. In
1998, total short-term investments purchases totaled $10.8 million and total
maturities totaled $12.8 million. In 1997, short-term investments purchased
totaled $2.0 million. Capital expenditures were $428,000, $472,000, and
$476,000, in 1999, 1998 and 1997, respectively. Capital expenditures consisted
primarily of purchases of computer equipment and office furniture to support our
product development needs. We currently have no significant capital spending
requirements or purchase commitments other than non-cancelable operating leases
for our facilities.
Cash provided by financing activities was $4.5 million, $348,000 and $445,000
in 1999, 1998, and 1997, respectively. The cash generated during 1999 was
primarily the result of net proceeds from the Preferred Stock, Series B
financing.
At December 31, 1999 we had $9.2 million in cash and cash equivalents and
$5.9 million in working capital. We believe that our existing cash and cash
equivalents, together with expected cash flows from operations combined with
external financing, will be sufficient to fund our operations for the next 12
months.* There can be no assurance that such financing will be available on
acceptable terms, if at all and that such terms
Page 25
<PAGE>
will not be dilutive to our existing stockholders. Our inability to secure
necessary funding would have a material adverse affect on our financial
condition and results of operation.*
Impact of Year 2000
Our Business Could Be Affected by Year 2000 Issues. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
to define the applicable year. Computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000.
During the transition to Year 2000, we experienced no material impact on
internal infrastructure, supplier relationships and/or products sold to
customers, nor did we incur any significant expenses related to the Year 2000
issue. We continue to monitor the impact of Year 2000 on our internal
infrastructure, supplier relationships and products sold to customers, and while
we do not anticipate any subsequent material impact on these areas of
operations, we cannot assure you that unknown future issues will not arise.
ITEM 7A. MARKET RISK DISCLOSURES
Our investments consist primarily of short-term money market investments that
earn interest at a fixed rate. All of our cash equivalents at December 31, 1999
have maturity dates of less than 90 days. We do not believe our exposure to
interest rate risk to be material given the short-term nature of our investment
portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements together with related notes, report of Ernst & Young
LLP, Independent Auditors, and supplementary financial information are listed at
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 26
<PAGE>
PART III
Certain information required by Part III is omitted from this report on Form
10-K in light of the fact that the Company will file its Definitive Proxy
Statement for its annual meeting of stockholders pursuant to Regulation 14A of
the Securities and Exchange Act of 1934, as amended (the "Proxy Statement"), not
later than 120 days after the end of the fiscal year covered by this report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to persons who are executive officers of the
Registrant is set forth under the caption "Executive Officers" in Part I of this
report. The section entitled "Election of Directors" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 14, 2000, sets forth certain information with respect to the directors
of the Registrant and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on June 14,
2000, sets forth certain information with respect to the compensation of
management of the Registrant and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Registrant's proxy statement for the annual meeting
of stockholders to be held on June 14, 2000, sets forth certain information with
respect to the ownership of the Registrant's common stock and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Transactions with Management" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 14, 2000, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its directors
and officers and is incorporated herein by reference.
Page 27
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements - see "Index to Financial Statements"
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
All schedules, except those listed above, have been omitted because
they are not required, not applicable, or the required information is
shown in the financial statements and related notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
<C> <S>
3.1(a)* Certificate of Incorporation of the Registrant, as amended (formerly Exhibit 3.1)
3.2* Bylaws of the Registrant.
4.1* Stockholders' Agreement dated July 31, 1992; Amendment No. 1 to Stockholders' Agreement dated
May 28, 1996.
10.1+* Agreement between Mellon Bank Corporation and the Registrant dated March 24, 1995.
10.2* 1992 Stock Plan.
10.3* 1996 Stock Plan.
10.4* 1996 Employee Stock Purchase Plan.
10.5* Loan and Security Agreement dated May 20, 1994 between Registrant and Bank of the West; First
Amendment dated May 22, 1995; Second Amendment dated February 21, 1996; Form of Third Amendment.
10.6* Severance and Non-Compete Agreement dated July 31, 1992 between Chakravarthi V. Ravi and the
Registrant.
10.7* Lease by and between Watergate Tower Associates and the Registrant dated June 30, 1993
10.8* Form of Indemnity Agreement.
10.9* Share Exchange Agreement dated May 29, 1996 between the Registrant, Warburg, Pincus Investors,
L.P. and holders of the Registrant's Series A Preferred Stock.
10.10* Amendment No. 1 to the Share Exchange Agreement dated November 6, 1996 between the Registrant,
Warburg, Pincus Investors, L.P. and holders of the Registrant's Series A Preferred Stock.
