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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______,
19__.
Commission file number : 0-20937
___________________
PHOENIX INTERNATIONAL LTD., INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Florida 59-3171810
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
500 International Parkway, Heathrow, Florida 32746
(Address of principal executive offices)
(407) 548-5100
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 4, 1998
<S> <C>
Common Stock, $0.01 par value 8,496,233
-------------------------
(No. of Shares)
</TABLE>
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1
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PHOENIX INTERNATIONAL LTD., INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of
Operations for the Three Months and Nine
Months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
EXHIBIT INDEX
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,832,577 $13,034,491
Investments, available for sale 1,990,400 7,705,000
Accounts receivable, net of allowance for doubtful accounts of $473,350
and $155,000 at September 30, 1998 and December 31, 1997, respectively 7,312,080 4,578,485
Unbilled accounts receivable 5,951,471 3,766,322
Deferred tax asset 2,065,863 2,229,000
Prepaid expenses and other current assets 538,935 592,274
----------- -----------
Total current assets 23,691,326 31,905,572
Long term investments, available for sale 21,104,252 13,088,014
Property and equipment:
Computer equipment and purchased software 3,963,379 2,217,366
Furniture, office equipment and leasehold improvements 2,154,127 1,100,275
----------- -----------
6,117,506 3,317,641
Accumulated depreciation and amortization (1,822,180) (972,616)
----------- -----------
Total property and equipment 4,295,326 2,345,025
Capitalized software costs, net of accumulated
Amortization of $1,902,782 and $1,078,749 at September 30, 1998 and
December 31, 1997, respectively 6,271,374 3,522,484
Other assets 1,879,150 1,296,400
----------- -----------
Total assets $57,241,428 $52,157,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 874,424 $ 624,924
Accrued expenses 2,197,425 1,810,662
Capital lease, current portion 138,936 129,997
Deferred revenue 2,499,216 1,851,960
----------- -----------
Total current liabilities 5,710,001 4,417,543
Deferred revenue under economic development grant -- 95,000
Deferred tax liability 1,921,576 1,309,000
Capital lease, long term portion 394,011 500,821
----------- -----------
Total long term liabilities 2,315,587 1,904,821
----------- -----------
Total liabilities 8,025,588 6,322,364
Shareholders' equity:
Common stock, $0.01 par value
50,000,000 shares authorized, 8,481,408 and 8,153,127 issued and
Outstanding at September 30, 1998 and December 31, 1997 respectively 84,814 81,531
Additional paid-in capital 45,235,677 43,900,249
Stock subscription receivables -- (13,360)
Unrealized gain on investments available for sale (net of tax effect) 379,565 --
Retained earnings 3,515,784 1,866,711
----------- -----------
Total shareholders' equity 49,215,840 45,835,131
----------- -----------
Total liabilities and shareholders' equity $57,241,428 $52,157,495
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
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PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees and other $4,762,975 $2,235,353 $11,474,125 $ 7,924,796
Implementation, customer and software
support and other service fees 3,239,504 1,119,357 6,793,501 3,849,746
---------- ---------- ----------- -----------
Total revenues 8,002,479 3,354,710 18,267,626 11,774,542
Expenses:
Cost of license fees and other 549,659 454,545 1,567,334 1,129,882
Cost of implementation, customer and
software support and other service fees 1,878,544 993,981 4,561,908 2,828,770
Sales and marketing 1,175,453 763,552 3,133,702 2,021,216
General and administrative 1,239,936 649,378 3,312,476 1,977,279
Product development 1,907,626 805,578 4,461,475 2,161,156
---------- ---------- ----------- -----------
Total expenses 6,751,218 3,667,034 17,036,895 10,118,303
Other income (expense):
Interest income 390,751 233,068 1,244,901 361,545
Interest expense (12,578) (15,308) (39,655) (36,745)
Other income 87,928 109,671 101,058 109,671
---------- ---------- ----------- -----------
Income before income taxes 1,717,362 15,107 2,537,035 2,090,710
Income tax expense 601,077 5,136 887,962 303,769
---------- ---------- ----------- -----------
Net income $1,116,285 $ 9,971 $ 1,649,073 $ 1,786,941
========== ========== =========== ===========
Net income per share - basic $ 0.13 $ 0.00 $ 0.20 $ 0 .29
========== ========== =========== ===========
Net income per share - diluted $ 0.13 $ 0.00 $ 0.19 $ 0 .26
========== ========== =========== ===========
Weighted average shares outstanding - basic 8,422,974 6,950,588 8,340,341 6,213,581
========== ========== =========== ===========
Weighted average shares outstanding - diluted 8,874,710 7,647,260 8,842,791 6,881,768
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of operations.
4
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PHOENIX INTERNATIONAL LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,649,073 $ 1,786,941
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,673,597 765,387
Provision for doubtful accounts 347,150 90,000
Deferred taxes 1,155,878 --
Revenues under economic development grant (95,000) --
Changes in operating assets and liabilities:
Accounts receivable (3,080,745) (2,067,246)
Unbilled accounts receivable (2,185,149) (2,111,664)
Prepaid expenses and other current assets 53,339 (100,360)
Accounts payable 249,500 67,054
Accrued expenses 386,763 275,992
Deferred revenue 647,256 (66,057)
----------- -----------
Net cash provided by (used in) operating activities 801,662 (1,359,953)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,799,865) (1,063,085)
Sale of short term investments 5,714,600 2,730,825
Purchase of long term investments, net of unrealized gain (8,016,238) --
Capitalized software costs (3,572,923) (1,571,880)
Purchase of other assets (582,750) (1,266,400)
----------- -----------
Net cash used in investing activities (9,257,176) (1,170,540)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (97,871) (69,126)
Net proceeds from issuance of common stock 1,338,111 31,737,455
Cash payments for stock subscription receivable 13,360 96,415
----------- -----------
Net cash provided by financing activities 1,253,600 31,764,744
----------- -----------
Net (decrease) increase in cash and cash equivalents (7,201,914) 29,234,251
Cash and cash equivalents at beginning of the period 13,034,491 3,770,889
----------- -----------
Cash and cash equivalents at end of the period $ 5,832,577 $33,005,140
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of cash flows.
For the nine months ended September 30, 1997, financing activities provided
$31.8 million of cash primarily from the issuance of 1,474,000 shares pursuant
to the company's offering of its common stock in August 1997. In subsequent
periods, this cash has been invested in the purchase of long and short term
investments.
5
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PHOENIX INTERNATIONAL LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring accruals, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for the interim periods presented. The condensed
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
"Selected Financial and Operating Data" included in the Company's annual report
on Form 10-K for the year ended December 31, 1997.
2. NET INCOME PER SHARE
Net income per share is calculated and presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). Basic earnings per share is computed using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of the
average number of common shares outstanding plus the effect of outstanding stock
options using the "treasury stock" method based on average stock price for the
period.
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator - net income available
to common shareholders $1,116,285 $ 9,971 $1,649,073 $1,786,941
========== ========== ========== ==========
Denominator for basic net income per
share - weighted average shares outstanding 8,422,974 6,950,588 8,340,341 6,213,581
Effect of dilutive securities -
employee stock options 451,736 696,672 502,450 668,187
---------- ---------- ---------- ----------
Denominator for diluted net income per share -
adjusted weighted average shares
outstanding and assumed conversion of
dilutive securities 8,874,710 7,647,260 8,842,791 6,881,768
========== ========== ========== ==========
Net income per share - basic $ 0.13 $ 0.00 $ 0.20 $ 0.29
========== ========== ========== ==========
Net income per share - diluted $ 0.13 $ 0.00 $ 0.19 $ 0.26
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
Stock Split
The Company effected a three-for-two stock split in the form of a 50%
stock dividend, distributed on May 18, 1998 to stockholders of record on May 11,
1998. Accordingly, all share and per share amounts have been adjusted to reflect
this split.
