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 June 30, 1998 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
(Address of principal executive offices)
94043-4023
(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 7,195,629 shares of Common Stock, no par value, outstanding at
June 30, 1998.
1
AWARD SOFTWARE INTERNATIONAL, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
a) Condensed Consolidated Balance Sheet as of June 30,
1998 and December 31, 1997 (Unaudited) 3
b) Condensed Consolidated Statement of Income for the
three and six months ended June 30, 1998 and 1997
(Unaudited) 4
c) Condensed Consolidated Statement of Cash Flows for
the six months ended June 30, 1998 and 1997
(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 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AWARD SOFTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(Unaudited)
June 30, December 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,432 $ 24,631
Accounts receivable, net 3,669 4,256
Receivables from related parties 686 747
Deferred income taxes 483 483
Other current assets 2,131 1,698
------------ ------------
Total current assets 33,401 31,815
Property and equipment, net 1,353 1,367
Other assets 1,723 1,199
------------ ------------
$ 36,477 $ 34,381
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 317 $ 449
Accrued liabilities 3,473 3,950
------------ -----------
Total current liabilities 3,790 4,399
Minority interest 157 170
------------ ------------
3,947 4,569
------------ ------------
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;
7,195,629 and 6,941,846 shares issued and outstanding 23,097 22,571
Deferred stock compensation (69) (106)
Retained earnings 10,652 8,320
Cumulative translation adjustment (1,150) (973)
------------- -------------
Total shareholders' equity 32,530 29,812
------------- -------------
$ 36,477 $ 34,381
============= =============
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 Six months ended
June 30, June 30,
1998 1997 1998 1997
------------- ------------- ------------- ------------
Revenues:
Software license fees $ 5,312 $ 4,287 $ 10,573 $ 8,323
Engineering services 662 695 1,341 1,042
Related parties 228 220 694 865
------------- ------------- ------------- ------------
Total revenues 6,202 5,202 12,608 10,230
------------- ------------- ------------- ------------
Cost of revenues:
Software license fees 226 210 597 438
Engineering services 239 211 451 297
Related parties 6 8 23 34
------------- ------------- ------------- ------------
Total cost of revenues 471 429 1,071 769
------------- ------------- ------------- ------------
Gross profit 5,731 4,773 11,537 9,461
------------- ------------- ------------- ------------
Operating expenses:
Research and development 1,577 1,428 3,212 3,089
Sales and marketing 1,795 1,210 3,568 2,251
General and administrative 989 940 2,061 1,828
------------- ------------- ------------- ------------
Total operating expenses 4,361 3,578 8,841 7,168
------------- ------------- ------------- ------------
Income from operations 1,370 1,195 2,696 2,293
Interest income, net 296 275 635 536
Minority interest 26 10 - 10
------------- ------------- ------------- ------------
Income before income taxes 1,692 1,480 3,331 2,839
Provision for income taxes 508 480 999 947
------------- ------------- ------------- ------------
Net income $ 1,184 $ 1,000 $ 2,332 $ 1,892
============= ============= ============= ============
Basic net income per share $ 0.17 $ 0.15 $ 0.33 $ 0.28
============= ============= ============= ============
Weighted average common shares 7,176 6,855 7,070 6,823
============= ============= ============= ============
Diluted net income per share $ 0.15 $ 0.13 $ 0.30 $ 0.25
============= ============= ============= ============
Weighted average common and
common equivalent shares 7,998 7,719 7,821 7,710
============= ============= ============= ============
See accompanying notes to condensed consolidated financial statements.