10.11** Employment Agreement between the Registrant and Kevin D. Moran, dated July 22, 1998.
10.12** Severance and Non-Compete Agreement between the Registrant and Dr. C.V. Ravi, dated July 22,
1998.
10.13*** 1998 Employee Stock Purchase Plan
10.14*** Stock Option Agreement between the Company and Kevin D. Moran
10.15*** Stock Option Agreement between the Company and Timothy F. McCarthy
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 44)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
+ Confidential treatment has been granted for portions of these agreements.
* Incorporated by reference to the exhibits filed with the Company's
registration statement on Form SB-2 (Registration Statement No.
333-4928-LA)
** Incorporated by reference to the exhibits filed with the Company's
September 30, 1998 Form 10-Q
*** Incorporated by reference to the exhibits filed with the Company's
March 1, 1999 Form S-8.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1999.
Page 28
<PAGE>
ALYSIS TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............ 30
Balance Sheets............................................... 31
Statements of Operations..................................... 32
Statements of Stockholders' Equity........................... 33
Statements of Cash Flows..................................... 34
Notes to Financial Statements................................ 35
</TABLE>
Page 29
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alysis Technologies, Inc.
We have audited the accompanying balance sheets of Alysis Technologies, Inc.
as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Alysis Technologies, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with auditing standards generally accepted in the United States. Also in our
opinion, the related financial statement schedule when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 27, 2000
Page 30
<PAGE>
ALYSIS TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................................... $ 9,159 $ 7,582
Receivables, including unbilled of $548 at December 31, 1999
and $0 at December 31, 1998, less allowance for doubtful
accounts of $126 at December 31, 1999 and $1,248 at
December 31, 1998............................................... 1,807 1,051
Other current assets.............................................. 494 678
------------- -------------
Total current assets.............................................. 11,460 9,311
Property and equipment, net............................................ 770 699
Other assets........................................................... 34 -
Intangible assets, net................................................. $ 2,337 -
------------- -------------
$ 14,601 $ 10,010
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.................................................. $ 664 $ 246
Accrued compensation and related liabilities...................... 2,483 1,809
Deferred revenues................................................. 1,973 3,778
Other accrued liabilities......................................... 467 354
------------- -------------
Total current liabilities.................................... 5,587 6,187
Commitments
Stockholders' equity:
Convertible preferred stock, Series B, $.001 par value:
Authorized shares---5,000,000
Issued and outstanding shares---400 at December 31, 1999
and none at December 31, 1998................................ 3,814 -
Common stock, $0.01 par value:
Authorized shares - 35,000,000
Issued shares - 10,643,792, outstanding shares - 10,619,792
at December 31, 1999
Issued and outstanding shares - 9,336,329 at
December 31, 1998............................................ 106 93
Class B common stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 2,417,112 at
December 31, 1999 and 1998................................... 25 25
Additional paid-in capital........................................ 30,067 28,150
Treasury stock at cost (24,000 shares)............................ (39) -
Accumulated deficit.................................................... (24,632) (24,204)
Deferred compensation.................................................. (327) (241)
------------- -------------
Total stockholders' equity................................... 9,014 3,823
------------- -------------
$ 14,601 $ 10,010
============= =============
</TABLE>
See Accompanying Notes
Page 31
<PAGE>
ALYSIS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
License $ 7,623 $ 3,141 $ 7,911
Service 7,290 5,661 11,347
Maintenance 4,899 4,369 3,223
----------- ----------- ----------
Total revenues 19,812 13,171 22,481
Cost of revenues:
License 77 231 362
Service 4,334 5,171 4,862
Maintenance 2,129 2,500 837
----------- ----------- ----------
Total cost of revenues 6,540 7,902 6,061
Operating expenses:
Sales and marketing 4,476 5,234 4,757
General and administrative 7,582 7,850 7,101
Product development 1,874 4,861 4,480
----------- ----------- ----------
Total operating expenses 13,932 17,945 16,338
----------- ----------- ----------
Operating income (loss) (660) (12,676) 82
Other income:
Interest income and other 349 395 502
----------- ----------- ----------
Income (loss) before income taxes (311) (12,281) 584
Income taxes - - 23
----------- ----------- ----------
Net income (loss) $ (311) $ (12,281) $ 561
Preferred stock dividends $ 117 $ - $ -
----------- ----------- ----------
Net income (loss) applicable to common stockholders $ (428) $ (12,281) $ 561
=========== =========== ==========
Basic net income (loss) per share applicable to
common stockholders $ (0.03) $ (1.06) $ 0.05
=========== =========== ==========
Diluted net income (loss) per share applicable to
common stockholders $ (0.03) $ (1.06) $ 0.05
=========== =========== ==========
Shares used in computing basic net income (loss)
per share applicable to common stockholders 12,326 11,596 11,164
=========== =========== ==========
Shares used in computing diluted net income (loss)
per share applicable to common stockholders 12,326 11,596 12,017
=========== =========== ==========
</TABLE>
See Accompanying Notes
Page 32
<PAGE>