3. CAPITALIZED SOFTWARE COSTS
The Company capitalizes certain software development costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
These costs include costs incurred internally after technological feasibility
has been established to develop and enhance computer software products and
include certain purchased software costs. Capitalized software costs include
purchased software costs of $761,000 and $311,000 at September 30, 1998 and
December 31, 1997, respectively.
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. Comprehensive income for the three months and nine months
ended September 30, 1998 and 1997 is comprised of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------------
1998 1997 1998 1997
---------- ------ ---------- -----------
<S> <C> <C> <C> <C>
Net income as reported $1,116,285 $9,971 $1,649,073 $ 1,786,941
Other comprehensive income:
Unrealized gain on investments available
for sale (net of tax effect) 352,108 -0- 379,565 (94,379)
---------- ------ ---------- -----------
Comprehensive income $1,468,393 $9,971 $2,028,638 $ 1,692,562
========== ====== ========== ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION OVERVIEW
OVERVIEW
The following discussion contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements appear in a number of places in this Quarterly
Report and include all statements that are not historical statements of fact
regarding the intent, anticipation, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
the Company's financing plans; (ii) trends affecting the Company's financial
condition or results of operations; (iii) the Company's growth strategy and
operating strategy (including, but not limited to, the Company's development and
implementation of the Phoenix System and its other products); and (iv) the
declaration and payment of dividends. The words "may," "would," "could," "will,"
"expect," "estimate," "anticipate," "believe," "intends," "plans," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Investors are cautioned that any such forward-looking statements are
not guarantees of future
7
<PAGE> 8
performance and involve risks and uncertainties, many of which are beyond the
Company's ability to control, and that actual results may differ materially from
those projected in the forward-looking statements.
Actual results may differ materially from these forward-looking
statements as a result of many factors, including the inability to obtain,
continue and manage growth or execute agreements with new customers;
fluctuations in quarterly operating results; market acceptance of new products
and enhancements; growth in the Company's customers; increased competition;
dependence on new products; rapid changes in technology, and the other factors
discussed in the Company's registration statement on Form S-1 as declared
effective on August 13, 1997, including the "Risk Factors" section contained
therein.
The Company derives its revenues from two primary sources: (i) license
fees for software products and other revenues and commissions from the sale and
delivery of software and hardware products of third party vendors; and (ii) fees
for a full range of services complementing its products, including
implementation, programming services, conversion training and installation
services, interface services for tying the Phoenix System to third-party
applications, customer and software support services, disaster recovery services
and Internet/Intranet consulting services.
Revenues were recorded in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 91-1 "Software
Revenue Recognition" ("SOP 91-1") for the three months and nine months ended
September 30, 1997. Fees for the Company's software products are charged
separately from fees for the Company's services and are recognized upon
delivery, when no significant vendor obligations remain and collection of the
resulting receivables is deemed probable. Revenues for implementation,
conversion, installation, training, interface and consulting services are
recognized when the services are performed. Service revenues for ongoing
customer and software support and product updates and disaster recovery services
provide recurring revenues as they are recognized ratably over each year of the
license agreement, the term of which is typically five years.
In October 1997, the AICPA issued a new Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 supersedes SOP 91-1, and
was adopted by the Company effective January 1, 1998. The Company has applied
SOP 97-2 to all contracts signed during 1998. While some principles remain the
same, there are several key differences between the two pronouncements,
including accounting for multiple element arrangements.
The Company currently believes, based on its reading and interpretation
of SOP 97-2, that future license and service agreements that require
modifications to the software may require contract accounting for both the
license fees and services and result in a deferral of license revenue compared
to revenue recognition under SOP 91-1 for some agreements. If this historical
trend continues there will be a material adverse effect on the Company's
recognition of revenues and earnings in 1998 during the implementation of SOP
97-2, but the Company anticipates this effect will be reduced in future periods
as revenues are recognized over the service period. In addition, the percent of
total revenue recognized from international sales could be reduced in 1998 as a
result of implementation of SOP 97-2 due to significant modifications to the
software. During March 1998, the AICPA issued Statement of Position 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" ("SOP 98-4"). SOP 98-4 defers until December 15, 1998 the
requirement of vendor-specific objective evidence of the fair value of the
various elements in a multiple-element arrangement as a condition to recognizing
revenue for elements delivered early in the
8
<PAGE> 9
arrangement.
The Company's quarterly operating results have varied significantly in
the past and may vary significantly in the future. Special factors that may
cause the Company's future operating results to vary include, without
limitation: the size and timing of significant orders; the mix of direct and
indirect sales; the mix and timing of foreign and domestic sales; the timing of
new product announcements and changes in pricing policies by the Company and its
competitors; market acceptance of new and enhanced versions of the Company's
products; increased competition; changes in operating expenses, including
expenses related to acquisitions; changes in Company strategy; personnel
changes; changes in legislation and regulation; foreign currency exchange rates
and general economic factors. Product revenues are also difficult to forecast
because the market for client/server application software products is rapidly
evolving, and the Company's sales cycle, from initial review to purchase and the
provision of support services, varies substantially from customer to customer.
As a result, the Company believes that quarter to quarter comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. Due to all of the foregoing factors,
it is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such an
event, the price of the Company's common stock would likely be materially
adversely affected.
YEAR 2000
The Company's business and relationships with its customers, marketing
agents, VARs and other parties depend significantly on a number of computer
software programs, internal operating systems and network, telephonic and
internet connections. If any of these software programs, systems or connections
are not able to recognize, store, transmit and properly process dates before, on
and after January 1, 2000 (the "Year 2000" issue), significant system failures
or errors may result which could have a material adverse effect on the business,
financial condition and results of operations of both the effected customers and
the Company. In an effort to protect against possible Year 2000 problems,
Phoenix has examined the Year 2000 issue as it affects three critical areas of
its business operations: (1) the Phoenix System; (2) its internal operating and
accounting systems; and (3) its customers' core processing systems.
Phoenix believes that the Phoenix System already addresses the Year
2000 issue because it was designed to require a four-digit year to be entered
into the date fields of the program and has always stored and processed
information using four-digit years. The Phoenix System employs sophisticated
database and other technologies provided by recognized companies in the software
industry (e.g., Sybase, MicroSoft and Centura). Many of these industry companies
have published materials indicating their products are Year 2000 compliant and
the Company believes these products are capable of addressing the Year 2000
issue. The Company has tested the Phoenix System repeatedly using various dates
before, on and after January 1, 2000, including all of the dates established by
the Federal Financial Institutions Examination Council in its April 10, 1998
statement of guidelines for Year 2000 readiness. Phoenix discovered no Year 2000
problems during such tests. Phoenix plans to continue testing the Phoenix System
periodically using any additional dates set forth for testing in any future
guidelines established for financial institutions in the United States or by
foreign governmental regulatory agencies. Phoenix has not made any material
modification to the coding for the Phoenix System software and does not
anticipate making any such changes to accommodate the Year 2000 issue.
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<PAGE> 10
Phoenix has also reviewed its internal accounting and operating systems
in the United States and currently believes that these programs and systems are
adequately programmed to address the Year 2000 issue or can be modified or
replaced to address the Year 2000 issue without material costs or delays.
Phoenix has not conducted tests on the third party products or systems used in
its business and at its offices or on the systems used by its marketing agents,
VARs or other third parties. The Company has contacted the providers of material
goods and services used in Phoenix's operations and has received written
assurances from several of these providers that their products and services are
capable of addressing the Year 2000 issue. The Company has not yet completed a
review of the accounting and operating systems of its value added resellers.