4
AWARD SOFTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
June 30,
1998 1997
------------------------ ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,332 $ 1,892
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 547 303
Deferred stock compensation 37 37
Minority interest (13) 189
Changes in assets and liabilities:
Accounts receivable, net 514 (983)
Receivables from related parties 61 533
Other current assets (447) (43)
Other assets (255) 26
Accounts payable (139) 33
Accrued liabilities (468) (2,383)
------- -------
Net cash provided by (used in) operating activities 2,169 (396)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (340) (404)
Capitalized software development costs (474) (373)
------- -------
Net cash used in investing activities (814) (777)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuances 525 374
Payments under bank loan - (45)
------- -------
Net cash provided by financing activities 525 329
------- -------
Effect of exchange rate changes on cash (79) (106)
------- -------
Net increase (decrease) in cash and cash equivalents 1,801 (950)
Cash and cash equivalents at beginning of period 24,631 23,706
------- -------
Cash and cash equivalents at end of period $26,432 $22,756
======= =======
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 June 30, 1998 for the three
and six months ended June 30, 1998 and 1997 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, 1997 included in the Annual Report on Form 10-K
filed by the Company on March 31, 1998, as amended.
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. REVENUE RECOGNITION
In October 1997, the AICPA issued Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition," which the Company has adopted for transactions
entered during the year beginning January 1, 1998. SOP 97-2 provides guidance
for recognizing revenue on software transactions and supersedes SOP 91-1,
"Software Revenue Recognition." In March 1998, the AICPA issued Statement of
Position No. 98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition." SOP 98-4 defers, for one year, the
application of certain passages in SOP 97-2 which limit what is considered
vendor-specific objective evidence ("VSOE") necessary to recognize revenue for
software licenses in multiple-element arrangements when undelivered elements
exist. Additional guidance is expected to be provided prior to adoption of the
deferred provision of SOP 97-2. The Company will determine the impact, if any,
the additional guidance will have on current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a material
impact on revenue recognition during the first and second quarters of 1998.
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to
Common Shareholders by the weighted average number of common shares outstanding
during the period. Diluted net income per share is calculated using the
weighted average number of outstanding shares of Common Stock plus dilutive
Common Stock equivalents. Common Stock equivalents consist of common stock
options and warrants, using the treasury stock method based on the average stock
price for the period.
Three months ended Six months ended
June 30, June 30,
(in thousands, except per share data) 1998 1997 1998 1997
--------------- --------------- --------------- ---------------
BASIC NET INCOME PER SHARE
Net income available to Common Shareholders $1,184 $1,000 $2,332 $1,892
=============== =============== =============== ===============
Weighted average common shares 7,176 6,855 7,070 6,823
=============== =============== =============== ===============
Basic net income per share $ 0.17 $ 0.15 $ 0.33 $ 0.28
=============== =============== =============== ===============
6
DILUTED NET INCOME PER SHARE
Net income available to Common Shareholders $1,184 $1,000 $2,332 $1,892
=============== =============== =============== ===============
Weighted average common shares 7,176 6,855 7,070 6,823
Dilutive common stock equivalents 822 864 751 887
--------------- --------------- --------------- ---------------
Weighted average common shares and equivalents 7,998 7,719 7,821 7,710
=============== =============== =============== ===============
Diluted net income per share $ 0.15 $ 0.13 $ 0.30 $ 0.25
=============== =============== =============== ===============
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive
income is defined as the change in equity of a company from transactions, other
events and circumstances excluding transactions resulting from investments by
owners and distributions to owners. The primary difference between net income
and comprehensive income, for the Company, is from foreign currency translation
adjustments. Comprehensive incomes for the three and six months ended June 30,
1998 are $879 and $2,155, respectively. Comprehensive incomes for the three and
six months ended June 30, 1997 are $946 and $1,778, respectively.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information." 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
standard will not be material to its consolidated financial statements.
6. SUBSEQUENT EVENTS
On April 16, 1998, the Company and Phoenix Technologies Ltd. ("Phoenix")
announced the completion of a definitive merger agreement. Under the terms of
the Agreement and Plan of Reorganization (the "Reorganization Agreement"), all
of the Company's outstanding stock will be acquired through the merger of a
wholly owned subsidiary of Phoenix with and into the Company (the "Merger").
