UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended September 30, 1997 Commission File Number 0- 28904
AWARD SOFTWARE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2893462
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043-4023
(Address of principal executive offices) (Zip Code)
650.237.6800
(registrant's telephone number, including area code)
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 __
-
Registrant had 6,918,985 shares of Common Stock, no par value, outstanding at
September 30, 1997.
1
AWARD SOFTWARE INTERNATIONAL, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheet as of September 30,
1997 (Unaudited) and December 31, 1996 3
b) Condensed Consolidated Statement of Income for the three
and nine months ended September 30, 1997 and 1996
(Unaudited) 4
c) Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 1997 and 1996 (Unaudited) 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Award Software International (R) and SMSAccess are trademarks of registrant.
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AWARD SOFTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
September 30, December 31,
1997 1996
---------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,843 $ 23,248
Accounts receivable, net 4,388 2,068
Receivables from related parties 640 1,197
Other current assets 1,044 598
---------------- ---------------
Total current assets 27,915 27,111
Property and equipment, net 1,210 683
Other assets 1,360 616
---------------- ---------------
$ 30,485 $ 28,410
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 254 $ 215
Accrued liabilities 2,332 3,104
---------------- ---------------
Total current liabilities 2,586 3,319
Minority interest 168 -
---------------- ---------------
2,754 3,319
---------------- ---------------
Commitments
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized;
no par value; no shares issued or outstanding - -
Common stock, 40,000,000 shares authorized;
no par value; 6,918,985 and 6,538,951 shares
issued and outstanding 21,620 21,269
Deferred stock compensation (124) (180)
Retained earnings 6,660 4,130
Cumulative translation adjustment (425) (128)
---------------- ---------------
Total shareholders' equity 27,731 25,091
---------------- ---------------
$ 30,485 $ 28,410
================ ===============
See accompanying notes to condensed consolidated financial statements.
3
AWARD SOFTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- -------- --------
Revenues:
Software license fees $ 4,693 $ 3,000 $ 13,017 $ 8,049
Engineering services 662 91 1,703 382
Related parties 248 304 1,112 1,118
---------- ---------- -------- --------
Total revenues 5,603 3,395 15,832 9,549
---------- ---------- -------- --------
Cost of revenues:
Software license fees 324 173 762 312
Engineering services 184 58 481 115
Related parties 15 27 48 262
---------- ---------- -------- --------
Total cost of revenues 523 258 1,291 689
---------- ---------- -------- --------
Gross profit 5,080 3,137 14,541 8,860
---------- ---------- -------- --------
Operating expenses:
Research and development 1,655 1,144 4,744 3,010
Sales and marketing 1,226 707 3,477 1,965
General and administrative 791 451 2,619 1,497
---------- ---------- -------- --------
Total operating expenses 3,672 2,302 10,840 6,472
Income from operations 1,408 835 3,701 2,388
Interest income, net 264 114 801 284
Minority interest 12 - 21 -
---------- ---------- -------- --------
Income before income taxes 1,684 949 4,523 2,672
Provision for income taxes 556 341 1,503 961
---------- ---------- -------- --------
Net income $ 1,128 $ 608 $ 3,020 $ 1,711
---------- ---------- -------- --------
Net income per share $ 0.15 $ 0.10 $ 0.39 $ 0.28
========== ========== ======== ========
Weighted average number of
common and common equivalent
shares outstanding 7,708 6,039 7,714 6,059
========== ========== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
AWARD SOFTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,020 $1,711
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 542 160
Deferred stock compensation 56 56
Minority interest 168 -
Changes in assets and liabilities:
Accounts receivable, net (2,252) (964)
Receivables from related parties 460 57
Other current assets (302) (1,394)
Other assets (296) (17)
Accounts payable (47) 496
Accrued liabilities (1,611) 310
-------------- ------------
Net cash provided by (used in) operating
activities (262) 415
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (857) (480)
Capitalized software development costs (466) (92)
-------------- ------------
Net cash used in investing activities (1,323) (572)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuances 316 6,969
Payments under bank loan (390) -
-------------- ------------
Net cash provided by (used in) financing
activities (74) 6,969
-------------- ------------
Effect of exchange rate changes on cash (204) (93)
-------------- ------------
Net increase (decrease) in cash and cash equivalents (1,863) 6,719
Cash and cash equivalents at beginning of period 23,706 6,498
-------------- ------------
Cash and cash equivalents at end of period $21,843 $13,217
============== ============
See accompanying notes to condensed consolidated financial statements.
5
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Award
Software International, Inc. (the "Company") as of September 30, 1997 for the
three and nine months ended September 30, 1997 and 1996 are unaudited. The
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, which in the opinion of management are
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented. The condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 1996 included in
the Annual Report on Form 10-K filed by the Company on March 28, 1997.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year or for
any future period.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares, when dilutive, from stock options and
warrants (using the treasury stock method). Pursuant to a Securities and
Exchange Commission Staff Accounting Bulletin, common and common equivalent
shares (using the treasury stock method and the public offering price) issued by
the Company within 12 months prior to the Company's initial public offering
filing have been included in the calculation as if they were outstanding for all
periods through the effective date of the Company's initial public offering.