ALYSIS TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible
Preferred Common
Stock Stock Additional Total
--------------- --------------- Paid-in- Treasury Accumulated Deferred Stockholders'
Shares Amount Shares Amount Capital Stock Deficit Compensation Equity
------ ------- ---------- ------ ------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 - $ - 11,009,514 $111 $27,121 $ - $ (12,484) $ (172) $ 14,576
Issuance of common stock
under stock option
and stock purchase plans _ - 274,058 3 442 - - - 445
Amortization of deferred
compensation - - - - - - - 41 41
Net income and comprehensive
income - - - - - - 561 - 561
------ ------- ---------- ------ ------- -------- ----------- ------------ -------------
Balances, December 31, 1997 - $ - 11,283,572 $114 $27,563 $ - $ (11,923) $ (131) $ 15,623
Issuance of common stock
under stock option and
stock purchase plans - - 469,869 4 344 - - - 348
Deferred compensation
resulting from grant of
options - - - - 243 - - (243) -
Amortization of deferred
compensation - - - - - - - 133 133
Net loss and comprehensive
loss - - - - - - (12,281) - (12,281)
------ ------- ---------- ------ ------- -------- ----------- ------------ -------------
Balances, December 31, 1998 - $ - 11,753,441 $118 $28,150 $ - $ (24,204) $ (241) $ 3,823
Issuance of common stock
under stock option and
stock purchase plans - - 827,432 8 720 - - - 728
Issuance of common stock
in connection with
business combination - - 480,031 5 745 - - - 750
Issuance of convertible
preferred stock, net
of issuance costs 400 3,814 - - - - - - 3,814
Dividends on convertible
preferred stock - - - - - - (117) - (117)
Purchase of treasury stock - - (24,000) - - (39) - - (39)
Deferred compensation
resulting from grant
of options - - - - 452 - - (452) -
Amortization of deferred
compensation - - - - - - - 366 366
Net loss and comprehensive
loss - - - - - - (311) - (311)
------ ------- ---------- ------ ------- -------- ----------- ------------ -------------
Balances, December 31, 1999 400 $3,814 13,036,904 $131 $30,067 $ (39) $ (24,632) $ (327) $9,014
====== ======= ========== ====== ======= ======== =========== ============ =============
</TABLE>
See Accompanying Notes
Page 33
<PAGE>
ALYSIS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOW
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) applicable to common stockholders...... $ (428) $(12,281) $ 561
Adjustments to reconcile net income (loss) applicable
to common stockholders to net cash used in operating
activities:
Depreciation and amortization....................... 567 351 320
Amortization of deferred compensation............... 366 133 41
Dividends on convertible preferred stock............ 117 -- --
Changes in operating assets and liabilities:
Receivables.................................... (756) 7,816 (1,608)
Other current assets........................... 184 70 (95)
Other assets................................... (34) -- --
Accounts payable............................... 301 (97) (397)
Accrued compensation and related liabilities... 674 409 (33)
Deferred revenues.............................. (1,805) 832 (605)
Other accrued liabilities...................... (87) 1,378 99
----------- ---------- ---------
Net cash used in operating activities......................... (901) (1,389) (1,717)
----------- ---------- ---------
Investing Activities
Business combination, net of cash acquired............... (1,597) -- --
Purchase of property & equipment......................... (428) (472) (476)
Proceeds from sales of property and equipment............ -- 37 --
Purchases of short term investments...................... -- (10,826) (2,000)
Maturities of short term investments..................... -- 12,826 --
----------- ---------- ---------
Cash provided by (used in) investing activities............... (2,025) 1,565 (2,476)
----------- ---------- ---------
Financing Activities
Borrowings under bank line of credit..................... -- -- 300
Repayment of borrowings under bank line of credit........ -- -- (300)
Net proceeds from issuance of preferred stock............ 3,814 -- --
Net proceeds from issuance of common stock............... 728 348 445
Purchases of treasury stock.............................. (39) -- --
----------- ---------- ---------
Cash provided by financing activities......................... 4,503 348 445
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents.......... 1,577 524 (3,748)
Cash and cash equivalents at beginning of period.............. 7,582 7,058 10,806
----------- ---------- ---------
Cash and cash equivalents at end of period.................... $ 9,159 $ 7,582 $ 7,058
=========== ========== =========
Supplemental disclosure of non-cash information:
Cash paid for interest................................... $ -- $ 5 $ 4
=========== ========== =========
Supplemental noncash investing and financing information:
Deferred compensation related to stock option grants..... $ 452 $ 243 $ --
=========== ========== =========
Common stock issued in business combination.............. $ 750 $ -- $ --
=========== ========== =========
</TABLE>
See Accompanying Notes
Page 34
<PAGE>
ALYSIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
The Company and Basis of Presentation
Alysis Technologies, Inc. (previously known as IA Corporation I) was
incorporated on July 20, 1992. We develop, market, implement and support large-
scale application software solutions to financial services organizations
primarily in North America. Certain reclassifications have been made to the
prior years' financial statements in order to conform to the current year
presentation in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with major banks and
investments in commercial paper with original maturities of three months or
less. At December 31, 1998, the Company had investments in commercial paper of
$4,980,000, all of which was classified as cash equivalents, which approximates
fair value. Unrealized and realized gains and losses in 1999 and 1998 were not
material. The Company maintains its cash in depository accounts with three
domestic institutions.