Pursuant to the terms of the Reorganization Agreement, shareholders of Award
will receive 1.225 shares of Phoenix common stock for each share of Award common
stock. The completion of the Merger is subject to customary conditions to
closing, including shareholder approval of both companies and regulatory
approval. The transaction is intended to be treated as a tax-free
reorganization pursuant to the provisions of Section 368 of the Internal Revenue
Code of 1986 and a pooling of interests for financial reporting and accounting
purposes. In connection with the execution of the Reorganization Agreement, the
Company, Sun Corporation ("Sun"), a shareholder, and Axis Corporation ("Axis")
entered into an agreement on April 13, 1998 whereby the Company will purchase
Sun's 19% interest and Axis's 19% interest in Award Software Japan KK for an
aggregate purchase price of approximately 20,000 shares of the Company's Common
Stock. On June 30, 1998, the Company and Phoenix announced that the respective
shareholders approved the Merger and Reorganization Agreement. The Company has
deferred approximately $458,000 in merger expenses related to the transaction as
of June 30, 1998.
7
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 Annual
Report on Form 10-K, as amended, for the year ended December 31, 1997 on file
with the Securities and Exchange Commission.
The Company designs, develops and markets system enabling and management
software for the global computing market. On April 16, 1998, the Company and
Phoenix Technologies Ltd. ("Phoenix") announced the completion of a definitive
merger agreement. Under the terms of the proposed transaction, all of the
Company's outstanding stock will be acquired through the merger of a wholly
owned subsidiary of Phoenix with and into the Company (the "Merger") pursuant to
an Agreement and Plan of Reorganization (the "Reorganization Agreement") by and
among Phoenix, its wholly owned subsidiary and the Company. Pursuant to the
terms of the Reorganization Agreement, shareholders of Award will receive 1.225
shares of Phoenix common stock for each share of Award common stock. The
completion of the Merger is subject to customary conditions to closing,
including shareholder approval of both companies and regulatory approval,
including expiration or termination of all waiting periods under the Hart-Scott-
Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"). The
transaction is intended to be treated as a tax-free reorganization pursuant to
the provisions of Section 368 of the Internal Revenue Code of 1986 and a pooling
of interests for financial reporting and accounting purposes. In connection
with the execution of the Reorganization Agreement, the Company and Vobis
Microcomputer AG ("Vobis") entered into a Support Agreement on April 15, 1998
whereby the Company will provide to Vobis certain support, maintenance and
development of basic input/output system code.
The HSR Act, and the rules promulgated thereunder, prohibit the completion
of the Merger until expiration or termination of a waiting period. On May 20,
1998, requests from the Antitrust Division for additional information and
documentary material were timely received by both the Company and Phoenix. Both
companies responded to requests for information issued by the Department in
connection with the application under the HSR Act, and both are awaiting final
government approval. No assurance can be given that approval will be obtained,
or that if obtained, such approval will be given on favorable terms or on a
timely basis. On June 30, 1998, the Company and Phoenix announced that the
respective shareholders approved the Merger and Reorganization Agreement. The
Company has deferred approximately $458,000 in merger expenses related to the
transaction as of June 30, 1998.
The success of the combined company will depend upon a number of factors,
including (i) the combined company's ability to integrate the various functional
groups, such as sales and engineering, effectively and achieve cost savings;
(ii) the risk that customers may defer purchasing decisions following the
announcement of the Merger; (iii) the ability of Phoenix, the Company and the
combined company to retain key employees following the announcement of the
Merger; (iv) the impact of transaction and restructuring charges to be incurred
by the combined company; and (v) the combined company's ability to successfully
introduce new products and upgrades to existing products. See "Merger Risks"
contained herein for further information on factors that could affect the
successful consummation of the Merger. Further information on factors that
could affect the Company's results are detailed in the Company's 10-Q for the
quarter ended March 31, 1998, and the Company's Joint Proxy Statement on Form S-
4 dated June 1, 1998, as filed with the Securities and Exchange Commission.