3. FORMATION OF JOINT VENTURE
In April 1997, the Company entered into an agreement with Sun Corporation
("Sun"), a shareholder, and Axis Corporation ("Axis") to establish a majority-
owned subsidiary, Award Software Japan KK ("Award Japan"). The objective of
Award Japan is to market and distribute the Company's products in Japan. The
Company, Sun and Axis contributed approximately $310,000, $95,000 and $95,000
for 62%, 19% and 19% ownership of Award Japan, respectively.
4. BUSINESS COMBINATION
In May 1997, the Company merged with Unicore Software, Inc. ("Unicore"), a
privately-held company providing basic input/output software upgrades for
personal computers and embedded systems. Under the terms of the Agreement and
Plan of Merger and Reorganization, the Company issued 218,571 shares of common
stock for all of the outstanding stock of Unicore in a transaction accounted for
as a pooling of interests. The historical operations of Unicore were not
material and as a result, the business combination has been reported by
restating the Company's consolidated financial statements to include the
Consolidated financial statements of Unicore effective January 1, 1997.
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share." SFAS No. 128 establishes financial accounting and reporting
standards for calculation of basic earnings per share and diluted earnings
6
per share. SFAS No. 128 supersedes APB No. 15 and is effective for periods
ending after December 15, 1997, including interim periods. The Company is
required to adopt the standard in annual financial statements for the year
ending December 31, 1997. The following table presents the pro forma effect of
adopting SFAS No. 128 and the three and nine month periods ended September 30,
1997 and 1996, respectively.
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Primary net income per share as
reported 0.15 0.10 0.39 0.28
Pro forma basic net income per
share 0.16 0.12 0.44 0.33
Pro forma diluted net income per
share 0.15 0.10 0.39 0.28
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," and No. 131 ("SFAS No. 131"), "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14 and
requires segment information to be reported on the basis that is used entirely
for evaluating segment performance and deciding how to allocate resources to
segments in quarterly and annual reports. SFAS No. 131 is effective for annual
reports for fiscal years beginning after December 15, 1997 and is applicable to
interim financial statements beginning with the second year of application. The
Company believes that the effect of adopting the new standards will not be
material to its consolidated financial statements.
7
AWARD SOFTWARE INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21A of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and those discussed in the Company's Form 10-K
for the year ended December 31, 1996 on file with the Securities and Exchange
Commission.
Award Software International, Inc. (the "Company") designs, develops and
markets system management software for the global computing market. On May 30,
1997, the Company acquired all of the outstanding stock of Unicore Software,
Inc. ("Unicore") through the merger of Unicore with and into a wholly owned
subsidiary of the Company (the "Merger") pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), dated as of May 29, 1997, by
and among the Company, its wholly owned subsidiary, Unicore and Pierre A. Narath
("Narath"). Unicore is engaged in the business of providing basic input/output
software upgrades for personal computers and embedded systems. Pursuant to the
terms of the Merger Agreement, the Company issued to Narath, the selling
shareholder, 218,571 shares of the Company's common stock. The Merger is being
treated as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and is being accounted for as a pooling of interests. The terms of
the Merger Agreement were determined through arms'-length negotiations between
the Company and Unicore and Narath. In addition, Narath entered into an
employment agreement with the Company pursuant to which Narath shall serve as a
Vice President of the Company and President of Unicore, the Company's wholly
owned subsidiary.
On April 30, 1997, the Company entered into a memorandum of understanding
with Sun Corporation ("Sun"), a shareholder, and Axis Corporation ("Axis") to
establish a majority-owned subsidiary, Award Software Japan KK ("Award Japan"),
a joint venture corporation incorporated under the laws of Japan and based in
Yokohama, Japan. The objective of Award Japan is to market and distribute the
Company's products in Japan. The Company, Sun and Axis contributed
approximately $310,000, $95,000 and $95,000 for 62%, 19% and 19% ownership of
Award Japan, respectively.
On February 21, 1997, the Company acquired certain assets of Willows
software ("Willows acquisition") for $400,000 cash, direct acquisition costs of
$40,000 and the assumption of liabilities totaling $44,000. The purchase price
was allocated based upon the estimated fair market value of identifiable
tangible and intangible assets and liabilities assumed, including $289,000 to
in-process research and development. The amount allocated to in-process
research and development relates to acquired development projects that had not
reached technological feasibility at the acquisition date and had no alternative
future use.