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation is
computed using the straight-line method over estimated useful lives ranging from
three to seven years.
Intangible Assets
Intangible assets represent purchased technology acquired in the acquisition
of At Work on September 15, 1999. This intangible asset will be amortized over
three years. Intangible assets are periodically reviewed for impairment based on
an assessment of future operations to ensure that they are appropriately valued.
Accumulated amortization was approximately $210,000 at December 31, 1999.
Software Development Costs
We account for software development costs in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed, under which certain software
development costs incurred subsequent to the establishment of technological
feasibility may be capitalized and amortized over the estimated lives of the
related products. Technological feasibility is established upon completion of a
working model. As of December 31, 1999, such capitalized software development
costs have been insignificant and all software development costs have been
charged to product development expenses in the accompanying statements of
operations.
Page 35
<PAGE>
Revenue Recognition
Our total revenues are derived from software licenses, maintenance and
support contracts and implementation and training services. Software license and
service revenue from contracts requiring significant customization services are
recognized on the percentage-of-completion method based on the ratio of incurred
costs to total estimated costs. The implementation of these application
frameworks can take several months or more depending on the complexity of the
customer's environment and the resources directed by the customers to the
implementation projects. Estimated losses on contracts are reported in the
period in which such losses become known.
Revenues from contracts for software licenses that don't require
significant customization are recognized upon delivery of the software if
there is persuasive evidence of an arrangement, collection is probable, the
fee is fixed or determinable and there is sufficient vendor-specific objective
evidence to support allocating the total fee to all elements of multiple
element arrangements. Software maintenance revenues are recognized ratably
over the term of the support contract, which is generally one year. Other
service revenue is recognized as services are performed.
The Company adopted Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2") and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition"
("SOP 98-4") as of January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for
recognizing revenue on software transactions and supersede Statement of
Position 91-1, "Software Revenue Recognition" ("SOP 91-1"). The adoption of
SOP 97-2 and SOP 98-4 did not have a material impact on the Company's
financial results.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions" (SOP
98-9"). SOP 98-9 amends SOP 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company does not expect a material impact from the final
adoption of SOP 98-9 on its future revenues and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements, ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosures described in SAB 101. The Company is
currently evaluating SAB 101 and has not completed its assessment of the impact
of adoption. A change in its revenue recognition policy, if any proves
necessary, resulting from SAB 101 will be reported as a change in accounting
principle in the quarter ended June 30, 2000.
Credit Risk
We currently sell our services primarily to large corporations in the
financial services industry in North America. We extend credit based on an
evaluation of the customer's financial condition and, generally, do not require
collateral. We maintain reserves for potential credit losses, which we believe,
are adequate to cover any potential loss. Actual credit losses may differ from
our estimates and such differences could be material to the financial
statements.
Stock-Based Compensation
We grant stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. We
account for employee stock options in accordance with Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations because we believe the alternative fair value accounting
provided for under Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation (FAS 123), requires the use of
option valuation models that were not developed for use in valuing employee
stock options. The Company has adopted the "disclosure only" alternative
described in FAS 123.
We account for equity instruments issued to non-employees in accordance with
the provisions of FAS 123 and the Emerging Issues Task Force in Issue No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services
("EITF 96-18").
Segment Reporting
The Company complies with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major customers. We
operate in one segment.