Further information on factors that could affect Phoenix's results are detailed
in Phoenix's Joint Proxy Statement on Form S-4 dated June 1, 1998, as filed with
the Securities and Exchange Commission.
On May 30, 1997, the Company acquired all of the outstanding stock of
Unicore Software ("Unicore") through the merger of Unicore with and into a
wholly owned subsidiary of the Company (the "Unicore 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 Unicore 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 arm's-length negotiations between the Company and Unicore and
8
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. In connection with the execution of the Reorganization Agreement,
the Company, Sun and Axis entered into an agreement on April 13, 1998, whereby
the Company will purchase Sun's 19% interest and Axis's 19% interest in Award
Japan for an aggregate purchase price of approximately 20,000 shares of the
Company's Common Stock.
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 June 30, 1998 and for the three and six months
ended June 30, 1998 and 1997, 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, 1997, included in the Company's
Annual Report on Form 10-K, as amended, 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.
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------------- ------------ ------------- -------------
Revenues:
Software license fees 86% 83% 84% 81%
Engineering services 11 13 11 10
Related parties 3 4 5 9
------------- ------------ ------------- -------------
Total revenues 100 100 100 100
------------- ------------ ------------- -------------
Cost of revenues:
Software license fees 4 4 5 4
Engineering services 4 4 4 3
Related parties 0 0 0 0
------------- ------------ ------------- -------------
Total cost of revenues 8 8 9 7
------------- ------------ ------------- -------------
Gross profit 92 92 91 93
------------- ------------ ------------- -------------
Operating expenses:
Research and development 25 28 26 30
Sales and marketing 29 23 28 22
9
General and administrative 16 18 16 18
------------ ------------ ------------- -------------
Total operating expenses 70 69 70 70
------------- ------------ ------------- -------------
Income from operations 22 23 21 23
Interest income, net 5 5 5 5
Minority interest 0 0 0 0
------------- ------------ ------------- -------------
Income before income taxes 27 28 26 28
Provision for income taxes 8 9 8 9
------------- ------------ ------------- -------------
Net income 19% 19% 18% 19%
============= ============ ============= =============
COMPARISON OF THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
REVENUES. The Company's revenues consist of software license fees and
engineering services revenues. Revenues increased by $1.0 million, or 19%, and
$2.4 million, or 23%, for the three and six month periods ended June 30, 1998,
respectively, from the same periods of the prior year. Software license fees
increased by $1.0 million, or 24%, and $2.2 million, or 27%, for the three and
six month periods ended June 30, 1998, 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. Engineering services revenues decreased by $33,000, or 5%, for the
three month period ended June 30, 1998 from the same period of the prior year
primarily due to lower engineering services revenues from customers in the U.S.,
and increased by $299,000, or 29%, for the six month period ended June 30, 1998
from the same period of the prior year primarily due to higher engineering
services revenues from customers in the U.S. Related parties revenues increased
by $8,000, or 4%, for the three month period ended June 30, 1998 from the same
period of the prior year primarily due to higher volume of software license fees
and engineering services, and decreased by $170,000, or 20%, for the six month
period ended June 30, 1998 from the same period of the prior year primarily due
to lower volume of software license fees and engineering services.
COST OF REVENUES. Cost of revenues consists primarily of the cost of
materials and freight expenses associated with software license fees and the
direct costs associated with engineering services revenues. Cost of revenues as
a percentage of revenues decreased to 8% of revenues for the three month period
ended June 30, 1998, as compared to 8% for the same period of the prior year.
This decrease was primarily due to lower cost of software license fees and cost
of engineering services revenues. Cost of revenues as a percentage of revenues
increased to 9% of revenues for the six month period ended June 30, 1998, as
compared to 7% for the same period of the prior year. This increase was
primarily due to higher costs of royalty fees associated with the Intel
Corporation ("Intel") LANDesk Client Management software, which the Company
began shipping in the fourth quarter of fiscal year 1997, and 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 $149,000, or 10%, and $122,000,
or 4%, for the three and six month periods ended June 30, 1998, 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. The
Company anticipates that it will devote substantial resources to product
research and development and that such expenses will 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 $585,000, or 48%, and $1.3 million, or 58%, for
the three and six month periods ended June 30, 1998, 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 product promotion expenses.