Phoenix currently expects to complete its Year 2000 examination of its internal
accounting and operating systems by the end of March 1999. The Company has not
yet completed a review of the operating systems used in its international
offices in London, England and Wellington, New Zealand and currently expects
that this review will not be complete until the middle of 1999. There can be no
assurances, however, that any or all of these products and services are Year
2000 compliant. However, Phoenix believes that if any Year 2000 issues are
discovered when these international office systems are examined and tested, the
Company will be able to modify or replace these systems without material costs
or delays.
Phoenix believes that if its customers do not successfully address Year
2000 issues in their operations, the Company's operations may be interrupted,
hindered or delayed. This would have a material adverse effect on Phoenix's
business, financial condition and results of operations. Phoenix (with
assistance from some of its customers) has developed a Year 2000 readiness
program that is designed to assist its customers in testing their core
processing systems for Year 2000 problems. Phoenix has invited its United States
customers (and plans to invite its international customers) to test their core
processing systems at Phoenix's facilities, using all of the same hardware and
other third-party products employed at their institutions. The customer
institution selects the dates and other information to be tested and Phoenix
monitors the performance of the customer's processing system and reports on any
Year 2000 problems identified. Testing under this program is scheduled to begin
in November 1998 and is expected to last between two and three days for each
customer institution.
The Company believes that many financial institutions, industry vendors
and suppliers, and other third parties are still in the preliminary stages of
analyzing their software and systems to address Year 2000 issues. It is not
possible, therefore, for the Company to accurately analyze or predict possible
"worst-case scenarios" related to the Year 2000 issue and the potential impact
to the Company's business if any of these parties fail to adequately address the
Year 2000 issue in their business operations. The Company currently believes
that the greatest risk to its business from Year 2000 issues will come from its
customers and third parties whose systems fail as a result of the Year 2000
issue. The Company has not developed a contingency plan for Year 2000 problems
experienced by these customers and third parties. It is impossible to estimate
the potential expenses involved or delays which may result from a large-scale
failure of the Company's customer institutions and third parties to resolve
their Year 2000 issues in a timely manner and there can be no assurance that
such expenses, failures or delays will not have a material adverse effect on the
Company's business, financial condition or results of operations.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues
represented by certain line items in the Company's statement of operations for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
License fees and other 59.5 % 66.6 % 62.8 % 67.3 %
Implementation, customer and
software support, and other service fees 40.5 % 33.4 % 37.2 % 32.7 %
-------- ------- -------- -------
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Expenses
Cost of license fees and other 6.9 % 13.5 % 8.6 % 9.6 %
Cost of implementation, customer and
software support, and other service fees 23.5 % 29.6 % 25.0 % 24.0 %
Sales and marketing 14.7 % 22.8 % 17.2 % 17.2 %
General and administrative 15.5 % 19.4 % 18.1 % 16.7 %
Product development 23.8 % 24.0 % 24.4 % 18.4 %
------ -------- -------- ------
Total expenses 84.4 % 109.3 % 93.3 % 85.9 %
Other income (expense)
Interest income 4.9 % 6.9 % 6.9 % 3.1 %
Interest expense (0.2)% (0.4)% (0.2)% (0.3)%
Other income 1.1 % 3.3% 0.6 % 0.9 %
------ ----- ------ ------
Income before taxes 21.4 % 0.5 % 14.0% 17.8 %
Income tax expense 7.5 % 0.2 % 4.9% 2.6 %
------- ------ ------ ------
Net income 13.9 % 0.3 % 9.1% 15.2 %
======== ======= ====== ======
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues. Total revenues increased $4.6 million, or 138.5%, to $8.0
million in the three months ended September 30, 1998 from $3.4 million for the
three months ended September 30, 1997. Revenues from license fees and other
increased $2.6 million, or 113.1%, to $4.8 million for the three months ended
September 30, 1998 from $2.2 million in the three months ended September 30,
1997 due largely to an increased number of customers and increased prices for
U.S. licenses of the Phoenix System. Revenues from implementation, customer and
software support, and other service fees increased $2.1 million, or 189.4%, to
$3.2 million in the three months ended September 30, 1998 from $1.1 million in
the three months ended September 30, 1997 due mostly to the increased number of
customer installations and increased prices charged by the Company for these
services in the U.S.
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<PAGE> 12
Expenses. Cost of license fees and other was $550,000 and $455,000 in
the three months ended September 30, 1998 and 1997, respectively. These costs
increased in the 1998 period mainly as a result of higher amortization of
capitalized software development costs and higher third party software
royalties.
Cost of implementation, customer and software support, and other
service fees consists primarily of personnel related costs incurred in providing
implementation, conversion and installation services, training and customer
support. Cost of implementation, customer and software support, and other
service fees increased $885,000, or 89%, to $1.9 million in the three months
ended September 30, 1998 from $1.0 million in the three months ended September
30, 1997 primarily as a result of additional personnel and travel costs related
to increased Phoenix System implementation activity.
Sales and marketing expenses increased $412,000, or 53.9%, to $1.2
million in the three months ended September 30, 1998 from $764,000 in the three
months ended September 30, 1997 largely as a result of additional expenses
incurred in connection with increased staffing, travel and personnel related
costs.
General and administration expenses increased $591,000, or 90.9%, to
$1.2 million in the three months ended September 30, 1998 from $649,000 in the
three months ended September 30, 1997 primarily as the result of increased
professional services fees, rent, personnel related costs and bad debt expense.
Product development expenses increased $1.1 million, or 136.8%, to $1.9
million in the three months ended September 30, 1998 from $806,000 in the three
months ended September 30, 1997. Product development expenses increased in the
1998 period primarily as a result of increased contract labor and personnel
related costs.
Other Income (Expense). Interest income was $391,000 and $233,000 in
the three months ended September 30, 1998 and 1997, respectively. Interest
income increased in the 1998 period primarily due to the increase in
interest-bearing funds resulting from the investment of the proceeds from the
public offering of the Company's common stock which was completed in August
1997.
Income Tax Expense. Income tax expense was $601,000 and $5,000 in the
three months ended September 30, 1998 and 1997, respectively. Income tax expense
increased as a result of increased revenues and diminishing net operating
losses. The Company's effective tax rate in the three months ended September 30,
1998 was 35% based on the estimated 1998 effective annual income tax rate. In
the three months ended September 30, 1997, income tax expense represents
withholding taxes which relate to licenses of the Company's products to foreign
customers (which taxes are contractually payable by those customers) and
alternative minimum tax.
Net Income. Net income increased to $1.1 million in the three months
ended September 30, 1998 from net income of $10,000 in the three months ended
September 30, 1997 as a result of increased revenues.
12
<PAGE> 13
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues. Total revenues increased $6.5 million, or 55.1%, to $18.3
million in the nine months ended September 30, 1998 from $11.8 million for the
nine months ended September 30, 1997. Revenues from license fees and other
increased $3.5 million, or 44.8%, to $11.4 million for the nine months ended
September 30, 1998 from $7.9 million in the nine months ended September 30, 1997
due largely to an increased number of customers and increased prices for U.S.
licenses of the Phoenix System. Revenues from implementation, customer and
software support, and other service fees increased $2.9 million, or 76.5%, to
$6.8 million in the nine months mainly ended September 30, 1998 from $3.8
million in the nine months ended September 30, 1997 due to increased number of
customer installations and increased prices charged by the Company for these
services in the U.S.
Expenses. Cost of license fees and other was $1.6 million and $1.1
million in the nine months ended September 30, 1998 and 1997, respectively.