Net Income (Loss) per Share
Shares used in computing basic and diluted net income (loss) per share are
based on the weighted average number of shares outstanding during the period.
Basic net income (loss) per share excludes any dilutive affects of stock
options. Diluted net income (loss) per share includes the dilutive affect of
outstanding stock options using the "treasury stock" method.
Page 36
<PAGE>
2. Net Income (Loss) per Share Applicable to Common Stockholders
Net income (loss) per share applicable to common stockholders is calculated
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Net income (loss)............................................ $ (311) $(12,281) $ 561
Preferred dividends.......................................... (117) - -
------- -------- -------
Net income (loss)
applicable to common stockholders.......................... $ (428) $(12,281) $ 561
======= ======== =======
Weighted average common shares outstanding................... 12,326 11,596 11,164
Effect of dilutive securities(a)............................. - - 853
------- -------- -------
Shares used in computing diluted net
income (loss) per share.................................... 12,326 11,596 12,017
======= ======== =======
Basic net income (loss) per share
applicable to common stockholders.......................... $ (0.03) $ (1.06) $ 0.05
======= ======== =======
Diluted net income (loss) per share
applicable to common stockholders.......................... $ (0.03) $ (1.06) $ 0.05
======= ======== =======
</TABLE>
(a) The effect (using the treasury stock method) of 3,066,150 and 3,175,596
outstanding stock options is excluded from the calculation of diluted net
loss per share for the years ended December 31, 1999 and 1998,
respectively, as their inclusion would be anti-dilutive.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Computer equipment and software.......................................... $ 2,541 $ 2,124
Furniture and fixtures................................................... 389 394
Other.................................................................... 99 83
------------------- --------------------
3,029 2,601
Less accumulated depreciation............................................ (2,259) (1,902)
------------------- --------------------
$ 770 $ 699
=================== ====================
</TABLE>
Page 37
<PAGE>
4. Commitments
The Company leases office space and certain equipment under non-cancelable
operating leases. These operating leases expire in various years through 2004.
Future minimum lease payments for the years ending December 31 are as follows
(in thousands):
<TABLE>
<S> <C>
2000.................. $1,385
2001.................. 1,332
2002.................. 1,346
2003.................. 1,369
2004 ................. 455
-----------------
Total................. $5,887
=================
</TABLE>
Rent expense was $1.6 million, $1.6 million, and $1.3 million, for the years
ended December 31, 1999, 1998 and 1997, respectively.
5. Stockholders' Equity
Preferred Stock
On July 30, 1999 we issued 400 shares of Series B Preferred Stock to our
largest stockholder, raising net proceeds of $3,814,000. Each share of Series B
Preferred Stock is convertible into approximately 5,229 shares of Class B Common
Stock. The conversion price of the Series B Preferred Stock is $1.9125 per
share, which represents a 16% premium over the average closing price of our
Common Stock during the ten days prior to subscription. The conversion price is
not subject to any reset or "floating" adjustment, other than standard anti-
dilution protection. The holders of Series B Preferred Stock will be entitled to
cumulative annual dividends of 7% of the purchase price, which are payable semi-
annually in cash or, at our option, with shares of our Class B Common Stock. The
Class B Common Stock is convertible into Common Stock. Upon the occurrence of
certain events, the Series B preferred Stock has liquidation preference equal to
the initial purchase price plus accrued but unpaid dividends. The Series B
Preferred Stock will also be entitled to certain registration rights.
Class B Common Stock
At December 31, 1999 and 1998, 2,417,112 shares of Class B common stock were
outstanding. The Class B common stock has the same rights, preferences,
privileges, and restrictions as the common stock, except that the Class B common
stock has very limited voting rights and does not vote for the election of
directors. The shares of Class B common stock are also convertible at the option
of the holder into common stock, so long as such conversion does not result in
the holder obtaining greater than 49% of our outstanding voting securities.
Stock Repricing
In August 1998, the Board of Directors approved a stock option repricing
program pursuant to which our employees elected to exchange or amend their then
outstanding employee stock options for new employee stock options having an
exercise price of $1.75 per share (equal to the fair market value at August 17,
1998), with exercisability generally prohibited until September 29, 1998, except
in the event of death or disability. A total of 1,208,378 options with exercise
prices ranging from $1.81 to $6.00 per share were exchanged or amended under the
program.
Stock Option Plans
Under the provisions of our 1992 Stock Plan (the "1992 Plan"), the Board of
Directors authorized up to 1,658,769 shares of common stock for the grant of
incentive stock options ("ISOs"), nonqualified stock options ("NSOs"), or stock
purchase rights. All options granted under the 1992 Plan expire seven years
after the date of the grant. Generally, options become vested and exercisable
20% one year after the date of grant and then 5% at the end of each three-month
period thereafter.