10
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 $50,000, or
5%, and $234,000, or 13%, for the three and six month periods ended June 30,
1998, respectively, from the same periods of the prior year primarily due to 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 $21,000
and $99,000 for the three and six month periods ended June 30, 1998,
respectively, from the same periods of the prior year primarily due to an
increase in interest income earned on higher cash balances and lower interest
expense on a short-term borrowing.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to
30% from 32% for the three month periods ended June 30, 1998 and June 30, 1997,
respectively, and decreased to 30% from 33% for the six month periods ended June
30, 1998 and June 30, 1997, 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 sale of equity
securities and from cash generated from operations. As of June 30, 1998, the
Company had cash and cash equivalents of $26.4 million and working capital of
$30.0 million. Net cash provided by operating activities was $2.2 million for
the six month period ended June 30, 1998 and was primarily due to higher income
and collections on accounts receivable partially offset by a decrease in accrued
liabilities and an increase in other current assets.
Net cash used in investing activities was $814,000 for the six month period
ended June 30, 1998 and was primarily due to an increase in capitalized software
development costs and the purchase of computer hardware and software equipment.
Net cash provided by financing activities was $525,000 for the six month
period ended June 30, 1998 and was primarily due to proceeds from Common Stock
issuances as a result of purchases of stock under the Employee Stock Purchase
Plan and exercises of stock options under the 1995 Stock Option Plan and 1997
Equity Incentive Plan.
The Company believes that anticipated cash flows from operations and
existing cash balances will satisfy the Company's projected expenditures through
1998 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
personal computer ("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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information." 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
standard will not be material to its consolidated financial statements.
11
In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP 98-
4"), "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition." SOP 98-4 defers, for one year, the application of certain
passages in SOP 97-2 which limit what is considered vendor-specific objective
evidence ("VSOE") necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
MERGER RISKS
DIFFICULTIES OF INTEGRATING TWO COMPANIES
The successful combination of Phoenix and the Company will require
substantial attention from management. The anticipated benefits of this Merger
will not be achieved unless the operations of the Company are successfully
combined with those of Phoenix in a timely manner with resulting cost savings
and other operating efficiencies. The difficulties of assimilation may be
increased by the need to integrate personnel and to combine different corporate
cultures. The diversion of the attention of management and any difficulties
encountered in the transition process could have an adverse effect on the
revenues and operating results of the combined company. The successful
combination of the two companies will also require integration of the companies'
product offerings and the coordination of their research and development and
sales and marketing efforts. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have a
material adverse effect on their combined operations. There can be no assurance
that the combined company will realize the expected cost savings and other
operating efficiencies or that it will be able to retain and successfully
integrate its key management, technical, sales and customer support personnel,
or that it will realize any of the anticipated benefits of the Merger.
RISKS ASSOCIATED WITH FIXED EXCHANGE RATIO
As a result of the Merger, each outstanding share of common stock of the
Company will be converted into the right to receive 1.225 shares (the "Exchange
Ratio") of common stock of Phoenix. Because the Exchange Ratio is fixed, it
will not increase or decrease due to fluctuations in the market price of either
common stock of Phoenix or the Company. The specific value of the consideration
to be received by the Company's shareholders in the Merger will depend on the
market price of the common stock upon the filing of an Agreement of Merger (the
"Agreement of Merger") with the Secretary of State of the State of California or
at such later time as may be agreed in writing by Phoenix, the Company and
Merger Sub, a wholly owned subsidiary of Phoenix, and specified in the Agreement
of Merger (the "Effective Time"). In the event that the market price of common
stock of Phoenix decreases or increases prior to the Effective Time, the market
value at the Effective Time of the common stock to be received by the Company's
shareholders in the Merger would correspondingly decrease or increase. The
common stock of Phoenix and the Company historically have been subject to
substantial price volatility. No assurance can be given as to the market prices
of the common stock of Phoenix or the Company at any time before the Effective
Time or as to the market price of the common stock of Phoenix at any time
thereafter.