These costs increased primarily as a result of higher amortization of
capitalized software development costs and higher third party software
royalties.
Cost of implementation, customer and software support, and other
service fees consists primarily of personnel related costs incurred in providing
implementation, conversion and installation services, training and customer
support. Cost of implementation, customer and software support and other service
fees increased $1.7 million, or 61.3%, to $4.6 million in the nine months ended
September 30, 1998 from $2.8 million in the nine months ended September 30, 1997
mostly as a result of additional personnel costs related to increased Phoenix
System implementation activity.
Sales and marketing expenses increased $1.1 million, or 55.0%, to $3.1
million in the nine months ended September 30, 1998 from $2.0 million in the
nine months ended September 30, 1997 mainly as a result of additional expenses
incurred in connection with increased staffing, travel and personnel related
costs.
General and administration expenses increased $1.3 million, or 67.5%,
to $3.3 million in the nine months ended September 30, 1998 from $2.0 million in
the nine months ended September 30, 1997 primarily as the result of increased
professional services fees, rent, personnel related costs and bad debt expense.
Product development expenses increased $2.3 million, or 106.4%, to $4.5
million in the nine months ended September 30, 1998 from $2.2 million in the
nine months ended September 30, 1997. Product development expenses increased
primarily as a result of increased contract labor and personnel related costs.
Other Income (Expense). Interest income was $1.2 million and $362,000
in the nine months ended September 30, 1998 and 1997, respectively. Interest
income increased primarily due to the increase in interest-bearing funds
resulting from the investment of the proceeds from the public offering of the
Company's common stock in August 1997.
Income Tax Expense. Income tax expense was $888,000 and $304,000 in the
nine months ended September 30, 1998 and 1997, respectively. Income tax expense
increased as a result of increased revenues and diminished net operating losses.
The Company's effective tax rate in the nine months ended September 30, 1998 was
35% based on the estimated 1998 effective annual income tax rate. In the nine
months ended September 30, 1997, income tax
13
<PAGE> 14
expense represents withholding taxes which relate to licenses of the Company's
products to foreign customers (which are contractually payable by those
customers) and alternative minimum tax.
Net Income. Net income decreased $138,000 to $1.6 million in the nine
months ended September 30, 1998 from $1.8 million in the nine months ended
September 30, 1997 mainly as a result of increased operating expenses and the
deferral of certain revenues as mandated by SOP 97-2.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $5.8 million at September 30, 1998. For
the nine months ended September 30, 1998, cash provided by operations was
$802,000. Increases in trade accounts receivable of $3.1 million and in unbilled
accounts receivable of $2.2 million used cash from the Company's operating
activities and an increase in deferred revenue of $647,000 provided cash in the
Company's operating activities. Cash used by investing activities was $9.3
million for the nine months ended September 30, 1998, including $2.8 million for
purchases of property and equipment, $450,000 for purchased software to be used
to further develop the Phoenix System, and $3.1 million for capitalized software
development costs. Purchase of long term investments used $8.0 million of cash
and the sale of short term investments provided $5.7 million in cash for the
nine months ended September 30, 1998. Financing activities provided $1.3 million
of cash for the nine months ended September 30, 1998, including $1.3 million
from the issuance of common stock pursuant to the exercise of stock options.
Capital lease payments represented a use of cash of $98,000 for the nine months
ended September 30, 1998. Working capital was $18.0 million at September 30,
1998.
For the nine months ended September 30, 1997, financing activities
provided $31.8 million of cash primarily from the issuance of 1,474,000 shares
pursuant to the company's offering of its common stock in August 1997. In
subsequent periods, this cash has been invested in the purchase of long and
short term investments.
The Company believes its cash balances, investments and cash flow from
operations will be sufficient to meet its working capital, capital expenditure
and capitalized software development requirements through at least the summer of
1999. Cash flows from operating activities are dependent on continued advance
payments from customers, and there is no assurance that the Company will
continue to receive these payments from customers or that it will continue to
receive these payments in advance on the same terms as it has in the past. The
Company anticipates that its operating and investing activities may use cash in
the future, particularly from growth in operations and development activities.
Consequently, any such future growth may require the Company to obtain
additional equity or debt financing.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any material legal proceedings, other than routine litigation incidental to its
business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation, as amended by
the Articles of Amendment to Amended and Restated articles of
Incorporation as filed with the Secretary of the State of
Florida on May 28, 1997 (incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form S-1 (No.
333-31415) as declared effective by the SEC on August 13,
1997. (the "Registration Statement").
3.2 Amended and Restated Bylaws, effective July 8, 1996,
(incorporated by reference to Exhibit 3.2 of the Company's
Form 10-Q, dated August 14, 1996, File No. 0-20937)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of Common Stock of
the Company (incorporated by reference to Exhibit 4.1 of
Registration Statement).
10.1 Agreement for Software Services in Relation to Phoenix Banking
System dated September 30, 1998 between the Company and
Siemens Nixdorf Information Systems Pty. Limited.
27.1 Financial Data Schedule for the nine months ended September
30, 1998 (for SEC use only)
</TABLE>
b) Reports on Form 8-K
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934,the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PHOENIX INTERNATIONAL LTD., INC.
/s/ Bahram Yusefzadeh
- ---------------- ----------------------------------------
November 4, 1998 Bahram Yusefzadeh
Chairman of the Board and Chief Executive Officer
(principal executive officer)
/s/ Anthony R. Obrzut
- ---------------- ----------------------------------------
November 4, 1998 Anthony R. Obrzut
Acting Chief Financial Officer
(principal financial and accounting officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
--- ----------- ----
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, as amended by
the Articles of Amendment to Amended and Restated articles of
Incorporation as filed with the Secretary of the State of
Florida on May 28, 1997 (incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form S-1 (No.
333-31415) as declared effective by the SEC on August 13,
1997. (the "Registration Statement").
3.2 Amended and Restated Bylaws, effective July 8, 1996,
(incorporated by reference to Exhibit 3.2 of the Company's
Form 10-Q, dated August 14, 1996, File No. 0-20937)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of the holders of Common Stock of
the Company (incorporated by reference to Exhibit 4.1 of
Registration Statement).
10.1 Agreement for Software Services in Relation to Phoenix Banking
System dated September 30, 1998 between the Company and
Siemens Nixdorf Information Systems Pty. Limited.
27.1 Financial Data Schedule for the three months ended September
30, 1998 (for SEC use only)
</TABLE>
17
<PAGE> 1
AGREEMENT FOR SOFTWARE SERVICES IN RELATION TO PHOENIX BANKING SOFTWARE
THIS AGREEMENT is made on September 30, 1998
BETWEEN
1. SIEMENS NIXDORF INFORMATION SYSTEMS PTY LIMITED (ACN 000 647 843) of
registered office 655 Pacific Highway, St Leonards, NSW, 2065 (SNI)
2. THE CUSTOMER REFERRED TO IN ITEM II OF THE FRONT COVER OF THIS
AGREEMENT at the address referred to in Item II of the front cover of
this agreement (Customer or Phoenix)
AGREEMENT
Customer wishes to avail itself of the services of SNI. This agreement sets out
the terms and conditions under which SNI will provide services to Customer.
ITEM I
Term of agreement: From September 30, 1998 until December 31, 2001
ITEM II
Customer Company
Name: Phoenix International Ltd., Inc.