Page 38
<PAGE>
At December 31, 1999, 3,100,000 shares of common stock are reserved for
issuance under our 1996 Stock Plan (the "1996 Plan") which provides for the
grant of ISO's, NSO's and stock purchase rights. All options under the 1996 Plan
expire ten years after the date of the grant and generally become vested and
exercisable 25% one year after date of grant and then 1/48 at the end of each
month thereafter.
Stock option data is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Number of of Shares
Shares Under Plans
----------------- ------------
<S> <C> <C>
Options outstanding at December 31, 1996............................ 1,314,324 $0.71
Options granted..................................................... 861,900 2.84
Options exercised................................................... (138,190) 0.18
Options canceled.................................................... (321,909) 2.15
----------------- ------------
Options outstanding at December 31, 1997............................ 1,716,125 1.55
Options granted..................................................... 3,533,000 1.67
Options exercised................................................... (278,619) 0.12
Options canceled.................................................... (1,794,910) 2.31
----------------- ------------
Options outstanding at December 31, 1998............................ 3,175,596 1.38
Options granted..................................................... 1,538,450 2.20
Options exercised................................................... (671,521) 0.82
Options canceled.................................................... (976,375) 1.59
----------------- ------------
Options outstanding at December 31, 1999............................ 3,066,150 $1.85
================= ============
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 were $2.18, $0.47 and $1.58, respectively. At
December 31, 1999, 1,248,730 options to purchase common stock were available for
future option grants. The following table summarizes information about stock
options outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ -------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number of Average
Exercise Prices of Shares Contractual Life Exercise Price Shares Exercise Price
----------------- ------------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01 - $ 0.01 8,400 1.95 $0.01 8,400 $0.01
$0.29 - $ 0.43 52,205 2.95 $0.32 32,605 $0.30
$0.50 - $ 0.56 243,500 8.99 $0.56 72,825 $0.56
$0.94 - $ 1.31 493,000 9.18 $1.15 75,375 $1.25
$1.43 - $ 2.00 2,045,420 8.56 $1.79 601,434 $1.75
$2.31 - $ 3.25 43,375 9.45 $2.99 4,155 $3.00
$5.00 - $ 7.44 180,250 9.94 $6.42 - $ -
----------------- ------------------- ------------------ ----------------- ----------------
3,066,150 8.67 $1.85 794,794 $1.52
================= =================== ================== ================= ================
</TABLE>
Stock-Based Compensation
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for our employee stock awards because as discussed below, the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise
Page 39
<PAGE>
price of our employee stock options equals the market price of the underlying
stock on the date of grant, no compensation is recognized.
In the year ended December 31,1999, the fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions.
<TABLE>
<CAPTION>
Stock Option Plans Employee Stock Purchase Plans
------------------------------------ -----------------------------------
Year Ended December 31, Year Ended December 31,
------------------------------------ -----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rate........... 6.00% 5.04% 6.16% 6.00% 5.04% 5.55%
Volatility........................ 1.70 1.21 0.75 1.70 1.21 0.75
Dividend Yield.................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected Life in Years............ 4.81 4.97 5.23 0.50 0.50 0.50
</TABLE>
Had the compensation costs been determined based upon the fair value at the
date of grant for awards under these plans, and the Employee Stock Purchase
Plan, consistent with the methodology prescribed under FAS 123, our net income
(loss) and net income (loss) per share for the year ended December 31, 1999
would have been impacted as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997
--------------- --------------- -------------
<S> <C> <C> <C>
Net income (loss)
applicable to common stockholders--as reported............. $ (428) $(12,281) $ 561
Net income (loss) $(4,164) $(13,033) (901)
applicable to common stockholders--pro forma...............
Basic net income (loss) per share
applicable to common stockholders--as reported............. $ (0.03) $ (1.06) $ 0.05
Basic net income (loss) per share
applicable to common stockholders--pro forma............... $ (0.34) $ (1.12) $(0.01)
Diluted net income (loss) per share
applicable to common stockholders--as reported............. $ (0.03) $ (1.06) $ 0.05
Diluted net income (loss) per share
applicable to common stockholders--pro forma............... $ (0.34) $ (1.12) $(0.01)
</TABLE>
The effects on pro forma disclosures of applying FAS 123 are not likely to be
representative of the effects on pro forma disclosures in future years.