RISKS ASSOCIATED WITH GOVERNMENT APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the rules promulgated thereunder, prohibit the completion of the
Merger until expiration or termination of a waiting period. On May 20, 1998,
requests from the Antitrust Division for additional information and documentary
material were timely received by both the Company and Phoenix. Both companies
responded to requests for information issued by the Department in connection
with the application under the HSR Act, and both are awaiting final government
approval. It is possible that governmental authorities may impose conditions or
remedial actions for granting approval under the HSR Act. However, under the
terms of the Reorganization Agreement or otherwise, neither Phoenix nor Award is
obligated to agree to such conditions or actions in order to facilitate the
consummation of the Merger. There can be no assurance that the consummation of
the Merger will not be delayed by reason of the HSR Act, or the failure to
resolve antitrust objections to the Merger on favorable or timely terms and
conditions would not lead to termination of the Reorganization Agreement.
12
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER
The negotiation and implementation of the Merger will result in substantial
pre-tax expenses to Phoenix and the Company primarily relating to costs
associated with combining the operations of the two companies and the fees of
financial advisors, attorneys and accountants. Such expenses may increase
substantially if the companies are required to respond to a request for further
information from the U.S. Federal Trade Commission and U.S. Department of
Justice Antitrust Division with respect to the companies' filings under the HSR
Act. In any event, costs associated with the Merger are expected to affect
negatively future results of operations of Phoenix and the Company.
DEPENDENCE ON RETENTION AND INTEGRATION OF KEY MANAGEMENT
The success of the combined company is dependent on the retention and
integration of the management of Phoenix and the Company. While the combined
company intends to implement management retention arrangements for its senior
management, there can be no assurance that the senior management personnel will
remain with the combined company. The loss of services of any of the key
members of the combined company's management team could adversely affect the
combined company's business and financial results.
In addition, the future success of the Combined Company is dependent, in
part, on its ability to retain and attract additional skilled personnel in all
areas of its business on a worldwide basis. Competition for such personnel is
intense. There can be no assurance that the Combined Company will be able to
retain its existing key management, engineering and sales personnel or attract
additional qualified employees in the future. This could be particularly
significant if the Combined Company needs to hire, train and assimilate a large
number of new employees. A failure to retain or attract qualified employees
could materially adversely affect the business and financial results of the
Combined Company.
BUSINESS RISKS
DEPENDENCE ON THE UNDERLYING PC INDUSTRY; DEPENDENCE ON CURRENT PC INDUSTRY
STANDARDS
The demand for the Company's system enabling and management software
depends principally on (i) PC manufacturers and other customers licensing the
Company's software rather than developing their own system enabling and
management software, (ii) 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
enabling and 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 conditions in the markets for the
Company's customers' products, new hardware and software product introductions,
demand for new applications, shortages of key components and seasonality.
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 total cost of ownership. A number of computer
manufacturers, including IBM Corporation ("IBM") and Compaq Computer Corporation
("Compaq"), develop some of their own Basic Input/Output System software
("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 enabling and 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 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-
13
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 motherboard 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, or if the average
price of desktop BIOS declines as the trend toward sub-$1,000 PCs continues, 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 ENABLING AND 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 enabling and management software
companies, including American Megatrends, Inc., Phoenix 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, 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
enabling and management software companies and their customers, which would need
to be overcome 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 manufacturers. Intel
has entered into formal agreements with, and has become a significant
shareholder in, Phoenix 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 may incorporate enough features into
their products to reduce the need for the Company's products. Microsoft
includes basic PC Card software in its Windows 95 operating system and full PC
Card software support in its recently released Windows 98 operating system.