The following is a discussion of the financial condition and results of
operations of the Company as of September 30, 1997 and for the three and nine
months ended September 30, 1997 and 1996, respectively, and should be read in
conjunction with the accompanying Quarterly Condensed Consolidated Financial
Information and Notes thereto and the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 1996, included in
the Company's 1996 Annual Report on Form 10-K, and is qualified in its entirety
by reference thereto.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated statement of income information as a percentage of the Company's
total revenues represented by each item. The Company's historical results are
not necessarily indicative of results in any future period.
8
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- --------------- --------------
Revenues:
Software license fees 84 % 88 % 82 % 84 %
Engineering services 12 3 11 4
Related parties 4 9 7 12
------------- ------------- --------------- --------------
Total revenues 100 100 100 100
------------- ------------- --------------- --------------
Cost of revenues:
Software license fees 6 5 5 3
Engineering services 3 2 3 1
Related parties 0 1 0 3
------------- ------------- --------------- --------------
Total cost of revenues 9 8 8 7
------------- ------------- --------------- --------------
Gross profit 91 92 92 93
Operating expenses:
Research and development 30 34 30 31
Sales and marketing 22 21 22 21
General and administrative 14 13 17 16
------------- ------------- --------------- --------------
Total operating expenses 66 68 69 68
------------- ------------- --------------- --------------
Income from operations 25 24 23 25
Interest income, net 5 4 5 3
Minority interest 0 - 0 -
------------- ------------- --------------- --------------
Income before income taxes 30 28 28 28
Provision for income taxes 10 10 9 10
------------- ------------- --------------- --------------
Net income 20 % 18 % 19 % 18 %
============= ============= =============== =============
COMPARISON OF THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. The Company's revenues consist of software license fees and
engineering services revenues. Revenues increased by $2.2 million (65%) and
$6.3 million (66%) for the three and nine month periods ended September 30,
1997, respectively, from the same periods of the prior year. Software license
fees increased by $1.7 million (56%) and $5.0 million (62%) for the three and
nine month periods ended September 30, 1997, respectively, from the same periods
of the prior year primarily due to higher unit shipments to new and existing
motherboard customers in Taiwan and the U.S. and embedded systems customers in
the U.S., partially offset by a decrease in software license fees from a
European customer. Engineering services revenues increased by $571,000 (628%)
and $1.3 million (345%) for the three and nine month periods ended September 30,
1997, respectively, from the same periods of the prior year primarily due to
higher engineering services revenues from customers in the U.S and Japan.
Related parties revenues decreased by $56,000 (18%) and $5,000 (0%) for the
three and nine month periods ended September 30, 1997, respectively, from the
same periods of the prior year primarily due to lower volume of software license
fees and engineering services.
COST OF REVENUES. Cost of revenues consist primarily of the cost of
materials and freight expenses associated with software license fees and direct
costs associated with engineering services revenues. Cost of revenues as a
percentage of revenues increased to 9% and 8% of revenues for the three and nine
month
9
periods ended September 30, 1997, respectively, as compared to 8% and 7%
of revenues for the same periods of the prior year. The increase in cost of
revenues as a percent of revenues for the three and nine month periods ended
September 30, 1997 was primarily due to higher cost of software license fees and
cost of engineering services revenues, mainly due to higher engineering salary
and related costs, partially offset by a decrease in cost of software license
fees and cost of engineering services revenues from a related party product
development effort.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of engineering personnel and related expenses and equipment costs.
Research and development expenses increased by $510,000 (45%) and $1.7 million
(58%) for the three and nine month periods ended September 30, 1997,
respectively, from the same periods of the prior year primarily due to the
hiring of engineering personnel and related expenses to develop new software
products and a one-time charge of $289,000 for in-process research and
development as a result of the Willows acquisition. The Company anticipates
that it will continue to devote substantial resources to product research and
development and that such expenses will continue to increase in absolute
dollars.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel and related expenses, sales commissions and travel costs. Sales and
marketing expenses increased by $519,000 (73%) and $1.5 million (77%) for the
three and nine month periods ended September 30, 1997, respectively, from the
same periods of the prior year primarily due to the hiring of sales and
marketing personnel and related expenses, higher sales commissions for increased
revenues, increased participation in trade shows and higher professional
services fees.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related expenses, professional services and
facilities costs. General and administrative expenses increased by $340,000
(75%) and $1.1 million (75%) for the three and nine month periods ended
September 30, 1997, respectively, from the same periods of the prior year
primarily due to higher public company expenses, the hiring of general and
administrative personnel and related expenses, higher professional services fees
and higher facilities costs.