Employee Stock Purchase Plans
Under the Employee Stock Purchase Plan (the "Plan"), 400,000 shares of common
stock have been reserved for issuance. The Plan has 24-month offering periods,
with each offering period divided into four consecutive six-month purchase
periods. The Plan allows for eligible employees to purchase stock at 85% of the
lower of the fair market value of our common stock as of the first day of the
offering period or the fair market value of the stock at the end of each
purchase period.
Page 40
<PAGE>
On June 17, 1998, we adopted the 1998 Employee Stock Purchase Plan (the "1998
Plan"). The 1998 Plan has 12 month offering periods, with each offering period
divided into two six-month purchase periods and includes an automatic share
replenishment feature. The 1998 Plan has 250,000 shares of common stock which
have been initially reserved for future issuance, plus annual increases,
beginning in 1999, equal to the lesser of (i) 300,000 shares, (ii) 2% of the
outstanding shares or (iii) a lesser amount determined by the Board of
Directors, for issuance thereunder subject to stockholder approval. The 1998
Plan allows for eligible employees to purchase stock at 85% of the lower of the
fair market value of our common stock as of the first day of the offering period
or the fair market value of the stock at the end of each purchase period.
At December 31, 1999, 441,379 shares were available for issuance. During
1999, 1998 and 1997, employees purchased 155,911, 191,260 and 96,419 shares
under the plan, respectively. The weighted average fair value of the rights
granted during the years ended December 31, 1999, 1998 and 1997 using the Black-
Scholes model was $3.11, $0.60 and $2.69 per share, respectively.
Consultant Options
In 1999 and 1998, we issued options to purchase 434,294 shares of our
common stock to five consultants for consulting services to be provided to us
over periods ranging from 15 months to four years. We have estimated the fair
value of these options at each reporting period using the Black Scholes method
in accordance with FAS 123 and EITF 96-18. At December 31, 1999, one consultant
continues to provide us with services in accordance with the original
consulting agreement.
Shares Reserved for Future Issuance
At December 31, 1999, the Company has reserved shares of common stock for
future issuances as follows:
Convertible preferred stock 2,091,600
Stock options outstanding 3,066,150
Stock options and shares available for grant 1,248,730
-----------
6,406,480
===========
6. Savings Plan
We maintain a retirement savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, employees may defer up to 18% of their pre-tax
salaries, but not more than the statutory limits. We contribute fifty cents for
each dollar contributed by a participant, with a maximum contribution of 2% of a
participant's earnings. Our matching contribution to the savings plan was
$144,000, $163,000 and $138,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
7. Income Taxes
At December 31, 1999, we had a net operating loss carryforward for federal
income tax purposes of approximately $16,704,000 expiring in the years 2008
through 2019 and federal tax credits of approximately $609,000 expiring in years
2008 through 2019. We have a net operating loss carryforward for state income
tax purposes of approximately $4,368,000 expiring in the years 2000 through 2004
and state tax credits of approximately $427,000 with an indefinite carryforward.
The valuation allowance decreased by $288,000 and increased by $4,916,000
during the years ended December 31, 1999 and 1998, respectively.
Due to "change in ownership" provisions of the Internal Revenue Code,
utilization of the net operating loss and tax credit carryforward may be subject
to an annual limitation regarding their utilization against taxable income in
future periods.
Page 41
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses.......................... $ 6,066 $ 4,307
Tax credit carryovers......................... 1,036 809
Capital loss carryovers....................... 1,145 1,145
Accrued expenses and reserves................. 732 2,195
Other......................................... 36 159
--------------------- --------------------
Total deferred tax assets................ 9,015 8,615
Deferred tax liabilities:
Purchased Technology ......................... (989) ----
Unbilled revenue.............................. (90) (324)
Prepaid Expenses ............................. (97) (164)
Total deferred tax liabilities........... (1,176) (488)
--------------------- --------------------
Net deferred tax assets............................ 7,839 8,127
Valuation allowance................................ (7,839) (8,127)
--------------------- --------------------
Net deferred tax assets............................ $ -- $ --
===================== ====================
</TABLE>
8. Significant Customers
In 1999, one customer accounted for 33% of total revenues. In 1998, one
customer accounted for 10% of total revenues. In 1997, two customers accounted
for 13% and 11% of total revenues, respectively.