Microsoft's Windows CE 2.0 operating system includes embedded toolkit software
that incorporates system enabling and 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 enabling and 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 enabling and 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
14
desktop PC industry. Although the Company's core products, specifically, the
desktop and embedded device BIOS, PC Card software and embedded system enabling
products, 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 on its
ability to enhance its core software and to develop and introduce new software
that keeps pace with technological developments and evolving industry standards,
as well as its ability 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.
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 enabling and 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 are 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
enabling and 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
15
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 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
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 on 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.
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
16
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. Eight
executive officers of the Company are parties to Severance Benefits Agreements.
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 enabling and 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 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 to 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 six
month periods ended June 30, 1998, approximately 48% and 45% of the Company's
revenues were denominated in New Taiwan Dollars, respectively, and approximately
4% and 4% of the Company's revenues were denominated in German Marks,
respectively. The Company's revenues denominated in Japanese Yen were
immaterial during the three and six month periods ended June 30, 1998. 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 operates in Taiwan, Hong Kong, Japan, and Germany. Its
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 in Asia, including
Japan, 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
17
affect the Company's business, financial condition or results of operation. See
"Dependence on 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 development 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.
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 currently holds a patent in the U.S. for one invention and a patent
abroad for one invention which is jointly owned with a third party. The Company
has patent applications pending in the U.S. and/or abroad on seven inventions,
two of which are owned jointly with a third party. 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 to avoid any further allegations of infringement. The Company believes
that its software does not presently 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
18
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.
19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual meeting of Shareholders held June 30, 1998, the shareholders of
the Company approved the following matters.
1. A proposal for the approval and adoption of the Reorganization
Agreement, the related Agreement of Merger and the approval of the
Merger was approved by the vote of 4,952,636 for, 21,761 opposed, 5,304
withheld and 1,612,108 broker non-votes.
2. A proposal to elect seven (7) directors of the Company to serve for the
ensuing year and until their successors are elected or until such
directors earlier resignation or removal.
Nominee In favor Withheld
George C. Huang 6,752,726 0
Cheng Ming Lee 6,473,271 0
David S. Lee 6,582,063 0
Masami Maeda 6,583,263 0
Anthony Sun 6,583,263 0
William P. Tai 6,583,263 0
Willy Weck 6,470,636 0
3. A proposal for the approval of the amendment to the Company 's 1997
Equity Incentive Plan to increase the number of shares reserved for
issuance thereunder by 700,000 was approved by a vote of 4,176,421
for, 741,673 opposed, 61,607 withheld and 1,612,108 broker non-votes.
4. A proposal for the approval of the amendment to Award's Employee Stock
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 200,000 was approved by a vote of 4,885,644 for, 30,600
opposed, 63,457 withheld and 1,612,108 broker non-votes.
5. A proposal for the approval and ratification of Price Waterhouse LLP as
independent accountants of Award for the year ending December 31, 1998
was approved by a vote of 6,576,279 for, 6,100 opposed and 9,430
withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed herewith:
Exhibit 10.1 Common Stock Purchase Agreement by and among Award
Software International, Inc., Sun Corporation and
Axis Corporation dated April 13, 1998.
Exhibit 10.2 Support Agreement by and between Award Software
International, Inc. and Vobis Microcomputer AG
dated April 15, 1998.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period
for which this report is filed.
20
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.
August 11, 1998 By: /s/ George C. Huang
-------------------
George C. Huang
Chairman of the Board, President and Chief
Executive Officer
August 11, 1998 By: /s/ Kevin J. Berry
------------------
Kevin J. Berry
Vice President, Finance, Chief Financial Officer,
Treasurer and Secretary
21
EXHIBIT INDEX
Exhibit No. Description
10.1 Common Stock Purchase Agreement by and among Award Software
International, Inc., Sun Corporation and Axis Corporation dated April
13, 1998.
10.2 Support Agreement by and between Award Software International, Inc. and
Vobis Microcomputer AG dated April 15, 1998.
27 Financial Data Schedule.
22