INTEREST INCOME, NET. Interest income, net consists primarily of interest
expense associated with short-term borrowings and interest income on cash and
cash equivalents, net of expenses. Interest income, net increased by $150,000
and $517,000 for the three and nine month periods ended September 30, 1997,
respectively, from the same periods of the prior year primarily due to an
increase in interest income earned on higher cash balances partially offset by
interest expense on a short-term borrowing.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to
33% from 36% for the three month periods ended September 30, 1997 and September
30, 1996, respectively, and decreased to 33% from 36% for the nine month periods
ended September 30, 1997 and September 30, 1996, respectively, primarily due to
an increase in income taxable in Taiwan at rates lower than the applicable
statutory rates in the U.S. and Germany.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the private sale of
equity securities and from cash generated from operations. As of September 30,
1997, the Company had cash and cash equivalents of $21.8 million and working
capital of $25.3 million. Net cash used in operating activities was $262,000
for the nine month period ended September 30, 1997 and was primarily due to
reductions in accrued liabilities and an increase in accounts receivable
partially offset by higher income and collections on receivables from related
parties.
Net cash used in investing activities was $1.3 million for the nine month
period ended September 30, 1997 and was primarily due to the Company's purchase
of computer hardware and software equipment, the purchase of equipment resulting
from the Willows acquisition and an increase in capitalized software development
costs.
10
Net cash used in financing activities was $74,000 for the nine month period
ended September 30, 1997 and was primarily due to the repayment of a loan to
Lawrence Savings Bank (the "Bank") entered into between the Bank and Unicore
partially offset by proceeds from purchases of stock under the Employee Stock
Purchase Plan and exercises of stock options under the 1995 Stock Option Plan.
On October 25, 1996, the Company completed the initial offering of its
Common Stock to the public ("IPO"). Pursuant to the IPO, the Company sold an
aggregate of 1,250,000 shares of common stock at $8.00 per share, resulting in
net proceeds to the Company of approximately $7.8 million. The Company believes
that the net proceeds from the sale of Common Stock, together with anticipated
cash flows from operations and existing cash balances, will satisfy the
Company's projected expenditures through 1997 for working capital and general
corporate purposes, including an increase in the Company's internal product
development, staffing in connection with new product introductions and other
related product development expenditures. From time to time, in the ordinary
course of business, the Company enters into strategic relationships with its
customers or other participants in the PC industry. Such strategic
relationships may include equity investments in the Company. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the shareholders of the Company will be reduced, shareholders may
experience additional dilution, or such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's Common
Stock. Other than its relationships with Vobis Microcomputer AG and Advanced
Micro Devices, Inc., the Company has no current commitments or agreements with
respect to any strategic relationships, including any equity investments.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share." SFAS No. 128 establishes financial accounting and reporting
standards for calculation of basic earnings per share and diluted earnings per
share. SFAS No. 128 supersedes APB No. 15 and is effective for periods ending
after December 15, 1997, including interim periods. The Company is required to
adopt the standard in annual financial statements for the year ending December
31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," and No. 131 ("SFAS No. 131"), "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14 and
requires segment information to be reported on the basis that is used entirely
for evaluating segment performance and deciding how to allocate resources to
segments in quarterly and annual reports. SFAS No. 131 is effective for annual
reports for fiscal years beginning after December 15, 1997 and is applicable to
interim financial statements beginning with the second year of application. The
Company believes that the effect of adopting the new standards will not be
material to its consolidated financial statements.
BUSINESS RISKS
DEPENDENCE UPON THE UNDERLYING PC INDUSTRY; DEPENDENCE ON CURRENT PC INDUSTRY
STANDARDS
The demand for the Company's system management software depends principally on
(i) PC manufacturers and other customers licensing the Company's software rather
than developing their own system management software, (ii) the market acceptance
of the products incorporating the Company's software sold by the Company's
original equipment manufacturer ("OEM") customers, (iii) the emergence of new
PC technologies that require system management software solutions to provide
functionality, user value and performance, and (iv) the technological competence
of the Company's core products. Sales of PCs fluctuate substantially from time
to time based on numerous factors, including general economic
11
conditions in the markets for the Company's customers' products, new hardware
and software product introductions, demand for new applications and shortages of
key components. Further, the markets in the PC industry are extremely
competitive and characterized by rapid and frequent price reductions.
The introduction of new hardware architectures, microprocessors, peripheral
equipment and operating systems within the PC industry has increased the
complexity, time to market and cost to develop PCs. A number of computer
manufacturers, including IBM Corporation ("IBM") and Compaq Computer
Corporation ("Compaq"), develop their own BIOS products to achieve
compatibility with and integrate new technologies into their products. While the
Company believes that price and time-to-market pressures will continue to foster
a trend among its customers and potential customers to out-source system
management software requirements to third parties, there can be no assurance
that this trend will continue or will not reverse itself, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's software to date has been primarily based on central processing
units ("CPUs") designed by or compatible with those of Intel Corporation
("Intel") and operating system software designed by Microsoft Corp.
("Microsoft"). If the market for Intel and Intel-compatible CPUs with x86
architecture is materially diminished or if another CPU, such as Motorola,
Inc.'s "PowerPC," achieves a high degree of success, demand for the Company's
current software would be reduced. In addition, most of the Company's software
has been installed on computers using Microsoft's MS/DOS or Windows operating
systems. If Microsoft's operating systems cease to be the dominant operating
systems for the PC industry, or if PC manufacturers use other operating systems,
which are not compatible with MS/DOS or Windows, the Company could experience
increased product development costs and/or diminished revenues.