Contact: Raj Shivdasani
ACN/ARBN: n/a
Street Address: 500 International Parkway
Suburb: Orlando, Florida, USA___________Postcode:__________________
Telephone: (407) 548-5100__________________Fax:_______________________
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<PAGE> 2
executed as an agreement:
SIGNED by an authorised representative for SIEMENS NIXDORF INFORMATION SYSTEMS
PTY LIMITED in the presence of
/s/ Scott Barlow
- ---------------------------------
Signature of witness
Scott Barlow
- ---------------------------------
Name of witness (print)
- ---------------------------------
Address of witness
- ---------------------------------
By executing this agreement the signatory warrants that the signatory is
authorised to execute this agreement on behalf of Siemens Nixdorf information
Systems Pty Ltd
SIGNED by an authorised representative for CUSTOMER in the presence of
/s/ Bahram Yusefzadeh
- ---------------------------------
Signature of witness
Bahram Yusefzadeh
- ---------------------------------
Name of witness (print)
- ---------------------------------
Address of witness
- ---------------------------------
By executing this agreement the signatory warrants that the signatory is
authorised to execute this agreement on behalf of Customer
Page 2
<PAGE> 3
OPERATIVE PROVISIONS
1. DEFINITIONS
1.1 DEFINITIONS
In this agreement, unless the context requires otherwise:
BUSINESS DAY means a day on which trading banks are open for regular business in
New South Wales.
COMMENCEMENT DATE means September 30, 1998.
CONFIDENTIAL INFORMATION of a party means information that:
(a) is by its nature confidential;
(b) is designated by a party as confidential; or
(c) the other party knows or ought reasonably to know is confidential; and
includes without limitation:
(d) information comprised in or relating to the Intellectual Property
Rights of a party;
(e) all trade and business secrets of a party;
(f) information relating to financial position, assets or liabilities of a
party;
(g) information relating to internal management or structure of a party;
(h) information required by law or any governmental agency to be kept
private and confidential;
(i) all Customer Software and Software documentation.
DOCUMENTS includes software (including source code and object code versions),
and other documents containing Confidential Information, including all copies of
and extracts from the same.
EXISTING TAXES means all Taxes existing as at the Commencement Date.
INTELLECTUAL PROPERTY RIGHTS includes copyright, trade secrets, confidential
information, trademark, design, patent, semi-conductor or circuit layout rights,
trade name or other proprietary rights or any rights to registration of such
rights whether created before, on or after the commencement of this agreement.
LICENCES means a non-exclusive, royalty free, source and object code licence
from Customer to SNI to adapt, modify, use and improve the Software for the
purpose of performing the services under this agreement on Customer's standard
terms and conditions as set out in Schedule 3.
MASTER SCHEDULE means the document named "Master Schedule" agreed between the
parties and attached to this agreement.
NEW TAXES means:
(a) any Taxes imposed or levied after the Commencement Date or announced to
have retrospective application from a date before the Commencement Date
including without limitation a goods and services tax, consumption tax,
value added tax or taxes with similar or like effect to such taxes; and
(b) excludes Existing Taxes.
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<PAGE> 4
PERSONNEL of a party means:
(a) that party's employees, agents and subcontractors; and
(b) employees and agents of the party's subcontractors.
RELATED BODY CORPORATE has the meaning given in section 50 of the Corporations
Law.
RESOURCE BASELINE, PERSONNEL RESOURCE BASELINE AND INFRASTRUCTURE RESOURCE
BASELINE have the meanings ascribed thereto in the Master Schedule.
SECURITY PROCEDURES mean the security procedures set out in Schedule 1.
SNI INTELLECTUAL PROPERTY means:
(a) Intellectual Property Rights held by or on behalf of SNI prior to the
Commencement Date; and
(b) any modification, adaptation, enhancement or improvement of such rights
after the Commencement Date.
SOFTWARE means the Customer's banking software as more particularly described in
Schedule 2.
TAXES means taxes, duties or charges levied or imposed by a government authority
from time to time on SNI in relation to the provision of services under this
agreement other than any tax on the net income of SNI, payroll taxes, workers
compensation charge, superannuation levies or any other charges or taxes payable
in respect of SNI employees.
1.2 INTERPRETATION
In this agreement unless the context otherwise requires:
(a) a reference to a clause means a reference to a clause of this
agreement;
(b) a reference to "this agreement" or to any specified provision of this
agreement or to any other agreement or document means a reference to
this agreement or the specified provision of this agreement or that
other agreement or document as amended or substituted with the
agreement of the relevant parties and in force at any relevant time;
(c) references to dollars are to Australian dollars.
1.3 PRECEDENCE
In the event of inconsistency:
(a) a clause of this agreement takes precedence over any schedule or
annexure to this agreement;
(b) a schedule or annexure to a document incorporated by reference to part
of this agreement, takes precedence over the body of that document;
(c) the Master Schedule takes precedence over Customer policies and
procedures notified to SNI.
2. ENGAGEMENT
2.1 ENGAGEMENT
Customer engages SNI to provide personnel and infrastructure resources in
accordance with the Master Schedule attached hereto.
Page 4
<PAGE> 5
2.2 NON-EXCLUSIVITY
(a) Subject to paragraph (b), nothing in this agreement restricts SNI from
providing any of its services to any third party.
(b) SNI must not use any of the resource baselines set out in the Master
Schedule for the benefit of any third party unless SNI and Customer
agree otherwise.
3. TERM
(a) This agreement commences on the Commencement Date and continues for the
duration specified in item I (TERM) of the front cover of this
agreement. Subject to paragraph (b) this agreement is automatically
extended for periods of 1 year (SUBSEQUENT TERM) at the end of the Term
or then Subsequent Term.
(b) Either party may terminate this agreement by giving 180 days notice
prior to the end of the Term or then Subsequent Term.
4. WORK
4.1 PERFORMANCE OF SERVICES
All resources provided hereunder shall be made available to perform services for
Customer in relation to the Software as required by Customer. All software
development and other work requested by Customer shall be performed in
accordance with Customer`s policies and procedures as provided to SNI from time
to time in writing.
4.2 RESOURCES
SNI must provide the resource baselines set out in the Master Schedule to
perform services as requested by Customer from time to time.
4.3 PERFORMANCE OBLIGATIONS
(a) Utilising the Resource Baseline, SNI shall perform all services
requested by Customer to the extent to which the services can be
performed utilising the then current resource baseline. If Customer
requests services which require changes or additions to the Resource
Baseline, SNI shall not be obliged to perform those services until a
revised Resource Baseline is agreed in accordance with the Master
Schedule.
(b) In using Software to perform services under paragraph (a), SNI must
comply with the Security Procedures and the License Terms.
5. CUSTOMER'S OBLIGATIONS
During the term of this agreement Customer must:
(a) grant SNI the Licences; and
(b) promptly deliver to SNI, at Customer's cost:
(i) object and source code versions of the Software; and
(ii) any other materials, Documents or software reasonably requested
by SNI to enable SNI to perform the services set out in this
agreement.
Page 5
<PAGE> 6
6. FEES
6.1 CALCULATION OF FEE
(a) In consideration for SNI providing the baseline resources set out in
the Master Schedule, Customer must pay the Infrastructure Resource
Baseline fee set out in the Master Schedule.
(b) In addition to paragraph (a), Customer must pay SNI the Personnel
Resource Baseline fees set out in the Master Schedule.
(c) All of payments under paragraphs (a) and (b) must be in accordance with
the process and calculation as set out in the Master Schedule.
6.2 TAXES
(a) Except as otherwise expressly provided, all amounts payable to SNI
under this agreement are net amounts payable and exclusive of all
Existing Taxes and New Taxes.
(b) Any increase in Existing Taxes and all New Taxes (less any credits and
rebates available against such taxes) are payable by Customer.