9. Acquisition
On September 15, 1999, we acquired all of the shares of the capital stock of
At Work Corporation ("At Work"), a New York-based provider of advanced document
distribution and electronic commerce applications that utilize Java and other
Internet-based technologies. The aggregate consideration paid for the shares of
At Work was (a) $1,696,000 in cash, (b) 480,031 shares of Common Stock of the
Company valued at $750,000, and (c) $1,000,000 in cash to be paid out as set
forth in employment agreements and to be expensed as compensation. The
acquisition has been accounted for as a purchase, whereby, all assets purchased
and liabilities assumed were recorded at their fair market value. The excess of
the aggregate purchase price over the fair value of the net assets acquired was
recorded as purchased technology and will be amortized over 3 years, its
estimated useful life.
The unaudited pro forma results of operations, which follow, assume that the
acquisition of At Work had occurred on January 1, 1998 (in thousands, except per
share data).
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Revenues................................... $19,965 $ 13,455
Net income (loss) applicable to common $(1,523) $(12,996)
stockholders..............................
Basic net income (loss) per share $ (0.12) $ (1.08)
applicable to common stockholders.........
Diluted net income (loss) per share $ (0.12) $ (1.08)
applicable to common stockholders.........
</TABLE>
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisition
occurred on January 1, 1998 or of future results of operations of the
consolidated entities.
Page 42
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of Period Additions Deletions End of Period
------------------- --------- --------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Deducted from asset accounts
Allowance for doubtful accounts $1,248 $ - $1,122 $ 126
--------- --------- --------- ---------
Totals $1,248 $ - $1,122 $ 126
========= ========= ========= =========
Year ended December 31, 1998
Deducted from asset accounts
Allowance for doubtful accounts $ 46 $1,202 $ - $1,248
--------- --------- --------- ---------
Totals $ 46 $1,202 $ - $1,248
========= ========= ========= =========
Year ended December 31, 1997
Deducted from asset accounts
Allowance for doubtful accounts $ 46 $ - $ - $ 46
--------- --------- --------- ---------
Totals $ 46 $ - $ - $ 46
========= ========= ========= =========
</TABLE>
Page 43
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized in the City of Emeryville, State of
California, on the day of March 30, 2000.
ALYSIS TECHNOLOGIES, INC.
By: /s/ Kevin D. Moran
-------------------------------------
Kevin D. Moran
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kevin D. Moran, his attorney-in-fact, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Titles Date
- ---------------------------------- ------------------------------------------------- --------------------------
<S> <C> <C>
President, Chief Executive Officer March 30, 2000
/s/ Kevin D. Moran and Chairman of the Board
- ---------------------------------- (Principal Executive Officer)
Kevin D. Moran
/s/ David R. Bankhead Vice President and Chief Financial March 30, 2000
- ----------------------------------
David R. Bankhead Officer (Principal Financial and
Accounting Officer)
/s/ John J. Cook, Jr. Director March 30, 2000
- ----------------------------------
John J. Cook, Jr.
/s/ Stewart Gross Director March 30, 2000
- ----------------------------------
Stewart Gross
/s/ Randy Katz Director March 30, 2000
- ----------------------------------
Randy Katz
/s/ Henry Kressel Director March 30, 2000
- ----------------------------------
Henry Kressel
/s/ Timothy F. McCarthy Director March 30, 2000
- ----------------------------------
Timothy F. McCarthy
/s/ John Oltman Director March 30, 2000
- ----------------------------------
John Oltman
</TABLE>
Page 44
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1996 Stock Plan, 1996 Employee Stock Purchase
Plan, 1998 Employee Stock Purchase Plan and the Non-Qualified Stock Opinion
Agreements of Alysis Technologies, Inc. of our report dated January 27, 2000
with respect to the financial statements and schedule of Alysis Technologies,
Inc. in its Annual Report (Form 10-K) for the year ended December 31, 1999,
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 9159 7582
<SECURITIES> 0 0
<RECEIVABLES> 1933 2299
<ALLOWANCES> (126) (1248)
<INVENTORY> 0 0
<CURRENT-ASSETS> 11460 9311
<PP&E> 3029 2601
<DEPRECIATION> (2259) (1902)
<TOTAL-ASSETS> 14601 10010
<CURRENT-LIABILITIES> 5587 6187
<BONDS> 0 0
0 0
3814 0
<COMMON> 131 118
<OTHER-SE> 5069 3705
<TOTAL-LIABILITY-AND-EQUITY> 14601 10010
<SALES> 19812 13171
<TOTAL-REVENUES> 19812 13171
<CGS> 6540 7902
<TOTAL-COSTS> 6540 7902
<OTHER-EXPENSES> 13932 17945
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (349) (395)
<INCOME-PRETAX> (311) (12281)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (311) (12281)
<EPS-BASIC> $(0.03) $(1.06)
<EPS-DILUTED> $(0.03) $(1.06)
</TABLE>