CONCENTRATION OF REVENUES FROM DESKTOP BIOS
The Company depends on sales of desktop BIOS for a substantial majority of
its revenues. The Company has not generated substantial revenues from the sale
of other products to date, including sales of mobile PC products. If sales of
the Company's desktop BIOS decline for any reason, the Company's business,
financial condition and results of operations would be adversely affected unless
the Company is able to replace those sales with increased sales of other
products. Sales of desktop BIOS could decline for a number of reasons, including
a shift in the market for PCs away from desktop PCs in favor of mobile PCs and a
delay in expected new hardware and software technologies from Intel and
Microsoft.
COMPETITION FROM SYSTEM MANAGEMENT SOFTWARE COMPANIES AND OTHER PARTICIPANTS,
INCLUDING MICROSOFT AND INTEL, IN THE PC INDUSTRY
The markets for the Company's software are highly competitive. The Company
faces competition primarily from other system management software companies,
including American Megatrends, Inc., Phoenix Technologies Ltd. ("Phoenix
Technologies") and SystemSoft Corporation ("SystemSoft"), as well as in-house
software development staffs of current and prospective customers. Certain of the
companies with which the Company competes or may in the future compete have
substantially greater financial, marketing, sales and support resources and
greater brand name and technology leadership recognition than the Company. There
can be no assurance that the Company will be able to develop software comparable
or superior to software offered by its competitors. In addition, the PC market
experiences intense price competition and the Company expects that, in order to
remain competitive, it may have to decrease unit prices on some or all of its
software products. Any such decrease would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that interdependencies may develop between system
management software companies and their customers, which would need to be
overcome in order to replace an entrenched competitor. While the Company
believes that such entrenchment may benefit the Company in its existing
relationships with key participants in the desktop PC market, customer
entrenchment may make it more difficult for the Company to displace entrenched
competitors or increase market presence, particularly in the mobile PC market,
where competitors may already have strong relationships with certain mobile PC
12
manufacturers. Intel has entered into formal agreements with, and has become a
significant shareholder in, Phoenix Technologies and SystemSoft. In addition,
SystemSoft has entered into agreements with Microsoft, IBM and Compaq to license
its PC Card software.
Operating system software vendors may in the future enter the Company's
primary markets as direct competitors or incorporate enough features into their
products so as to reduce the need for the Company's products. Microsoft includes
basic PC Card software in its Windows 95 operating system and has announced the
inclusion of full PC Card software support in its next generation Windows 98 and
Windows NT operating systems. Microsoft's recently released Windows CE 2.0
operating system includes Hardware Abstraction Layer (HAL) software that
incorporates system management software features and some PC Card capabilities.
As software developers provide greater functionality and features, user value
and performance in their products that eliminate or reduce the need for the
Company's system management software, the market for the Company's products
could be materially diminished. In addition, chipset manufacturers, including
Intel, may increase their presence in the motherboard manufacturing market,
which may have an adverse effect on the Company's OEM customers. There can be no
assurance that other participants in the PC industry will not develop products
and solutions that reduce the demand or obviate the need for the Company's
products.
ABILITY TO RESPOND TO RAPID TECHNOLOGICAL CHANGE
The market for system management software is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The general trend in the PC industry is toward shorter product life cycles,
resulting in rapid product and technology obsolescence. The life cycle of the
Company's products is highly dependent on the life cycles of the products sold
by its customers, who are primarily in the desktop PC industry. Although the
Company's core products, specifically, the desktop and embedded device BIOS and
PC Card software, may have a life cycle as long as several years, specific
customized adaptations of the Company's core products are generally expected to
have a life cycle of six months to one year. The Company's future success will
depend upon its ability to enhance its core software and to develop and
introduce new software which keeps pace with technological developments and
evolving industry standards as well as to respond to its customers' and end-
users' demand for greater features and functionality. The Company is currently
developing certain technologies that it will need to remain competitive. There
can be no assurance that the Company will be successful in developing such
enhancements or new software, or, even if successful, that it will not
experience delays in achieving such developments. Any failure or delay by the
Company to develop such enhancements or new software or the failure of its
software to achieve market acceptance would adversely affect the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that products or technologies developed by others will not
render the Company's software or technologies non-competitive or obsolete.
DEPENDENCE ON KEY CUSTOMER RELATIONSHIPS; CONCENTRATION OF CREDIT RISK
The Company believes that its success to date has been largely due to its
relationship with participants in the desktop PC industry, particularly OEMs in
the desktop PC market. The Company works closely with its customers to provide
quick response to their product design needs and assists them in evaluating new
technological developments as they affect future products and enhancements to be
sold by the Company's customers. The loss of any one of these strategic
relationships or any other significant customer in the PC industry could
adversely affect the Company's product development efforts, business, financial
condition and results of operations.