7. CONFIDENTIALITY
7.1 OBLIGATION OF CONFIDENTIALITY
Each Party must, and must ensure that its Personnel:
(a) keep the other party's Confidential Information confidential;
(b) use the other party's Confidential Information solely for the purposes
of this agreement;
(c) disclose the Confidential Information of the other only to those of its
Personnel and professional advisers who have a reasonable need to know
such information in order for the Party to perform its duties
hereunder; and
(d) not disclose any of the other party's Confidential Information to any
third party;
7.2 NO BREACH
Neither Party is in breach of the obligations imposed by this clause 7
(CONFIDENTIALITY) where the information referred to in clause 7.1 (OBLIGATION OF
CONFIDENTIALITY):
(a) is or becomes public knowledge other than by breach of clause 7.1
(OBLIGATION OF CONFIDENTIALITY);
(b) is in the possession of that party without restriction in relation to
disclosure before the date of receipt;
(c) is required by law to be disclosed; or
(d) has been independently developed or acquired by that party.
7.3 DEEDS OF CONFIDENTIALITY
At Customer's request, SNI must cause any of SNI's Personnel involved in
performing any services under this agreement to execute confidentiality
undertakings in favour of Customer in SNI's standard form.
8. NO REPRESENTATIONS
Each party shall not make representations to third parties regarding:
Page 6
<PAGE> 7
(a) this agreement;
(b) its relationship with the other under this agreement; or
(c) any other aspect of the services performed under this agreement,
without the prior express written consent of the other party.
9. WARRANTY
(a) SNI warrants that it will perform the services under this agreement
with due skill and care. If the Customer considers that SNI is in
breach of this warranty in relation to any work product resulting from
any services performed by SNI under this agreement (WORK PRODUCTS) then
Customer must notify SNI of this alleged breach of warranty...
(b) Customer's only remedy for actual breach of the warranty in paragraph
(a) is for SNI to promptly reperform the services relating to the
relevant Work Product.
(c) Irrespective of anything else contained in this agreement, SNI is not
liable for any cost loss or damage suffered by Customer as a result of
Work Product produced solely under the direction of Customer or for any
act or omission made by SNI under the direction of Customer.
10. TERMINATION
Either party may at its sole discretion terminate this agreement by giving
notice at any time with immediate effect if:
(a) the other party is in breach of any of the terms of this agreement and
has not corrected such breach within 60 days notice. In the case of an
alleged breach of clause 9(a), Customer is not entitled to terminate
the agreement for so long as SNI is undertaking corrective action under
clause 9(b); or
(b) the other party becomes bankrupt, or goes into liquidation, voluntary
administration or any other external administration, or makes a
compromise or arrangement with creditors generally.
11. EFFECT OF TERMINATION
11.1 CUSTOMER DEFAULT
If SNI terminates this agreement under clause 10 (TERMINATION), then Customer
must pay SNI the termination fees and payments set out in the Master
Schedule (TERMINATION CHARGES).
11.2 TERMINATION CHARGES
The parties acknowledge and agree that the Termination Charges:
(a) have been discussed and negotiated between the parties; and
(b) represent a genuine pre-estimate of the loss that SNI will suffer as a
result of early termination of this agreement.
11.3 SNI DEFAULT
If Customer terminates this agreement in accordance with clause 10
(TERMINATION), then Customer is only liable for fees incurred prior to that
termination.
11.4 DISENGAGEMENT AND RETURN OF MATERIALS
On termination of this agreement, each party must return or cause the return of
all Documents and other materials relating to or concerning any Confidential
Information, and all materials supplied to the other party or otherwise in
Page 7
<PAGE> 8
their possession or within their control and containing or pertaining to any
Confidential Information, including all copies of those documents and materials
then in existence. In the event of lawful termination as a result of SNI's
default or on expiration of this Agreement, the Parties must comply with the
provisions of clause 1.4 of the Master Schedule.
11.5 NO PREJUDICE TO RIGHTS
Termination of this agreement does not prejudice any rights or remedies already
accrued to any party under, or in respect of any breach of, this agreement.
12. LIABILITY
12.1 LIABILITY LIMITATION - CUSTOMER
Except for:
(i) personal injury, sickness or death;
(ii) damage to tangible property; or
(iii) material breach of the confidentiality provisions of this
Agreement.
Customer's only liability for breach of this agreement is:
(a) payment of the Termination Charges as referred to in clause 11.1
(CUSTOMER DEFAULT) and set out in the Master Schedule; and
(b) any other charges due and payable under this agreement.
12.2 ASSESSMENT OF SERVICES
Customer acknowledges that in entering into this agreement and in submitting any
request for services it has relied upon its own experience, skill and judgement
to evaluate the services and that it has satisfied itself as to the suitability
of the Resource Baseline to meet its requirements.
12.3 LIABILITY LIMITATION - STATUTORY
To the extent that SNI is able to limit the remedies available under this
agreement, SNI expressly limits its liability for breach of a condition or
warranty implied by virtue of any legislation to, the choice of which is to be
at SNI's sole discretion:
(a) in the case of goods any one or more of the following:
(i) the replacement of the good or the supply of equivalent goods;
(ii) the repair of the goods;
(iii) the payment of the cost of replacing the goods or of acquiring
equivalent goods;
(iv) the payment of the cost of having the goods repaired; or
(b) in the case of services:
(i) the supply of the services again; or
(ii) payment of the cost of having the services supplied again.
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<PAGE> 9
12.4 LIABILITY LIMITATION - GENERAL
(a) No action, regardless of form, arising out of or relating to this
agreement may be brought by either party against the other more than
two years after that cause of action arose.
(b) The maximum aggregate liability of SNI whether for breach of this
agreement or in negligence or any other tort or for any other common
law or statutory cause of action arising from this agreement is, except
in relation to liability for:
(i) personal injury, sickness or death;
(ii) damage to tangible property;
(iii) material breach of the confidentiality provisions of this
Agreement;
(iv) material breach of License Terms or Security Procedures.
limited to the fees paid by Customer to SNI under this agreement in the
six months immediately prior to the time the cause of action arose.
12.5 LIABILITY LIMITATION- CONSEQUENTIAL DAMAGES
In no event is either party liable under or relating to this agreement for any
indirect, special, economic or consequential loss or damage or loss of revenue,
profits, goodwill, bargain or opportunities or loss or corruption of data or
loss of anticipated savings whether caused by negligence or otherwise and
whether or not such party was aware or should have been aware of the possibility
of such loss or damage.
13. NO POACHING
(a) Except as set forth in clause 1.4 of the Master Schedule or as
otherwise agreed in writing, neither party may solicit for employment
nor employ or engage as an independent contractor, whether directly or
indirectly through an associated or subsidiary company or otherwise,
from the Commencement Date until the expiration of six (6) months after
the expiration or termination of this agreement any person who is
employed or contracted by the other party during the term of this
agreement.
(b) If Customer is in breach of paragraph (a), then without limiting SNI's
rights, customer must pay SNI the daily charge of the employee employed
by Customer under paragraph (a) for a period of 6 months immediately
following the date of their engagement by Customer for each day of that
six month period, weekends and public holidays in the State of New
South Wales, Australia being excluded.
(c) The parties agree that the amounts set out in paragraph (b):
(i) have been discussed and negotiated between the parties; and
(ii) represent a genuine pre-estimate of the loss SNI will suffer
as a result of Customer being in breach of paragraph (a)
including without limitation the investment made in the
employee.
14. INTELLECTUAL PROPERTY
14.1 NEW INTELLECTUAL PROPERTY
(a) Subject to paragraph (d) all software, documentation and associated
Intellectual Property Rights therein created by SNI or any of its
Personnel during the performance of services under this agreement
including, without limitation, any development, modification, change,
enhancement or compilation of the Software but excluding SNI
Intellectual Property (NEW INTELLECTUAL PROPERTY) shall vest in the
Customer.