For the three and nine month periods ended September 30, 1997, a related party
accounted for approximately 4% and 7% of the Company's total revenues,
respectively. The loss of any key customer or the inability of the Company to
replace revenues provided by a key customer would have a material adverse effect
on the Company's business, financial condition and results of operations.
Revenues from the distribution of the Company's PC Card software accounted for
2% and 3% of the Company's total revenues in the three and nine month periods
ended September 30, 1997.
13
The Company's customer base consists primarily of motherboard manufacturers
and OEMs in the desktop PC market, and as a result the Company maintains
individually significant receivable balances from these customers. If these
customers fail to satisfy their payment obligations, the Company's business,
financial condition and results of operations would be adversely affected.
UNCERTAIN ACCEPTANCE IN NEW AND DEVELOPING MARKETS
The Company's future success is dependent on customer acceptance of new
products and penetration of markets outside the desktop PC market. There can be
no assurance that the Company will be able to expand its products and
technologies into the mobile PC, embedded device and network computing and
Internet markets or that the Company will be able to increase its market
presence in the desktop PC market. Expansion of the Company's software and
technology into the mobile PC market will depend primarily on the Company's
ability to replace entrenched competitors. Penetration of markets outside the
desktop PC market, such as the embedded device market, will depend upon the
development and availability of system management software providing the
necessary functionality and customer acceptance of such new technology. There
can be no assurance that the Company will be able to develop or obtain from
third parties the necessary software and technology to penetrate these markets,
or that, if such software and technology is developed by the Company or obtained
from third parties through licensing, which may include payments of license fees
or royalties in advance, the Company will be able to successfully distribute
such products. There can be no assurance that such products will not be
developed by others rendering the Company's products non-competitive or
obsolete. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of such new products, or that such products will
achieve market acceptance. In addition, there can be no assurance that the
introduction of Microsoft Windows CE into the embedded device and Internet
appliance market will not have a material impact on the Company's new products
for these markets.
Any increase in the demand for the Company's embedded device products is
dependent upon the increasing use and complexity of embedded computer systems in
new and traditional products. No assurance can be given that this trend will
continue or, even if it does, that the Company will be able to design system
management software that will address the unique requirements of the embedded
device market. Further, since the Company's experience and expertise are based
on Intel x86 architecture, the Company's success in the embedded device market
is significantly dependent on Intel's continued commitment to, and the increased
presence of x86 architecture in, this market. There can be no assurance that
Intel will not de-emphasize or withdraw its support of the embedded device
market, or that the trend toward x86 architecture in the embedded device market
will continue, any of which could result in a material adverse effect on the
Company's growth strategies, financial condition and results of operations.
Certain of the markets for the Company's existing and future products, such as
the Internet and private internet protocol networks ("Intranet"), have only
recently begun to develop and are rapidly evolving. Demand and market acceptance
for recently introduced or developing products are subject to a high level of
uncertainty and risk. Critical issues concerning the commercial use of the
Internet remain unresolved and could adversely affect the growth of Internet
use. There can be no assurance that commerce and communication over the Internet
or Intranet will become widespread, or that the Company's planned products
addressing the Internet and Intranet markets will become widely accepted.
Because these markets for the Company's existing and developing products are new
and rapidly emerging, it is difficult to predict the future growth rate, if any,
and size of these markets. There can be no assurance that such markets for the
Company's existing and developing products and technology will develop or that
such products will be accepted. If these markets fail to develop, develop more
slowly than anticipated or become saturated with competitors, or if the
Company's products do not obtain customer acceptance, the Company's business,
financial condition and results of operations could be materially adversely
affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience fluctuations
in its quarterly results of operations. The Company's revenues are affected by a
number of factors, including the demand
14
for PCs and embedded devices, timing of new product introductions, product mix,
volume and timing of customer orders, activities of competitors and the ability
of the Company to penetrate new markets. The Company's business is seasonal with
revenues generally increasing in the fourth quarter as the result of increased
PC shipments during the holiday season. Consequently, during the three quarters
ending in March, June and September, the Company has historically not been as
profitable as in the quarter ending in December. In addition, the Company's
revenues and profits have historically decreased in the first quarter of each
year as compared with the fourth quarter of the previous year. The Company
generally ships orders as they are received and, as a result, has little or no
backlog. Quarterly revenues and results of operations therefore depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. Because the Company's staffing and other operating expenses are based
on anticipated revenues, delays in the receipt of orders can cause significant
variations in results of operations from quarter to quarter. The Company also
may choose to reduce prices, increase spending in response to competition or
pursue new market opportunities, each of which decisions may adversely affect
the Company's business, financial condition and results of operations.
Therefore, the Company believes that period-to-period comparisons of its
revenues and operating results are not necessarily meaningful and should not be
relied upon as indicators of future performance.
Due to all of the foregoing factors, it is likely that in some future quarters
the Company's operating results will be below the expectations of public market
analysts and investors. Regardless of the general outlook for the Company's
business, the announcement of quarterly results of operations below analyst and
investor expectations is likely to result in a decline in the trading price of
the Company's Common Stock.
VARIATIONS IN OPERATING RESULTS
The revenue growth rates experienced by the Company to date may not be
indicative of future growth rates and there can be no assurance that the Company
will remain profitable in the future. Future results of operations may fluctuate
significantly based upon numerous factors including the demand for PCs and
embedded devices, the timing of new product introductions, product mix, volume
and timing of customer orders, activities of competitors and the ability of the
Company to penetrate new markets. The volume and timing of new contracts and
delays in the achievement of milestones could have a significant impact on
operating results for a particular quarter. In addition, the delay of Windows
98 by Microsoft could slow the growth of the PC market until such time as that
product is released.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN KEY TECHNICAL
EMPLOYEES
The Company's success to date has depended to a significant extent upon a
number of key management and technical employees. The loss of services of one or
more of these key employees, particularly George C. Huang, the Company's
Chairman of the Board, President and Chief Executive Officer, and Lyon T. Lin,
General Manager, Taiwan and President, Award Software Hong Kong Limited, Taiwan
Branch, could have a material adverse effect on the Company's business,
financial condition and results of operations. Except for two employees in the
U.S. and all employees in Germany, none of the Company's employees is party to
an employment agreement with the Company. The Company believes that its future
success will also depend in large part upon its ability to attract and retain
highly skilled technical, management and sales and marketing personnel.
Moreover, because the development of the Company's software requires knowledge
of computer hardware, operating system software, system management software and
application software, key technical personnel must be proficient in a number of
disciplines. Competition for such technical personnel is intense, and the
failure of the Company to hire and retain talented technical personnel or the
loss of one or more key employees could have an adverse effect on the Company's
business, financial condition and results of operations.
Future growth, if any, of the Company will require additional engineering,
sales and marketing, and financial and administrative personnel to expand
customer services and support and to expand operational and financial systems.
There can be no assurance that the Company will be able to attract and retain
the necessary personnel to accomplish its growth strategies or that it will not
experience constraints that will adversely affect its ability to satisfy
customer demand in a timely fashion. If the Company's management is
15
unable to manage growth effectively, the Company's business, financial condition
and results of operations could be adversely affected.
MANAGEMENT OF GROWTH
The growth of the Company's business and, in particular, the Company's
customer base, has placed, and is expected to continue to place, a strain on the
Company's management systems and resources. The Company's ability to compete
effectively and manage future growth, if any, will require the Company to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis and expand, train and manage its work force. There
can be no assurance that the Company will be able to do so successfully, and the
failure to do so would have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company's success
will depend to a significant degree on the ability of its executive officers and
other members of its senior management, none of whom has any prior experience
managing public companies in their current roles, to manage future growth, if
any.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS; INTERNATIONAL UNREST
The Company operates on a multinational basis, and a significant portion of
its business is conducted in currencies other than the U.S. Dollar. As a result,
the Company is subject to various risks, including exposure to currency
fluctuations, greater difficulty in administering its global business, multiple
regulatory requirements and other risks associated with international sales,
such as import and export licenses, political and economic instability,
overlapping or differing tax structures, trade restrictions, changes in tariff
rates, different legal regimes, difficulty in protecting intellectual property,
enforcing agreements and collecting accounts receivable. For the three and nine
month periods ended September 30, 1997, approximately 36% and 38% of the
Company's revenues were denominated in New Taiwan Dollars, respectively, and
approximately 4% and 3% of the Company's revenues were denominated in German
Marks, respectively. The Company's revenues denominated in Japanese Yen were
inmaterial during the three and nine month periods ended September 30, 1997.
While the impact of foreign exchange rate movements have not had a material
impact on the Company's financial statements, there can be no assurance that
fluctuation in foreign currency exchange rates will not have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company does not currently engage in foreign currency hedging transactions.
There can be no assurance that exchange rate fluctuations will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The Company's business, financial condition or results of
operations could be adversely affected by factors associated with international
operations such as changes in foreign currency exchange rates, uncertainties
relative to regional economic circumstances, political instability in emerging
markets, and difficulties in staffing and managing foreign operations, as well
as by other risks associated with international activities. In particular, the
recent currency devaluations in South East Asia and the general downturn of the
economies of that region could materially adversely affect the Company's
business, financial condition or results of operations. As a result of such
economic instability, Dataquest, Inc. has revised downward its forecasts of
demand for PCs in the region. Any such reduction in demand for PCs would
adversely affect the Company's business, financial condition or results of
operation. See "Dependence Upon the Underlying PC Industry; Dependence on
Current PC Industry Standards."