(b) SNI assigns and must procure that its Personnel assign to Customer:
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<PAGE> 10
(i) any and all copyrights that SNI or its sub-contractors are
entitled to in New Intellectual Property as an assignment of
future property under section 197 of the Copyright Act 1968
(Cth) and in equity; and
(ii) all Intellectual Property Rights (other than copyright) that
SNI or its sub-contractors are entitled to in New Intellectual
Property, without need for further assurance.
(c) SNI must use reasonable endeavours to ensure that none of SNI's
Personnel use or cause to be used any Intellectual Property Rights
belonging any third party in the performance of duties pursuant to this
agreement.
(d) SNI, at the expense of Customer, shall execute and deliver all other
assignments and other documents reasonably requested by Customer to
give effect to the terms of this Section.
(e) Nothing in this agreement transfers to Customer any right, title or
interest in any SNI Intellectual Property.
14.2 CUSTOMER IP WARRANTY
Customer warrants that the use by SNI and its Personnel of the Software and any
other materials licensed or provided to SNI under this agreement does not
infringe any Intellectual Property Rights of any third party.
14.3 SNI IP INDEMNITY
(a) SNI indemnifies the Customer against any liability under any final
judgement in proceedings brought by a third party against Customer,
determining that Customer's use of any work product provided to
Customer under this agreement (WORK PRODUCT) constitutes an
infringement of a third person's copyright.
(b) SNI will only be liable under paragraph (a) if Customer:
(i) notifies SNI as soon as practicable of the infringement or
alleged infringement;
(ii) gives SNI the option to conduct the defence of the claim,
including negotiations for settlement or compromise before the
institution of legal proceedings;
(iii) provides SNI with reasonable assistance in conducting the
defence of the claim;
(iv) permits SNI to modify, alter or substitute the Work Product at
its own expense, to render it non-infringing; and
(v) authorises SNI to procure for Customer the authority to
continue the use and possession of the Work Product.
(c) SNI is not liable to indemnify the Customer under paragraph (a) if and
to the extent that the infringement arises from:
(i) use of the Work Product in combination by any means or in any
form with computer programs not specifically approved in
writing by SNI;
(ii) use of a superseded or altered release of the Work Product if
the infringement would not have occurred if the current or
unaltered release of the Work product was used;
(iii) the combination, operation or use of any Work Product supplied
under this agreement with software, hardware or other material
not supplied by SNI if the infringement would not have
occurred if the Work Product had been used without the
software, hardware or other material;
(iv) use of the Work Product in a manner or for a purpose not
reasonably contemplated or authorised by this agreement;
Page 10
<PAGE> 11
(v) modification or alteration of the Work Product without the
prior consent of SNI or by a person other than SNI if the
infringement would not have occurred but for such modification
or alteration;
(vi) any transaction entered into by Customer in breach of this
agreement or relating to the Work Product without SNI's prior
consent.
(d) The Customer must indemnify SNI against any loss, cost, expense or
demand, whether direct or indirect, arising out of the claim by a third
party alleging infringement of that person's Intellectual Property
Rights including copyright, if:
(i) the claim arises from any event specified in paragraph (c);
(ii) the ability of SNI to defend a claim has been prejudiced by
the failure of Customer to comply with its obligations under
paragraph (b); or
(iii) the claim arises out of SNI's use of information or
specifications provided to SNI by Customer (including, without
limitation information in Customer's policies and procedures
to develop, modify or alter the Work Product.
(e) If SNI does not exercise its right set out in paragraphs (b)(iv) and
(b)(v), then SNI may refund any fees paid by Customer for the relevant
Work Product and upon such refund this agreement is terminated. The
refund of such fees is SNI's sole and exclusive liability to Customer
for breach under this clause 14.2 (SNI IP INDEMNITY).
(f) SNI must, and must procure that its Personnel:
(i) waive any rights SNI or its Personnel may have to be named as
the author of any Work Product;
(ii) not object to Customer claiming authorship of any Work
Product; and
(iii) not object to Customer changing, modifying or deleting any
aspect of any Work Product.
Nothing in this clause in any way alters the scope, or nature of the
indemnity, indemnity carve outs or obligations on either party set out
in clauses 14.3 (a), (b), (c) and (d).
14.4 CUSTOMER IP INDEMNITY
(a) Customer indemnifies SNI against any liability under any final
judgement in proceedings brought by a third party against SNI,
determining that SNI's use of any Software and other Materials provided
to SNI under this agreement (SOFTWARE AND MATERIALS) constitutes an
infringement of a third person's Intellectual Property Rights.
(b) Customer will only be liable under paragraph (a) if SNI:
(i) notifies Customer as soon as practicable of the infringement
or alleged infringement;
(ii) gives Customer the option to conduct the defence of the claim,
including negotiations for settlement or compromise before the
institution of legal proceedings;
(iii) provides Customer with reasonable assistance in conducting the
defence of the claim;
(iv) permits Customer to modify, alter or substitute the Software
and Materials at its own expense, to render it non-infringing;
and
(v) authorises Customer to procure for SNI the authority to
continue the use and possession of the Software and Materials.
Page 11
<PAGE> 12
(c) Customer is not liable to indemnify the SNI under paragraph (a) if and
to the extent that the infringement arises from:
(i) use of the Software and Materials in combination by any means
or in any form with computer programs not specifically
approved in writing by Customer;
(ii) use of a superseded or altered release of the Software and
Materials if the infringement would not have occurred if the
current or unaltered release of the Software and Materials was
used;
(iii) the combination, operation or use of any Software and
Materials supplied under this agreement with software,
hardware or other material not supplied by Customer if the
infringement would not have occurred if the Software and
Materials had been used without the software, hardware or
other material;
(iv) use of the Software and Materials in a manner or for a purpose
not reasonably contemplated or authorised by this agreement;
(v) modification or alteration of the Software and Materials
without the prior consent of Customer or by a person other
than Customer if the infringement would not have occurred but
for such modification or alteration; or
(vi) any transaction entered into by SNI in breach of this
agreement or relating to the Software and Materials without
Customer's prior consent.
15. RELATIONSHIP
The relationship between the Customer and SNI is that of principal and
contractor. Nothing in this agreement will be taken as constituting Customer or
any servant, agent or contractor of Customer as an employee or servant of SNI or
any of its Related Body Corporate. Notwithstanding clause 7 (CONFIDENTIALITY),
each party, its employees and independent contractors, are free to use and
disclose ideas, concepts and techniques relating to software development and
data processing (except for Customer confidential information contained in the
Software or Software Documentation), so long as such use or disclosure does not
constitute an infringement of copyright or patent.
16. NOTICE
(a) A notice, consent, request or any other communication under this
agreement must be in writing and must be left at the address of the
addressee, or sent by prepaid post (airmail if posted to or from a
place outside Australia) to the address of the addressee or sent by
facsimile to the facsimile number of the addressee as specified on the
front cover of this agreement or sent to any other address or facsimile
number the addressee requests.
(b) A notice, consent, request or any other communication is deemed to be
received:
(i) if by delivery, when it is delivered;
(ii) if a letter, three days after posting (seven, if posted to or
from a place outside Australia); and
(iii) if a facsimile, at the time of dispatch if the sender receives
a transmission report which confirms that the facsimile was
sent in its entirety to the facsimile number of the recipient.
17. GENERAL
17.1 SURVIVAL
All obligations of the parties which expressly or by their nature survive the
termination of this agreement continue in full force and effect notwithstanding
such termination.
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<PAGE> 13
17.2 ASSIGNMENT
(a) Customer must not assign its rights and obligations under this
agreement, except to a Related Body Corporate, without the prior
written consent of SNI.