Award Software Hong Kong Limited, the company's wholly owned subsidiary, is
incorporated under the laws of Hong Kong ("Award Hong Kong"). Substantially all
of the Company's Asian desktop motherboard and OEM manufacturing and design
facilities are operated through Award Hong Kong's branch office located in
Taipei, Taiwan. These operations could be severely affected by national or
regional political instability in China, including instability which may occur
in connection with a change in leadership in China, change of control of Hong
Kong from the United Kingdom to China, by evolving interpretation and
enforcement of legal standards, by conflicts, embargoes, increased tensions or
escalation of hostilities between China and Taiwan and by other trade customs
and practices that are dissimilar to those in the United States. Interpretation
and enforcement of China's laws and regulations continue to evolve and the
Company expects that differences in interpretation and enforcement will continue
in the foreseeable future.
16
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in significant part on the development,
maintenance and protection of its intellectual property. The Company regards all
of its software as proprietary and attempts to protect it with a combination of
patents, copyrights, trademarks and trade secrets, employee and third-party
nondisclosure agreements and other methods of protection. Despite these
precautions and the protection of copyright laws, it may be possible for
unauthorized third parties to copy the Company's software or to reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company has patent applications pending in the U.S. and/or abroad on six
inventions, three of which are owned jointly with a third party. There are
currently no issued patents covering the Company's products. However, the
Company does not generally rely on patents to protect its products. The Company
licenses its object and source code under written license agreements. Certain
provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed programs, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign jurisdictions, including Taiwan, do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the protections put in place by the Company will be
adequate.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property to determine the scope of the proprietary rights
of others or to defend against claims of infringement. Moreover, although the
Company is not currently involved in any litigation with respect to intellectual
property rights, in the past there have been allegations that certain portions
of the Company's core BIOS infringed on a third party's copyrights. In response,
the Company rewrote certain software routines in a "clean room" procedure and
upgraded its customers to the new version of such software routines in order to
avoid any further allegations of infringement. The Company believes that its
software does not infringe the copyrights of any third parties. However, there
can be no assurance that other parties will not make allegations of infringement
in the future. Such assertions could require the Company to discontinue the use
of certain software codes or processes, to cease the manufacture, use and sale
of infringing products, to incur significant litigation costs and expenses and
to develop non-infringing technology or to obtain licenses to the alleged
infringing technology. Although the Company has been able to acquire licenses
from third parties in the past, there can be no assurance that the Company would
be able to develop alternative technologies or to obtain such licenses or, if a
license were obtainable, that the terms would be commercially acceptable to the
Company in the event such assertions are made in the future.
VOLATILE MARKET FOR STOCK
The market for the Company's stock is highly volatile. The trading price of
the Company's Common Stock has been and will continue to be subject to
fluctuations in response to financial condition and results of operations,
announcements of technological innovations or new products by the Company and
its competitors, changes in the Company's or its competitors' product mix or
product direction, changes in the Company's revenue mix and revenue growth
rates, changes in expectations of growth for the PC industry, as well as other
events or factors which the Company may not be able to influence or control.
Statements or changes in opinions, ratings or earnings estimates made by
brokerage firms and industry analysts relating to the market in which the
Company does business, companies with which the Company competes or relating to
the Company specifically could have an immediate and adverse effect on the
market price of the Company's stock. In addition, the stock market has from time
to time experienced extreme price and volume fluctuations that have particularly
affected the market price for many high-technology companies and that often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
could adversely affect the market price for the Company's Common Stock. Certain
shares of Common Stock held by existing shareholders are "restricted
securities" as such term is defined in Rule 144 under the Securities Act of
1933, as amended (the "Act") (the "Restricted Shares"). Restricted Shares
may be sold in the public
17
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 or Regulation S promulgated under the Act.
Recently, the Securities and Exchange Commission enacted a new rule effective
April 29, 1997 shortening the holding periods under Rule 144 to permit re-sales
of limited amounts of Restricted Shares after one year and unlimited amounts of
Restricted Shares by non-affiliates of the Company after two years. Further, the
Company, all directors and executive officers and certain shareholders of the
Company had agreed not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days after October 24, 1996, which period expired
April 23, 1997.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed herewith:
Exhibit 11.1 Computation of Net Income per Share.
Exhibit 21.2 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
A Form 8-K/A was filed on October 14, 1997 and September 17,
1997 solely for the purpose of amending Exhibit 2.1 to the Form 8-
K Current Report dated May 30, 1997 and filed on June 16, 1997.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARD SOFTWARE INTERNATIONAL, INC.
November 13, 1997 By: /s/ George C. Huang
-------------------
George C. Huang
Chairman of the Board, President and Chief
Executive Officer
November 13, 1997 By: /s/ Kevin J. Berry
------------------
Kevin J. Berry
Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
20
EXHIBIT INDEX
Exhibit No. Description
Exhibit 11.1 Computation of Net Income per Share.
Exhibit 21.2 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule.
21