(a) Customer agrees that SNI may transfer, assign or novate its obligations
under this agreement to its related company, Siemens Ltd. Subject to
the foregoing, SNI may not transfer, assign or novate any of its rights
or obligations under this agreement, except to a Related Body
Corporate, without the prior written consent of Customer.
17.3 WAIVER
A provision or a right under this agreement cannot be waived except in writing
signed by the party granting the waiver, or varied except in writing signed by
the parties.
17.4 SEVERABILITY
If any part or a provision of this agreement is judged invalid or unenforceable
in a jurisdiction and does not go to the essence of this agreement it is severed
for that jurisdiction and the remainder of this agreement continues to operate.
17.5 GOVERNING LAW AND JURISDICTION
This agreement is governed by the law of New South Wales, Australia. Each party
irrevocably and unconditionally submits to the non-exclusive jurisdiction of the
courts of New South Wales, Australia.
17.6 VARIATION
This agreement cannot be changed or modified in any way, after it has been
signed except in writing signed by authorised representatives of both Customer
and SNI.
17.7 ENTIRE AGREEMENT
This agreement supersedes all previous agreements in respect of its subject
matter and embodies the entire agreement between the parties.
17.8 FORCE MAJEURE
(a) Neither party is liable for any damages or any remedies if it is
delayed in the performance of any of its obligations except an
obligation to pay money under this agreement where such delay is caused
by circumstances beyond its reasonable control. In such circumstances
the other party shall extend a reasonable extension of time for the
performance of those obligations.
(b) If an event described in paragraph (a) prevents the performance of a
party's obligations for a period of more than 4 months, the other party
may terminate the Agreement on 14 days written notice to the first
party
Page 13
<PAGE> 14
SCHEDULE 1
SECURITY PROCEDURES FOR PHOENIX SOFTWARE
1. The information contained in the Phoenix Banking System and other Phoenix
Software is highly proprietary and confidential information belonging to Phoenix
International Ltd., Inc. SNI is responsible for the security and safekeeping of
such information, including all copies of the Source Code and Source Code
Documentation for such Software. It is each employee's duty to follow the
procedures set forth below to ensure SNI's compliance with its security
obligations.
2. Strict security measures are necessary to insure the safety and security of
the Phoenix Source Code and other proprietary information.
3. Only those employees who need to have access to the Phoenix Source Code and
Source Code Documentation shall be authorized for access by SNI. SNI shall keep
a list of such authorized employees. Only authorized employees shall be allowed
access to the Source Code and Source Code Documentation.
4. The Source Code and Source Code Documentation shall be kept in a secure area
at all times. Only authorized employees shall have access to such area.
5. During non-working hours, all hard copies of the Source Code and Source Code
Documentation and all computer disks, tapes, CDs and other media containing
copies of the Source Code and Source Code Documentation shall be kept in a
locked and secure file cabinet or safe.
6. All Source Code accessible on a computer or computer network shall be secured
with an encrypted security scheme with password protection. A separate password
shall be allocated to each employee with access to the Source Code and Source
Code Documentation, and all access by any person shall be recorded and logged by
name and password. Passwords shall be changed periodically, but no less than
quarterly.
7. Computers which are logged in for access to the Source Code or Source Code
Documentation shall never be left unattended by authorized personnel. All
employees shall log off of computers before leaving them unattended.
8. A written record shall be kept of the number and location of all copies of
the Source Code, Object Code, Documentation and Source Code Documentation for
the Phoenix Software. Each employee shall keep a detailed record of all changes
made to the Source Code. SNI shall keep a comprehensive and thorough record of
all changes to the Source Code.
9. Prior to disposal of any media or materials that contain any part of the
software, documentation, other proprietary or confidential information of
Phoenix, SNI and its employees shall obliterate or otherwise destroy all code,
instructions, commentary, or further evidence of Confidential Information, for
example, by erasing, incinerating, or shredding such materials.
Page 14
<PAGE> 15
SCHEDULE 2
BANKING SOFTWARE DESCRIPTION
Phoenix Banking System International Version 2.02 and later versions.
Page 15
<PAGE> 16
SCHEDULE 3
CUSTOMER LICENCE TERMS
1 DEFINITIONS.
1.1 "Licensed Products" means the Software, including object and source code,
associated documentation and development level or technical documentation for
the source code or object code which may be provided to SNI from time to time.
1.2 "Territory" means Australia.
2 SOURCE CODE LICENSE. Phoenix hereby grants to SNI, and SNI accepts, subject to
the terms and conditions set forth herein and in the associated Agreement, a
license (limited as specified herein) to develop, modify, change, enhance, and
compile the Licensed Products as necessary to fulfil its software development
responsibilities to Phoenix.
3 RESTRICTIONS.
3.1 SNI may copy the Licensed Products only as required to perform its duties
hereunder. The Licensed Products shall not be provided to any third party for
use, evaluation or any other purpose, except as allowed under written agreement
with Phoenix. SNI shall not use the source code and associated documentation for
the Software for any purpose other than as expressly authorised herein shall not
provide such source code or documentation to any other party under any
circumstances.
3.2 Phoenix, or its authorised agent, shall have the right to audit SNI for
compliance with the terms of this Licence. SNI shall provide Phoenix or such
agent access during regular business hours to SNI's premises and books and
records as necessary for any such audit upon 2 day's written notice from
Phoenix. Phoenix may only exercise its rights under this clause 3.2 to a maximum
of once in any period of six months.
4 TITLE; INTELLECTUAL PROPERTY.
4.1 The Licensed Products are protected by U.S., Australian, and other
international copyright laws, treaties and conventions, the Licensed Products
are copyrighted works under U.S. and foreign laws, and the Licensed Products are
protected as trade secrets and Confidential Information of Phoenix. Phoenix
retains all right, title, and interest in and to the Licensed Products, and all
intellectual property rights contained therein, subject only to the limited
license granted to SNI in this Agreement and any other written agreement between
Phoenix an SNI. SNI shall assist Phoenix, at Phoenix's request, in perfecting
and maintaining Phoenix's rights under copyright law in each country in the
Territory by advising Phoenix of any special registration, recording or notice
requirements.
4.2 SNI may not distribute, sell, sublease, assign, give, or transfer in any way
any copies of the Licensed Products except as provided by written agreement with
Phoenix.
4.3 SNI shall notify Phoenix in the event that it discovers any infringement of
Phoenix's rights in the Licensed Products, and shall cooperate with Phoenix and
assist in the prosecution of Phoenix's claims, at Phoenix's cost and expense
charged by SNI at SNI's then current time and materials rates. Phoenix shall be
entitled to retain any proceeds from such claims, including settlement amounts.
Page 16
<TABLE> <S> <C>
<ARTICLE> 5 EXHIBIT 27.1
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (FOR SEC
USE ONLY) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 5,832,577
<SECURITIES> 23,094,652
<RECEIVABLES> 13,736,901
<ALLOWANCES> (473,350)
<INVENTORY> 0
<CURRENT-ASSETS> 23,691,326
<PP&E> 6,117,506
<DEPRECIATION> (1,822,180)
<TOTAL-ASSETS> 57,241,428
<CURRENT-LIABILITIES> 5,710,001
<BONDS> 0
0
0
<COMMON> 84,814
<OTHER-SE> 49,131,026
<TOTAL-LIABILITY-AND-EQUITY> 57,241,428
<SALES> 0
<TOTAL-REVENUES> 18,267,626
<CGS> 0
<TOTAL-COSTS> 6,129,242
<OTHER-EXPENSES> 10,907,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39,655)
<INCOME-PRETAX> 2,537,035
<INCOME-TAX> 887,962
<INCOME-CONTINUING> 1,649,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,649,073
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
